Did Someone Call a Plumber?
You have a water leak in your basement. You call a plumber in the middle of the night. He comes immediately and fixes the issue. This early action saved you countless hours of cleanup, plus the expense of lost valuables.
A few months go by. You are coming down with something. You have the chills, and it’s the middle of the night. What do you do? Why, call the plumber, of course. When you had a problem in the middle of the night before, he fixed it. Duh!
The plumber arrives. Your radiators aren’t putting out much heat.
“It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.”
— G.K. Chesterton
The Quarter in Review
What a way to end the year! Global markets experienced a robust finish to 2019, with all but the so-called safe assets experiencing an acceleration in the fourth quarter. Though confidence increased as trade tensions appeared to lessen, this may not result in a lasting euphoria. (When does euphoria ever last?) Corporate earnings are about to record their second
“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty.” -Nissim Nicholas Taleb
Well-intentioned plans can bring unintended consequences. The world’s major central banks have been adding stimulus to the global financial system, hoping to lessen economic volatility and minimize the chance of a material slowdown. However, the result of their actions might be to increase the fragility of the institutions they intend to strengthen.
We have written about the unnatural negative interest rates in many developed nations outside the U.S. (See,
“The investor of today does not profit from yesterday’s growth.”
The Quarter in Review
Compared with previous quarters, the third quarter exhibited considerably more volatility with little appreciation. Most investment markets are showing signs of exhaustion due to continued uncertainty about trade wars, the negative interest rates in most developed countries, and deteriorating economic readings. Over this past quarter, we have seen companies reduce their outlook for growth and earnings, for obvious reasons.
The U.S. continues to be the only large house in the neighborhood not on fire. Both developed international and emerging markets have deteriorated since the end of the second
Two weeks ago, Jamie Dimon, the CEO of JP Morgan, said, “So, we have taken liquidity out of certain products. And it won’t hurt you very much in good times. Watch out when times get bad and people are getting stressed a little bit.”
He was referring to changes in banking regulations after the 2008 financial crisis that, by tightening up lending requirements, reduced the ability of large banks to offer liquidity to the markets. Though the legislators’ intent was reasonable, they removed a historical shock absorber from the financial system and increased the potential for market dislocations.
Dimon’s comments appear well
The Sound of Money Dying
Wealth can be created and destroyed. Wealth is created when the investment of time, money, and energy arrives at an endpoint where the profit obtained is greater than the investment made. A simple example: you give your child ten dollars, allowing her to purchase supplies to open a lemonade stand. She builds the storefront, stocks inventory, and perhaps employs her brother to operate the store. In return for your investment, she pays you back plus a handsome dividend (unless you drink all the profits). She is thus rewarded with a profitable ongoing business, and you have
We hosted Brad Kotler of SSGA to discuss the mechanics underlying fixed income ETFs. As the AUM within these ETF’s now is over $1 trillion, more people are concerned about their impact on the credit markets. We discuss how ETFs are created and redeemed and the role they play within the changing fixed income market.
Liquidity—the growing scarcity of it right now—is something that has bothered us for a while. It’s getting harder to turn an asset into cash. Higher liquidity implies the ability to sell quickly at a price similar to recent pricing. One way of thinking about liquidity is to consider the difference in the liquidity of a house (not very liquid) versus publicly-traded equity (typically very liquid). You can often measure in months, or even years, the time from the moment of the first action to sell a house to the point where the proceeds of the sale are in your bank