ValueArb

From WSJ:

More on Ray Dalio from Matt Levine/Bloomberg. The computer called Dalio’s underlings into its little computer office and was like “oh boy do I have a task for you, you have to tell that Dalio guy to stop messing with my trades.” And they were like “thank you, computer, this is an incredible opportunity for radical transparency and ideas meritocracy,” I guess.

Yet the end-buyers of the debt are unlikely to disappear since government deficits automatically create the very savings that are then channeled into financial assets. This sounds like more Keynsiasm twaddle, like when Krugman said the economy would benefit if we paid people to dig holes and then fill them in again. Deficits crowd out private investment and damages the economy. This is the truth but you'll never have a long career as a government economist and reach the pinnacles if you say it. Instead to be a successful government economists you need to always justify increased government spending so your benefactors, the political class, can use that spending to reward their supporters who keep them in office.

It has worked for BTC, at least so far. I'd rather own productive assets that generate 10%+ returns in USD, and incur the 2-3% in USD depreciation each year for a near guaranteed 7%+ annual appreciation over long periods than to hold an electronic accounting mark with zero yield or assets. But obviously I'm a tiny minority on this thread.

Gotham Yield (as of 11/07/20231 11.1% Percentile Towards Cheap: 52nd Average Two-Year Forward Return*: 38.13% I'm not sure I buy this analysis. Gotham.com currently says that a portfolio of the highest value 700-800 stocks out of the top 1,400 has a "Gotham" yield of 11.1%, which historically is consistent with an average future two year return of 38%. I will say that the outliers on their chart (Gotham yield > 17%) are perfectly consistent, and below 10% is heavily weighted towards poor returns. But anything in the middle seems basically a crap-shoot. Would be good to know explicitly how Gotham Yield is calculated, it only says "Gotham Yield is a proprietary assessment of earnings and cash flow relative to the adjusted enterprise value of a business" and that financial companies have been excluded.

The Shiller PE is still near historic highs. One flaw in it is that it doesn't adjust for interest rates, as lower interest rates make it more reasonable to pay higher PEs. That could explain why we saw much higher than historical median PEs from 2010 to 2022 because interest rates were at unprecedentedly low levels from 2008 to May of this year. What it doesn't explain is why are PEs so high now, as interest rates are closer to median historical levels. It could signal liquidity is slowly draining and the first to see it is the smaller caps. Supporting that is that the Shiller PE is based on the SP500. Not only is that index only the largest of the largest caps, it is weighted by market cap meaning it is heavily weighted to the magnificent seven nowadays. So essentially the rest of the market may be at much lower CAPE PEs already, and the mega-caps will follow over time. Or it just takes years to adjust and the market will be in a holding pattern for a few years as earnings slowly catch up to valuations. https://www.multpl.com/shiller-pe

Matt Levine: Rob Copeland’s book about Bridgewater, The Fund, is out today, and oh man does it have a point of view! Copeland’s thesis is essentially that the “radical transparency” stuff is fake and Bridgewater is a pure cult of personality around Dalio, that all of the scorecards and iPad apps were just overcomplicated ways to measure who agreed with Dalio the most. (They have been scaled back a bit since Dalio stepped down.) In the introduction, Copeland tells the story of Paul McDowell, who built a Bridgewater app for ranking employee “believability”: But Dalio objected: And so McDowell “assigned an underling to go into the software and program a new rule”1: The book is full of stuff like this: Dalio would call a big meeting, some underling would say something to the effect of “buddy this is a cult and the Principles are nonsense,” Dalio would turn to other underlings and say “do you agree,” the other underlings would say “oh no boss definitely not” in unison, and the objector would get shamed and fired. (One of these stories is excerpted in New York magazine today. And Vanity Fair has an excerpt about some of Bridgewater’s show trials, conducted by James Comey.) A system of radical transparency in the service of making the boss feel good. Copeland also reports that this applied to investing decisions. From an excerpt that ran in the New York Times this weekend:

Yep, a currency that fluctuates 30% on average every five years is just like a cryptocurrency that fluctuates well over 50% every single year. Must mean CAD is no safer a currency than BTC, or SafeMoon, TerraUSD, Luna, Celsius, FTT, etc;)

https://web.archive.org/web/20221027180943/https://www.sequoiacap.com/article/sam-bankman-fried-spotlight/ Sequoia tried to scrub their blog post crowing about investing with Sam Bankman Fried from the internet but through the way back machine it lives on as a magnificent example of mythological hagiography. Its quite an enjoyable read given today's reality, though I admit I was surprised by the inappropriateness of this particular description. An awkward beat later, SBF broke, slayed by the silent force of Ellison’s four-eyed gaze.

As the universe disappears into nothingness billions of years from now there will still be someone somewhere drinking a Coca-Cola.

And who said someone calling it a "currency" actually makes it a viable currency? Again, fluctuating 80% a year in price doesn't make anything a viable currency.

Again commodities are speculations and so is crypto. Its a standard definition. And yes, any commodity with industrial uses is different than crypto because crypto has none. We can use gold or wheat as mediums of exchange just as easily as BTC, it doesn't give them any intrinsic value. No goalposts have been moved. And you keep talking about "valuable use cases" in generalities. Be specific and name them.

And when it becomes a viable currency that will give some form of intrinsic value.

No I'm not mixing up anything. Neither gold or any other commodity has any intrinsic value because it's future cash flows are just based on a price that's unpredictable. Commodities are always speculations, even if you think you understand a commodities supply/demand curves better than the market and can predict its future, its still speculating. Whether money has an intrinsic value is an interesting philosophic question. Obviously one dollar is worth one dollar now and for eternity, but the buying power of that dollar will certainly decline over its future. But measured in dollars, the intrinsic value of dollars is perfectly consistent, so I say it has an intrinsic value and owning it isn't a speculation on anything (other than inflation and maybe exchange rates). If I believe that, what this means is that contrary to what I just said previously on this thread, there is some crypto with an intrinsic value. Can you guess it?

Again, crypto doesn’t get to redefine long defined financial terms. Intrinsic value means it generates internal cash flows and/or is likely to in the future. Without intrinsic value it fails the test of being an investment, and passes the test of being a speculation. And something isn’t very useful for money if it can lose half its value in a few months. As for other uses, the most popular other use for crypto is for producing rug-pulls. I’m never entirely dismissing crypto, I just spent 6 hours evaluating a crypto project on Friday to see if was different and could create actual value for holders. Turned out it wasn’t and can’t. But I will still evaluate new ideas as they come across my desk. I do believe BTC is inherently deflationary and offers the potential to retain value better than the dollar in the long run. But I can’t value it, it has no yield and does not pay dividends, I have no idea of what price it’s undervalued and what price it’s overvalued. So I sit out and invest in safer things.

from matt Levine. Looks like the sign of a top. PIK loans Elsewhere in private credit products that work best with long-term locked-up capital, PIK is back:

I’m not “rebranding” anything. The historic definition of speculation is betting on price movements without the backing of an intrinsic value.

Again that volatility makes it a speculation not a currency. While the end game of the dollar is likely continued depreciation that’s not certain. We aren’t the Roman Empire yet. There is still the potential that a fiscal crisis will lead to changes that address our profligate government spending.

Are you denying the dollar is less volatile than crypto? Or do you think it’s only by accident?

I agree with much of what you say about gold and attributes that crypto share with it (other than no one ever got rug pulled owning gold). But that just brings us back to the fact that crypto “money” lost 80% of its value in 12 months, while it took many decades for dollars to do same. The underlying forces that limit the volatility of the dollar are much more trustworthy than those underlying crypto. Which gets us back to the central point, because of its lack of intrinsic value crypto is just a speculation. And no one is paying anything significant for those “other uses”.

Commodities have consumers, their demand curve meets the supply curve to dictate price. Even gold has industrial uses. Crypto is just speculation.

it has no intrinsic value to make itself a store of value. Its price is simply dictated by inflows/outflows which means that record of beating inflation is unlikely to last.

I’m a big believer in short sellers because they make the market much more liquid and efficient and reduce fraud. But this is yet another example of why I never do it. Everyone knows the risk/reward equation is flipped for short sellers, unlevered long positions have infinite upside with capped downsides while unlevered short positions have caped upsides with unlimited downsides. And then you have to pay borrow fees instead making dividends while waiting for the market to agree with you, That’s bad enough. But you can be 100% right about a position being massively overvalued but you also better be sure the float is big enough, and that short coverage doesn’t get too large or you will get squeezed into a massive loss. A great short may be easier to identify than a great long, but it’s absolutely torture until it pays off. While a great growing business just keeps compounding while you sleep and even if Mr market disagrees with you for a while you have increasing profits/net asset value and dividends keeping you warm.

“A stable currency doesn't lose 80% of its value in 50 years.” How did a “stable currency” lose 80% of its value in one year?