I’m starting a new occasional feature to revisit some past posts and drop some interesting brief asides too short for a full entry. So here we go…
Passive Investing Passes a Milestone
I’ve discussed before the impact passive investing has had on the behavior of markets. Well, congratulations, passive fans, you now make up more than half of mutual fund assets. Is this the sign of a top? Perhaps. Michael Burry, of The Big Short fame, thinks index funds are a crisis waiting to happen.
The Invisible Hand Wins Again
My warning about the unseen risks being created by central banks proved omniscient pretty quickly as, almost immediately after the Fed cut, banks started coming up short on reserves. This goes to show that the Fed can’t anticipate everything and there will be unintended consequences.
I’ve yet to get a really good explanation for why banks are short on liquidity, but the most reasonable explanation I’ve seen suggests it has to do with the low yields on long term Treasuries.
The short version of the story, as I understand it, is bondholders feel the curve is too flat and are dumping their inventories back to the banks who then need to fund them which is driving up repo costs and causing the Fed to step in. Hopefully, that’s all it is and not a warning sign of a bigger stress.
The Insurance Company Behind the Grand Ole Opry
Maybe this is common knowledge among some readers, but I learned something interesting last week. I was watching some of the new Ken Burns’ documentary on the history of country music and it talked about the history of the Grand Ole Opry in Nashville.
The Opry started as a radio station formed by…an insurance company! National Life and Accident was a home services company that sold accident policies door to door. To increase its brand awareness, they decided to start a radio station broadcasting country music. The call letters were WSM for We Shield Millons. Pretty nifty! Well, the ploy worked. A lot of people listened and a lot of them ended up buying insurance policies.
What happened to National Life & Accident? They were eventually bought by American General which sold the radio station (along with other entertainment properties). American General later became part of AIG so, in a way, AIG is responsible for the success of country music.
The “We” IPO Failure = A Systemic Risk?
I predicted this one months ago! We is a towering fraud. Yes, they have a little bit of a real business underneath all the nonsense and self-dealing, but as I described in the Uber piece, the valuations were fake because there was only one buyer, rather than a market-clearing price. Excuse me for a minute while I take my victory lap!
OK, I’m back and with a new thought. Could We be the LTCM of this cycle? They are facing a capital squeeze. If they can’t get the IPO done, they are going to have to go into fire sale mode to raise cash. If they can’t do that, then they default on their debt. If they default on their debt, how are they going to pay for all the real estate they’ve leased? If they can’t pay the rent, what happens to the property owners and, thus, commercial real estate prices?
I’m not the only person thinking about this certainly. People are definitely talking about it. The (perhaps) original thought is that this could be more than just a CRE event. This could be a giant market shock. It is not hard to imagine a market panic if investors in CRE don’t know how exposed they are to We as tenants and assume the worst.
Then, you get into counterparty risk where I don’t know which banks have funded the developers who are exposed to We. This can get nasty really quick. It’s similar to the mess LTCM created. This We story isn’t just an “I told you so” for those of us skeptical about private valuations. It could cause a major market panic.
More Dumb Sports Bets
I wrote a few weeks back about a really dumb sports bet. This one isn’t quite as bad but it’s still not very smart.
Last week, the Cowboys and Patriots were giant favorites at over 20 points. If you didn’t want to risk betting on the points, you could take the “safe” path of betting them to win straight up but at a lower payout.
The problem is the odds on this bet were around 35-1 so you were essentially getting a 3% payout which implied a 97% chance the favorites would win. The problem is the computer models had them at 90-95%. So it’s a little bit of an overpay.
Some “savvy” gamblers came up with a better plan. Do a “parlay” which means you have to be right on both bets. This paid 4.5% instead of 3% so 50% better return! These were slam dunk wins so why not grab that extra 50%?
Because #math! If the odds for each individual game were 95% to win, that means only 90% of the time would they both win. So fair value was a 10% payout, not 4.5%. This is quite an overpay. To break even at 4.5% odds on a parlay, you would have had to believe both the Pats and Cowboys each had a 97.7% chance to win their individual games. This is well above all the models. Even though both teams won this time (as expected, but not guaranteed), this was a sucker’s bet.