Category Archives: Not Dope
During my job this summer I kept a notebook and wrote about 3-5 pages of notes each day. The thing is about 200 pages front and back and I got to about 170 by the end of it, so there’s a shitload of my thoughts on paper. It’s funny reading some of the earlier notes compared to my later ones. One of those things where you go into the summer thinking “alright I know a solid amount let’s crushingtons”. Then you end the summer and all you can think is “wow I learned so much… and I didn’t know DICK coming in”. But ya I’m gonna start posting some of the better notes I took and maybe see if my opinion has changed since.
This note is from one of my last days when I was having a conversation with my boss about different types of careers. We started talking about mutual funds, and how they differ from say, a broker like him. To preface, my boss is an extremely hard worker, the kind of guy who gets 4 hours of sleep a night because he’s got trade strategies running through his head non-stop. More than that, he’s extremely old school. Doesn’t pay attention to P/E ratios or any technical indicators like that. And to his defense, he’s good as HELL at what he does… making money for other people. But back to my main point, he has a strong anti-mutual fund opinion. And here’s why.
Let’s say you want to get into bonds right now. While there are tons of strategies you can use for bond exposure, the two most basic are buying your own bonds straight up or investing in a bond fund. For most people, the latter means your broker will purchase shares in whatever bond mutual fund it is you want. Right off the bat you should notice something. You’re paying a broker to manage your money, but the asset you hold (shares of the bond fund) is being managed by someone else entirely. Seems stupid to me at least.
The next issue is the mutual fund managers’ motives, which have to be tilted toward the fund investors. Most investors who want to get into a bond mutual fund are curious about one thing: what is their yearly return? When you buy your own bond(s), you know the YTM, call protection status, maturity date, etc. All of these things let you know exactly what your total return is, not just what your coupon rate is. If you’re not following, this is what I mean. An investor buys into a fund because he sees it gives a 5% semi-annual return, in other words the fund’s structure is made up of 5% coupon bonds that pay every 6 months. This sounds great to the investor, but the actual return isn’t going to be 5%. If all the investors care about is that 5% coupon, the managers will have no problem paying premiums on those bonds when structuring the fund just to get that 5% coupon (not a 5% YTM). So in reality, when you sell your shares or the fund closes you won’t be making a total return of 5%/6-months.
The last part shows how mutual fund management can be bad (obviously there’s a ton of good mutual funds out there with great managers, but I’m speaking in general right now). The main goal of the fund is that % return, while brokers and FA’s must also worry about their clients retirement goals, whether or not they need to send kids to college, etc. So, mutual fund managers can apply one single strategy to every investor, whether or not that strategy applies to that investor. The managers don’t have to speak directly to the investors, and only have to worry about the structure of the fund (making sure they’re solvent enough to pay out investors who want out). In the end, mutual fund managers don’t have too much incentive to actively manage the fund for higher returns. They know that they can load up on coupon bonds paying out what people want, and that’s good enough. I’ll expand on that point in my next post.
The last problem goes back to the fund structure. Money is always coming in and going out of these funds. Therefore, the structure of the fund is always being changed (i.e., diversification %, maturity structure, etc.). Unlike a broker, where you know exactly what you hold at all times, it’s much more difficult finding out the funds exact holdings, and therefore your own holdings (as a % of the fund). All in all, it’s a pretty lazy way to invest your money. There are plenty of ways to find higher returns, more income/cash flow, or whatever your personal strategy should be.
Sarkozy: Do we know what we’re doing? Merkel: Shut the fuck up…
About two days ago I had a friend ask me for some help for an interview he’s got coming up. The guy he’s been connecting with sent him one of his weekly write-ups about the current economic/market conditions and told him that’s the sort of thing he’d have to start knowing. Here’s basically what I talked to him about (this will be a long post, I’m trying to be in-depth so anyone can follow).
For starters, the sovereign debt crisis in Europe is the most important thing going on right now. I’ll get into how it affects the US in a minute. Greece is the most likely default case of anyone right now, as CDSs on greek debt have about a 450 bp spread (i.e., expensive as shit to buy those CDS’s, b/c there’s a very high probability of default). The ECB/IMF/EFSF (European Financial Stability Facility) are continuing to pump money into its bond markets, as well as Italian, Spanish, and Portuguese bonds. Whether they think Greece will ever be able to repay this debt is almost irrelevant (they won’t), so these cash flows are being used to keep rates from ballooning and to stop a full on default. Worst case scenario is Greece defaults, which triggers CDS payouts (not good for the US), margin calls, and significant flight from European sovereign debt. The last part of course could see defaults by more important countries such as Spain and Italy, but that is less likely (I refuse to say highly unlikely b/c as you can see this shit has never really been seen before). The main problem is European banks, who hold a huge amount of these sovereign bonds. If we see a restructuring of sorts, or huge drops in bond prices, these banks will have to make enormous writedowns. After this, further possible events include major drops in equity and bond prices of these banks as investors flee from fear the banks will have liquidity, or even solvency issues. This of course is a classic self-fulfilling prophecy: investors fear they’ll lose big from these banks, so they dump them, which of course causes the actual problem they feared in the first place.
The US comes into this directly in two ways. First, US banks have written a colossal amount of CDS’s for European banks over the past 3-4 years. As of early July, we’ve sold $34 bln, $54 bln, and $41 bln in Greek, Irish, and Portuguese debt CDS’s alone. That’s not even counting CDS’s on European banks. If there’s widespread default (again, unlikely, but possible), then the US will be losing BIG on those payouts. The second way is economic rather than financial. Europe is one of our main trading partners, and if they enter a recession (probably will), we’ll be taking a big hit in export losses and possibly face import shortages as production slows down there. This also ties into emerging markets (esp. China), as expectations are quickly rising that we’ll see a pretty hard landing in a year or two. In other words, nearly every country is facing stagnant (or negative) growth for a few years, which… is bad.
For those who’ve wanted to actually stay in a good mood, and therefore haven’t watched the news in awhile, the main political/economic topics right now are the US debt level, and our struggling economy. Before I get into this, let me make on thing clear: you cannot solve a debt crisis in a recession. Whether or not the media/politicians have been playing up the debt situation, I really have yet to see any issues arise from the ACTUAL debt level itself. Obviously the track we’re on is unsustainable and blah blah blah, but I’m talking over the course of a couple years. Our gov’t is having no trouble at all borrowing money; the 10YR Treasury is still sub-2%… from a buy&hold/investment standpoint that is absolutely outrageous. It just goes to show that when the world is freaking out, everyone looks to the US.
As much as I hate to say it, the real issue is the political system. I’m not saying we need to raise taxes or cut spending or whatever the buzzwords are right now, I mean the political process is absolutely KILLING our economy right now. It took over half a year for the debt limit to be raised, literally up to the last possible moment. The next day, BAM! Equities plummeted and Treasury yields approached record lows (and to my utter disbelief, reached those lows a few weeks later). This of course wasn’t expected, as the pundits had been chirping “yields will pop as the world realizes we can’t repay our debt!”. Bull. Fucking. Shit. This isn’t a series of graphs relating debt levels to interest rates or whatever, this is real life. What’s more, we have an entire year before election season, and you can bet your sweet ass no politician will be willing to make the tough decisions if it means pissing off their voters.
The debt ceiling squabble was one of the most atrocious displays of leadership I’ve ever seen, and I’m not exaggerating. The hard decisions weren’t even close to being made. If I remember correctly, we raised the debt ceiling by about $1.5 trillion and promised to cut about $2 trillion over the next 10 years. I don’t even have to do the math to see that $2 trillion over 10 years is a joke when we’re projecting a $1.5 trillion deficit in 2011 alone. If anything, all we did was push the decisions off for another few months. The debt level itself isn’t the immediate issue, it’s the perception that our leaders are unable to make the necessary decisions to get the US on the right path.
This perception is twofold. On one side we had non-stop political bashing occurring all summer long, with both sides bickering over what should be cut, what’s off the table, and who’s to blame for our national debt’s recent surge. On the other side, we have a country who is on the brink of relapsing into recession (sidenote: I don’t know why, but I think the term double-dip is so fucking stupid). Unemployment is STILL above 9%, and won’t return to normal levels for awhile. What’s more, I believe the drop we’re seeing in equities is due to people realizing the Fed has run out of bullets. Which is another way of saying that their policies aren’t doing what they said they would. Rant:
Let me get this straight. The Fed is making sure rates stay low, which is a good thing to have. But jesus christ have you not opened your eyes? I’m usually agree with the Fed/Bernanke, but what the fuck. Rates are at all time lows! And nobody is borrowing! Not only are rates at all time lows, but they’re there without your doing. People aren’t arbitraging Treasuries, they’re using them as a bank. If we have another international recession, Treasuries are gonna continue to be the safest asset. So what is the point of more bond buying? Does buying the 10YR down to 1.85 from 2 and the 30 from 3.1 to 2.9 really do anything? Rates are there. Save the ammo. God damn.
Alright back to the main point, bulls are currently pointing to corporate profits and equity levels as the main reason why we shouldn’t end up in a recession. I think that that is exactly why we’re entering a recession. Corporations are preparing for the worst by hoarding cash and laying people off. The majority of them will weather the storm to come, but people as a whole are left out to dry. If everyone is scared to lose their job, they’re gonna take whatever pay they get and hold onto it. Which, ya know… doesn’t help the economy grow. The uncertainty that’s clouding everything is all hanging on one major thing–Europe. People are waiting for Merkel/Sarkozy/anyone to come out and save the day. Obviously if they had the strategy to end all strategies for fixing the European debt crisis, we’d have heard about it already. As of today, Germany has said they’re capping their bailout funds at 221 billion euros, which gives the EFSF about 450 billion euros when recapitalization is needed (for both banks and the various countries who will undoubtedly need them).
I’m pretty lost right now, so I’m just gonna end this here. I’ll go back and go through each area more in depth throughout the next week(s), but this is a dece start. As you can see, everything is connected, even more so than 4 years ago. My prediction: we’re not gonna see an end to this until the EU is literally on the brink of collapse. That’ll be an interesting time… hopefully I have a job by then.
For those like myself who have only a few tidbits of knowledge of the Israeli-Palestinian conflict, here’s a good six-part documentary done by Al Jazeera a few years ago. Al Jazeera is usually very good at being unbiased, but I will say this is a little slanted towards Palestinians. Nonetheless, good series with a lot of facts and only about an hour and a half in total.
Read this. The author, economist Kash Mansori, had to do a shitload of research to get these numbers, but it shows how bad things could be for the US in the case of European credit event. It’s some hard evidence that US institutions have just as much on the line as Europeans from a default by one of the PIGS.
Apparently this isn’t a joke. Tennessee has made it illegal for shocking or offensive images that could cause emotional distress to be posted on the internet. I don’t even know what to say about this. You guys are fucked in the head. That’s about all I got. The governor actually signed this into law… an elected official. Well suck my dick and call me Sally this is just absurd. Fuckin’ twilight zone shit down there, they can just ignore the First Amendment completely and the only thing we say is “jesus those people are stupid”.
Back from a weekend at the cottage so I have been disconnected from reality since Thursday morning. Now, I have to say something about this Goldman Sachs situation.
Goldman got subpoenaed for bad business practices. Your everyday average American is thinkin’ “YA! FUCK THOSE BANKERS!”. Well I got news for ya… nothing’s gonna happen. I’m sure Matt Taibbi is in his basement right now jerkin’ to the thought of them going down… but–as always–the media is overlooking one of the most important pieces of the puzzle: Goldman’s got some smart motherfuckers. Sure, many (if not the majority of) Americans see the bank as a bunch of scumbags. But if I’m a CFO lookin’ to issue new corporate bonds or an IPO, I’m gonna go to the smartest, most well connected people available. Anyone who denies that Goldman is exactly that has their head up their ass.
Obviously there’s plenty of greedy bastards on Wall Street and elsewhere whowere trying to screw people over before the onset of the crisis. But am I the only one that’s sick of news outlets framing this situation as Goldman “betting against their clients”? When Goldman created Abacus, the now notoriously awful CDO, they weren’t able to sell every part of it. Now I could talk for awhile about my thoughts on this specific case, but that’s for another time. In short, the bank had to hold the parts of the security that it couldn’t get rid of, which opened themselves up to a considerable amount of risk. How do you eliminate that risk? You take the opposite position. In this case, they had to short it. While I’m sure there were plenty of people who thought the market would plummet, I guarantee you there were others right there next to them claiming the party was still happening. So, by shorting these same securities they’re holding (CDS’s, interest rate swaps, whatever) they’re able to reduce some personal risk.
The amount of leverage and systemic risk throughout the banking system was obviously far too irresponsible. In retrospect, there were a lot of bad judgments made leading up to the crisis. But, I don’t think we can start locking people up because they guessed wrong. It truly is a god damn shame that so many people lost money in the financial crisis, but pinning the blame on a few people is just a way for everyone to feel they had no responsibility for the outcome. If there’s still no consensus on the direct cause of the Great Depression, it’s prolly time to focus our efforts on a recovery. I could care less how GS comes out of this, but if there’s one thing I fucking HATE… it’s media spin
Well this coincidence somehow doesn’t surprise me. As I’m writing this I have Fox News on in the background and whatdya know they’re talkin’ about this exact situation. This lady Brenda Buttner is doing exactly what I just pointed out. She is describing the subpoena and says “Goldman bet against its clients, or “shorted” the deals”. Yes… she put quotations around the word “short”. I get that they want to make the situation easier to understand. But tell me that fucking phrase doesn’t force everyone to assume that Goldman is guilty. WOW!!! My blood is fucking BOILING watching this. You are on national TV saying “Goldman designed these securities to fail”. Uhhhh… who the fuck are you? Could you possibly provide some… oh I don’t know… evidence? Ya, Fabrice Tourre got caught with an email calling these “shitty deals”. 4 months after they sold them. As in after they started to plummet. You don’t think their clients did a little bit of research before they bought them and maybe they thought they weren’t gonna fail?
Seriously… this is exactly why I can’t trust half of the shit I hear. Fox isn’t the only one to blame here. Everyone does it. Just once I’d like to hear some actual fact-based news. I’m not some batshit crazy conspiracy theorist, I just can’t stand bullshit. Gimme the facts and I’ll make up my own damn mind.