Tag: quicknote

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 sold off a large part of my stocks portfolio in September 2021, and have been mostly flat till now, only making temporary tactical trades. The idea was that I’d get back in when things look stable again. Today, it seems this strategy received some support from empirical evidence.

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.

Flat as Nebraska

As noted in the May 12 update, I closed a large part of my stocks portfolio and went mostly flat, except for a few choice positions. As explained in My Personal Portfolio, I tend to be very risk averse and conservative. As such, whenever things look bumpy, I tend to flatten my portfolio or at least hedge a bit. When things are calmer, then I’ll slowly get back in again. I have no real reason to believe this strategy works well in practice, other than letting me sleep better at night. Until today…

Note: You see the positions and trades in one of my brokerage accounts (out of ~10) on StockClubs, an app that I’ve invested in.

Empirical data

Today, John Authers of Bloomberg posted an article in his daily column, which claims that my strategy apparently works, at least based on historical data:

Richard Bernstein Advisors LLC analyzed the returns of a hypothetical investor around major market bottoms. The returns for entering 100% into stocks “early,” meaning six months prior to a market bottom, were compared with holding nothing but cash until six months after the market bottom and then shifting to 100% stocks “late.”

…

“Not only does [being late] tend to improve returns while drastically reducing downside potential, but this approach also gives one more time to assess incoming fundamental data,” Dan Suzuki, the firm’s deputy chief investment officer, wrote Tuesday. “Because if it’s not based on fundamentals, it’s just guessing.”

John Authers, Bloomberg – https://www.bloomberg.com/opinion/articles/2022-08-19/-the-godfather-insight-oil-prices-have-been-driving-markets-all-along August 19th, 2022

While this doesn’t really change anything for me, it’s good to know that at least I’m not completely crazy.

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.

As volatility in the crypto space continues, it appears one man, Sam Bankman-Fried (SBF) is trying to rescue his industry by saving banks first.

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.

SBF

Before I posted the quick note on Voyager’s bankruptcy, SBF had already been in touch with various crypto banks, injecting capital so as to prevent a greater meltdown of the crypto ecosystem.

If you have money in crypto, especially if that money is tied up in one of the crypto banks that are in serious trouble and have halted transactions, and especially, especially so if your bank/broker is one of those SBF is looking to save first, then you may just be heaving a sigh of tentative relief. If SBF’s plan works, your losses will likely be dramatically reduced.

As far as I can tell, SBF’s efforts are generally held up as a shining example of the crypto community’s “community-ness”, and generally viewed as a good thing.

Irony

And that is highly ironic.

Recall the premise for the founding of crypto — that central banks were somehow evil for bailing out the financial system, especially during the 2008 Great Financial Crisis.

Nevermind that if central banks had done nothing, there was a good chance that regular folks whose money was caught up in banks stood a very high chance of taking a large financial loss. Nevermind that if the financial system were to shut down, even for just 2 months, those who would be hurt the most would likely be those who are least financially prepared. Nevermind that SBF is basically acting as a central bank for crypto, and doing exactly what a central bank would do in the event of a financial crisis — being the lender of last resort.

The crypto community (then) pointed at the rich who benefited “disproportionately” from the bailouts. Yes, a billionaire probably stood a very good chance of not losing a few hundred million dollars due to the bailouts. But for a billionaire, losing a few hundred million dollars is annoying, maybe even frustrating, but in the overall scheme of things, just a flesh wound. Consider what would happen to a family living paycheck to paycheck, if they lost access to their bank accounts for just 2 months, even if they eventually got back all their money? Would they even be able to keep a roof over their heads and food on the table in those 2 months? For our regular-joe family, even if they only stood to lose a few hundred/thousand of dollars, it would almost certainly be a financial catastrophe.

As many have pointed out over the years, the crypto community essentially seems intent on relearning every facet of financial history all over again… and mostly coming up with the same solutions.

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.

Wealthion just released a great interview this weekend, that I feel is well worth watching.

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.

Lance Roberts

Wealthion interviewed Lance Roberts this weekend (this is a weekly thing — Lance and Adam are friends), which I feel should be mandatory watching for anyone managing their own money.

In this, Adam and Lance talk about recent macro economic issues, possible resolutions, and general positioning strategies with such high uncertainty in the markets. For those who haven’t read it before, I wrote on something similar to one of the topics discussed a long time ago — Death of price discovery?

Even if you don’t have the time to sit through the whole 1hour+ (protip: Watch at 1.5x speed), you should at least listen to the ~10minutes from the 56m to around the 1h 5m mark, where Adam and Lance talk about the idea of permabears. This is something particularly close to my heart, because that’s a label some people who don’t seem to be very in tuned with macro economics like to hurl around.

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.

Voyager Digital just filed for bankruptcy. What happens next is going to be interesting.

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.

Sailing to bankruptcy

According to Bloomberg, Voyager Digital, the crypto broker, just filed for chapter 11 bankruptcy.

In the regular world …

Now, if this was a regular broker, the process is fairly well established and straightforward. Generally speaking:

1. The regulators and SIPC will try and find a buyer for the assets of the broker.
2. If a buyer is found, that buyer will provide customers with new login details (or in some cases, use the bankrupt broker’s existing website/apps).
   1. Most customers will basically see no real down time, except for maybe creating a new account on the new broker’s website.
   2. SIPC will work in the background with the new broker to recover assets.
3. If a buyer is not found, then a trustee of some form is created to find assets and distribute them.
   1. Customers with accounts below the SIPC insurance limits (currently $500k, at most $250k of which can be cash) will get instructions on how to move their assets to a broker of their choice. This probably takes a few days to a few weeks.
   2. Customers with accounts above SIPC insurance limits will get assets up to the insurance limit, and anything else will be considered unsecured debt against the trust.

For the majority of customers, it should mostly just be an inconvenience.

… and then there’s crypto

Since there are no regulators in crypto, and no insurance scheme, points 1, 2.2 and 3.1 don’t apply. Basically, if a buyer is found, the buyer assumes all liabilities (i.e. customer assets), and if a buyer is not found, then all customers become unsecured creditors to the trust.

But how would it actually work?

In regular finance, the assets are typically kept at third party custodians, so the process is relatively easy — the custodian freezes the account until SIPC/regulator/trustee signs off on release of assets. But in crypto, there are rarely third party custodians — Voyager itself likely holds the keys to its crypto assets, and in many cases, the assets are backed by the broker itself, such as Voyager Tokens.

If the accounts are at a third party, a court order will force the custodian to freeze the accounts, and any missing assets from that point on must be repaid by the custodian. But if Voyager (and presumably its executives) holds the keys to the assets, how do you freeze the assets?

What’s preventing some Voyager executive from mysteriously dying after all the assets disappear?

What would Voyager Tokens be worth after chapter 11?

Are the courts able to even wrap their heads around all of these to make a reasonable ruling?

Will the entire process take so long that the price of the assets shift dramatically? And if so, are customers owed the assets, or the value at time of bankruptcy, or the value at time of distribution? This is particularly interesting because Voyager loaned out much of the assets, and with the broker now defunct, how is it going to continue servicing the loans (issuing margin calls, collecting collaterals, etc.)?

So many questions! This event has the possibility of bringing a lot of clarity to the murky world of crypto. Stay tuned!

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.

Yesterday, CPI reported consumer inflation at the highest level in about 40 years — since 1981. Instead of the expected flattish reading of 8.3%, inflation was reported at 8.6%, a level that must certainly be ringing some alarm bells at the Fed.

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.

Expectations

Prior to the release of CPI numbers, economists were predicting that inflation was turning, that May’s CPI print would confirm a slowdown, which could signal the start of disinflation.

Listening and reading to various financial analysts over the past month or so, almost everyone has been positioning for a gradual end to inflation. The thinking is that the Fed will eventually raise rates to around 2-2.5% (from 1% now) sometime near the end of the year or early 2023, realize that they’ve overdone it, and start the next round of QE + rate cuts.

To that end, a lot of fund managers initiated positions in TLT (long duration Treasuries ETF), thinking that with the Fed tapering the rate hikes, TLT will bottom out soon.

Instead, we had a scorcher of a print, at a level way higher than anything seen so far in this inflation cycle.

Fed

I had previously expected the Fed to start the rate hike cycle much earlier, obviously that was wrong. The thinking was that the Fed needed to shock the market into reducing liquidity conditions, so as to reduce the velocity of money and thus inflation. The sooner they did so, the less they’d need to do in actual hikes, as market expectations will do most of the work for them.

However, the Fed has, thus far, taken relatively mild steps with regards to hikes, often telegraphing their intentions well ahead of time, effectively losing the shock and awe factor which I feel is needed for the Fed to regain the narrative over inflation.

Prior to the CPI print, the Fed hinted strongly at another 50bps hike this coming FOMC meeting (next week, June 14th and 15th). With the print, the media is speculating that the Fed may have to do 75bps.

Which is to say, a hike of 50bps next week could potentially be seen as dovish, and a 75bps hike may be seen as “expected”.

If the Fed wants to shock the market, then the next alternative is a 1% hike.

For those speculating on the markets, what do you think the Fed will do? Do you feel lucky, punk?

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.

Recently, there has been a lot of talk about bubbles, and bubbles bursting. This is despite the fact that we are about 15% below all time highs for the SPX, and 6% above recent lows. It is getting scary out there…

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.

Sequoia

In 2008, Sequoia made the, then controversial move of publishing a slide deck titled “RIP Good Times”. Despite the events of late 2007, no major financial entity was publicly talking about dramatic economic hardships at the time, and the Fed then was still publicly optimistic.

As we now know, those slides turned out to be prescient, almost perfectly marking when the Great Financial Crisis really started in earnest, eventually resulting in the SPX dropping around 50% peak to trough.

Recently, Sequoia is out with another note, this time in a medium more fitting of the times, “Adapting To Endure”. While the title is less punchy and doomy than the deck in 2008, the contents aren’t exactly encouraging.

Wealthion

A relatively recent entrant to the financial news scene, Wealthion has grown fairly rapidly, with insightful interviews of various prominent financial scholars.

Wealthion recently published a 2-part interview with Peter Atwater, who is a fairly noted and celebrated financial observer, titled “Everything That Can Go Wrong, Will – As This Confidence Cycle Ends” and “As Bursting Asset Bubbles Vaporize Wealth, Social Blowback Will Be Inevitable”,

Clearly, the titles are less than optimistic, and the content matches the mood set.

Well then…

I would strongly encourage everyone to read Sequoia’s latest note. If nothing else, it gives some ideas for how one would prepare for potential future financial hardships.

The videos from Wealthion are also worth the time. They give a brief history of how we got to where we are, and highlights something I’ve been talking about on and off — price discovery doesn’t seem to be working well, especially since the Great Financial Crisis; With the dramatic rise in stock valuations in the past ~20 years, and despite the recent drop in stock prices and the dramatic earnings improvements of the past ~10 years, the P/E ratio of the S&P 500 is still about 30% higher than the average pre-dotcom.

Nobody really knows what the future will bring, so take the above with a pinch of a salt. They aren’t meant to be predictive, nor prescriptive. Instead, they suggest that at least in some parts of the economy, some people are starting to take note and they seem worried.

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.

A long time ago, before the creation of this blog, I used to write semi frequent, though not really regular, short notes about what I think about the markets in the near term. That was the model for the “quicknotes” posts in this blog.

A couple of people reached out and mentioned that they missed the discussions around those posts, and were also curious about my take on the market’s behavior so far this year. And so, here we are…

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.

Powell

Before we discuss more, we need to talk about my mental model of Powell. Personally, based on his words and actions I think that Powell leans towards the hawkish side of the Fed (I can’t substantiate these, as I’m lazy, deal with it):

• He was on the record in favor of hikes when Yellen was chair.
• He hiked in 2018, despite the markets going down.
• He mentioned Volcker a lot in his speeches. Less so Greenspan.

Now, some people are very quick to point out that Powell blinked and reversed course in 2018, stopping the hikes after the markets turned down. That’s partially correct — he did do that, but I don’t believe he did it willingly.

If you’d recall, (then president) Trump was very upset about Powell hiking, and repeatedly bashed Powell in public, press conferences, Twitter, etc. He also repeatedly threatened (and was rumored to be exploring options) to fire Powell before Powell’s term was up. It was only after a long time of this abuse did Powell relent.

Imagine if your boss, and the president of the United States wanted you to do something, but you did something else instead. And only after being threatened did you relent. Would you be stopping willingly, or not?

From all these, it seems to me that Powell is a pragmatist, a technocrat. He recognizes that low interest rates forever is not a good thing as it distorts markets (1), and he’s willing to let the market take a hit to restore balance.

Federal Reserve

The Federal Reserve (Fed) as an institution has only 2 official mandates — price stability and full employment.

We are currently very near full employment (some may argue too high, given the labor shortages). But we have very high inflation, i.e. no price stability.

When I wrote my first inflation note, I had already seen early signs of inflation for a few months, which was why I was fairly confident that the Fed would have seen it too and would act soon. I mean, if a code monkey like me can see it, anyone who wasn’t blind could… right?

I figured that since it was early, if the Fed stepped in quickly, they could probably get away with just jawboning and maybe 1 or 2 symbolic hikes.

By September 2021, when the Fed still hadn’t acted, despite inflation being super obvious and already reflected in CPI numbers, I decided to flatten my portfolio (2). My thinking then was, the stock markets already seemed to be starting to price in some action from the Fed, despite nothing from them, so everyone must be seeing it. The fact that the Fed aren’t acting yet means that the problem is more likely to get out of hand, which then makes it that much harder to control — recall in my first inflation note that beyond some point, inflation becomes really hard to control without draconian measures (hence the Volcker policies of the 70s). I didn’t like the odds for the market, and so I tamped down my exposure.

At this point, inflation is so high that the Fed cannot simply jawbone it down, neither can they (I believe) just get it down with a few symbolic hikes. At the same time, inflation is so high that they cannot claim “mission accomplished” just by changing the trajectory of inflation (i.e. disinflation) — no, it’s too late for that now — to restore public confidence, it seems like they’ll need to get the absolute level of inflation down to some reasonable level, say 2-3%.

Biden

Finally, the last piece of the puzzle. Recall that in 2018, when Powell wanted to hike, Trump stopped him so as to bolster the stock markets. Well, will Biden do the same if stocks go down?

First of all, Trump was an unconventional president. Biden is quite a bit more conventional. And conventionally, presidents tend to avoid overtly influencing the Fed.

Secondly, Biden is on the record as saying that he believes inflation is too high. Indeed, inflation is currently seen as the most important topic for the midterm elections later this year.

Finally, Biden has expressed that he believes the Fed will tame inflation. I’m not much of a politician-speech expert, but I think that means “Powell, you’re it! Please get inflation down, kthxbai.”

Which is to say, Biden seems like he’s more concerned about controlling inflation, than about stock markets taking a beating or two.

Now what?

Currently, it seems like the 3 entities most able to control the inflation vs stock markets balance are all leaning towards “taming inflation”. Maybe they’ll be able to find a soft landing, maybe not. I don’t know.

Either way, it does suggests that volatility is here to stay for a while.

For reference, historically, the trough of the S&P500 tends to occur when its P/E ratio is from 5-15, or 18 (for the Dotcom bubble):  https://www.multpl.com/s-p-500-pe-ratio (3)

A P/E ratio of 5 for the S&P500 implies SPX at around 989. 15 implies 2968 and 18 implies 3561.

I’m guessing the truth is somewhere in there.

Footnotes

1. Since it’s mid May 2022, I’m guessing most people have gotten this memo by now.
2. “Flatten” here meaning reduce risk, not “sell everything”.
3. I’m excluding the post GFC period. Guess why.

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.

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.

Almost anniversary

Almost a year ago, on June 6th, 2021, I made a post about inflation. In it, I talked a bit about my thoughts on inflation, where I think it was heading, and some potential sectors to invest in if you believed inflation was going to be a problem. I made a follow up on August 30, 2021, clarifying some misunderstandings I hear from talking to people.

Unless you’ve been hiding in the middle of the forest and living off the land, you’ll probably have noticed that inflation has not been kind in the past “almost a year”:

And this is how the sectors I’ve talked about have performed:

Notes:

• The candlesticks are for SPY, the colored lines are each for a sector ETF.
• I’m cheating a little by using XLU. I wasn’t talking about the utilities sector in my prior posts, but “utilities-like” stocks (see the posts for clarifications). But there’s no real “utilities-like” stocks ETF, so I’m using XLU to represent.
• Some people were confused when I say “housing”, thinking I meant “homebuilders”. No, I meant “housing”. Homebuilders didn’t do too well was what I gathered.
• ARKK isn’t really a sector, but a bunch of people have been crowing about how “innovative, disruptive tech” is the best inflation hedge. Yeah…., no.

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.

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.

Curve inverted

Historically, when the US Treasuries yield curve inverts, such that 2 year Treasuries have a higher yield than the 10 year Treasuries, recession very often follow within about 18 months. Therefore, you can imagine the concern in various financial forums when the 2/10s inverted late last week, and the inversion got even worse (2 year Treasuries yield – 10 year Treasuries yield became bigger) this week.

Separately, the thinking is that the Federal Reserve generally has greater control over the short end of the curve (i.e. the Fed can influence 2 year yields more than they can influence 10 year yields). Hence the inversion suggests that the Fed may have to stop their rate hiking cycle before it really got out the door, for fear of making the inversion even worse.

Brainard to the rescue

Today, Lael Brainard, Biden’s proposed vice chairperson of the Federal Reserve, also historically one of the biggest doves (in favor of lower rates) in the Fed, made a speech. In that speech, she shed her dovish skin, and made the case not just for greater rate hikes, but also for faster Quantitative Tightening (QT), possibly as soon as early May.

Conventional wisdom (as covered above) would suggest that such hawkishness from one of the traditionally more dovish members of the Fed, and also someone with considerable influence due to her pending appointment to vice chair, would cause rates to rise, and the inversion to get worse.

Conventional wisdom was half right. Yields across the curve jumped around 10bps (0.1%), but the curve un-inverted. 2 year Treasuries are now yielding less than 10 year Treasuries, albeit by a tiny amount (about 2 bps) — 10 year yields jumped more than 2 year yields due to Brainard’s speech.

What would the Fed make of this, I wonder? And how would they react? Would they be encouraged to hike even faster?