Econ & Markets
Collateralised fund obligations: How private equity securitised itself.
CFOs are, in some ways, a private equity variant of “collateralised debt obligations”, the bundles of mortgage-backed securities that only reached the public consciousness when they wreaked havoc during the 2008 financial crisis.
“It was bothering some people at the NAIC . . . that you could take fund interests, kind of package them, securitise them, issue this collateralised fund obligation, and lo and behold you’ve gone from a 30 per cent-capital-charge private equity investment to something highly favoured with a lower capital charge,” said Hamilton.
"It's no use, Mr. James—it's leverage (turtles) all the way down."
Collateralized Fund Obligations (CFOs): The Technicolor Dreamcoat of Fund Finance
Crypto Firm FTX’s Ownership of a U.S. Bank Raises Questions. Go Go Gadget Suspicious Activity Report.
Farmington has more than one crypto connection. FBH bought the bank in 2020. The chairman of FBH is Jean Chalopin, who, along with being a co-creator of cartoon cop Inspector Gadget in the 1980s, is the chairman of Deltec Bank, which, like FTX, is based in the Bahamas. Deltec’s best-known client is Tether, a crypto company with $65 billion in assets offering a stablecoin that is pegged to the dollar.
I wonder if he will cry when nothing happens? Ackman’s Big Hong Kong Short Comes at a Bad Time for Bears.
What do you mean by policy lags?
Thus some people seem to assume that the Fed’s been tightening policy all year, and that we haven’t seen much slowdown in demand due to policy lags. In fact, interest rates probably remained well below neutral for much of the year, and the Fed only began tightening recently. Perhaps they still have not begun to tighten policy.Fed effects & European corporate bond market.
Fed effects & European corporate bond market.
The Bundesbank paper is a large-scale econometric exercise. But the effect of the dollar cycle can also be detected at the level of particular financial markets. Recently, I was asked to comment on the prospects for European corporate bond markets. This isn’t normally my bailiwick, but I came away impressed. The total stock of European investment grade and high-yield corporate bonds (both financial and non-financial) comes to c. 3 trillion euros. And in 2022, as interest rates rise, this market has been suffering an epic sell-off.
Inflation and Unemployment: Good News Isn't Bad News.
Yet, somewhere along the way the Phillips Curve reemerged as a policy guide. It still doesn’t exist – fifty years after the relationship between inflation and unemployment broke down the Peterson Institute hosted a conference where they asked ‘has the relationship between inflation and unemployment broken down?’ and in 2020 economist Kristie M. Engemann asked ‘What Is the Phillips Curve (and Why Has It Flattened)?’ – but, as Timiraos notes, it guides monetary policy and explains why monetary policy makers see buoyant jobs numbers as bad news.
Global central bank purchases leapt to almost 400t in Q3 (+115% q-o-q). This is the largest single quarter of demand from this sector in our records back to 2000 and almost double the previous record of 241t in Q3 2018. It also marks the eighth consecutive quarter of net purchases and lifts the y-t-d total to 673t, higher than any other full year total since 1967.
Inside Masa Son’s $5bn SoftBank IOU.
Armed only with cash from SoftBank and its founder Masa, Vision Fund 2 seemingly entered into a Brewster’s Millions-style contest with Tiger Global to see who could plough the most money into the biggest number of start-ups in the shortest amount of time.
To summarise, SoftBank is extending credit to its CEO to invest in a fund it manages. The loan is secured on a) his equity in the fund b) a bunch of SoftBank shares and c) his personal wealth. Just try to wrap your head around what would happen in a scenario where massive investment losses at SoftBank trigger a share price slide that wipes out most of Masa’s net worth.
"Price is the Medium Through Which Housing Filters Up or Down": Part 3
Where housing is undersupplied, it creates much more of a rise in low-end housing costs than it does at the high end. This is a universal trait.
Yet, a scatterplot showing the median home price and income of different metro areas will have a positive slope - richer cities have higher price/income ratios. But, that is mostly because prices in the poorest neighborhoods of housing-deprived cities move up enough to force poorer residents to move away. The upward slope of the medians is mostly due to the compositional changes in regional incomes created by semi-voluntary displacement of poorer families to places where more new housing is legal.
Lawler: Likely "Dramatic shift" in Household Formation has "Major implications" for 2023
there is strong reason to believe that household growth is no longer getting the “boost” from behavioral changes as that suggested from March 2021 to March 2021. If that turns out to be true, then household growth is or will return back to growth more consistent with underlying population changes by age group, a development that would imply household growth over the next year of about half that apparently experienced from early 2021 to early 2022. Such a dramatic shift has major implications for projections of rent growth and home price growth next year.
…the relative momentum of cyclical and defensive stocks contains a very strong signal of market-wide risk appetite. In terms of the relative performance of these sectors, the market is pricing an imminent recession: cyclicals are down 1.0% so far this quarter, while defensive stocks are up 11.2%. Yet, banks are on tear, performing second only to energy stocks. Bank stocks should be getting killed given that the damn economy is falling into a recession! Aren’t they supposed to be leveraged bets on the economy? Very strange.
Foreign
Europe accuses US of profiting from war. The Inflation Reduction Act subsidies have triggered some latent, previously undetectable, form of European Union intelligence.
China's pivot is a bit of a mess.
Now of course, none of this means that “China is done”, or that the country’s manufacturing prowess will evaporate, or that it will become a weak actor on the international stage, or any of the other melodramatic things that people say on social media when they see news like this. These problems are stumbling blocks, and China will almost certainly recover after a while. But they illustrate the downsides of dictatorial decision-making in a way that should prompt observers to recalibrate their own narratives about the ascendance of autocratic systems.
Biden Trashes the Abraham Accords.
The reason for the administration’s hostility to the Abraham Accords goes beyond jealousy or the desire to deny credit to a hated predecessor. There are significant matters of substance and strategy at stake. The Abraham Accords framework is fundamentally opposed to the Obama-Biden vision for the region. Whereas the Abraham Accords framework draws a bright line separating the U.S.-allied camp from Iran and its camp, the Obama-Biden vision turns the very concept of friend and foe on its head, elevating Iran and downgrading allies under the pretext of creating “equilibrium” or “balance.” The problem the White House faces is that the accords are popular: The biblical name alone resonates with the American public.
Pakistan’s House Divided. Imran Khan versus the Pakistani deep state.
At his rallies and in countless interviews, Khan has described the current government as dynastic and corrupt (he calls the current prime minister “crime minister”) and undeserving of the office.
This prime/crime minister wordplay is masterful, I don’t see how he could lose.
Inside the Trilateral Commission: Power elites grapple with China's rise.
On Saturday, however, the proceedings of the commission were opened to three reporters from Nikkei Asia. They were permitted to attend the meeting of the commission's Asia Pacific Group on Nov. 19 and 20, on the condition that the discussants would not be quoted by name. This was the first time in its five decades that members of the press have been allowed to sit in for all of the sessions at the Asia Pacific Group.
The effort by the Asia Pacific Group to disclose the discussions is not necessarily aimed at demystifying it to critics, however. Instead, the press has been invited to highlight a rift that may be emerging between Asia and the other wings of the organization.
Domestic
Building Fast and Slow: The Empire State Building and the World Trade Center (Part I)—We used to be a proper country. There is zero chance we could build The Empire State Building as quickly or cheaply as they did almost 100 years ago.
Related: Web3, the Metaverse, and the Lack of Useful Innovation
The Inflation Reduction Act Sparks Trade Disputes: What Next?
Bound tariff rates are like a price ceiling: a promise that you won’t charge more for a given product. Of the 164 WTO Members, U.S. tariff rates have the lowest average cap, a paltry 3.4 percent. All of these nations joined the GATT/WTO without the United States ever expecting tariff reciprocity. This is at the center of our deindustrialization. While National Treatment for friendly nations is a good policy, when combined with nonexistent or ultralow tariffs, as is the case in the United States, it becomes an economic suicide pact.
The real bamboozle of the “Uruguay Round” of GATT negotiations during the late 1980s and early 1990s, which involved the creation of the WTO, was to marry the GATT to a new global intellectual property agreement, trips, or trade-related aspects of intellectual property rights. Here, Western leaders intentionally chose to prioritize income from intellectual property rents over domestic manufacturing.
The Illogic of Nuclear Escalation.
The U.S. probably needs more than a few dozen nuclear weapons — but does it need a lot more than that? And if so, for what?
We would be better off mounting a full rebuttal of the vague assertions about “perceptions” (no one argues that some wasteful anti-poverty program should be funded anyway, so that it looks like we’re fighting poverty). It’s time for a return to first principles, the basic questions that nobody has been asking: How much is enough? And enough to do what? Enough material has been declassified over the last few decades that informed citizens can hold hearings and stage debates, even if members of Congress won’t.
Culture & Miscellany
New England’s Opium Overlords. IMHO, the Chinese government allows the export of Meth and Fentanyl chemical precursors because it still actively resents 19th century Anglo-American drug running.
But as New Englanders got richer, China grew poorer. That is because, by 1837, opium accounted for over half of all of China’s imports. And to pay for their opium, the Chinese spent silver. Between 1828 and 1836, opium sales drained $38 million in silver out of the economy. As China hemorrhaged silver in the south, alarms sounded up north in Beijing. In 1839, the emperor decided that the magnitude of the crisis called for drastic action.
A French Village’s Radical Vision of a Good Life with Alzheimer’s—Every resident of the Village Landais has dementia—and the autonomy to spend each day however they please.
One of the most radical aspects of the Village is its insistence that a person with Alzheimer’s is not just diminishing into the sum of her symptoms, but flourishing and evolving as a human being until the end.
Wine is not fake. Wine experts aren’t fake either, but they believe some strange things, are far from infallible, and need challenges and blinded trials to be kept honest. How far beyond wine you want to apply this is left as an exercise for the reader.
Parasite gives wolves what it takes to be pack leaders. How long until infecting yourself with Toxoplasmosis becomes a Tim Ferris life hack?
Meyer and Cassidy found that infected wolves were 11 times more likely than uninfected ones to leave their birth family to start a new pack, and 46 times more likely to become pack leaders — often the only wolves in the pack that breed.