Til Schuermann

US Debt and Cassandra syndrome In Greek mythology, Cassandra was blessed and cursed by the god Apollo. She could see the future, but no one believed her. In medical terms, Cassandra syndrome manifests itself in anxiety, hypervigilance, and disassociation. It is a version of PTSD trauma The syndrome was recently triggered by the latest CBO estimates that indicated larger forward deficits, with Federal debt potentially exceeding 120% of GDP by 2034. CBO also showed that the government is now paying more on interest than on defense. This provoked a surge of articles prophesizing the end of the global power of the U.S. and the unsustainable trajectory of its debt. Unfortunately for doomsayers and Cassandras, we do not reside in the 16th century Spain nor are we in the 18th France or 20th century Weimar Republic. Instead, I think IMF was recently right to argue that the US spending and debt are sustainable. Why? First, US is a monetarily sovereign nation, issuing and using only USD, with the bulk of its bonds owned domestically. Hence, interest on debt is relocation of money from one group to another, without improving or damaging the national position. What counts is the primary deficits, which are running at a steady 3%-3.5% of GDP, having plunged from more than 9% during COVID, and now on par with 2018-19 Second, there is nothing special about specific thresholds. Global government debt is today in excess of 100% of GDP and for more developed economies it is already at 115%. Although this is up from ~60% pre-GFC, it has been a gradual rise over two decades rather than an explosion. There is also no evidence of crowding out of private sectors. The opposite is true, with governments crowding in private sector spending Third, what counts is not just the public sector debt (which in the U.S. is already at 120%, if we include local) but the financialization of the economy. In that respect, US leverage has remained unchanged for a decade at ~3.3x GDP, with private sector steadily deleveraging. What we are seeing is a mild transfer of private debt to public books. Flat leverage also implies that capital is being deployed efficiently Fourth, unlike sovereign debacles in prior centuries, our choices are not limited to default or debase. Multiple avenues are available to monetarily sovereign nations. These include altering macro- and micro-prudential controls to influence private sector, and directly utilizing CB liquidity The question is not whether U.S. government spending is out-of-control but rather why over the last twenty years most economies were not able to grow at rates that societies find acceptable without strong government intervention. But this is a whole different debate from Cassandras prophesizing the end of the empire or USD Views expressed are solely my own and do not reflect views of my employer https://lnkd.in/eWUf9qnu

120

13 Comments

Voters are defanging extremes Policy choices is what determines the success of equity baskets: Biden vs Trump, Le Pen vs Macron, and many others that seem to be filling pages in financial press these days. We all have seen charts that are invariably described as the most important ever whether it is flattening or steepening of yield curves, equity risk premia, energy or technology. However, in reality, none of these trades are likely to persist or, at the very least, are far less predictable than charts suggest. Why? 1. Following elections in the Netherlands, France, UK and the EU, it is clear that while a rise of extreme right reflects genuine issues, especially suffering of large sections of the population who were left behind by the neoliberal agenda. Economic and inflationary volatility, compounded by rising inequalities and inequities, has always been a recipe for a rise of extreme right. It is as much true today as it was in 1920’s-30s. However, it is also clear that while voters are not happy, they are not yet ready to embrace extremes. The right, if it wants to govern, must abandon their most extreme policies. Brothers of Italy, PVV or RN have all emerged as social and cultural conservatives but were forced to eject most other ideas - from exiting EU and emasculating institutions to cutting welfare. One might describe it as a domestication but it is the change driven by voters 2. The same process is underway in the U.S, as the Republican Party is continuing to liquidate its Reagan’s neoliberal roots. Despite close association with the Heritage Foundation, it is actively distancing itself from Project 2025 (focused on dismembering “administrative state”, including shrinkage of federal public services, elimination of entire departments and channeling all power into the executive branch). Republicans are also promising to protect entitlements while massively downplaying abortion and healthcare debates. It is even starting to distance itself from one of the most conservative Supreme Courts on record. Just as RN or Brothers, GOP is emerging as cultural conservatives but with economic policies that are closer to socialism than conservative liberalism (witness JD Vance speech) What does it mean for investors? Whether left or right, there is now a consensus that policies must change. Both agree on limiting immigration while protecting locals and sponsiring industrial policies. Both increasingly regard housing, healthcare and broadband as a right not privilege. Although left is not discussing frontal attacks on state institutions, the right is starting to distance itself from some of their more extreme ideas. So, what is Trump trade? Will it lead to higher inflation and/or higher or lower dollar? Both might be the right answers. Will it disrupt supply chains and encourage or discourage global conflicts? Possibly. The only certainty is the unstoppable march of technology Views expressed are my own and do not reflect views of my employer

45

5 Comments

Quant’s New Frontier Famed investor and philanthropist James Simons passed away in May. Simons was the founder of Renaissance Technologies and led the Medallion Fund, likely the most successful hedge fund ever. Over a 30-year period from 1988 to 2018, estimates are the Medallion Fund annualized at 66% before fees and 39% after fees1. While details on the firm’s investment process are highly guarded, it’s accepted that their use of advanced machine learning techniques was instrumental in their process. As an accomplished mathematician and former Cold War code breaker, Simons' technical expertise led to incredible success and launched widespread interest in quantitative investing. Today, as the investment industry continues to play catch-up with techniques likely utilized by Renaissance decades ago, assessing how artificial intelligence (AI) and machine learning (ML) are employed is at the industry’s forefront.   It should be noted that while AI and ML are often used interchangeably, there are distinctions. AI is a larger field that aims to build computers capable of mimicking human cognitive functions such as reasoning, learning, and recommendations. ML is a branch of AI that involves teaching machines to learn from data without being explicitly programmed. While the number of use cases and future applications are only going to grow as computing power and market interest increases, let’s review a few relevant examples as many investment firms often promote how they utilize ML in a rather vague manner. As an incredibly dense field without an accepted list of best practices, specific examples should help cut through the everyday jargon.     Return Predictions Using Neural Networks and Decision Trees. Investment firms use neural networks and decision trees as part of their predictive modeling tools to help forecast investment returns. Neural networks are a type of ML that can identify complex patterns and relationships in data. Firms will train neural networks using historical market data, such as stock prices and economic indicators, to predict future market movements and investment returns. These models can consider a wider range of variables and factors that may impact investment performance. Decision trees are another type of predictive model that use a tree-like structure to make decisions based on input variables. Decision trees can also be used to analyze historical market data and identify key factors that are correlated with investment returns.    Follow this link to read the complete article and important disclosures: https://lnkd.in/gibUDuHC Follow this link to learn about independent financial planning and investment management through Mountain-Bishop Private Wealth Management: https://mbpwm.com/ #QuantitativeInvesting #MachineLearning #InvestmentStrategies

6

Minxin Pei in his regular column at Bloomberg is often a great source to assess where the US-China relationship is or where it may be headed. And his latest book, “The Sentinel State,” is a must-read as it shows how economic engagement with China has often assisted Beijing in its ability to suppress dissent in China. His most recent commentary is both timely and important as the statements by China’s defense minister Dong Jun in Singapore indicated that, as Pei argues, Beijing is running out of options in terms of how to intimidate Taiwan, short of acts of war. And with the recent move by Russia to send vessels - and a tugboat - to Cuba to evoke memories of the Cold War and even suggest a new end to the Cuban Missile Crisis is desired by Moscow - it is important to make a distinction for those who may now try to portray the tensions in the Taiwan Strait to the 1962 crisis. While Cuba then was a society that had just overthrown a Western-supported, capitalist dictatorship, making it a win for Moscow, Taiwan is an important symbol for America and “the West,” as it is a society that became a democracy mostly on its own, peacefully. Those who are being counted on to oppose China and Russia’s aggression would do well to keep in mind, too, the dictatorship resides in Beijing, not Taipei, and Beijing and Moscow need to be reminded of that. However, and also unlike Cuba in 1962, Taiwan today is one of the region’s if not the world’s richest economies and, more importantly, the source of most of the world’s advanced chips. Brinksmanship in the Taiwan Strait could result in an even more disasterous outcome. Beyond the nuclear exchange that could materialize, the global economy could face disaster if Taiwan is attacked by Beijing. This makes finding a peaceful solution in the Taiwan Strait even more important, as well as one which has to reaffirm that Beijing and Moscow are standing on the wrong side of history when they seek to rebuild or rejuvenate their historical, illiberal empires. https://lnkd.in/gx6MPa58

16

2 Comments

Wrestling over whether multilateral development banks can leverage their callable capital will go on, and may yield results in increased development finance. But what about reforming callable capital itself - to make it more reliable, more timely, and even to kick in long before the MDB gets into real distress? MDBs are working on it. The World Bank #callablecapital #mdb #multilateraldevelopmentbank #sustainabledevelopmentgoals #sdgs #climatefinance #sustainablefinance #esg #sri https://lnkd.in/eYxncgHW

3

Thanks to many friends for their comments and suggestions on our long-range projection work. A substantially condensed, updated and more policy-oriented version of the paper is now published in the peer-reviewed Journal of Policy Modeling. "Policy steps in the federal budget and health care to achieve sustainable fiscal conditions in the U.S." ScienceDirect provides a 50 days' free access to our article at this Link: https://lnkd.in/gtAtu5xP Abstract Health care spending has grown significantly in the US, and is a major cause of rising federal deficits. Official projections find that low economic growth and aging of the population will lead to a modest continuation of this situation, but they miss that labor shortages have a particular impact on inefficient sectors, raising the cost of health care. We develop a unified macroeconomic model to address this shortcoming, with key variables—particularly in the health care sector and interest rates—endogenously determined. We find that the current fiscal trajectory of the US is unsustainable, with future deficits and debt well beyond both historical norms and official projections. Policy steps, focusing on reducing health care spending, increasing capital, and fiscal retrenchment, can lead to sustainable fiscal conditions and raise living standards that will otherwise fall.

9

Just released a new paper "Empirical Model of VIX Volatility and SPX Variance" on how one can relate VIX skew with that of SPX skew. https://lnkd.in/ekn_ZqxE

17

1 Comment

Read this new white paper by my friend and eminent practitioner-scholar Michael Mauboussin, coauthored with Dan Callahan, CFA. The paper explains how to apply valuation multiples like P/E and EV/EBITDA ratio for modern corporations. The message is consistent with my own research--be careful in mechanically using accounting numbers for modern tech companies--their accounting suffers from numerous deficiencies. This paper suggests precautions an analyst must exercise in using numbers and ratios, while offering concrete solutions.

244

14 Comments

An interesting study especially for those claiming that "high stock concentration invalidates rallies" Never, ever forget the SP500 is cap-weighted... In Technical Analysis jargon - a relative strength strategy ===============================================          WHERE TO FROM HERE ? =============================================== "Knowledge is the only Treasure that increases by sharing"... ..that is why I share Charts & Stats about: 💻 Trading / 📈 Technical Analysis / 🌍 Macros If you are interested in these topics, you can receive: 1. NEWSLETTER 📰 Join 2,000 others for my FREE "S.M.A.R.T. Trader Systems" Newsletter https://lnkd.in/eHcz-4Cd 2. NOTIFICATIONS 🔔 Join 8,200 others and click on Alex Spiroglou 🌍 + follow + 🔔 https://lnkd.in/efwd22Cz 3. EMAIL LIST 📩 Join 6,000 others in our email list https://lnkd.in/e2EK2r8S ===============================================

17

Great to join Jonathan Ferro and Dani Burger on Bloomberg TV today to cover the BoE decision live, and discuss today’s 7:2 vote split to hold policy rates unchanged within the context of the broader DM easing cycle. Spillovers from the Fed’s delay in easing should have limited impact on the timing of ECB and BoE decisions to ease. However, the Bank of Japan (BoJ) could be encouraged to hike sooner as US/Japan yield differentials continue to pressure the yen.  (PS - I accidentally say Fed HIKES instead of CUTS. To be clear we expect two 25bp cuts this year starting in September. Live TV nerves!!) Interview starts 54 mins in… https://lnkd.in/eq8PXY_g

42

Chart of the day – Growth decay and margin of safety Equity valuation gurus from McKinsey have clearly demonstrated that sustaining a period of very high growth usually proves to be extremely difficult if not impossible, because growth decay / growth mean-reversion is on average a very huge challenge to overcome. Therefore when carrying out an equity valuation via DCF model, pay always attention to the applied growth rates, especially in the second stage of the model (terminal value/perpetuity), in order to build in a solid margin of safety. In other words try to be conservative with your assumptions. Chart source: McKinsey & Company, Valuation – Measuring and Managing the Value of Companies, 5th edition, 2010, page 97

29

4 Comments

Hugh Wheelan reports mass layoffs at Moody's ESG data unit following data deal with MSCI. Three comments: 1️⃣ Sad outcome for a unit formed from Vigeo-Eiris, a pioneer of values based investing.  Vigeo was founded in France in 2002 by former trade union leader Nicole Notat to promote socially responsible investing (#SRI) and high standards of corporate social responsibility (#CSR). Its signature product rated the policies, practices, and performances of companies against criteria anchored in global ESG norms. Eiris was one of the very first ESG data players, having been established in 1983 in the UK to provide screening tools for #ethicalinvesting.  Their 2015 tie-up brought together two companies with a shared commitment to what is #impactmateriality in today’s terms. 2️⃣ Bad news for competition and innovation in service provision to the detriment of investors. This was the last of the large independent ESG data providers. The dominant players in #ESG data provision now all belong to financial groups with index and other service provision arms.  For businesses that wish to develop offerings that these groups consider as potential competitors, fair and non-discriminatory access to ESG data is highly theoretical. There has been insufficient supervision and enforcement from competition authorities in this market and the concentration and integration of the industry makes it difficult for parties that are harmed by unfair practices to come forward (are you sure you wish to whine about ESG data and lose your access to the security universe, the risk modelling tools, etc.?) 3️⃣ In my past life as ESG Director for a service provider, I had the pleasure of working with Vigeo Eiris product managers and developers. I was favourably impressed with the thinking and the work that went into the development of their #transition tools and with their readiness to seek and reflect upon feedback. I hope some of this good work can be salvaged - there is hope there as the story notes that the climate data business will not be discontinued.

9

1 Comment

AI isn't magic—it's advanced statistical analysis. Joe Lonsdale, at SIC 2024, reminded us that models like ChatGPT predict words and actions based on vast data sets, making them seem intelligent. It's a powerful reminder of the technology's roots and potential. #AI #MachineLearning #Technology If you are interested in these topics, I invite you to read my letters and join the conversation. You can subscribe to my free weekly newsletter, Thoughts from the Frontline. https://lnkd.in/ecpVCyuN

6

"Asset Pricing with Cognitive Biases and Deep Learning": "Biased expectations can explain two central puzzles in the asset pricing literature: the equity premium puzzle and the excess volatility puzzle." https://lnkd.in/euFNTFM7

25

Why are flexible exits, such as this recently announced minority offer by KKR in PG&E, available for large businesses only? In the lower middle market, business owners do not have flexible exit options because purchasers in this space are typically interested in 100% acquisitions. PE Gate is on a mission to change that (with a proven track record). We offer minority and majority exit options for business owners in the lower middle market who are looking to remain majority or minority shareholder and plan for a larger, future exit. Please connect if you are (or know of) a business owner interested to partially sell their business, de-risk, and partner to grow for a larger, future exit. Get in touch directly or through pe-gate.com https://lnkd.in/gKHg2RQx

8