FOMC Recap: Performance Review Edition

• As expected the FOMC remained on hold for the third straight meeting, leaving the Fed Funds Target range at 5.25% to 5.50% with no changes to QT or other policies.
• The language in the FOMC Statement was less firm on the possibility of additional rate hikes.
• The Dots showed the Fed forecasting a 50bp lower 2023 Core PCE rate relative to estimates from September, as well as a 50bp reduction, from 5.1% to 4.6%, in the Median 2024 Fed Funds dot relative to September.
• Powell indicated the Fed remains fully committed to returning inflation to 2% goal, characterizing the current stance of policy as restrictive and cited the long and variable lags associated with monetary policy.
• Powell indicated that FOMC participants believe we are at the peak of interest rates.
• "Normalization Cuts" were discussed in the press conference, albeit poorly, but Powell acknowledged there was discussion as to when to start cutting rates as inflation cools.
• 2Y yields were down 20bps following the FOMC Statement and fell a further 10bps as Powell spoke, breaching 4.45%.

Every year most of us are forced to write down our professional goals, usually cascading down from company and team goals to you as the individual.  Now is that time of year where many organizations are conducting their performance reviews.  With that in mind, there is no better time than now to review the FOMC's performance for this year.

As is the case with any good performance appraisal, you should start with some objective criteria against which you are measuring performance.  In the case of the FOMC, Congress specified the goals of the Fed as: (1) maximum employment, (2) stable prices, the so called "dual mandate", but there is an often forgotten third mandate in the amended Federal Reserve Act of 1977 and that is (3) moderate long-term interest rates.

Now for the appraisal:

On Maximum Employment - Exceeds Expectations:  we came into 2023 with forecast for recessions which would have included job losses.  The unemployment rate remains below 4% and though there may be some signs of labor market weakness, it's hard to say that the jobs picture isn't more robust than what most expected at the start of the year.

On Inflation - Needs Improvement/Below Expectations - you can argue with me until you are blue in the face that the Fed deserves a better grade here given the rapid disinflation seen in PCE and CPI data, but perhaps an example will sway you.  Assume that you, as an employee, start the year with your boss telling you that the number of errors (maybe it's trading errors, maybe it's quality defects) you made was way to high last year and that the number of errors to be tolerated was 2.  Your boss gave you a second chance last year because they knew there were some extenuating circumstances and you hadn't made too many of these types of errors recently, so your boss let you overshoot the error quota for a while (your boss even allowed you to change your the policy goal to "FAIT"), but said they weren't going to tolerate errors above 2 forever.  You go into 2023 knowing you have to bring the level of errors back to 2, so you continue to be aggressive with your policies, they seem to be working, but your errors are still double what you were told you needed to achieve.  Well, that's the Fed, they have that 2% inflation goal, but we're sitting here today a year later and we're still nearly double that rate.  You wouldn't get away with that in your performance review, would you?  You can tell your boss that everyone thinks your error rate will come down in the future, expectations are that they will, but would your boss keep giving you a pass?

On Moderate Long-Term Interest Rates - Meets Expectations - in the Federal Reserve's publication, "The Fed Explained: What the Central Bank Does" it states: ".. long-term interest rates remain moderate in a stable economy with low expected inflation...".  This third mandate is never really mentioned because it seems to be dependent upon the first two topics.  Certainly yields are higher than some people expected as the start of the year and they seem more moderate than they were when most of the curve was very low across the curve in the 2010's. But with so much uncertainty around things like R* and U* it's hard to do better than "meets" here.  I think the Fed did a better job on meeting or exceeding "volatile" long-term interest rates this year than they did on meeting the definition of "moderate". Arguably the rating could be worse as the Fed seemed to be relying upon tightening of financial conditions to do some work for them, with that tightening coming from higher long-term rates, and that seems to be going the wrong way as financial conditions have eased into year end.

Most reviews also include a section where the manager provides some narrative assessment of how things are going for the employee being reviewed.  Here's mine for the Fed:

While progress has been made towards your goals, it's unclear how much of the success is attributable to your performance. You haven't done a great job of explaining your reaction function and often the market discounts what you are saying and believes you'll abandon your goals early if they complain loud enough.  What is your reaction function? Are there rules you look at and follow to help you achieve your goals? 

Your colleagues noted you did a lot of talking and many times that talking was distracting. We value a high "sit-next-to" factor here and it seems you can cause a lot of people anxiety. It seems like you spend most of your day just talking, when do you get work done? Oh, I see you think your job is mostly talking, propaganda, and suasion. We'll take this under consideration in 2024 goal setting.

Your track record of forecasting is not good. In 2024 maybe you should focus on the concept of "Margin Of Safety".  In the words of Benjamin Graham in his classic book "The Intelligent Investor", Margin Of Safety is "in essence, that of rendering unnecessary an accurate forecast of the future".  I know you're trying to balance both risk to unemployment and inflation, but look at where you need improvement, perhaps you might need to apply the Margin Of Safety concept to your inflation mandate.

Lastly, your performance was mixed on supervising your direct reports. Remember how several banks failed?  You did a nice job of limiting the impact, but some find it troubling how this happened in the first place and how you seemed to miss the build up of economic and financial risk in years prior as well. 

As we head into 2024, as you stay employed in your job of steering the most important economy in the world, I will remind you of some advice from the late, great Charlie Munger,  "Nobody survives open heart surgery better than the guy who didn't need the procedure in the first place."  You say you'd rather be Volcker than Burns, your goal for 2024 is to get inflation back to 2%.  Let's try to get there without breaking something that will require open heart surgery.

 

 

Edward Quince's Wisdom Bites: The Hard Truth of Fiscal Discipline – Or, Why We Keep Kicking the Can

Welcome back to Edward Quince's Wisdom Bites, your daily reminder to cut through the noise and focus on what truly matters. Today, we're diving into a topic that feels perennially relevant, yet consistently misunderstood: fiscal discipline. While the market gyrates and pundits clamor, the wisdom of the past, and a dash of intellectual humility, might just offer the clearest path forward.

The Elephant in the Room: Mounting Debt and Deficits

It seems that every day brings fresh warnings about the U.S. fiscal situation. From Moody's putting U.S. sovereign debt on negative watch to calls about a "Minsky moment" from a fiscal situation deemed "impossible," the chatter is omnipresent. There's a persistent concern among investors about rising U.S. debt levels. Even Fed Chair Powell has acknowledged the national debt as unsustainable. We're talking trillions added to the debt, often with hundreds of billions more if expiring provisions are extended. It appears that policymakers sometimes act as if the answer to all problems is simply more government spending, as if there's no such thing as an uncovered deficit.

Historically, Alexander Hamilton warned Congress in 1790 that "the creation of public debt should always be accompanied with the means of extinguishment" as "the true secret for rendering public credit immortal". For the first 175 years of the nation, the U.S. largely adhered to this "Hamilton Norm," issuing large quantities of public debt only during emergencies. One can certainly wonder if we've violated that norm, and if it matters.

The Fiscal Theory of the Price Level (and Why it Matters)

While Modern Monetary Theory (MMT) might "diss" the idea of bond vigilantes and suggest governments can finance all spending without borrowing or taxes, other compelling theories offer a starkly different view. John Cochrane, a leading proponent of the Fiscal Theory of the Price Level (FTPL), suggests that if fiscal policy is undisciplined, the Fed's actions alone may not lower inflation. In fact, if the Fed raises interest rates, it raises interest costs on the debt, and if taxes don't rise or spending doesn't fall to pay those costs, there's "no reduction in inflation". He calls this "unpleasant interest rate arithmetic".

The FTPL posits that inflation occurs if debt exceeds faith in a country's long-run ability and will to repay it. This theory suggests that the Central Bank can only "move inflation around over time," and ultimately doesn't have full control if fiscal policy isn't consistent with price stability. It highlights the "real danger" that comes from "encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking".

The Fed's Dilemma: Independence vs. Politics

The Fed may believe a certain policy is correct but worry it will appear politically motivated. Peter Stella's definition of central bank independence is "the ability to raise interest rates when the Treasury doesn't want you to," which is almost always the case due to the cost of debt. Powell has stated the Fed "do not consider politics in our decisions. We never do. And we never will". However, the macroeconomic models themselves implicitly include some budget constraints and fiscal-monetary coordination. If fiscal policy is the major driver of inflation, how is the Fed supposed to fulfill its price stability mandate?

What's the Wise Play? Beyond the Headlines.

In a world loud with information, where everyone has a "take," the key is often to mute the unnecessary and discern what truly matters. As the wisdom from the blog frequently emphasizes, "Clarity comes from subtraction, not addition. Remove the noise, the distractions, and the unnecessary. What truly matters will emerge".

Here's some wisdom to help you navigate the fiscal noise:

• Embrace Intellectual Humility: Recognize that forecasting the future is a "fool's errand," and even "experts" are often wrong. As Morgan Housel wisely noted, "Real optimists don't believe that everything will be great...Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way".

• Focus on What You Can Control: Your behavior matters more than any forecast. Instead of reacting to every headline, cultivate discipline and a robust process. As Charlie Munger advised, "It's waiting that helps you as an investor, and a lot of people just can't stand to wait".

• Prioritize a Margin of Safety: Benjamin Graham's concept of a "margin of safety" is about "rendering unnecessary an accurate forecast of the future". This means building flexibility, avoiding excessive leverage, and having a buffer to withstand unexpected events. "Know your goals, mitigate unwanted risk, prepare and position the best you can for when the unknown or unexpected occurs, because life is uncertain, but remember without risk there is no return".

• Learn from History, But Don't Over-predict: "History doesn't repeat, but human nature does". Studying past financial disasters can impart "invaluable lessons on what to do and what not to do at far lower cost than making the mistakes oneself". However, be wary of thinking "this time is different".

• Question the "Why": Understand the motivations and incentives of those providing information. As Charlie Munger said, "I never allow myself to have an opinion on anything that I don't know the other side's argument better than they do".

Ultimately, fiscal discipline—or the lack thereof—has profound consequences. While you can't control government policy, you can control your own approach to navigating an uncertain world. Remember, "The greatest shortcoming of the human race is our inability to understand the exponential function". This applies not just to compounding wealth, but also to compounding problems.

Daily Economic Update: October 21 2024

As we approach the election, increasingly we are inundated with experts expressing with much certainty their financial views.  This is often done with much confidence, yet generally short of much more than abstracted terms like increased volatility, horrible consequences, game ending outcomes, big down turns, etc.  Sometimes the discussions center around something of a paradox whereby without massive deficits the economy will fall into some disaster, yet with further deficits we are certain to end in disaster.  Other times it is about the yet to be felt consequences of the "lags" of monetary policies or some other topic which again has generally been on the radar for a long time now. 

Whoever the expert and whatever the view there is generally some explicit or implicit message that you must do something now.  Perhaps it's more wise to consider whether there is more wisdom below than what you hear there:

"We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen." - Warren Buffett

 "Often we tell ourselves, “Don't just sit there, do something!” But when we practice awareness, we discover that the opposite may be more helpful: “Don't just do something, sit there!" -  Thich Nhat Hahn

 "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."  – Mark Twain.

We all know elections occur regularly, often an investor might experience multiple elections over the hold period of an investment.  We also know that the cost to insure against risk is generally not when it's being experienced, you probably want to buy the fire extinguisher before the fire.

The point is not whether the views of the experts are right, or to argue that you should bury your head in the sand, it's not.  The point is to more clearly know the difference between investing and speculating (discussed here and here and here) and to remember that even when experts tell you that you must do something around the election even in the vein of "risk management", that "risk management" is actually a process, one that is generally well served by understanding why you are taking any risk in the first place, a goal. Often good advice is to build a risk management culture.  Perhaps your risk management process coupled with new information that comes to light might lead to action, perhaps not, and likely not in some alarmist way.

With respect to risk management perhaps there is more wisdom here than in all the expert calls to do something you'll continue to hear:

"Taking a risk without a goal is just like getting in a car and driving around aimlessly expecting to wind up in a great place" - Allison Schrager

“[Risk management] is not just in responding to anticipated events but in building a culture and organization that can respond to risk and withstand unanticipated events. In other words, risk management is about building flexible and robust processes and organizations.”  - John Coleman

Of course as Jason Zweig noted:  

"All investors labor in a cruel irony: We invest in the present, but we invest for the future. And, unfortunately, the future is almost entirely uncertain. Inflation and interest rates are undependable; economic recessions come and go at random; geopolitical upheavals like war, commodity shortages, and terrorism arrive without warning; and the fate of individual companies and their industries often turns out be the opposite of what most investors expect.  Therefore, investing on the basis of projection is a fool's errand; even the forecasts of the so-called experts are less reliable than the flip of a coin. For most people, investing on the basis of protection - from overpaying for a stock or from overconfidence in the quality of their own judgment - is the best solution."

Thinking in terms of preparation over prediction, discipline and process over emotion, recognition of the folly of certainty are probably better mental frameworks than the soundbites designed to get clicks.

 In the words of Benjamin Graham in his classic book "The Intelligent Investor", Margin Of Safety is

 "in essence, that of rendering unnecessary an accurate forecast of the future".   

 A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

Anyway, that's my speil to start your week. 

We start a new week at new all-time highs, people still loving Netflix, a 2Y at 3.95% and a 10Y at 4.08%.  On the week ahead, it's earnings, Fedspeak, PMI's and Durable goods as highlights.

Mon: Fedspeak

Tue: probably rest

Wed: home sales, Beige Book, Bank of Canada

Thur: jobless claims, home sales, PMI's

Fri: Durable Goods, UofM final

XTOD: The McRib is back. BTC historically goes up >2x after the McRib returns. Don't fade the McRib.   Not financial advice.  https://pbs.twimg.com/media/GaMkC2qbUAAHl9Q?format=jpg&name=900x900

XTOD: From Edelweiss Holdings PLC Owners Manual - Anthony Deden's firm.   Excerpt from "Chapter 7 - Value is not a Number" https://pbs.twimg.com/media/GaLIQ1YW4AAdM4z?format=jpg&name=900x900

XTOD: GOLDMAN: "We estimate the S&P 500 will deliver an annualized nominal total return of 3% during the next 10 years (7th percentile since 1930) and roughly 1% on a real basis."

XTOD: Getting really into finance is bad for investment performance, past a certain point. You're fine with a simple investment program and chilling. You will outperform most other investors over the long run.  But - if you're really into finance you'll get shiny object syndrome.   "Oh, leverage that portfolio up. Oh, futures. Maybe I should hedge. Oh, I heard this guy on a podcast with a great macro take. Perhaps I should act on that. This commodity is at a 50-year low. This merger is gonna go through and the market is wrong. I should short China because demographics. I should go long China because valuation. This s*itco is net cash. Maybe this is the next Monster Beverage." etc.  That's why it's good to have a small account to get that stuff out of your system & scratch the itch so you don't screw up the boring portfolio that's actually gonna work.

XTOD: "Most of what I know about writing I’ve learned through running every day." Murakami

Daily Economic Update: February 26, 2024

Stocks will start the week coming off record highs.  The week ahead will feature PCE and the first revisions to 4Q2024 GDP.  Speaking of GDP, the NY Fed Nowcast forecast remains at 2.80% (real GDP for 1Q) while the Atlanta Fed GDPNow will be updated Tuesday.

The highlight of the weekend was the Berkshire Hathaway annual shareholder letter .  The letter starts with Buffett highlighting the impact Charlie Munger had on both his success and that of Berkshire Hathaway, calling him the "architect" of the company, a nod to Munger's love of architecture.  Buffett goes onto credit Munger with what was arguably the most important change in his investing philosophy, stating: "Charlie, in 1965, promptly advised me: “Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.”   For more on Munger, see here.

As for the rest of the letter, here are what I consider to be the highlights:

• Buffett opens the letter by basically differentiating investors from speculators (a topic we covered here) whereby he believes in attracting "lifetime" shareholders as opposed to those locking for lottery tickets.
  
  
• Buffett also takes a jab at so called economic experts in the following lines (discussing his sister Bertie as a typical investor): "She is sensible – very sensible – instinctively knowing that pundits should always be ignored. After all, if she could reliably predict tomorrow’s winners, would she freely share her valuable insights and thereby increase competitive buying? That would be like finding gold and then handing a map to the neighbors showing its location. (again a topic we covered here).
  
  
• Buffett never misses a chance to bemoan accounting standards, "So sanctified, this worse-than-useless "net income" figure quickly gets transmitted throughout the world via the internet and media. All parties have done their job - and legally, they have."  Lamenting the mark-to-market accounting requirements impact on Berkshire's GAAP earnings.
  
  
• Buffett remains optimistic about the power of investing in U.S. based equities and the patient approach to investing, avoiding the noise. (we talked about optimism here and noise here)
  
  
• Buffett describes his continued investment philosophy in terms of owning businesses with strong fundamentals that can deploy additional capital at high rates of return in the future, he pulls no punches that he can't predict the winners and losers, but he hopes he can select a few of these business that are run by "able and trustworthy" managers.  Later in the letter he points to Coke and Amex as two such companies where patience has paid and how these two wonderful decisions can outweigh the many other mediocre decisions Berkshire has made over the years.
  
  
• Buffett states his realization that the size of Berkshire today makes it nearly impossible to double the net worth of the company in the near future stating "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire...outside the U.S., there are essentially no candidates..."
  
  
• Buffett believes "Berkshire should do a bit better than the average American Corporation, and, more important, should also operate with materially less risk of permanent loss of capital.  Anything beyond "slightly better," though, is wishful thinking.  (Buffett is known to recommend passive index investing as being an acceptable strategy for most investors).
  
  
• Buffett lays out two investing maxims: (1) Wall Street will market whatever foolishness that can be marketed and will do so vigorously - they want activity (2) "Never risk permanent loss of capital" - you will be rewarded if you make a couple of good decisions during your lifetime and avoid serious mistakes.  Or to quote Munger: "Never interrupt compounding unnecessarily".  (In my opinion both of these maxims are clearly drawn from his mentor Benjamin Graham, you can see the groundwork laid in these Graham quotes: (a) "Nearly everyone interested in common stocks wants to be told be someone else what he thinks the market is going to do. The demand being there, it must be supplied."  and (b)  "In the old legend the wise men finally boiled down the history mortal affairs into a single phrase, "This too will pass". Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY"
  
  
• Buffett as usual is very patriotic throughout his letter.  He refers to the things like the "American tailwind",  Berkshire's "allegiance..to our country", and Berkshire's goal to be "an asset to the country - and to help extinguish the financial fire [referring to any situation where the U.S. hits a financial disaster]".  Buffett also discusses the increased ownership stake in Occidental Petroleum, his ownership of railroads and energy assets all in patriotic terms.
  
  
• Buffett describes Berkshire as having "extreme fiscal conservatism" as a corporate pledge, holding a sizeable cash and T-Bill position and always being prepared for a period of economic paralysis while also never wanting to inflict permanent damage on any of their investors.  (I feel like you can see how engrained Ben Graham's margin of safety concept is in his thinking - always having a buffer that allows you to render an accurate forecast of the future as unnecessary.)
  
  
• Buffett concludes the letter, where he started with reference to his sister Bertie, imparting this piece of advice as it relates to the patient approach to investing: "in 1980...Retaining only the mutual fund and Berkshire, she made no new trades during the next 43 years. During that period, she became very rich..." "Millions of American investors could have followed her reasoning which involved only the common sense she had somehow absorbed as a child in Omaha"

In addition to the above, the letter provides an overview of Berkshire's core rail, energy and insurance businesses and an overview of the three managers who are responsible for overseeing Berkshire's business day-to-day.

On the week ahead:
Today: New Home Sales, Treasury Auctions 2Y and 5Y notes

Tue:  Durable Goods, 7Y Auction

Wed: 4QGDP (1st revision), Inventories 

Thur: Jobless Claims, PCE, pending home sales, Fedspeak

Fri: ISM mfg, construction spending

XTOD: The ridiculous images generated by Gemini aren't an anomaly. They're a self-portrait of Google's bureaucratic corporate culture. The bigger your cash cow, the worse your culture can get without driving you out of business. And Google's cash cow, search advertising, is one of the biggest the world has ever seen.

XTOD: This shall now be known as the Paul Graham Rule - absolute monopolies endanger themselves - they lose the self correcting imperatives of competition. Now layer on the greatest Innovator’s Dilemma in the history of business. $GOOG needs  @elonmusk  level course correction!

XTOD: Working in finance has completely ruined me. Literally got paid an amount that a few years ago I would have literally shed tears of happiness over, and it just feels like it's never enough.

XTOD: A Harvard professor asked millionaires how much more money they'd need to be 10 on the happiness scale.    Here's how each group answered:    $1 mm: Double  $2 mm: Double  $3 mm: Double  $5 mm: Double  $10 mm: Double    Folks, the hedonic treadmill is real

XTOD: Absolutely. I receive 5X the number of inquiries per month that I can consult with. Other advice-only advisers (non-asset management or product sales) have similar backlogs. The issue here isn’t people looking for advice, it’s people who are looking only for advice and don’t want to be forced into an AUM relationship or similar.

XTOD: If you were funded, with no strings attached, to pursue your obsession for 2-3 years, what would you pursue?   I wish their were more programs that funded this sort of thing. 

Nothing as infectious as someone’s passion coming awake after a long slumber

XTOD: “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.”    — Steve Jobs 

Diversity of focus leads to average results.  

One way to create advantageous divergence is to focus all of your efforts on the one or two best opportunities in front of you.  

A question to ponder:   What would it look like if you organized your life to maximize focus around the biggest opportunity you have?   What would you stop doing?

Daily Economic Update: May 9, 2024

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."
•  This reminds me and reminded Marks of one of my favorite Marks' memos https://www.oaktreecapital.com/docs/default-source/memos/2008-12-17-volatility-leverage-dynamite.pdf?sfvrsn=c7bc0f65_2
  
  
  
• "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.

Edward Quince's Wisdom Bites: The Peril of Debt – Navigating the Stream with Caution

Greetings, astute investors! In today's Wisdom Bites, we turn our attention to a powerful, yet often perilous, force in finance: leverage. While it promises amplified returns, it also holds the potential for ruin, a truth Howard Marks masterfully unpacked in his May 9, 2024 memo, "The Impact of Debt." This memo strongly aligns with our blog’s consistent emphasis on robust risk management and the timeless principle of "margin of safety."

Marks highlights that "Leverage doesn’t add value or make an investment better." Instead, it 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". Drawing on the insights of Morgan Housel, Marks emphasizes that "as debt increases, you narrow the range of outcomes you can endure in life".

The core danger, Marks warns, is the "risk of ruin". He employs a powerful analogy: "never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average". This illustrates that 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". Leverage has the power to "push routine risks into something capable of producing ruin". Marks further notes that investors "rarely consider outcomes that have happened only once a century . . . or never" when making leveraged bets.

For Marks, the solution is clear: investors should "usually use less than the maximum available" leverage. Instead, focus on generating "good-enough return". This advice ties directly into Warren Buffett’s investing maxim: "Never risk permanent loss of capital". This principle underpins our blog’s belief in patience and compounding – because "The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference". As Munger famously stated, "Never interrupt compounding unnecessarily".

Ultimately, Marks advocates for adherence to "Margin of Safety", a concept deeply rooted in Ben Graham’s philosophy. This means cultivating flexibility, having a buffer, and maintaining the humility to "change course when our plans go awry". By carefully managing debt and prioritizing survival, you position yourself for long-term success rather than succumbing to the temptation of short-term, high-risk "bonanzas".

Daily Economic Update: June 28, 2024

"The Noah Rule says: "Predicting rain doesn't count, building an ark does." - Warren Buffett

 "In the final chapter of The Intelligent Investor Ben Graham forcefully rejected the dagger thesis: "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." Forty-two years after reading that, I still think those are the right three words. The failure of investors to heed this simple message caused them staggering losses" - Warren Buffett

It's a summer Friday, I'll keep it brief and I won't write anything on the debate, sorry if that dissappoints....feel free to consult the odds sites https://www.predictit.org/markets/detail/7456/Who-will-win-the-2024-US-presidential-election.   With last night's debate, the first round of the French elections on Sunday and the UK general election on the 4th, elections are certainly front and center.  Today's PCE report and UofM survey will be the highlight.  

Yesterday's 1Q Real GDP was revised up to 1.4% annualized though consumption was weak and prices were higher than consensus forecast expected.  Headline durable goods were better than expected and jobless claims remained benign.  The Atlanta Fed GDP now was revised down to 2.7% for Q2 estimate.  

If you spend all day running your life or business going from one economic data point to another, you might want to take a step back and revisit Ben Graham's secret of sound investment which he distilled into three words: Margin of Safety.

XTOD: My 1 repeated learning in life: "There Are No Adults" Everyone's making it up as they go along. Figure it out yourself, and do it.

XTOD: Incredible work by the Wells Fargo analyst who ordered the same burrito bowl 75 times at eight different Chipotles in NYC to prove the portion size inconsistency

XTOD: The collapse of #walgreens has been unlike anything I've ever seen in big retail.  It's down 24% today and has now lost 80% of its value in under 5 years.     This is America's largest pharmacy chain .. with over 8,500 stores & more than 300,000 employees.  Simply insane.

XTOD: Compounding starts slow and then happens all at once.  Looking for quick results and checking in on your progress constantly can be disheartening.  Be patient with the results, and trust the process.

XTOD: Augie Garrido 5x NCAA national 🏆⚾️coach at Cal State Fullerton & Texas told me in a podcast 15 years ago when I asked him what he knew now he wish he knew early in his career 

he said  “Be loyal to people not institutions or brands, institutions change, you don’t work for an institution. You work for people. When the people change, the institution will too.”

Daily Economic Update: July 18, 2024

Potential economic policies seemed to be a catalyst to push investors out of big tech and into small caps.  The narrative around the trade is that the large AI sensitive names might find it challenging to procure the hardware needed to fuel the growth that is priced into those stocks, while smaller companies tend to have more floating rate debt and could be direct beneficiaries of Fed rate cuts.  According to CNBC, it was the first time in over 20 years the Nasdaq lost over 2.5% while the Dow registered a gain.  Yields were little changed.

In more important news, Howard Marks latest Memo was released The Folly of Certainty.  A quick summary in the bullets below (You can probably find my recaps of some of the other recent memos here.)

• The premise: "how can anyone be without doubt."
• Macro-forecasting is impossible: (a) we don't know what's going to happen and (b) we don't know how the markets will react to what actually does happen
• The economist consensus has been wrong about the path of rate cuts and about the odds of a recession.
• He remarks about how some people have ended up capturing massive gains in the stock market based on a belief the Fed would be cutting rates.  Clearly the Fed didn't cut but stocks rose nonetheless.  In other words, they ended up right for the wrong reasons.
• "Markets swing more than economies and companies. Why? Because of the unpredictability of market participants' psyches or emotions."
• "Intelligence, education, access to data and analysis can't be sufficeint to produce correct forecasts.".  Quoting John Kenneth Galbraith, "There are two kinds of forecasters: those who don't know, and those who don't know they don't know."
• People underestimate the role of luck in making money. There is a specious association of money and intelligence.
• Have intellectual humility - realize you might not be sure, or you don't know
• Certainty in fields like politics, economics and investing is absurd.

After reading Marks', here are some reminders from this blogger (from post on this blog over the year +):

Uncertainty is an interesting word and one that is often conflated with "risk" in the financial setting and perhaps is a little confusing. I've found the following to be a helpful guide: "risk refers to all outcomes that can be insured against, uncertainty to those which cannot." And "..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."  To further illustrate: "For example, if one smoker out of ten died of lung cancer, the probability of smokers dying of lung cancer is 10 percent. This set of numerical probabilities [cardinal probabilities] is the standard domain of risk as recognized by actuaries...At the opposite extreme is uncertainty...where we have no scientific basis for calculating a ratio."  Keynes (as reported by Skidelsky) sums this up as "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]."  If you're ever interested in reading more about risk and uncertainty (and Keynes views on uncertainty), author Peter Bernstein's classic "Against The Gods" is worth a read.   

While uncertainty might be scary, Bernstein laments: "A tremendous idea lies buried in the notion that we simply do not know.  Rather than frightening us, Keyne's words bring great news: we are not prisoners of an inevitable future. Uncertainty makes us free."

Or as Frank Herbert said in the Dune series:   “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.” 

Given the uncertainty and the bombardment of noise in the current economic environment, I was reminded of two quotes in the famous wall street book "Where Are the Customers' Yachts?" by Fred Schwed: "In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness" and "For one thing, customers have an unfortunate habit of asking about the financial future.  Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer.  Rarely will it be the most difficult of all answers-"I don't know".

A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".

On the data side, housing starts beat expectations lead by a beat in multifamily.  Building permits also beat expectations and industrial production beat after auto assemblies surged.  In Fed news, NY Fed Prez John Williams seemed to indicate that the data between July and September would be important for the Fed to gain more confidence on the fight against inflation, which would seem to potentially make a July cut a long shot.  Gov. Waller continued to express belief that we'll pull off a soft landing and also the need to see "a bit more evidence" over the next couple of months before penciling in a rate cut.

In the real world people still seemed to largely be employed, taking vactions, flying, dining out, etc. 

On the day ahead, it's ECB (expected to be on hold), jobless claims, Philly Fed and Fedspeak.  Markets will also look to parse and further react to overnight comments from VP nominee Vance.

XTOD: Part 1 Here is a contrary opinion on the emergence of Silicon Valley support for former President Trump. Which like all my opinions on here, probably won’t be popular.    It’s a bitcoin play.  

Not because the former President is a far stronger proponent of crypto. That’s nice. But doesn’t really impact the price of crypto. It makes it easier to operate a crypto business because of the inevitable, and required, changes at the SEC  

What will drive the price of BTC is lower tax rates and tariffs, which if history is any guide (and it’s not always ), will be inflationary. 

Combine that with global uncertainty as to the geopolitical role of the USA, and the impact on the US Dollar as a reserve currency, and you can’t align the stars any better for a BTC price acceleration

Part 2  How high can the price go. Way higher than you think.  Remember, the market for BTC is global.  And the supply has a final limit of 21m BTC, with unlimited fractionalization.  

Keep that in mind as you consider what happens if because of geopolitical uncertainty and the decline of the dollar as the reserve currency, BTC becomes a “safe haven” globally.  Which means that BTC could be what countries and all of us look to buy as a means to protect our savings.  

Crazy ? It already happens in countries facing hyperinflation.  

And if things really go further than we can imagine today (and I’m not saying they will.   Just that this has a possibility somewhere above zero) , then BTC becomes exactly what the Maxis envision.   A global currency

XTOD: The biggest outperformance of small-cap stocks over large-cap stocks, over a 5-day period, in history.

XTOD: The problem with this Trump ticket is that most these economic policies are predicated on proven to be totally inefficient measures like tariffs, devaluation, etc… 

I sure hope these are election rhetoric and that Trump will prove his usual opportunistic self by using the ideas to get voted in but not actually toying with implementation.

XTOD: “On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.”  - Buffett

XTOD: Keep the goal. Change your mind about how to reach it.  One sign you’re getting in your own way is not changing your tactics when you’re not getting the desired result.

FOMC Recap: It's a Vibe

IT'S A VIBE

• As expected, the FOMC is on hold for the second straight meeting, leaving the Fed Funds target range at 5.25% to 5.50% and leaving QT unchanged
• The Fed remains committed to returning inflation to its 2 percent target
• Powell is not confident yet that rates are sufficiently restrictive to bring inflation back to 2%, not thinking about rate cuts
• The rise in long-term yields has been viewed as being driven by exogenous factors that should slow the economy and effectively do the job of additional rate hikes as long as there is a persistence of these higher yields

About a week ago, a few days after BEA data shows the U.S. economy grew at 4.9% in the 3Q2023, I was awakened to the text message above, a text which is emblematic of how it seems many people feel about the state of the U.S. economy. While statistically the U.S. economy is by all accounts in pretty good shape, with current low unemployment, strong GDP, household net worth at record levels, and slowing inflation, the overall sentiment seems to be pretty bad.  The recession calls of the past 18 months continue to plague the psyche, the recent geopolitical actions have reminded us that the world is indeed a scary place, there are economic concerns tied to the government financing, commercial real estate, regional banks, China's economy and the list goes on.  

The term "vibecession" was reportedly coined by Bloomberg Opinion contributor Kyla Scanlon to describe such a situation where sentiment risks creating narratives that actually lead to consumer and business behavior that does in fact lead to a decline in real economic activity.  In my opinion this is "vibecession" thinking is a form of Keynes "animal spirits" .  Post-Keynesian economist would probably say we should be fairly concerned about the bad vibes.

How much expectations matter for inflation and central bank policy is a source of debate, but with nominal GDP growth sporting an 8 handle, it might be hard to see an immediate impact from sentiment.  Nonetheless, I believe the Fed is cognizant of the "vibes" as they continue to assess the cumulative impact of rate hikes to date, the potential lagged impacts and the uncertain impact of policy on financial conditions.

In my opinion, the text message above and the term "vibecession" are really problems in risk management and dealing with uncertainty.  The Fed is also dealing with this risk management problem and inherent uncertainty when asking "should we hike more?"  While Powell believes the risks are more two-sided at present, he noted that there are risks that policy may not be sufficiently restrictive even with uncertainty over the impact of lags.

I'm not an expert on Keynes, but Robert Skidelsky is one such expert.  In his book "What's Wrong With Economics?"  he spends some time discussing Keynes perspective on risk and the differences between risk and uncertainty.

"risk refers to all outcomes that can be insured against, uncertainty to those which cannot."

" ..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)."

Effectively, Keynes (as reported by Skidelsky), defined risk and uncertainty as being on a continuum: "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]." 

Fortunately one of the great triumphs of Finance is that it gives us ways to manage risk through innovations such as insurance and hedging. Unfortunately, it cannot eliminate all uncertainty, and of course taking some level of risk is necessary to meet return objectives.  

A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning.  This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out.  It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily". Perhaps this is why the Commercial Real Estate industry has clung to the motto "survive to '25".

Just the other day economist Brad DeLong shared a substack post which discussed the long-run outperformance of U.S. equities over U.S. government bonds.  After reviewing the data, which shows the 65004-to-41 wealth gap in favor of stock investors since 1870, he posits: "But if stocks are such a good deal for the long run, why are our investors in the stock market not richer?" to which he retorts: "there is a reason why they are not even richer. It takes time for the law of averages to work itself out. And "average" is only "typical" if you have that time. If you lose your stake and cannot continue to play, you do not have that time. Mathematically, your strategy may have had a high expected return. But the typical investor who undertakes that strategy never sees that expectation."

It is unfortunate that the ideas of market efficiency and staying the course seem to be fighting an uphill battle of late. After all, if we all thought there was certainty that a financial crisis was right around the corner, we would all act on that information today and in essence we would cause that crisis today.  In theory all of this negative sentiment, and the beliefs about fiscal and monetary reaction functions are already "priced in" to today's markets   We also generally know that investors who try to time the market fail, or even if they can get out at the right time (top), they fail at redeploying their capital when the market truly does look cheap (even based on whatever metrics led them to sell in the first place). Perhaps the reason these ideas sometimes fall by the wayside is that people find it much more interesting to read a post about recession or doomsday than to read a post about risk management.

Back to the Fed, can the Fed engineer a "soft landing", can they get inflation back to 2% without pain? I don't know.  In my last FOMC recap, I described what I see as the three main "endings" to the current rate hike cycle that I see most commonly discussed in financial media, these are broadly (1) soft landing, (2) financial repression or (3) hard landing.

I don't know how the economy will unfold from here, or what other "shock" will hit in the interim, but I think that I know that surviving through whatever downside scenarios you can imagine will allow you to most fully maximize returns in the long run.

Daily Economic Update: April 18, 2024

Another down day for equities as bets on rate cuts continue to get pushed out further into the future, with some strategist now pushing cuts out to 2025 and some bank strategist at UBS warning that the Fed may need to raise fed Funds to 6.5% by mid-next year.  Despite that sentiment, yields managed to fall and the 20Y Treasury auction was solid.  The 2Y is 4.93% and the 10Y is 4.59%.

In a Substack Note, Economist Brad DeLong, characterized what he sees as the current sub-era of post-GFC monetary policy as "waiting for a shoe- any shoe to drop".  He goes on to say that the Fed's current willingness to see long-term real interest rates rise as a sign that the Federal Reserve has:

"reached two conclusions: 

1. It no longer believes that considerations as to what it thinks r* is can guide monetary policy and its adjustment. 

2. The major risk is not a deep recession and a return to the zero interest-rate lower bound, but rather some sort of rebound in inflation and a consequent de-anchoring of inflation expectations."

Maybe it all comes down to R-Star.   Back on August 23, 2023, I mentioned Knut Wicksell's theory that while you could not see the natural rate, you could see the impact of policies that kept rates above or below this rate by looking at trend growth rates.

Away from Fed land, Howard Mark's had his latest letter published yesterday titled, 'The Indispensability of Risk' .  If you read this blog you can check out my summary on Mark's previous memo here.

As for the current memo it is based on the role of sacrifice in chess, as highlighted recently in a recent WSJ article, and how that can be applied to the world of investing.

• In chess sacrificing a piece can serve one of two purposes: (1) a "sham" sacrifice -  when one gives up a piece in order to obtain a concrete benefit that can be calculated and (2) "real" sacrifice - when giving up a piece provides no immediate or tangible benefit but may offer some strategic benefit.
  
  
• "The analogy to investing begins to become clear. Buying a 10-year U.S. Treasury note is a modest or “sham” sacrifice. You give up the use of your money for ten years, but that’s only an opportunity cost, and accepting it brings the certainty of interest income. Most other investments involve real sacrifices, though, where the risk of loss is borne in pursuit of “gains that are neither immediate nor tangible.”
  
  
• In chess players often intuit the level of risk and have to decide if making a risky move is worth it.
  
  
• In investing "Because the future is inherently uncertain, we usually have to choose between (a) avoiding risk and having little or no return, (b) taking a modest risk and settling for a commensurately modest return, or (c) taking on a high degree of uncertainty in pursuit of substantial gain but accepting the possibility of substantial permanent loss."
  
  
• While most investors understand that earning high returns, both in absolute and relative terms, requires bearing meaningful risk, they may take for granted that "The risk inherent in not taking enough risk is very real. Individual investors who eschew risk may end up with a return that is insufficient to support their cost of living."
  
  
• "There’s such a thing as the risk of taking too little risk. Most people understand this intellectually, but human nature makes it hard for many to accept the idea that the willingness to live with some losses is an essential ingredient in investment success."
  
  
• "You have to take a shot. Not every effort will be rewarded with high returns, but hopefully enough will do so to produce success over the long term. That success will ultimately be a function of the ratio of winners to losers, and of the magnitude of the losses relative to the gains. But refusal to take risk in this process is unlikely to get you where you want to go."

I know Mark's is a big Buffett fan and reference's what he sees as the basis for the success of Berkshire in this latest letter, but perhaps the memo is just another way of stating what Buffett recently summed up in the last Berkshire Hathaway annual letter:

"One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes."

Remember optimism and taking risk is not incongruent with "Margin of Safety".

XTOD: Sebastian Steudtner, a German pro surfer, rode a wave over 115 feet tall at Nazare, Portugal, a record breaking surf!

XTOD: How bad is  @CathieDWood  ? Over the last 5 years she has now returned -7% in $ARKK she trails the $SPX by 88% and $COMP by 107% respectively. Maybe think twice about shoving her face on TV again.

XTOD: Economics is an ecosystem and I love most or perhaps even all of it. Theorists. Empiricists. Government statisticians. Ivory tower academics. In the trenches think tankers. Investment bank economists. Government economists. Tweeters. And many more I didn't mention.

XTOD: Bank of England policy maker Megan Greene said developed economies including the UK face a “bumpy ride” as central banks squeeze out the final effects of the global inflation shock

XTOD: Clarity comes from cutting out the clutter.  Pinpoint your focus, relentlessly eliminate noise, and watch productivity soar.

XTOD: Tony Robbins believes that, in a lowered emotional state, we only see the problems, not solutions.   Let’s say you wake up feeling tired and overwhelmed. You sit down to brainstorm strategies to solve your issues, but it comes to naught, and you feel even worse afterward. This is because you started in a negative state, then attempted strategy but didn’t succeed (due to tunnel vision on the problems), and then likely told yourself self-defeating stories (e.g., “I always do this. Why am I so wound up I can’t even think straight?”).   To fix this, he encourages you to “prime” your state first. The biochemistry will help you proactively tell yourself an enabling story. Only then do you think on strategy, as you’ll see the options instead of dead ends.  “Priming” my state is often as simple as doing 5 to 10 push-ups or getting 20 minutes of sun exposure.  I often ask myself, “Is this really a problem I need to think my way out of? Or is it possible I just need to fix my biochemistry?” I’ve wasted a lot of time journaling on “problems” when I just needed to eat breakfast sooner, do 10 push-ups, or get an extra hour of sleep.  Sometimes, you think you have to figure out your life’s purpose, but you really just need some macadamia nuts and a cold fucking shower.

XTOD: In a world loud with information, mute the unnecessary.  Pinpointing the essential is a superpower.