Nomad

So it appears that Citadel has Ben Bernanke as an "advisor," Janet Yellen on the payroll to the tune of $850,000, and now it's coming out that the White House press secretary Jen Psaki may even have a relative working as a PM there: https://twitter.com/colinkalmbacher/status/1355241077721063430 If you recall, Psaki was asked about a potential investigation into the Gamestop matter yesterday and refused to answer whether Yellen would have any conflict of interest related to her speeches at Citadel. The Wall Street-to-government revolving door appears to be humming along just fine.

What legal theories are you referencing? I am only familiar with Rule 10b-5, which is here: https://www.law.cornell.edu/cfr/text/17/240.10b-5 A 10b-5 violation requires a material misstatement or omission of fact. Speculative statements of opinion ("This stock is going to the moon" or "Buy GME, can't go tits up") don't count. And there are more hurdles than this in the law. Importantly, the Supreme Court held in Ernst & Ernst v. Hochfelder (https://supreme.justia.com/cases/federal/us/425/185/) that there must be intent to deceive. On top of that, you actually have to show that the misstatements or omissions caused someone to buy or sell the stock in question, AND that they lost money. Are regulators really going to trawl through millions of posts from 20-year-old kids looking for deliberate factual misstatements to trace to individual buy/sell decisions? I doubt it.

Apparently Discord just banned WallStreetBets for "hate speech" (whatever the hell that is). Curious timing, to say the least.

I'm certainly no libertarian, but I fail to see why any regulation is necessary here. If you're a sophisticated institution and you decide to be short on a position where the aggregate short interest is 100%+ of the float, then you're the proverbial pig that deserves to be slaughtered. It's the classic greed described by Buffett: Risking what you have and need in a vain effort to gain what you don't have and don't need. Short squeezes have been happening for decades. What's different now is that it's retail orchestrating the short squeeze and thus the "wrong kind" of person is making money from the trade. The calls for regulation are being driven by envy, pure and simple.

That's certainly a plausible hypothesis, and Lacy Hunt has forgotten more than I will ever know about monetary policy, so it's definitely humbling to be on the other side of the trade. That being said, the reason I'm betting the way I am is that the virus and concomitant lockdowns have destroyed a lot of our productive capacity and gummed up supply chains worldwide, but that capacity hasn't really been restored by the stimulus packages. Handing out cash has not put Humpty Dumpty back together again. So we have a situation where trillions of dollars are being pumped into the system, but those trillions are not going to things that improve productivity like infrastructure or toward saving the firms that actually need aid. Many businesses were left out in the cold by our previous stimulus packages and are either dead/dying or unable to return to "normal" operations. In the US, we also have relief checks being sent to people who may not have lost their jobs in the first place, and many people, especially the work from home set, have more cash than ever. The Fed's chart of M2 (https://fred.stlouisfed.org/series/M2) is sobering, and the anecdotal evidence seems to suggest that a certain amount of this money has made its way into speculative bets on options, tech stocks, and cryptocurrencies. The overly simplified equation to me is: More money sloshing around / fewer goods & services actually able to be produced, delivered, or provided = higher prices for goods and services (especially those with inelastic demand like food) and skyrocketing asset prices. The policymakers seem to be totally out of ideas; their only policy prescriptions are to "print more money" and "kick the can down the road." Just today Janet Yellen talked about issuing 50-year bonds, which would take the US to new levels of can-kicking. To me, since the US will never default (due to its control of the reserve currency) and can't raise rates due to the enormous burden of debt service, the only way out is inflation. This is also a politically palatable option as some of the people can be fooled some of the time by nominal "increases" in their salaries and prices of their houses and stocks. One thing that strikes me is that both the inflationist and disinflationist/deflationist camps seem to broadly agree that once you lower interest rates to 0% to spur nominal GDP growth, there's no coming back in real terms. ZIRP is like the Hotel California - you can check out anytime you like, but you can never leave.

Is this a response to the superstockmarket and government monetary policy? Yes - at the risk of diverting this thread into the political quicksand, I am concerned about inflation as it seems to be a risk that many market participants are discounting right now. I'm cognizant of the fact that gold yields nothing, but I'm overexposed to USD as a US resident, and I think that the fiscal bias of the new administration will be towards more stimulus. We will have the most dovish Fed chair in history working with the second most dovish Fed chair in history (in her forthcoming role as Treasury Secretary) along with a new President who has voiced support for significant spending programs. The prudence of Paul Volcker is long past, we're now well over 100% debt-to-GDP in the US, and given our relatively anemic GDP growth over the past decade, I don't see us "growing out" of that debt, meaning that the only course for policymakers is full on fiscal repression. Anecdotally, I'm already seeing significant increases in grocery prices along with dastardly "shrinkflation" (same price, less food), and it seems like some of the current levitation in the stock market may simply be attributable to the sheer amount of liquidity surging into the system. That being said, I seem to be an excellent contrary indicator on macro, so those reading this might want to load up on NASDAQ calls :D

Added significantly to GLD - not really finding much else to do

The mantra of the WSB / Robinhood crowd is "Stocks only go up." One member of Gen Z recently told me that she has been buying Tesla shares because "it's free money." I don't think this is poised to end well, but I have also been thinking that for 5+ years now and have been proven consistently wrong. If the Fed is going to continue to step in to prevent companies from failing, then the current trend seems poised to continue, as the upside to equity ownership is rewarded and downside risk is virtually removed from the system. Ultimately, it's central bank liquidity driving this casino market. What the Fed is doing is terrible for capitalism in the long run, but good for stocks in the short term.

The tax discussion is very interesting to me, because assuming that one rejects the MMT hypothesis that debt-to-GDP ratios don't matter, tax increases are one of the only ways for the developed world economies to get their fiscal houses in order. The other options appear to be default (for countries excluding the US, which owns the reserve currency) and financial repression. Of those three, it seems like the most politically feasible option is a redux of the financial repression tactics used post-WWII. However, unlike the last time around, GDP growth and productivity growth have both been anemic in most of the OECD countries since 2008. To me, it seems like the big risk is high inflation without commensurate GDP and productivity growth, leading to long-term pain for asset owners. With financial repression, it seems like we're back to square one - too much capital chasing too few productive assets, leading to lower prospective returns going forward. It's hard to see how tax increases or defaults wouldn't also do the same thing by different methods.

TL;DR: Demographics may have contributed to current decade developed market tailwinds in the form of cheap capital. Central bank intervention, globalization, and the lowered capital intensivity of business could turn out to be secular trends. Will we ever see prolonged periods of capital scarcity again, and if not, does capital oversupply mean lower returns on equity going forward? I was recently reading Peter Zeihan's book, The Accidental Supowerpower. Zeihan is known as being somewhat of a snake oil salesman in geopolitics, and his book makes a number of bold claims about the economic and political futures of various countries. Among these, however, Zeihan makes one contrarian argument that I believe warrants further discussion. Zeihan contends that developed world financial markets have benefited from capital inflows due to demographic factors. In particular, he argues that the Boomer generation represents an "unprecedented" bulge in the working age population that has provided tailwinds to developed countries in the form of low-cost capital for investment. Fast forward to 2020, and the youngest Boomers are now 55 and looking at retirement, if they haven't retired already. Following the Boomers is a small generation (X), a broke generation (Millennials), and a generation that has not yet entered the workforce in appreciable numbers (Z). Zeihan claims that the tailwinds in financial markets are about to subside and that capital scarcity will become the norm for many years as the Boomers withdraw their savings from investments to fund late-life consumption needs. I find Zeihan's argument difficult to accept, for a couple of reasons. First, he seems to completely ignore the huge, coordinated interventions by the world's central banks since the financial crisis to provide cheap capital to the system. There appears to be no posture too dovish and no money-printing scheme too untouchable for the major central banks, and that's when they don't decide to just buy equities and corporate bonds outright. Next, although Zeihan touches on globalization, he doesn't appear to give enough weight to the capital surpluses being produced in many populous, fast-growing emerging markets. A large part of this capital surplus from the developing world has diffused to the comparative safe harbor of developed world markets. Third, the nature of business has shifted to favor companies with largely intangible assets, and these companies can generate enormous amounts of surplus capital. Finally, it seems to me that Zeihan misses the big picture: In a world where communism is no longer a viable alternative and most countries have adopted market systems, we should expect the overall amount of capital generated by the system to increase as countries get richer and more productive in the aggregate. This has implications for investing: If we never again see prolonged periods of capital scarcity, then doesn't it stand to reason that returns on equity should dramatically and permanently decrease due to capital oversupply? Very curious to hear your thoughts.

It's interesting to see the narratives pop up in this thread about NYC either becoming the next Mogadishu or coming back better than ever due to horny young singles, fancy jobs, etc. More than any other city, New York seems to emit a reality distortion field that causes people to either love it or hope that it burns to the ground. Having lived in NYC, I certainly think that many people are too emotionally invested in the place. It seems like a lot of people draw some strange Outer Scorecard type of satisfaction and feeling of superiority from living or working in NYC. All that aside, from a real estate standpoint, I would be very hesitant to touch anything in New York right now, especially at the cap rates on offer. The expression "cheap for a reason" comes immediately to mind. Even before Covid, the population of NYC was going down, not up. Don't believe me? Look it up yourself. NYC has been losing people for the last several years, and the population decline has been slowed only by the level of international in-migration. American-born residents are moving OUT of the city on a net basis, and have been for many years: https://www1.nyc.gov/assets/planning/download/pdf/planning-level/nyc-population/new-population/current-populatiion-estimattes.pdf Now, maybe this trend reverses and American citizens start moving back in droves due to cheaper rent, perceived "coolness," etc. Or maybe immigrants start flowing in again. Maybe I'm completely wrong and missing the investment opportunity of a lifetime. All I am saying is that NYC as an investment thesis is in my "too hard" pile. It's not unprecedented for a city to fall and never recover. Look at Detroit - once one of the gems of the United States - which has never returned to its former glory.

JPMorgan sticks with plan to build giant New York headquarters https://www.reuters.com/article/us-jpmorgan-results-realestate/jpmorgan-sticks-with-plan-to-build-giant-new-york-headquarters-idUSKBN26Y2HP?il=0 Interesting metaphor, to say the least:

The difference between COBF and the major social media platforms like Instagram and TikTok is that COBF was not deliberately designed in consultation with behavioral scientists and UI experts to target your brain's reward circuitry. There are no strategically utilized flashing lights, bright colors, pop-up notifications, or "likes" on the site; there's no employment of peer pressure to create network effects ("Friend X joined!"), and most importantly, there are no algorithms working over millions and millions of iterations to identify the types of posts that will keep you hooked. The difference between COBF and Instagram/TikTok is the difference between an ice cream shop and a heroin dealer. This is exactly what documentary claims. And it is as enormously exaggerated as you just did. So hey you bought their product. Congrats. ::) What product is the documentary selling, specifically? Leaving aside the dramatization of the teenage boy's life, what specifically did the documentary exaggerate? Most of the film is just interviews with the software engineers who helped create the products themselves. Are you disputing their accounts? Whose? Point out specific examples, otherwise you're just blowing hot air.

The difference between COBF and the major social media platforms like Instagram and TikTok is that COBF was not deliberately designed in consultation with behavioral scientists and UI experts to target your brain's reward circuitry. There are no strategically utilized flashing lights, bright colors, pop-up notifications, or "likes" on the site; there's no employment of peer pressure to create network effects ("Friend X joined!"), and most importantly, there are no algorithms working over millions and millions of iterations to identify the types of posts that will keep you hooked. The difference between COBF and Instagram/TikTok is the difference between an ice cream shop and a heroin dealer.

The most telling indictment of social media is that many of the people most intimately involved in its creation (VCs, engineers, UI designers, etc.) refuse to allow their own children to use it.

I would be interested in this as well - Kerr Neilson is incredibly under-followed as an investor.

You can really smell the desperation wafting out of Manhattan - big writedowns must be looming. I'll give 1:2 odds on the JPM "study" being completely non-empirical. This is my favorite part by far:

Well, that settles it. Get out there and die for the landlords!

This was too good not to post: https://www.bloomberg.com/news/articles/2020-08-20/nyc-landlords-press-finance-bosses-to-speed-return-and-save-city

There's nothing worse than a host that constantly interrupts the interviewee. Too many podcast hosts try to create a weird cult of personality around themselves rather than letting their guests do the talking. I guess that's par for the course in this narcissistic age of Instagram, but it's unfortunate. A good interviewer knows how to gently steer a conversation and knows the right times to ask probing questions. An excellent interviewer knows how to do both of the above and will STFU when called for instead of asking an internationally-recognized expert about his favorite blogs in lieu of an intelligent follow-up question.

This is an incredibly important question, but an incredibly tough question to answer. Manager selection is one of the seemingly insoluble problems of investment that I would place in the "Important But Unknowable" category. Nevertheless, I'm going to attempt an answer simply to put my own thoughts on the matter in writing and to invite further discussion. In a reductionist hypothetical, you could posit Companies A, B, and C, with equal financial statements, competitive positions, and margins. You could then assign a superior manager to Company A and a good manager to Company B. Company C you leave as the control, to which you could assign a superintelligent AI that ensures that Company C grows but generates no excess return. At this point, you could begin tinkering with the "alpha" you estimate for the managers of A and B. Let's say that Company C delivers a post-tax real return of 5% per annum for 20 years, so your $100 invested at the outset becomes $265. Company B, led by the good manager, delivers an excess return of 4%, so you have $560 at the end. Company A, led by the superior manager, shows an alpha of 8%, leaving you with $1,152. The manager of company A has increased its value to over 4 times that of the benchmark, while the manager of Company B produces 2 times the value of the control company. Extending this scenario to 30 years, the control company gives you $432, the manager of Company B gives you $1,327, and the manager of Company A gives you $3,912. So, over a 20-year period, Manager A delivers twice the value of Manager B, but over 30 years, Manager A delivers treble the value of Manager B. The duration of outperformance also matters; letting Manager A run the show for a 30-year term produces double the value of keeping him at the helm for only 20 years. Of course, the exercise above is so simplistic as to be ridiculous. The math tells you what you have at the end of each period, but it doesn't tell you what you should pay for Company A vs. Company B as a non-omniscient actor looking at the situation for the first time. Jurgis and spartansaver have already noted the difficulty of finding great managers ex ante. That's why Buffett and Munger "cheat" (in their own words) by only selecting great managers ex post. Compounding the problem is the fact that mediocre managers often become great managers over time. Mark Zuckerberg started off at Facebook with cartoonish antics ("I'm CEO, bitch") and ended up creating the dominant social networks of our time. He grew into his leadership role, and despite his arguably negative impact on society at large, there can be no doubt that he is a shrewd manager and capital allocator par excellence. There are examples of this outside business too - just look at Bill Belichick. He went 36-44 with the Cleveland Browns and was considered maybe slightly above average as a football coach before joining the Patriots and winning six Super Bowl titles. There were plenty of other coaches who worked just as hard and who had similar schemes, but who did not become great. Who could have seen in 2000 that Belichick would become one of the best-ever NFL coaches? Could anyone have predicted in 2005 that Zuckerberg would become the John D. Rockefeller of the age? Maybe. But if you're in that camp, you have what is likely a five standard deviation ability to recognize rising talent, and you are probably enjoying the spoils produced by that ability on your yacht rather than posting on the Corner of Berkshire and Fairfax. Broeb22 also brings up the industry variable, which has a massive impact. A great manager at a hypothetical pager or fax machine company in the late 1990s may have been able to reduce the exponential decay factor to 3% per annum, where a merely good manager would see 6% decay. The compound effect over a decade leaves you with about three-fourths of your value remaining with the great manager, but only slightly more than half of your value remaining with the merely good manager. But here the great manager, despite his evident talents, is still limited to finding clever ways to hold at bay the forces of decline, and he must either pivot to new business lines or gracefully return capital to owners. It's an interesting thought experiment, but the industry discussion raises more questions than it answers. What if the great manager's acumen allows him to steer clear of the fax and pager company in the first place? Alternatively, what if the great manager recognizes that the industry is in secular decline before anyone else and chooses to leave before he presides over the decline? Meanwhile, a great manager in a great industry can easily do 100x or 1000x in a career. We see this process repeat in every business era, because every era presents different variables. Good managers recognize those variables and react, but great managers weaponize them. The Stanford historian Ian Morris has said that, eventually, "each age gets the thought it needs," and I would argue that this observation applies to business as well. The truly great manager in every domain of human experience is the one who recognizes the challenges and opportunities of the era and creates the paradigm that ultimately becomes the new normal. Given all this, what do we do as investors? I think the best course of action is to simply copy the Buffett and Munger approach and select great managers ex post. Naturally, past performance does not equal future results, but it is not unreasonable to assume a decent probability of continued success with a captain who has astutely steered the ship already. But most of us are not that lucky, and we are stuck playing the game ex ante. In this case, as cliched as the term has become in the investing community, it's probably best to take the Jacobian approach and invert. Bad leaders can be spotted much more easily than good leaders, but I'll leave that discussion to another post since this one is already far too long.

https://www.bloomberg.com/news/articles/2020-05-21/how-larry-fink-s-blackrock-is-helping-the-fed-with-bond-buying Front-running the taxpayers for fun and profit!

WSJ today with more details on one of the most corrupt and fraudulent schemes perpetrated on the American taxpayers in my lifetime: https://www.wsj.com/articles/big-money-managers-take-lead-role-in-managing-coronavirus-stimulus-11589130185

Ironically, infrastructure spending is probably one of the things that would actually be accretive to US GDP and productivity right now. Lots of US infrastructure is in Third World condition, and I say this as an American citizen. I will never forget landing at LaGuardia Airport in New York a few years ago - it was shortly after a rainstorm and I had to pass by plastic buckets placed around the concourse set up to catch the water leaking from the ceiling. It's not just the airports - apparently nearly 4 bridges out of every 10 are "structurally deficient" according to this report: https://artbabridgereport.org/reports/2020%20ARTBA%20Bridge%20Report.pdf Despite its arguable utility and bipartisan popularity with the public, I'm doubtful that there will be a dime allocated to infrastructure spending. The takeaway is simple: In the modern US, spending that benefits the public is "too costly." But if you are a lucky member of the looter class, we can offer you infinite money courtesy of the Treasury and the Federal Reserve. If you happen to be a member of the looter class that owns BlackRock, so much the better, because the taxpayers will be paying your ETF fees.

https://www.bloomberg.com/news/articles/2020-05-05/fed-is-propping-up-companies-it-had-warned-banks-not-to-touch