Author: Andrew Packer

Cryptocurrencies

Elm Wealth: A Missing Piece of the SBF Puzzle

Posted on by Andrew Packer

The swift collapse of cryptocurrency brokerage FTX and the loss of billions of dollars has brought to mind other major financial drops. Behind the swift rise and fall of this firm is its co-founder, Sam Bankman-Fried.

Living larger than life, the once-billionaire was a regular feature at a number of prominent conferences. He gave copious interviews. And he worked to cultivate the image of being the world’s most generous billionaire.

The reasoning behind that? A view held by Bankman-Fried that he should always act to maximize expected value.

Rather than consider risk-aversion practices, that means to always swing for the fences. Consider an event that has a 1 percent chance of happening but has a 10,000 percent payoff. If you’re maximizing expected value, that means you take that bet every time.

That’s in contrast to maximizing utility. As one grows wealthier, typically they take on less risk. Older investors who need more certainty in their portfolios lighten up on volatile stocks to buy fixed-income positions.

In the real world, investors need to consider their risk aversion. It may make sense for an aggressive investor to invest 1 percent of their wealth in the 10,000 payoff. But not all of it.

Yet in interview after interview, that’s how Bankman-Fried described his worldview. And it worked. Until it didn’t.

 

To read the full analysis, click here.

Private equity

Institutional Investor: How Allocators Can Avoid “Secondhand Smoke” From Illiquid Investments

Posted on by Andrew Packer

The increasing market wealth of the past few decades has seen a rise in investors interested in alternative assets. Different from stocks or bonds, these assets can offer higher returns, but also carry higher potential risks.

One such risk is that alternative investments can be illiquid. Buying a stake in an early-stage company before it goes public leaves few ways to exit. One would have to find a buyer, rather than rely on liquid markets like those that publicly-traded stocks enjoy.

And, such investors may also have to contend with systemic risks, where all asset classes are being sold off at the same time.

Investors with a mix of assets are likely to sell the most liquid ones first to meet their cash needs. If illiquid assets have to be sold, it may be at a far more considerable discount to the investment’s value relative to a stock.

That said, investors who have some proportion of their holdings in such alternative assets can earn higher returns over time. And there’s generally lower volatility in most markets. That’s because illiquid assets don’t change price too often, if at all.

To ensure the right mix, investors should balance the potential for market shocks and how they can impact a portfolio. And investors should consider the allocations of other market participants. And finally, it’s important to consider cash needs when markets are humming along, not crashing.

 

To read the full analysis, click here.

Economy

Wall Street Silver: The Fed Is Paving a Path of Destruction

Posted on by Andrew Packer

The economy has been slow all year, with the first two quarters of 2022 showing a decline. Historically, that’s been the definition of a recession. And with many big tech companies announcing the layoffs of thousands of employees, it’s clear the slowdown continues.

In the meantime, the Fed continues to raise interest rates, which could further erode the economy in the months ahead. This destruction could potentially become much more obvious before the policy of destruction ends.

Measured in real, inflation-adjusted terms, GDP has yet to reach its pre-2008 levels. While higher in nominal terms, the housing crash, Covid crash, and now high inflation have kept the economy back.

Recent years have seen the economy fail to get back to a post-war average of 2-2.5 percent annual GDP growth. With each year that growth doesn’t occur, there’s potentially trillions of potential wealth that isn’t being created.

Now, with rising interest rates, incremental prosperity is being destroyed. And the Fed’s policy of slowing the economy can only be achieved by increasing unemployment.

In the meantime, rising rates are impacting global debt levels. Rising rates mean a far higher cost to service debt, which in turn can impact trends such as government spending and tax rates.

As long as rates continue to rise, expect market uncertainty and volatility to continue.

 

To listen to the full podcast, click here.

Personal finance

QTR: Housing Demand “Vaporized” After Rates Hit 7%… And A New Wave Of Inventory Is Next

Posted on by Andrew Packer

Like all other assets, there’s a seasonality to real estate. While the stock market tends to rally into the end of the year, sales and activity slow during the holiday season, only to gradually thaw out in the spring.

This year, that move is occurring amid a painful backdrop. Mortgage rates have jumped to 7 percent, more than double where they stood at the start of the year. That’s having an impact on price… but also likely on supply come the spring.

With buyer demand for homes slowing amid rising rates, inventory is likely to creep up. That’s because listings are likely to stay on the market for longer. And as new homes are added, it’s clear affordability will need to improve to clear the backlog.

Thanks to years of low rates, today a full 92 percent of homeowners enjoy rates under 5 percent. And nearly two-thirds have rates under 3.75 percent.

So the silver lining is that many won’t list their homes for sale unless they absolutely need to move.

With rising mortgage rates and a gradual rise in inventories likely in the spring, expect further pressure on home prices. So far, the drops have been minimal. But for those who have to make a sale, it’s only a matter of time.

That will help improve home affordability. But it may also take the next round of interest rate declines to make a real difference.

 

To read the full analysis, click here.

Stock market

Game of Trades: This Is Going to Trigger a Massive Top on the S&P 500

Posted on by Andrew Packer

One of the unusual features of the stock market decline this year has been volatility. As measured by the VIX, the market selloff has not seen an extreme spike in volatility typically associated with bear markets.

And relative to the daily swings in the market, volatility continues to look subdued. That’s true even as overall volatility has been steadily rising since 2017, with each bout of volatility higher in the markets setting a higher low point than the previous one.

This type of trend of rising volatility was last seen from 1994-2002, and from 2007-2008. Both periods ended in a crisis before peaking and moving lower once again.

Historically, volatility rises as stocks move down. But the question is if the current trend of rising volatility will continue, or break. While that’s true most of the time, there can be exceptions, as with so many other trends that investors look at.

One counter-example is the rising volatility in the stock market between 1996 and 2000, when the tech bubble was being fueled.

It wasn’t unusual for tech stocks to have massive declines, only to soar and close the year at higher levels. But such a bull run wasn’t healthy in hindsight. So investors seeing rising stocks amid rising volatility should beware a potential bubble.

 

To watch the full analysis, click here.

Income investing

Dividend Growth Investor: Twelve Cash Machines Hiking Dividends Last Week

Posted on by Andrew Packer

While the stock market may be off of its lows, and may trend higher going into the end of the year, investors still need an anchor. They need a way to sift through the market damage and find strong companies.

That’s why one strategy that investors keep using successfully is dividend growth investing. Some stocks pay dividends. A smaller number work to faithfully grow that payout annually. These companies tend to beat the market thanks to their ability to grow payouts.

In recent weeks, 12 companies have raised their dividends. In a poor year for both stocks and bonds, that’s a good sign that many companies can continue to grow, no matter what the economy is doing.

Investors starting on dividend growth investing may see things start small, but the effects over time can prove to be life-changing.

One example of a dividend growth company is Nike (NKE). They just raised their dividend by 11.5 percent, and for the 21st year in a row.

While the stock’s starting dividend is low at 1.3 percent, the growth is in excess of today’s inflation of 7.7 percent.

And the athletic apparel company is well positioned to continue its market share and raise dividends in the future.

So buyers can likely see more dividend increases for years to come. Over the past five years, Nike has grown its dividend at an average rate of 12 percent.

 

To view the full list of 12 companies raising dividends now, click here.

Stock market strategies

The Intellectual Investor: Why Value Investing Requires Thoughtful Arrogance

Posted on by Andrew Packer

There are many ways to think about how to invest. One way is to look at what crowds are doing. When markets are going up or down, following the crowd up or down will lead to reasonable results.

But sometimes the crowd is wrong. Or a trend is about to shift. That’s why knowing how to approach an investment independently of the crowd can be a crucial skill. They key is to do it without ego.

That’s especially true for a value investment, which should beat the market over time, but may take time to play out.

Value investors try to take advantage of the fears or greed of others. They tend to lean towards fear, looking for a good long-term buying opportunity. But even investors going against the crowd may only succeed some of the time.

That’s why it’s important to keep emotion in check. Those who fail to do so may end up with the crowd. They could end up being fearful at a time to buy. Or they may get exuberant when it’s time to take profits.

That’s where “thoughtful arrogance” comes into play. Investors who buy a stock are assuming that they’re right and the price will rise. At the same time, they’re buying from someone who is selling based on their view that a stock is fairly or overvalued.

Keeping a cool head allows investors to focus on the fundamentals, not the market’s feelings.

 

To listen to the full podcast, click here.

Economy

George Gammon: Michael Burry Is Now Predicting Another Huge Crash

Posted on by Andrew Packer

Stocks go up and stocks go down. Those who go long stocks have to sit through periodic bear markets. Those who look for obvious signs of overvaluation can make strategic short trades. That allows them to cash in when an asset falls in value.

Michael Burry was one of a handful of traders to bet against the housing market in the mid-2000s. The “Big Short” investor has continued to warn of other pockets of overvaluation, including crypto and SPACs.

And in recent years, Burry has raised concern that passive investing has led investors into mostly large-cap names and created a bubble there.

Now, his latest warning is based on a “bullwhip effect.”

Simply put, stimulus measures were artificial and short-term in nature. As they unwind, companies may end up being worse off than before. That’s because many firms may have planned for a permanent increase in business that was based on a temporary stimulus boost.

Bellwether company Amazon (AMZN) has become the first company to lose $1 trillion in value. That’s thanks to the market decline just this year. Yet over the past few years, the company has doubled its workforce, which now tops 1.6 million.

Amazon has announced layoffs of 11,000 employees in total. That’s not nearly enough to offset the employment gains of recent years. Further big drops ahead could show the full power of this bullwhip effect to crush the economy ahead.

 

To watch the full video, click here.

Economy

The Reformed Broker: People Hate Inflation, But Unemployment Is Worse

Posted on by Andrew Packer

Inflation has been the big theme for markets this year. But with inflation starting to come down, many are looking at other trends to determine if inflation is dropping for good or not.

Some measures of higher prices show a return to pre-pandemic levels. That includes data points like shipping rates, which soared in the immediate aftermath of the pandemic. And non-energy commodities are subsiding after spiking following Russia’s invasion of Ukraine.

Overall, these are positive trends. They’re a sign that the economy is working through its excesses from the past two years. And that pain is largely over.

However, rising interest rates to combat inflation are resulting in a slowing economy. That’s putting pressure on the labor market. This has best been seen with a number of layoff notices from big tech companies.

Generally, people may hate inflation, but they’ll tolerate it if it means keeping their jobs.

Higher unemployment is more painful than paying higher prices. An extra point of inflation isn’t as painful for investors as an extra point of inflation.

Meanwhile, many see the Fed’s interest rate policy as a way of slowing the economy to crush inflation. But the way the Fed slows the economy will lead to higher unemployment, with lower inflation as a result.

So investors could be in for more pain ahead as higher unemployment and a slower economy lead to a mild recession in 2023.

 

To listen to the full podcast, click here.

Economy

Markets Policy Partners: The Fed Is Fighting a Bigger Foe Than Inflation and Risk Investors Should Beware

Posted on by Andrew Packer

This year, the stock market has moved around the narrative that the Federal Reserve has had to raise interest rates to fight off inflation. With inflation rising to 40-year highs in 2021, that narrative has made sense.

Now, with inflation on the decline, investors are starting to look ahead to the Fed ending its interest rate hike policy. But that might not be the best way of looking at what the Fed is doing now.

That’s because the central bank has made its steepest rate hike cycle in over 40 years. That’s a bit unusual following the prior tightening cycle, which took years to play out, and occurred over a series of quarter-point rate hikes.

While we may be nearing the end of the current rate hike cycle, the real issue ahead could be policy lag. It can take a long time for a change in monetary policy to ripple throughout the entire economy.

Meanwhile, the Fed is still raising rates while the yield curve has inverted. That’s usually a sign of a recession ahead and that monetary policy may want to get more accommodating.

2023 may show that the Fed isn’t just crushing inflation, but that the Fed is now moving to detach the financial economy and the real economy. If so, there may be further pain ahead for stocks in the months ahead.

 

To listen to the full interview, click here.