Daily Economic Update: January 10, 2024

Howard Mark's writing a memo that uses Edward Chancellor's excellent book, The Price of Time, as the source of Mark's inspiration, sign me up!  I've written about Chancellor's book in this LinkedIn article and I've mentioned Marks a few times on this blog (you can search) and have always enjoyed his thinking on risk and leverage, including this quote: 

"Leverage doesn’t add value or make an investment better. Like everything else in

the investment world other than pure skill, leverage is a two-edged sword – in fact,

probably the ultimate two-edged sword. It helps when you’re right and hurts when

you’re wrong. "

As for Mark's latest memo "Easy Money" , I would summarize and comment on Mark's thoughts as follows:

• Mark's notes (again) that the extended period of low interest rates had a major impact on business and the associated appreciation of assets.
• Mark's list the stimulative effects of lower interest rates, including pushing investors out into riskier investments in a classic 'search for yield'.
• He goes onto discuss some of the problems that occur with abnormally low interest rates, something Chancellor provides examples of in his book and something I equally mentioned in my LinkedIn article (above).  In my article I wrote - "As Chancellor states: “Without interest, future income streams are impossible to value. Capital can’t be properly allocated and too little is saved. If this situation continues for long, then the state investment would have to replace private investment and central banks would have to replace commercial banks as the major providers of credit.” "
• Mark's cites a number of "malinvestment" examples from the recent cycle of low yields including Argentinian 100 year bonds, financing of LBO's, Theranos & FTX scams, and the proliferation of 'zombie companies'.
• As always Mark's never misses an opportunity to discuss leverage, writing: "In much the same way, leverage can make otherwise unattractive investments investible....it must be noted that cheap leverage doesn’t make investments better; it merely amplifies the results. In times of low interest rates, absolute prospective returns are low and leverage is cheap.  Why not use a lot of leverage to increase expected returns?  In the late 2010s, money flowed to both private equity, given its emphasis on leveraged returns from company ownership, and private credit, which primarily provides debt capital to private equity deals.  These trends complemented each other and led to a significant upswing in levered investing."  Further providing, "Heavy leverage can render companies fragile and make it hard for them to get through the proverbial low spots in the stream"
• Mark's also talks about the perils of borrowing short to invest long, reminiscent of the March 2023 bank failures, and mentions some of the challenges of a psychological belief in lower for longer rates.
• After discussing the impact of the low interest rate cycle, Mark's moves onto to discussing the power of understanding financial history and specifically that of credit cycles.  Interestingly Mark's uses the same John Mills quote in his article that I used in mine....should I go all Bill Ackman on him?
• Mark's notes how similar the post-GFC years characterized by 'easy money' have been to other periods of financial history that did not end well for investors, yet, the lessons of the past fall on deaf ears.
• While avoiding making any predictions, Mark's does not believe we're going back to unusually low interest rates and characterizes current interest rates as "normal", believing that only a true economic emergency should lead to rates lower than 2-4% range over the coming years.
• Mark's believe the market is currently pricing in "goldilocks thinking" as it relates to either what will be the likely strength of weaknesses in the economy which will reveal themselves in the future and that such thinking will lead to disappointment.

Yesterday, stocks were little changed and yields remain largely rangebound with the 10Y Treasury seemingly caught in a trading range from around 4-4.05%. Spot BTC ETF's were "approved" until it turned out the SEC's Twitter account was "compromised".  Got to love how much crypto can and does get manipulated.

Treasury Supply (10Y auction today), earnings season and CPI on the horizon. 

XTOD: What's the lesson I want you to understand?  Greed and status can make you successful to the point of self-destruction. Leverage + taking instant IRS credits (filing taxes w/ accelerated depreciation) to live large, acquire properties, be that person on X, IG or TikTok talking about financial freedom through owning real estate is fun, until it's not.

XTOD: So, what is the purpose behind those who tell tales of cheap Canadian drugs? They seek to imply that our system is broken, and delivers only expensive drugs, when the socialist Canadian system delivers the goods for its people. Thus, they implicitly argue that we need to have socialism here. It's not complicated.  So, repeat after me. We could go with the Canadian system and have super cheap drugs, if only we can find a much bigger, more medically advanced, freer country right next to us to make miracle drugs for themselves, and then we insist that we pay them only a bit above their variable cost for our share, and then they in turn agree to let us be their parasite. Mexico, would you mind helping us out?”

XTOD: Hoarding talent backfires. Managers who fail to promote people wind up with weaker teams. 

Study of 96k job applications: Bosses who advanced their employees attracted more & better internal candidates for open positions.  People gravitate to leaders who invest in their growth

XTOD: Makes me happy to see one of my old blog posts still being read, liked, and shared.

https://worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/milton-friedmans-thermostat.html

XTOD: An analysis finds that nominal wage growth peaked in 2022. In 2023, wages were still increasing but at a slower rate, and growth has yet to fall to pre-pandemic levels https://ow.ly/EF4E50Qpc0s

https://x.com/AdvisorJohn/status/1744378287306965280?s=20

https://x.com/CliffordAsness/status/1744415880887284025?s=20

https://x.com/AdamMGrant/status/1744406141059105174?s=20

https://x.com/MacRoweNick/status/1744354692220465397?s=20

https://x.com/stlouisfed/status/1744826434827264272?s=20