Janky Thoughts

unfettered crazy

jankythoughts2's avatar

jankythoughts2

Fairness

jankythoughts2's avatar by 1 Comment

Foreword

Some people are born with a silver spoon in their mouths, others inherit healthy trust funds or major companies and never need worry about money in their lives. Yet others strike the lottery, or stumble upon buried treasures in their backyards. How is any of these fair?

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Conversations

For the past 10 odd years, perhaps more, millennials (1) have been complaining of the short end of the stick they’ve been given, especially by the baby boomers. The gist of the complaint goes along the lines of baby boomers in power have rearranged rules and laws, such that they have benefited unfairly, for example the housing boom (which benefited boomers the most), the financial boom (again, boomers were the main beneficiaries), etc. At the same time, millennials complained that boomers have left us a pile of trouble, including global warming, geopolitical tensions, divided politics in the USA, etc.

Talking to my software engineering compatriots, many of them are completely gloomy about their future prospects, with some predicting they’ll never be able to afford a home, never be able to afford kids, get married, retire, etc. Most of them are convinced the only real way they can ever get ahead in life is to win the lottery or otherwise cheat in a “rigged game”.

Childhood

A long time ago, when I was little, around 6 or 7, my family visited a small island in Indonesia, then a third world country, and fairly poor by most standards. Upon arrival, we were swarmed by a swarm of kids, most around my age, more than a few younger. One of them made a particularly strong impression on me, an impression I remember to this day:

The kid, who was probably around 4 or 5, was running with a shallow wooden drawer strapped to his neck and balanced on his belly, filled with various sundries. He was going around, clearly asking anyone to buy something from him.

I had no need of the goods he was peddling, and I had no money anyway. But for some reason, I felt sad that this was the life of someone who otherwise was so similar to myself, and I offered him the only thing of value I had at the time — a sticker of the Teenage Mutant Ninja Turtles (2) that I was particularly proud of, and carried around with me all the time.

The child stared at me like I was mad, shook his head and eventually ran off. I couldn’t explain to him that it was a gift, that I wasn’t expecting to trade it for something — he spoke no English and I spoke no Indonesian, and that was that.

To put things in context, the most expensive thing on his drawer was a 25c (rough equivalent of local currency). I paid a friend almost double that for the sticker.

Blessings

For the vast majority of folks who were born in the USA, Canada, western Europe, the richer countries in Asia (Japan, South Korea, Singapore, etc.), the raw truth is that you’ve already won life’s first mini lottery. If you don’t have to worry about clean running water, if you can reasonably trust your doctors and leaders, if you can step out of the house in the middle of the night without reasonable fear of being harmed, then compared to the majority of the world’s population, you already have it pretty good.

If you further were born in one of the first or second tier cities, or at least in the suburbs of one, then you’ve won the second lottery. Access to life’s opportunities are disproportionately available to those who live near the centers of finance, typically the tier one and two cities.

Finally, in addition to all the above, if you were afforded the chance to attend K-12 schooling, or even better, if you had attended college, then you’ve pretty much struck the lottery. As long as you do reasonably well in school, you are almost guaranteed a decent selection of jobs.

Software engineers

Rounding back on my software engineering compatriots — I’m fairly certain that all of them make a 6 figure salary, and most make $200k or more a year, with more than a few going much higher. Even if many of them live in the San Francisco Bay Area, infamous for being one of the most ridiculously expensive places to live on Earth, it is instructive to note that those in the same area not so fortunate to work for a large tech company will be lucky to see a 6 figure salary (3).

So, yes. Life is unfair, and some people just have it easier in life. Welcome to Earth, blah, blah, blah.

But maybe let’s not rub it in other people’s faces?

A bit of light heartedness

And with that, I leave you with a little bit of light heartedness. Happy New Year!

Stocks, why’d it have to be stocks

Because this is, after all, a finance blog. On the topics of being broke, for those who want to see what crazy shenanigans I’ve been up to, and how fast I’m going broke in my brokerage account, you can follow 1 (out of 10+) of my brokerage accounts on StockClubs, an app I’ve invested in.

Footnotes

  1. Disclaimer: I’m a millennial.
  2. Don’t judge. TMNT was hot stuff back then, and TMNT stickers and Ghostbuster stickers were basically money to kids in my school.
  3. Per capita income in San Francisco Bay Area in 2021 is just under $80k. Source.

January 1, 2023: New Year’s video binge – The Global Everything Crisis

jankythoughts2's avatar by Leave a comment

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

Money & Macro Talks interviewed one of my favorite YouTubers (Patrick Boyle) about a variety of financial topics that I’ve touched on in the past. Certainly worth a listen if you are interested in finance.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Boyle, oh Boyle!

Related posts I’ve made in the past on topics discussed (in the order they are discussed in the video):

Efficient Market Hypothesis

Save Banks First

Genius level stock trader

All Money is Debt

Regulations

Price vs Value

Stock Clubs

In the vein of crises in the financial markets, I’ve recently picked up some puts on various assets for the new year. You can see part of my portfolio (1 out of 10+ brokerage accounts) with Stock Clubs, an app I’ve invested in.

December 10, 2022: Weekend video binge – Josh Brown’s End of the Year Chartapalooza!

jankythoughts2's avatar by Leave a comment

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

Just watched (really just listened) a great video summing up the year, and how investors should really think about their portfolios.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Watch this

Josh Brown’s End of the Year Chartapalooza!

For this who are too busy/lazy to watch the whole thing, here’s a little glimpse which starts at 38m 38s (direct link):

So I think there was like this widespread mental illness amongst people who were like 16 years old, men, young men, who were like 16 years old and 35 years old, where in the last couple of years, they like discovered the markets and they followed a lot of people who were unqualified to be followed, and they did a lot of things that were inadvisable, and some of those things in the early going were like working, so they kept going, or they used margin, or they graduated from buying a stock to buying a stock on margin to buying options, like the, all of that stuff had to get wiped away. Like it, it had to, it was very unhealthy, it was like this young male, toxic energy of like, you know, I don’t need to learn anything, I don’t need to listen to you, I don’t need a job, I just need to wake up and trade shit on my phone.

…

And it hasn’t been replaced by anything, there’s like a vaccum now. What are these people doing? We know they are not trading. Look at Robinhood, common stock, look at Coinbase, we know they are not trading, that’s the one thing we know for sure. We don’t know how many of them started reading books, god forbid, and like actually learning about investing and actually, like, came to the ephiphany that like people have done this before?

…

So, it’s fine, it’s fine though, like because nobody comes into this smart, and you have to lose money to learn how to not lose money, like, it’s, it’s a progression. So we don’t know what’s gonna take its place, I don’t think, erm, that somebody’s gonna go from crypto to 60/40 indexing, it’s probably going to be a step in between and maybe that’s like the value stock rally now. Maybe that’s like people realizing like oh you mean you can buy like an oil stock, and they don’t make semiconductors, and it, stuff actually goes up?

…

It’s not a smart vs dumb thing, it’s like you have to do this for a while, to understand how it works, and what the stakes are. So, er, I don’t know where the puck goes next, but we’ll see if we get a wizened class of investors out of this.

https://www.youtube.com/watch?v=L6fC1r_QsLE&t=2318s

December 6, 2022: Stocks are cheap?

jankythoughts2's avatar by Leave a comment

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

I keep hearing people say that stocks are cheap, because they are 10, 20 (or in some cases 90)% below their peaks. Are they though?

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Bovine Stool

For the sake of decorum, let’s say I have a pile of, ahem, bovine stool. Let’s just call it BS for short.

OK, I have a pile of BS. It’s a pretty big pile. Are you willing to pay me $1m for it?

No?

What about $500k! It’s 50% off from peak!

Would you buy my BS for $500k?

Last offer, $100k, 90% off! Yes?

EMH

One criticism I hear of the example above, is some form of EMH style argument — Markets are efficient/smart/sortof-efficient/whatever, so if you buy at this temporary dip, you’ll make a lot of money.

Cool, if markets are efficient/whatever, what makes you think it was efficient then, and not efficient now?

Or, maybe, it will be efficient after your favorite stock drops another 50%?

Summary

Just because something is selling for X% less than it used to, doesn’t mean it’s on discount for X%.

It could very well mean that it’s still overvalued by Y% (Y > 0), and waiting a bit will get you a better price. If your entire thesis is that “Stock Z has dropped X%”, so it must be cheap, then I suspect over the long run, you’ll be very disappointed in your portfolio performance.

To be clear, I’m not saying stocks are overvalued (or undervalued) right now. I’m just pointing out that comparing a stock’s current price vs its prior price at some point in time, and ignoring everything else, makes no logical sense.

Regulations

jankythoughts2's avatar by 1 Comment

Foreword

AML, KYC, MIFID, RegNMS, RegT, SEC, CFTC, FinCEN! Regulations and regulators! If you’ve ever worked in finance, you’ll know that the alphabet soup of regulations and regulators that need to be followed is long and overwhelming. Do we really need all of these?!

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Cost of regulations

If you’ve ever worked in a financial company, you’ll know that other than legal, there is a compliance department, whose job, it seems, is solely to make your life miserable. “Can I do this?”, “No”. “How about this?”, “Hell, no”. “What can I do?”, “I’ll get back to you in a month. Or year.”

And to rub salt into the wound, compliance folks do not come cheap. Every large bank spends millions to possibly even billions every single year for compliance related reasons, or, in cases where there is a compliance lapse, for fines. All of these costs are directly the result of regulations mandated by regulators. And like all costs to a business, all these are directly or indirectly paid for by clients.

Which means, yes, you are getting a lower interest rate from your savings account, in part, because some of the gains are taken by the bank to pay for compliance. You are paying a higher fee (either directly or via spreads) when you trade stocks, because the broker needs to take part of your profits to pay for their compliance. You are paying a higher mortgage rate, because, you guessed it! The mortgage company needs to pay for compliance.

Is it really worth it? What about a world without regulations?

Road to Alabama

Let’s say you are driving in a car, on the way to Alabama (1). This is the new world, a freer world, a world where there are no rules. Street signs? Nope. Traffic laws? No, siree. Speed limits? LOL. You get the idea.

How would you drive? On the right side of the road? Is the right side still the right side? There are no rules!

How fast would you drive? What if you drive too slowly for someone in a fancy car and they decide to just bump you off the road? Again, no rules!

How do you navigate a roundabout? Go straight through over the middle? Turn left? Or right? NO RULES!

Would you even dare to drive?

Confidence

Let’s say you have $100k, and you need to stick it somewhere. Somewhere safe, so not your mattress. What would you do?

Would you give the money to your next door neighbor Blair, and ask them (nicely) to take real good care of it and leave it at that?

Would you give the money to your local loan shark? After all, Cameron seems to be really good with money!

Would you put the money in the bank?

I’m guessing most people would say the bank, and the next question is… why?

Insurance

One of the reasons why folks tend to choose the bank for largish sums of money, is because of the FDIC insurance. If the bank goes under, or there is fraud and the money is lost, or pretty much anything else, the FDIC, an agency backed by the full might of the US Government, will make you whole. It may take a few days or even weeks for them to sort out the mess, but you can be sure that you’ll get your money back. In full.

Are you confident of getting your money back from your Blair? Or Cameron the loan shark? What if they just laugh in your face when you ask nicely to get your money back? Who you gonna call (2)?

Now, how does FDIC insurance works? Why would the FDIC subject itself to this? What if the banks just collectively decide to defraud the entire nation, take all the money and go live in the Bahamas with their slightly scandalous college room mates?

Well, that’s where regulations come in. The FDIC is playing a statistics game. They know that regulators regularly conduct checks on the balance sheets of banks, and that if anything goes wrong, certain folks at the banks are personally liable and may very well spend the rest of their days in jail. Now, bankers make a lot of money, especially if you are at the top of the food chain in a big bank. Like, a lot, a lot. But a lot of money is really only useful if you actually get to spend it freely — it’s really no fun spending money whilst in jail. So there is just that amount of incentives for bankers, and thus banks, to toe the line.

Yes, not all bankers and banks will toe the line. Some will think they can get away with it, and maybe they can! And some other banks are just unlucky and make bad bets. Like, who would have thought calls on AMC would go to 0? So some banks go under, and the FDIC pays out for those banks. But because the vast majority of banks don’t go under, collectively, the FDIC manages to stay afloat by collecting a small premium from every bank, and directing those premiums to bail out customers of the banks that do go under. Insurance, at work.

And the thing that gives the FDIC that confidence? The thing that allows this statistics game they play? Regulations. Regulations which detail what banks can and cannot do with your money. Regulations which mandate banks keep a minimum amount of liquidity (float), and regulators which conducts checks to make sure the banks are following the rules.

Confidence, again

Other than insurance (and also for insurance, because this is something FDIC, SIPC, other insurance companies depends on), is the fact that by putting down regulations, and setting out what a bank and broker can or cannot do with customer money, it dramatically reduces the surface area of shenanigans that bankers and brokers can do.

Yes, some of the more creative ones will still do stupid things. And some of the less scrupulous ones will just laugh at the regulations and do whatever anyway. But the vast majority of them will know where the line is, and while they will push ever so hard against the line, they will likely not actually cross it (by too much).

Because of that self policing, confidence in the economy and the financial system blooms. Businesses can operate, because they know that when they are approved for a loan, their interest rates won’t magically jump 20% tomorrow. Savers can bank, because they know the banks won’t bet it all on red in Vegas. Investors can leave their cash in their brokerage accounts, because they can be sure that the money is likely there, as opposed to being used to buy magic beans or to fund the CEO’s lavish lifestyle (3), and even if the money is lost, the SIPC will make them whole (4).

And this confidence in the system, this ability to know how others will act, and what to expect, these regulations, they allow the modern world to work.

All regulations are equal, but some regulations are more equal than others

That’s not to say that all regulations are good. While most of them come from a good place, a lot of regulations are reasonable, and many regulations are simply needed for the world to even work, there are, clearly, some regulations which were either poorly thought out, or designed with less than altruistic concerns.

Which is not great, certainly, but welcome to Earth, population 8billion (5), where humans fail, and there’s a lot of us around to fail. Get used to it.

The whole point of having ongoing lawmakers is because we know that laws and the rules borne of those laws are not always good or right, and very often become obsolete over time. And the whole point of democracy is so that lil’ ol’ us get at least a bit of a say in how and what the lawmakers do and legislate. If every law and rule was perfect and will always remain perfect, then there’s really no point to having an ongoing government, is there?

So yes, things break sometimes, but hopefully, over time the bad bits will get replaced with somewhat better bits.

But claiming that we should do away with all regulations, because of 1 or 2 bad ones, is simply naïve.

Footnotes

  1. To bring granny a basket of fruits and cakes. In your red car. What else could it be?
  2. Ghostbusters! The answer is, always, Ghostbusters! With the exclamation mark.
  3. OK, fine, bank/brokerage CEOs get paid a lot of money. So maybe some of that. But not all of it.
  4. Currently up to a maximum of $500k, of which at most $250k can be in cash.
  5. Yea, that just happened, in the Philippines, apparently.

All Money is Debt

jankythoughts2's avatar by 2 Comments

Foreword

What is money? What is debt? How are they related?

Some people get all twisted out of shape calling fiat money “debt”, and that only gold or bitcoin or silver or whatever is real “money”. But is that really right?

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Debt

Let’s start with the easy one. What is debt?

The Cambridge dictionary defines debt as “something, especially money, that is owed to someone else, or the state of owing something“. That’s fairly clear, ain’nit?

Island adventure

Let’s do a little thought experiment. Let’s say a bunch of people, including you, are on a remote island. None of you know each other, none of you have reasons to trust each other. But for your little society to work, and for everyone’s lives to improve, you need to work together, because it simply isn’t feasible for one person to do everything well — division of labor generally tends to yield much better results for everyone.

One day, one of the strangers, Alex, did a favor for you — they built a little fire pit for you, out of rocks they carried down from a nearby mountain. Your specialty is foraging berries, but Alex already had their meals today, and berries don’t keep long. How can you repay Alex?

One way, is for you to give Alex a token, a symbol of the value you owe them, for their work in constructing the fire pit. This token can be a cowrie shell, a pretty rock, a piece of leaf you scribble a mathematical puzzle that only you can solve, etc., pretty much anything — Anything that both you and Alex agree to recognize as an accounting measure of what you owe Alex.

Now, let’s say you and Alex settle on using cowrie shells — they are hard enough to find that neither of you are concerned about the other using newly found cowrie shells to deceive the other, and the shells are pretty enough that you wouldn’t mind keeping them just for their own sake. Further, let’s say that the rest of the group of strangers feel the same — that cowrie shells are rare enough, and valuable enough in their own right, so that everyone starts offering, and accepting, cowrie shells for goods and services bought and rendered.

Well, congratulations, you’ve just invented money — the cowrie shells are, essentially, money.

As you can see, money is, at least in this case, just a means to measure how much each person is owed by the collective body — the rest of the island (world). It is a physical manifestation of the debt that the rest of the world owes you. Nothing more, nothing less.

Intrinsic value

“Hold on there!” someone will be shouting right about… now, “Cowrie shells have intrinsic value as you’ve said, that’s why they are money”. Yes, I did say that cowrie shells, at least on that island, has some intrinsic value — they are pretty enough that everybody wouldn’t mind keeping them around just to look at them.

But you see, that doesn’t make cowrie shells money. It just makes cowrie shells pretty. There are a lot of things that are pretty, yet are not used as money — a medium of exchange, a scoreboard for tracking how much you owe the world, or how much the world owes you.

Part of the reason why cowrie shells is money on your remote island, is because everyone agrees they are money, and everyone agrees to accept or offer them as representations of value transferred. The fact that they are pretty is mostly irrelevant — the prettiness is a useful property for bootstrapping the economy, but beyond that has no real relevance to the day to day use of cowrie shells.

Similarly, a fiat currency can be bootstrapped into money by, well, fiat — a government can decree that within the borders under its control, some currency needs to be accepted and offered as legal tender for goods and services offered or rendered. The currency need not be pretty in this case for the bootstrapping — the credibility of the government, and how much people believe the government is able to enforce its legal tender laws, is the criteria for bootstrapping the currency. And once the currency is in wide circulation, and everyone agrees to use it as money, then it will be money, and it will, as before, track debt owed to (or by) each individual person.

Hyperinflation

Now, let’s say that for whatever reason a large portion of the population of the island decide not to use cowrie shells anymore at any point in time. They stop accepting cowrie shells, and start using their existing cowrie shells to quickly buy up goods or services from those who still use cowrie shells.

In time, more and more people will recognize that cowrie shells cannot be used to buy certain goods and services, and even though the shells are just as pretty, their “value”, how much each cowrie shell can buy, will start to drop. As more and more people recognize this, they will be more and more willing to exchange cowrie shells for less and less, resulting, eventually, in hyperinflation — the value of money essentially drops to, or close to, 0.

Now, I want to be clear here — hyperinflation and inflation are not the same thing. Inflation is just the regular ebb and flow of the value of money vs goods and services. Hyperinflation, on the other hand, is a loss in confidence in the value of money by a large portion of the populace, which then feeds on itself, becoming a death spiral for the value of money (1). The former is a measure of relative supply and relative demand, while the latter is a loss in confidence of money — two very different things.

You can have very, very high inflation (say 10-20% a year), without actually getting hyperinflation. There are countries with poorly managed currencies with such high inflation numbers for prolonged periods of time, but because enough people still believe in the currency (even if that belief means mentally adjusting by 10-20% a year), that hyperinflation simply does not set in.

In short, high inflation is a crisis of relative supply vs relative demand. Hyperinflation is a crisis of confidence in money.

Another way of looking at it, is that hyperinflation is one way how money stops being money.

Forgeries

Let’s say instead of losing confidence in the cowrie shells, someone stumbled upon a little cove on a remote part of the remote island, where cowrie shells are just all over. They secretly take these cowrie shells and start using them to buy things, and entirely stop working. If they do this at a small scale, most people may not notice, and while inflation may set in (prices will go up a bit to reflect the relative value of money vs goods and services has shifted), confidence in cowrie shells won’t be loss, and life goes on without hyperinflation. If, however, they do it on a large enough scale, effectively introducing a level of supply of money that’s so large that society (the rest of the island) can never repay the debt as symbolized by the new supply cowrie shells, then things will likely go haywire and hyperinflation will likely set in.

To counter the demise of cowrie shells, you found something else, a shiny yellow rock, that is, again, very rare, but because it wasn’t money, nobody has been really collecting it, and so you are the only person with a lot of it. Can you just unilaterally demand everyone use the yellow rock as money? Maybe! Obviously everyone else will be at a severe disadvantage to you, and clearly they won’t like that very much. Some other people can probably find other things, maybe a leaf scribbled with an arcane math problem only they managed to solve, or a series of auditable numbers carved on a giant stone, things that are also hard to forge, but that they themselves have a lot more of than the rest of the island. Those people will also make the same demand that their thing is the new money.

So why yours and not theirs?

Ultimately, the choice of what to use as money depends on the interplay of 2 things:

  1. Who has the clout, the ability (by persuasion or by force) to convince more people to accept their choice
  2. What is the thing most people agree to use

Essentially, being hard to forge, even impossible to forge, does not automatically make something money. Humanity has known for decades about cryptography and how to make essentially unforgeable artifacts. Yet none of these have become money in and of themselves — instead, they are used to secure existing money, by encrypting transactions made in USD, EUR, GBP, etc.

Summary

To become money, having the properties that are necessary for being money is not enough. You also need that bootstrap, and you need that bootstrap to morph into popular support by the populace. Finally, to prevent your money from stopping being money, you also need to maintain the people’s confidence in your money, essentially in perpetuity.

But underlying all of these, is the basic premise, that money is, simply, debt. Money represents debt owed, and is the unit of accounting so that society can decouple the 2 parts of a barter trade — instead of you and Alex trading a fire pit for berries, you get the fire pit now, and Alex gets the berries later, with money acting as a measurement of the debt you owe Alex in between.

Edit:

The key, then, to remember, is that the value of money does not come from within — it comes from without. Money is money not because it has intrinsic value. Instead, money is money because it has extrinsic value — its value is entirely bestowed by the willingness of others to take that money as payment for their goods and services. Claiming something is hard to forge or highly divisible is necessary, but not sufficient. Claiming something has intrinsic value because it can be used in industries, or looks pretty, is mostly irrelevant. Claiming something is backed by something else, is irrelevant, unless that backing is either a form of widely accepted money, or that backing involves the ability to persuade others (again, either by persuasion or force) to accept the backed asset as money.

Footnotes

  1. Wikipedia defines hyperinflation here, which includes a mathematical definition of hyperinflation, which is basically 50% increase in prices of general goods and services on a month over month basis, over a prolonged period of time, essentially the death spiral mentioned above. On a year over year basis, 50% month over month translates to roughly 129x increase in prices per year.

November 9, 2022: Well, there you go…

jankythoughts2's avatar by 1 Comment

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

About a year and a half ago, I noted that leverage in crypto and interlinkages via institutional and retail players could cause a minor contagion. I was, of course, soundly mocked for being an idiot. Well then, let me tell you about Celsius, Voyager, Three Arrows Capital and FTX…

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Mini-tagion?

Well, the foreword kind of already said everything (1). But the last few rounds of crypto drawdowns due to some sort of “stablecoin”(2)/leverage issue saw massive dumps in the entire crypto space, accompanied by less severe stocks drawdown.

And that happened, again, today. As FTX circled the drain due to its liquidity (and solvency) issues, stocks took a small beating (SPX down ~2%) on basically no other news (3) — apparently FTX committed the rookie mistake of using their own token as collateral, resulting in a giant #REF! in Excel spreadsheets worldwide.

Thankfully the volume in cryptoverse is relatively small compared to stocks, and the collateral damage was manageable.

SEC/CFTC investigations

While the current issue is said to only affect FTX.com, the SEC and CFTC are actively looking into the issue and potential contagion risks for FTX.us. Unfortunately for banks (4), sometimes even the whiff of impropriety can be extremely damaging (5). We will have to see if FTX.us manages to survive this crisis of faith.

Edit: It appears the DoJ is now also involved in investigations.

Related news

Footnotes

  1. Yes, this is sort of a “I told you so” moment, Mr M.
  2. Can we still call them “stablecoins”?
  3. Technically, there was news — midterm election results are mostly out, but given what looks like a gridlocked Congress, that should be positive for stocks.
  4. Here, I’m using the word “bank” more symbolically — basically any entity that takes money from others for safekeeping, while using part of the money for its own investment purposes.
  5. This is often cited as the reason why the Fed forced all banks to take bailouts during the 2008 Great Financial Crisis, and forbid any bank from disclosing whether they actually needed the bailout.

October 30th, 2022: Fed watch party

jankythoughts2's avatar by Leave a comment

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

The Federal Open Market Committee (FOMC) is meeting next week, with a decision due on Wednesday. With all that’s going on, the Fed’s actions is quickly becoming one of the only things that matter in the markets.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

What next?

Everyone is, of course, concerned about where the Fed is heading with regards to interest rates. While inflation is still extremely high, there are mixed signs that it may be coming down, so in the past week or so, despite horrendous earnings by some of the country’s largest companies, stocks have been generally going upwards.

Bull case

The bull case for stocks right now seems to be some mix of the following:

  • At the margins, some of the leading causes of inflation (used car prices, housing prices, etc.) have started to come down, and in some cases, dramatically so, hinting that the Fed’s policies may be working, and they may be tempted to ease up.
  • Quite a few companies have been warning about their profits, as well as near term profit forecasts, suggesting an economic recession may be in our near future. To head that off, the Fed may want to ease up on the hikes or even outright ease policies.
  • The Fed has said many times that the goal is to hike to a suitable rate, and then hold rates there for a while. Maybe they are at that rate already and can stop hiking?
  • The dollar is extremely strong right now, causing much consternation to the rest of the world and notably many of America’s allies. Going slower on hikes will alleviate that somewhat and make lives easier for America’s friends.
  • The strong dollar is also causing export oriented American companies to face strong headwinds in their businesses, leading to several rounds of layoffs already in some large companies.

Bear case

And the bear case for stocks right now seems to be some mixed of the following:

  • While the initial causes of high inflation have somewhat abated, inflation seems to have spread to other parts of the economy. More worryingly, “sticky inflation” (1) seems to be going up, suggesting more effort to combat inflation may be needed.
  • The Fed, through Powell, has said many times that they wish to avoid the mistakes of the 70’s where rates were lowered only to see inflation return with gusto, leading to even more future hikes.
  • Powell has also been, of late, using words and verbal imagery, sometimes even outright invoking Volcker’s name. As we know, Volcker is famous for breaking inflation in the 70’s by raising rates relentlessly, arguably to the point where he went slightly overboard.
  • Compared to inflation, Fed funds rate is still extremely low, and despite everything, inflation is still extremely high.
  • Inflation is, first and foremost, a sentiment issue. Preventing the seed of higher expected future inflation from taking root is critical to containing inflation. The Fed has said many times that they are concerned with that seed being planted in people’s minds, and the recent calls for higher wages suggest the self-reinforcing cycle of higher inflation may be getting started.

Which is it?

There’s a lot riding on the Fed’s decision on Wednesday, and possibly even more on Powell’s press conference right after. How much the Fed rises rates by, what their dot plot hints they are thinking for the future, and what Powell says and even the tone he uses to say it — all these will be put under the microscope and analyzed to a degree that probably borders on crazy.

Getting the Fed’s nuances, and more importantly the market’s reactions to those nuances, right and doing so consistently this year will have almost guaranteed stellar portfolio performance. Since I’ve yet to retire, you can assume that I haven’t done so. 😉

Footnotes

  1. Sticky inflation is inflation of goods that tend to have more sticky prices, as in their prices don’t tend to move as much, but when they do move, they tend to stay at the new price level for longer.

October 28th, 2022: Can’t grow to the sky

jankythoughts2's avatar by Leave a comment

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

The major cap growth stocks just took a long walk off a short cliff, and even with the rally today, most of them are still underperforming the SPY, something that has been a fairly rare sight in the past decade and a half.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Value value stocks

If there is a theme to outperformance so far this year, it is to take a long hard look at value stocks. And then buy the good ones.

Mind you, not just any value stocks, only the good ones — There are two main definitions of value stocks, one popularized by Benjamin Graham in his genre defining book “The Intelligent Investor”, and one popularized by Fama and French in their, also genre defining, quantitative three-factor model.

The former talks about understanding the fundamentals of a company, and trying to figure out whether it is underpriced for its earnings potential, while the latter talks about metrics which hint at the potential underpricing of select stocks. The differentiation seems minor but is important — Graham’s model suggests that investors should thoroughly understand their investments and with that understanding, gain confidence to concentrate their portfolios. Fama and French’s model is the direct opposite, and relies on diversifying across many stocks with certain characteristics (such as low P/B ratios), and trying to profit off the aggregate average outperformance.

Here, I’m talking about Graham’s model.

Negative growth

Over the past 15 years or so, large cap growth stocks like Google, Microsoft, Apple and Facebook have collectively (and independently) outperform the SPY by dramatic amounts. At their peaks, these companies were commanding P/E ratios of more than 30, with many investors treating them as safe havens. Cathie Woods even famously talked about moving excess cash in her funds into these stocks temporarily while she looks for better opportunities.

Today, after a series of mistake starting late last year, most of these stocks have been beaten down severely, as investors rediscover their goals of actually making money; John Authers says it best:

This is all a tad reminiscent of the period of a few weeks in early 2000 when dot-com investors suddenly moved from metrics like “clicks per eyeball” to “burn rate” — an old metric with a new name, referring to how quickly startup companies were burning through their cash flow. Meta has become a vastly more substantial and tangible concern than the entities that evaporated 22 years ago, but the sudden and swift realization that it had been valued far too generously still rings those bells.

John Authers, Bloomberg 10/28/2022 – https://www.bloomberg.com/opinion/articles/2022-10-28/tech-s-fangs-plummet-in-wile-e-coyote-moment-on-earnings

Investing vs Speculating

As folks grapple with their buyers’ remorse, it is important to remember the fundamental difference between an investor and a speculator: If you are investing, you are looking to profit from the productivity of the asset, while if you are speculating, you are looking to sell that assert at a higher price to someone who values it more.

If you are comfortable with a 3% (assuming no growth) rate of return from your investments, then buying at 30P/E make sense — 30P/E implies a return of 3.33% (assuming no growth).

If you need your investments to return quite a bit more than 3.33%, then either you have to consider potential, realistic growth — nothing grows to the sky, so projecting 30years of 30% growth is almost definitely wishful thinking, or you’ll need to find stocks that are trading for less than 30P/E. Simple as.

October 2nd, 2022: ERP, derp

jankythoughts2's avatar by Leave a comment

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

Inflation is near its highest in ~40 years, the Fed and almost all other central banks are aggressively hiking rates at an unprecedented pace, global supply chains are shaky at best, Russia and Ukraine at effectively at war, effectively disrupting two of the largest sources of both food and fuel for the world and Europe is facing an uncertain winter due to energy shortages. Sounds like a good time to check in on equities.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

ERP

Equity risk premium, or ERP, is defined as the rate of return investors demand for equities over that of the risk free rate. Based on Yardeni Research, the current ERP is around 5.5%, slightly lower than the start of the year, and quite a bit lower than late 2019, early 2020 (pre-pandemic).

The lower the ERP, the more confident investors are generally said to be of equities — at the extreme, an ERP of 0% implies that investors view equities are interchangeable with risk free securities in terms of returns.

Which is to say, despite all the above, investors actually view equities more favorably than the start of the year, at least, based on the ERP.

Derp

The 3rd quarter just ended, and earnings season is upon us again, starting in earnest in about 2 weeks with the banks, followed closely by the big tech companies. By the end of October, we’ll have CPI for September as well as the Q3 earnings report from most of the largest companies in the US. Just in time for the Fed’s FOMC meeting on November 1st and 2nd.

Given that the ERP went down slightly compared to the start of the year, it seems like the market is expecting (at least with regards to the risk free rate) that the Q3 earnings reports will come in good, or at least in line with expectations.

That seems a little optimistic, given the financial situation around the world right now. In particular, it seems in my naïve view that

  • Companies that depend heavily on sales made in foreign currencies are going to suffer from the strong US dollar.
  • Companies that depend heavily on global supply chains are going to have issues with shortages.
  • Companies that don’t have pricing power relative to their input costs are likely to get their margins squeezed.

On the other hand

  • Companies that are allowed to export energy seem like they may do well.
  • Companies that are able to adjust their prices based on inflation, while keeping their costs low, are likely to do well.

Positioning

For all the reasons above, I’m thinking seriously of shorting the stocks of those companies in the first list into earnings. As usual, this will be a small position (since I don’t generally like shorting and shorting is extremely hard to get right), mostly for fun, but also for personal validation.

As always, you can see the positions in one (out of 10+) of my brokerages with StockClubs (1), with a 1 day delay.

Footnotes

  1. Disclaimer: I am an investor in the app.