Yesterday the Swedish central bank cut their benchmark rate by 25bps to 3.75% in what some believe will be the first of many developed country central banks to cut rates this year. On the day ahead we'll get the Bank of England rated decision, they are not expected to cut rates.
Stateside, the large 10Y Treasury Auction tailed by a full basis point, the 13th of the last 15th auction to tail, perhaps showing that the market appetite for longer dated treasury paper has some fragility, but we'll see what the 30Y auction does today. In Fedspeak, it's been more of the same kind of data dependent talk that everyone has become accustomed to of late. Yields rose a couple of bps and stock grinded out another day of gains on the Dow and was nearly flat on S&P.
In other news Howard Marks dropped his latest memo titled
The Impact of Debt. It is his second "short" memo, following up on his last memo which I reviewed
here. Readers will know I enjoy Marks' work and have covered some of his other recent memos
here and
here. Perhaps my favorite Marks' quote is "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."
In this most recent memo Marks' reference the work of someone else I very much enjoy reading, Morgan Housel. Here are some takeaways:
- "It's the presence of debt that creates the possibility of default, foreclosure, and bankruptcy."
- "Does that mean debt is a bad thing and should be avoided? Absolutely not. Rather, it’s a matter of whether the amount of debt is appropriate relative to (a) the size of the overall enterprise and (b) the potential for fluctuations in the enterprise’s profitability and asset value."
- "As Housel puts it, “ as debt increases, you narrow the range of outcomes you can endure in life.”
- The reason for taking on debt is simple, it's cheaper than equity, allows you to 'bet' more and when you're right you end up winning more.
- Of course when you're wrong you lose more...
- And this is where Marks' makes his mark in the memo: "But levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin. The most important adage regarding leverage reminds us to “never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average.” To survive, you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so. "
- And in referencing Housel referencing Taleb, Marks' provides "It’s the isolated “tail events” that saddle levered investors with the greatest losses" and "One is thus capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” name. " and " as illustrated by recent events, we rarely consider outcomes that have happened only once a century . . . or never."
- So where does that leave things with regards to Marks' views on using leverage:
- "investors should usually use less than the maximum available. Successful investments, perhaps enhanced by the moderate use of leverage, should usually provide a good-enough return – something few people think about in good times."
- The risker the asset, the less leverage you should use and
- Adhere to Buffett's "Margin of Safety"
What's "Margin of Safety", there are many good definitions you can find that I've written on this blog, but I think this sums it up: think creatively and be open to things unfolding in ways different from what they expect....flexibility comes with a cost....retain the option to change course when our plans go awry and have the humility to follow through.
On the day ahead it's BoE, jobless claims and 30Y Auction.
XTOD: There are many people here with serious gifts and talents—intelligent, witty, thoughtful—and those talents constitute a great power. Unfortunately, most choose to use that power in stupid and/or dangerous ways: the sharp-tongued pundit on here wreaking insecure havoc on everyone that disagrees with him in the slightest way; or the amount of time and energy thinking of funny memes for cheap engagement.
I often imagine what good is being lost to the world—what great good could be added to the world—if these same people used those gifts and talents, that power, to build others up and do something productive.
What books will never be written?
What genuine words will never be said?
What time and attention is not given to a spouse that is given to a social media critic?
XTOD: If you do things you don’t enjoy for long enough without understanding why you’re doing them, you develop the bad habit of doing things you don’t enjoy without understanding why you’re doing them. And you end up with a lot of people who are miserable at work.
XTOD: Want to understand what's going on in the commercial real estate market right now, especially office properties? Watch what's happening with 1440 Broadway. The $400 million loan backing 1440 Broadway helped push up the serious delinquency rate for office loans to 7% in April, its highest level since early 2017, https://bloomberg.com/news/articles/
XTOD: What I want 2 understand is where all the ratings agencies downgrades are. Crickets. Even CRE CLOS-- where the losses to the AAAs stand a real chance of repeating the 2008 meltdown that saw Our Heroes taking the "First." They LITERALLY claimed a 1st Amendment pass to avoid suits
XTOD: DavidBeckworth
𝘔𝘺 𝘱𝘳𝘰𝘮𝘱𝘵 𝘵𝘰 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐: can you imagine a world where the combination of (1) big data and (2) AI enables the Federal Reserve to become more automated and less reliant on human beings?
@pmarca
𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐 𝘙𝘦𝘴𝘱𝘰𝘯𝘦:
Yes, I can envision a world where the combination of big data and advanced AI technologies enable the Federal Reserve's decision-making processes to become more automated and less reliant on human input. Here's how this scenario could potentially unfold:
𝗕𝗶𝗴 𝗗𝗮𝘁𝗮 𝗜𝗻𝘁𝗲𝗴𝗿𝗮𝘁𝗶𝗼𝗻: The Federal Reserve could leverage big data analytics to integrate vast amounts of economic data from various sources, including financial markets, banking systems, employment statistics, consumer spending patterns, and global economic indicators. This comprehensive data integration would provide a real-time, holistic view of the economic landscape.
𝐀𝐈-𝐃𝐫𝐢𝐯𝐞𝐧 𝐌𝐨𝐝𝐞𝐥𝐢𝐧𝐠 𝐚𝐧𝐝 𝐅𝐨𝐫𝐞𝐜𝐚𝐬𝐭𝐢𝐧𝐠: Powerful AI algorithms and machine learning models could be trained on this extensive data to analyze economic trends, identify patterns, and make accurate forecasts about inflation, employment, economic growth, and other key indicators. These AI models could continuously learn and adapt, improving their predictive capabilities over time.
𝐀𝐮𝐭𝐨𝐦𝐚𝐭𝐞𝐝 𝐏𝐨𝐥𝐢𝐜𝐲 𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧𝐬: Based on the insights derived from AI-driven modeling and forecasting, the Federal Reserve's decision-making processes related to monetary policy, interest rate adjustments, and other interventions could become increasingly automated. AI systems could recommend optimal policy decisions based on predefined objectives and constraints, minimizing the need for human deliberation and decision-making.
𝐂𝐨𝐧𝐭𝐢𝐧𝐮𝐨𝐮𝐬 𝐌𝐨𝐧𝐢𝐭𝐨𝐫𝐢𝐧𝐠 𝐚𝐧𝐝 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭: With real-time data feeds and AI-driven monitoring, the Federal Reserve's policies and interventions could be continuously evaluated and adjusted based on changing economic conditions. AI systems could dynamically adapt policies to maintain economic stability, without the delays associated with human decision-making processes.
𝐑𝐞𝐝𝐮𝐜𝐞𝐝 𝐇𝐮𝐦𝐚𝐧 𝐈𝐧𝐯𝐨𝐥𝐯𝐞𝐦𝐞𝐧𝐭: While human oversight and governance would likely still be necessary to some extent, the day-to-day operations and decision-making processes of the Federal Reserve could become significantly less reliant on human input. AI systems could handle the bulk of data analysis, modeling, forecasting, and policy recommendations, with human expertise focused on setting overarching objectives and ensuring the system's integrity.
However, it's important to note that such a scenario would also raise concerns about transparency, accountability, and the potential for unintended consequences or biases inherent in AI systems. Careful governance frameworks, ethical considerations, and robust monitoring mechanisms would need to be in place to ensure the responsible and trustworthy deployment of such AI-driven systems in critical economic domains like central banking.
