Tag Archives: Finance

Always double guessing my stock choices

I don’t know if other folks do this, but every time I buy a stock I stop to double guess myself. If I see a stock that looks FANTASTIC, good P/E, good dividend, good growth, it may seem like a perfect buy. But I always stop and ask myself “if it’s such a great buy, why isn’t everyone else buying it, why hasn’t the price been pushed up?” Usually this leads me to double checking and realizing the reasons which I had not previously noticed. For instance, it was pointed out to me that Big Box retail stores are very highly valued right now, Walmart is selling at a higher P/E than Microsoft and Apple just for example. It seems that in the current economy, people are looking for the security of retails rather than the growth of Tech. But there’s no way Walmart is worth about 50 P/E, so it doesn’t make sense to buy it at this price point. Macy’s however ($M) is selling at just around 8 P/E. It’s a big box retailer with steady cash flow, doesn’t it look like a perfect buy? But why is it selling so low and Walmart is selling so high? I looked and Macy’s forward P/E isn’t so good, it’s expected to be around 10 or 12. So it looks like right now Macy’s is expected to be a shrinking company, and that’s why it’s being sold on discount. So now I have a better idea of exactly what bet I’m making, do I expect Macy’s P/E to go down that much or might they buck the trend and remain stable or grow? That will tell me whether I actually want to buy their stock or not.

In a market as efficient as the stock market, there are rarely any free 20$ bills on the sidewalk, you always have to wonder “if this move makes sense then why isn’t everyone doing it?” and that will make you realize the downsides of the bet you’re making.

Short post, just want to vent

I encourage anyone to read this tweet thread as it sums up perfectly my anger with how the FTX scandal is being covered. This is a news story about a crypto exchange doing what all crypto exchanges do, steal clients money to fuel their vices. And yet the framing in most stories you find will not be about how SBF stole client’s money, but about a “lack of controls” and “failures of governance” which are corporate-ese ways of downplaying SBF’s crimes and making him seem like just a CEO who couldn’t quite handle it. This cannot possibly be by accident, most journalists understand framing and most journalists on twitter are laser-focused on complaining about other people framing things in ways they don’t like. So why is the framing surrounding the FTX saga downplaying SBF’s crimes and normalizing his actions? Why are so many stories trying to focus attention on SBF allegedly raising new funds, instead of on the fact that he stole funds in the first place? Why is his opinions and personal life being written about with more detail than the lives he destroyed through theft? Go find some of SBF’s villains, it shouldn’t be hard. Write about them struggling to pay the bills because they lost it all in his exchange. Hopefully find some who have finally learned that all crypto is a scam, and write about how they had to lose their house in order to learn that lesson. Most of the journalists currently humanizing SBF and ignoring his victims would have screamed bloody murder if the same had been done to Bernie Madoff, so why the fuck are they doing it now.

Yes it’s OK that J Powell killed your puts

I’ve been trawling through old internet posts, and I found something interesting from March 2020. I won’t quote it directly but the gist was this:

I knew the market would crash due to Coronavirus, now that rat bastard J Powell comes in and pumps the market with free money, killing all my puts. What the fuck is this? Are you going to buy my puts from me now since they’re *distressed assets*?

As should be obvious this comes from the time when the Federal Reserve announced they would take every possible measure, including buying “distressed assets” in order to maintain liquidity in the market. Obviously anyone who was hoping a liquidity crisis would create a market crash was SOL, but for the good of the nation as a whole it’s better that our economy keeps chugging than a few disaster capitalists make it rich.

But it does raise a somewhat unfortunate truth: the Federal Reserve mostly buys up the assets of rich institutions that don’t need the help. The Fed buying someone’s underwater mortgage doesn’t actually help them, they’re still underwater and in debt, but it does help the bank that wrote the mortgage and is now facing a loss. The bank gets to offload the “distressed asset” (ie bad loan) and go use that money to make more money, while the mortgage owner just gets a new person they have to pay. It’s genuinely true that the Fed gives the greatest help to those already wealthy, and those of us not wealthy have to live with the consequences. Although all of us are helped in a way by the Fed maintaining liquidity in the economy, we aren’t helped to nearly the same extent as the banks that get to offload their bad decisions onto the government. I think it’s good that the Fed maintains liquidity, but I think there need to be more strings attached, demanding equity in exchange for liquidity would be a very fair trade in my book. And if banks don’t want the Government to own a percentage of them, then they can just refuse the free money.

Why is Sam Bankman-Fried being beatified?

The above paragraph is an utterly insane ending to what should otherwise be an OK NYT opinion piece on Sam Bankman-Fried (SBF). What’s insane to me is that SBF is getting media treatment like this which paints him as shockingly harmless despite the fact that he stole billions of dollars in other people’s money. Would Bernie Madoff have received this treatment? Would Jordan Belfort get this kind of treatment? Hell I don’t remember the NYT even treating legitimate investors like Mitt Romney this way. This SBF coverage is barely one step removed from beatification, covering up his sins and pushing his virtues to the fore in their stead. And the fact that he’s a thief and a crook? Well everyone makes mistakes, right?

Let’s get one thing straight, everyone does not make the kind of mistakes that steal billions of dollars from thousands to millions of people. Generations of money managers have not regularly stolen money from their clients. If you think they did, point to me how much was stolen by traditional money managers this year versus how much was stolen by SBF and pals. The financial institutions of most countries (barring the obvious kleptocracies) are watched closely by their governments to ensure compliance with the rules and regulations, and this means that theft is not the norm, when it happens it is newsworthy.

No, SBF is a once-in-a-generation crook and fraud. Someone who so brazenly stole from every one of his clients that his corporate governance was worse than Enron’s. He is not the kind of person who needs to be painted as a normal guy just like the rest of us who made a few mistakes, he is the kind of guy whose active and willful theft has left many many people much worse off.

What is utterly galling about this coverage is how transparent it is, how obvious it is that this is not the way the NYT usually covers people who profit off of other people’s misery. As someone who has sounded the alarm on crypto for a while now (privately first, and then publicly here on my blog) I’ve long been infuriated by reporters who cover cryptocurrency like it’s “just another tech beat,” as if a Ponzi scheme whose only value is evading taxes should get the same dispassionate tone as the latest smart phone. But now I’m finding a “paper of record” going so far as to whitewash the sins of crypto’s greatest thief (so far) and I have to wonder if they’re doing it on purpose or they’re just stupid?

Because the NYT has to know what this is feeding into, right? Trust in institutions is at an all time low, trust in news media is at an all time low, and carrying water for obvious crooks when you’ve previously maligned people in the exact same situation is exactly the way you get people to believe that you are filled with fake news and hypocrisy! Already I’ve seen conspiracy stories circulate that SBF’s favorable media coverage is because he donated so heavily to Democratic Party causes, or because he said all the right things to get a good ESG score. Coverage like this coming from the New York Times does so much harm to media trust precisely because it’s such a 180 turn from their usual fair, and without a good reason for saying why this Robber Baron needs to be humanized, it really does feed into the conspiracy theories that the only reason he’s getting this is because he said the right things in liberal spaces.

Stock buybacks are very similar to dividends

There’s an old saying in the Tech industry: “Tech companies only give dividends when they have nothing better to do with their money.” It’s been used as an explanation for why so many Tech companies don’t have dividends, and why that’s a good thing: they’re spending their money in better ways which should bring more value to the investors. Yet this is honestly nothing more than a lie: Tech companies don’t give dividends because they found a more tax-efficient way to give money to investors: buybacks.

Amazon is the poster child for buybacks instead of dividends. It has long defended its no dividends policy by saying it spends all its money on capital expansion (ie growing the business). And to be honest it has posted impressive growth numbers for years. But while it has never given a dividend, it has almost always used a buyback.

A buyback of stock, like a dividend, is merely a way for the company to hand value back to its investors. The company floods the market with asks for its stock which raises the stock price, and those investors who wish to cash out can now do so at the higher price. It’s no secret that buybacks increase a stock’s price, pretty much everyone who isn’t economically illiterate understands this, what is less understood is why Amazon uses them instead of dividends.

Dividends are an unavoidable capital gain for investors, unless the stock is held in a preferential account (an IRA or 401k) the investor will have to pay tax on the dividends. A stock buyback though, only creates realized gains for the investors who do want to cash out, and they were going to take a realized gain anyway. For everyone who wants to hold the stock, a buyback raises their stock price without them having the realize the profit, the investors become measurably richer but don’t get taxed. Stock buybacks were illegal until 1982, which is a damn good reason for why most “boomer” companies (Coke, Ford, Boeing) never got into them. Tech companies like Amazon and Google were incorporated in the 90s though, and once they IPO’d management quickly became aware of the tax benefits to buybacks over dividends. For these tax reasons, Tech companies perform buybacks instead of dividends, while giving lip service to the idea that they’re actually fully committed to capital expansion and not shareholder value.

Make no mistake, Amazon, Tesla, and other growth companies are just as committed to shareholder value as Intel and Ford if for no other reason than to enrich Bezos, Musk and the other major investors. They do so with buybacks instead of dividends because it’s more efficient tax-wise, but they are still committed to handing money back to their shareholders. If congress presses ahead with raising taxes on buybacks, we may see a change, or if Amazon and Tesla’s growth begin to slow their shareholders may start to demand a true dividend in addition to buybacks. Either way the shareholders will always be compensated, that’s just how companies work.

Can retail investors make money in real estate?

Maybe not

This is going to be a kind of short post that may prove me to be a dumbass, but I’ve been thinking about real estate and I wanted to talk about it.

For background, I had a friend at work who had to quit her job and move back to her hometown because she could no longer afford rent in the city. She had a steady job at a big research university but it just didn’t pay her rent and so she moved away. I was saddened by both her loss (since she could no longer do the job she loved) and the loss to science, how many other bright minds have been pushed away by low pay and the cost of living crisis?

But it also got me thinking. I’ve talked before about how dividends are supposed to help cure inflation. The housing crisis is caused by a lack of housing supply, and this should mean that housing investors are making bank (much like oil investors). While we think of housing investors as just the individuals who own their own home, the landlords who own most of America’s rental stock are often incorporated and can be invested in. A common investment vehicle for investing in these companies are REITs (real estate investment trusts), which are often publicly traded just like stocks and ETFs. So if landlords are making bank, then REITs should be making bank, so people investing in REITs should also make bank, right? Maaaaaaaybe not.

I did a quick scan of popular REITs and for whatever reason almost all of them seem like strong underperformers. A REIT invests in the real estate market much like an ETF invests in the stock market, and you can grade how well a REIT or ETF is doing by a few metrics, such as alpha, beta, and Sharpe ratio. Note that all REITs and ETFs will be graded relative to a chosen index, $VOO is an ETF that seeks to track the performance of the S&P 500 so it is graded relative to that index. REITs track the performance of the housing market and so will be graded according to a housing market index. Anyway let’s start with alpha, this tells us how much better or worse the fund is doing than it’s chosen index. If $VOO goes up more than the S&P 500, then it has a positive alpha, if it goes down more than the S&P 500 then it has a negative alpha. Beta is a measurement of volatility, $VOO may track the S&P over time, but if it swings wildly up and down (moreso than the S&P) then it will have a higher beta. The Sharpe ratio then is a measurement of reward relative to risk. A higher Sharpe ratio means the ETF or REIT has over-performed on a risk-reward basis, and a lower Sharpe ratio means it has underperformed.

What does this all mean for REITs? They all seem to underperform. The most popular REITs I could find online all had negative alpha (meaning they underperformed their index) and surprisingly low Sharpe ratios of below 0.2 (meaning they weren’t stellar on a risk-reward basis either). Compare that with the most popular ETFs out there, $VOO (mentioned above) has about 0 alpha and a Sharpe ratio of 0.5, meaning it tracks its index almost exactly and is at least OK on a risk/reward basis. $QQQ (another popular ETF, this one tracking the NASDAQ) has a positive alpha (overperforms its index) and a Sharpe ratio of 0.6. Add to this that the stock market has higher expected returns than real estate (meaning you’d expect $VOO and $QQQ to do better than REITs anyway) and it doesn’t look like REITs are a good investment. Past performance does not determine future performance and all that, but the real estate market would have to moon while the stock market tanked for me to expect these REITs to overperform the most popular ETFs.

So it seems that despite skyrocketing housing costs, it’s hard for a retail investor to make money on real estate. I’m not sure who exactly is making money on real estate, if the landlords are making money then it isn’t coming back to the investors, and if the builders/maintainers are making money then it isn’t coming back to their investors either. It seems at this point that the housing market is hurting us all in ways we can’t even make money off of.

Flywheel investments, an anatomy of most crypto scams

FTX is in the news for both the enormity of its bankruptcy and the moral bankruptcy of its founder, Sam Bankman-Fried. Before even reading the news I knew in general how FTX went bankrupt, because it’s the same way every crypto ponzi scheme, sorry crypto “exchange” goes bankrupt. Here’s how it always happens.

Someone creates a whole bunch of magic beans, a billion in fact, then sells one of the beans to a sucker for a dollar. Their billion beans are now worth 1 billion dollars, because the most recent sale multiplied by the total number of items must be the fair value of them all, right? With net assets of 1 billion dollars, you can start doing some real financial malfeasance. You can take out big loans (using beans as collateral) or trade your beans for someone else’s beans, since you’re both playing a game where you pretend these beans have value. This gives you cashflow (although most of your “cash” is just other people’s beans) and the ability to pretend you’re running a business.

Once you’re trading beans, you tell suckers (retail investors) that your business is profitable and they should invest. Not by buying stocks in your company on the stock market, that’s a mug’s game. Stocks actually have value and are regulated by the government, no we’re in the business of beans. You tell people that to invest in your beans they just have to hand you over some of their dollars and in exchange you’ll give them beans. You tell them that the beans are interest payments on the dollars they’ve deposited with you, and since you’re still claiming the beans have value these suckers can then trade the beans amongst themselves. You then take those dollars they deposited and gamble them away on over-leveraged stock and crypto bets, all while pretending you’re the Wolf of Wall Street.

As long as people keep giving you dollars in exchange for beans, the scheme is solvent. The beans cost you nothing and you can print as many as you like. If a few people want to exchange their beans for dollars again, well that’s OK too because you’ve still got a big pot of dollars that you haven’t lost yet, so you can give them back their dollars and take back your beans to maintain the illusion of solvency. Your beans are your main asset remember, they’re what you are selling to raise money, they’re what is underwriting all your loans, so people need to believe that the beans have value and the best way to maintain that lie is to always be willing to buy back beans at the current market price.

It seems like the magic of a flywheel, once you spin it up it keeps going and going forever. As more and more people see your company as being profitable, more and more will want to buy your beans to “invest” in you. And when they invest, you give them all the beans they could ever ask for. As long as you keep buying back beans, fear of missing out (FOMO) will drive many investors to throw more and more money at you, driving up the price of your beans and making your company seem like a can’t lose bet. But nothing lasts forever, entropy will eventually slow down a flywheel and risky bets will eventually end a crypto exchange. There’s always some trigger, whether it be too many bad bets, a collapse in the price of bitcoin (which is probably one of your main “assets” after your magic beans) or you or an employee just steals everything and runs. But eventually people will start to catch on that you’re probably insolvent, and they’ll want their money back.

The reason FTX was insolvent is the same reason every crypto “exchange” is insolvent, there is absolutely no profit to be made in doing what they claim to do which is hold people’s money and always be willing to give it back. There is zero profit in doing this, banks write loans using depositor’s funds because that’s the only way to make a profit, and for the same reason exchanges gamble with depositor’s money because that’s the only way they make a profit. But banks are highly regulated to prevent insolvency and stupid bets, whereas crypto exchanges just aren’t. So eventually all exchanges make stupid bets and go insolvent, while most banks don’t.

So insolvency, it’s just a fancy word meaning people want their money back and you don’t have it. You gambled it all away and now all you have are magic beans, magic beans which only have value because you’ve been claiming you’d always buy them back at the market price. So the price of your beans collapse once people learn what’s up and that you no longer have the money to support your beans. Everyone tries to get their money out but you’re broke and can’t give it to them, then the people you took loans from realize you can’t pay them back either. As long as the numbers were going up, people kept buying beans from you and you could use more and more deposits to pay back your loans and keep up the fascade, now you can’t so you’ve got no choice but to default on those loans. And those loans and other obligations were underwritten with beans, which are now worthless as you won’t buy them back from anybody.

This above scenario is more or less how every crypto collapse has operated, plus or minus a few cases of an insider just taking all the money and leaving. They always issue their own coin because it’s an easy way to create the illusion of assets, they always take deposits and gamble them because it’s the only way to make money, and their balance sheet is always nothing but crypto so when the price of crypto goes down, they collapse under the weight of their own coins. Sam Bankman-Fried isn’t the first crypto scammer (although he does have the most appropriate name for one), he’s just the biggest one so far.

The End of Growth Part 4: At what point is China no longer a bubble?

I’m still reading The End of Growth by Richard Heinberg. As a reminder, Heinberg claimed (in 2011) that the world’s economic growth was essentially over, and that in the future any “growth” would be an illusion created by nations fighting over an ever shrinking economic pie. A nation may have a quarter or two of growth, or some prolonged growth as they stole more of the pie from their neighbors, but taken as a whole there was no more economic growth left for the world, largely because Heinberg also thought there was no more oil left for the world. The problem or course is how do you explain China?

It’s a lot easier to brush away claims of “growth” in the Western world, growth has been anemic (although still positive) for the last decade and a half since the Financial Crisis. And although US GDP has growth by 20% or more in that time, most Americans don’t “feel” any different, and so it’s easier for Heinberg to claim (as he does earlier in the book) that this growth is all just an illusion funded by debt. But China is different. Growing their GDP at near double digits for 3 decades straight cannot be easily ignored, and the Chinese middle classes have definitely seen massive changes in their lifestyles as almost anyone today in China can afford more and better stuff than their parents could. Houses are larger, food is more varied, technology is cheaper and easier to get to, China continues to experience massive economic growth, and that’s a difficulty for Heinberg who claims that’s impossible.

The first thing he does is punts, like anyone who doesn’t like the outcomes of China growing economically, Heinberg claims China’s growth is really just a bubble ready to collapse. I’m not about to say that China’s economy is perfect or that it doesn’t contain massive real estate speculation, but I’ve been hearing “China’s economy is a bubble that’s about to collapse” for over a decade now and I’m wondering when people will stop claiming this. A bubble is no longer a bubble is it never pops. China’s economy does experience downturns like everyone else’s, but I haven’t seen any evidence that the whole thing has or will soon collapse, as the world “bubble” would imply.

Heinberg goes on to say that China’s growth is also unsustainable because of falling exports to the West, depleting resources like coal, too many old people with too few young people, and all the other stuff that people have been claiming will implode China any day now. My question for today is: when does this end? If China continues growing at a steady clip, at what point do people update their theories to fit the facts? At what point can we conclude that China’s economy is not a bubble and has the momentum to withstand all the same shocks and stresses as a Western economy? China’s economy has more than doubled since Heinberg wrote his book, and I’m curious to know if he would accept this as disproving his theory or if he’s pushed “the end of growth” date back like so many pushed back “the end of oil.”

Now again, I’m not saying China or its economy is perfect. The Chinese Communist party is a totalitarian nightmare committing genocide in its own boarders and threatening war outside of them, the Chinese economy has vast structural problems that the government papers over, Chinese demographics are not ideal for a growing economy and there is no easy solution to any of these. But I don’t think China is going to collapse any time soon, I don’t think it’s economy is just a bubble, and I think people have been claiming the Chinese Sky is Falling for far too long without ever admitting that they are divorced from the actual facts.

Don’t put all your money into bonds

In fact, don’t put all your money into any single investment. I’m not anti-bonds, I’m pro-diversification.

As the Fed has continued to hike interest rates, I’ve been encountering a lot of chatter about buying bonds, and while I agree with some of it I’ve also seen talk saying that anyone with money in stocks is a moron and that everyone should sell everything they own and put it all into long-term government bonds. The benefits of government bonds are clear: they are a risk-free way to protect and sometimes grow your money. A bond is just a loan to the government and the government (whether the Federal government of America or the AA+ rated governments of Europe and the rest of the world) is not going to go bankrupt. Governments like Germany, America, and Japan will always pay their debts so purchasing a government bond is guaranteed to return your money to you at the end of the day. But just because they don’t have risk doesn’t mean they don’t have cost.

Everything in economics has an opportunity cost and this applies especially to bonds. There’s no guarantee that the investment you made was the best way you could have invested your money, even if you made a bit of money through it in the long run. Let me explain some of the opportunity costs you are facing when you buy bonds.

If you buy bonds today, you lock in a fixed interest rate for the length of the bond (let’s ignore I-bonds for now). That means you will receive a fixed amount of money for the length of the bond, plus you will be given back the initial amount you paid at the bond’s maturity. So if you buy a 10,000$ bond, and hold it to maturity, you will have made 10,000$ + 4% interest, it sounds like a great deal. But what other opportunities did you have with your money? Well in December the Fed will have another meeting, and it’s possible that they will once again raise interest rates. If that happens, you could buy a bond with around 4.75% interest instead of around 4%, so one of the opportunity costs you have is that if you just waited another month you could have bought a higher yield 10,000$ bond and made more money.

That’s not the only opportunity cost though, what if you suddenly have to make a big purchase? You could sell that 10,000$ 4% bond you purchased, it’s still worth somewhere close to 10,000$ if you bought it recently, but if you sell it after the Fed has raised interest rates you will find the price you can get for it is much lower than what you may have expected. That’s because your bond is paying a lower interest rate than what people can get buying new bonds, why spend 10,000$ to buy a 4% bond when you can spend 10,000$ to buy a 4.75% bond. So if you buy a lot of bonds then have to sell them after an interest rate hike, you’ll have lost out compared to if you had bought after the interest rate hike or if you had not bought at all.

Another scenario is that the Fed doesn’t hike interest rates but the markets recover. Say the inflation report comes out and shows inflation slowing substantially, in that case the Fed would have less reason to raise rates and the markets would have more reason to rally as people expect better times ahead. You’ve still got your 4% bond but markets on average rise 7% each year, so in an average year the stock market can be expected to give greater returns than buying a bond. In this case you haven’t lost any money but you’ve incurred an opportunity cost by buying bonds instead of stocks, you could have had greater returns buying stocks.

I’m not saying don’t buy bonds, bonds can be a good way to mitigate risk and ensure consistent returns. But I am seeing some people act like current trends will last forever, that the market will stay down forever and thus bonds are the only way to get any kind of return. I’m just saying that every action has an opportunity cost, and while buying bonds are low risk they are still a bet that interest rates won’t go much higher and the market won’t gain too much. Otherwise, you might have been better off putting your money elsewhere.

People are always fighting the last war

We live in a time of high inflation and rock bottom unemployment, but I remember less than a decade ago reading the prognosticators of economics talk about how low inflation and high unemployment (or underemployment) were the inevitable future of our economy. It was said with as much certainty as could be mustered that the Financial Crisis had fundamentally changed the nature of our economic reality, no more could we expect governments to bail us out (they all had too much debt), instead we were going to keep suffering for a long while for the profligate lending of the banks. Of course that wasn’t true, and neither is it true that inflation and low employment are a certainty for the rest of time.

What’s crazy to me is that both predictions were made with the same data. Our population is aging, globalization inevitably moves certain jobs overseas and forces American workers and companies to compete with those in foreign nations. Our government has high debt, real wage growth is anemic or negative, and the job of fixing all this has landed solely on the head of the Federal Reserve since the rest of the government can’t or won’t do so. This describes 2012 as much as 2022, and yet this evidence is used just as confidently by the takemongers of 2012 who predicted an eternal low-growth as the takemongers of 2022 predicting eternal inflation. It reminds me of all the sci-fi books and movies from the 70s and 80s predicting a far future of the 21st or 22nd century in which the Soviet Union still existed, people routinely project their current reality onto the future without any further thought. If pressed they’ll then use any evidence at all to defend their predictions, even if the same evidence could be used for an entirely different conclusion.

The 2010s were a period of low growth, low inflation, and high unemployment/underemployment. The 2020s have so far been a period of higher growth, high inflation, and very low unemployment. Both decades have challenges, and many of the challenges are the same. But I see no reason to believe that the trends of today will last forever.