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Currency, Carry and Entropy

  Currency, Carry and Entropy Things ain’t what they used to be or How currencies are not stores of value   One of the standard attributes that money is claimed to have is that it acts as a store of value. “Store of value” tells you that it is the current holder’s intent to keep the currency for a while before exchanging it and that during that time before the exchange, the currency is expected to hold its purchasing power. Money, however, has a “particular requirement “that is the proverbial fly in the ointment. That characteristic has interesting and not so often mentioned consequences on how to view the “store of value “attribute of money. Gold bugs like to mention how gold has maintained its value over time and how that value has never gone to zero or completely disappeared, like many fiat currencies have done. This may be true, but it is a grossly incomplete statement of affairs. What is always missing in that observation is the storage cost, the negative carry, that c
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Examining the Crypt in Crypto

[This is a recap of a more expansive discussion of our monetary system including bitcoin. When the larger version is complete it will be posted here] Crypto currency appears to be a new development and a step beyond traditional banking as we know it. However, when you take a closer look it will be clear that this is not the case. In fact, crypto currency is in a way a full circle back to the day of gold and silver coins. In the olden days, coins were the medium of exchange, and a store of value as well as a unit of account.   As the global population and economic activity grew shortages and practical issues ensued.   As a result physical precious metals were replaced initially by receipts from the safekeepers, then by currency. Initially that currency was 100% backed by p recious m etals (“PM”s) then, over time less and less. The reason for this is not necessarily nefarious. If the quantity of currency is determined by the quantity of p recious m etals, the amount of gold/silver
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Getting Lucky with Trump

  The US, as a country, should count its blessings that Trump was the president over the last   almost 4 years. As crude and rough as Trump may be, the US has been incredibly lucky. His narcissistic nature, as painful it may be to witness and deal with the consequences of decisions made by him, are exactly that – all about him. Fealty to him is required; Kim Jong-Un fell in love with him and his stable genius. He seems to have an infinite need for praise and admiration. While revolting (yet slightly interesting from a psychological point of view) this is actually a great thing. Trump’s infinite need to be loved and adored, combined with the need to embarrass anyone and anything that was not sufficiently obedient and full of praise, is what has prevented the US from bidding farewell to the American Experiment. Trump needs to be the best, and to have the biggest crowds. It got so bad that even Fox (yes, Fox) called him out on it.  During the 2016 presidential campaign, his need to
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Winner Takes All - or - why the playing field is so slanted

As we are getting closer to the US election the question as to why characters like Trump and Biden the candidates of choice are pops up again. A big part of the underlying cause of why politics in the US are moving more to extremes is the unrelenting, ever increasing wealth inequality – or, more accurately – the awareness of huge inequality in society. To take this one step further, it is not so much that We, The People, are equal (because we are not) but that we should have access to an equal opportunity set. And we don’t. After the ’08 financial crises and subsequent bailouts of the financial system, the Occupy Wall Street movement fomented. It was a general protest against the corrosive power of moneyed interests over democracy itself. Eventually it somewhat fizzled out but the notion that when there is a crises Wall Street gets bailed out while Main Street does not was a bit more obvious and has lingered since. Occupy Wall Street also made the 1%/99% part of our everyday langua
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Big Oil and the coming bailout

  Exxon et al. are on track for a bailout that will make the financial rescue of ‘08 look like handing a lollypop to a child. Oil companies – no matter what you think of them – create an essential product for modern society. Covid has caused a temporary surplus of crude which in turn has brought down prices significantly. US producers have been leaning heavily on horizontal / fracking to extract oil. This method of extracting oil is considerably more expensive than traditional drilling.   The reason why oil companies are going that more expensive route is because there are fewer and fewer vertical drilling locations available that economically make sense -we are running out of the affordable oil that society is built on. The result of companies switching to more expensive production is that – for example – the free cashflow from Exxon has dropped from 30-40bn/year in the mid 2000’s to 5-10bn with more and more quarters showing negative cashflow. XOM is borrowing money to pay dividends.
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Global CIO - A macro view

Finally the day has come that your Ivy League (please note that the spell checker capitalized that, not me) education and hard work are paying off: Congratulations, you were just appointed Global CIO.   You are now responsible for investing all of the world’s financial assets and, given your history as a highly educated CIO, steeped in finance and highly experienced managing other pools of capital your goal is to create a diversified portfolio with uncorrelated assets. On the first day of work you decided to use a three step process in setting up the portfolio 1) see what you have, 2) determine what you want to have and 3) make changes to create the desired portfolio. The first thing you do is send your star analyst to give you a rundown of what is in the portfolio you inherited. S/he starts out with collating and aggregating the portfolio which consists of stocks, bonds, and a number of derivatives such as futures, options and credit default swaps as well as a number of hedg
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Some (un)intended consequences of mortgage refinancing

As mortgage rates are decreasing and households take on mortgages with lower rates there are several consequences, not all of them obvious. The amount of interest paid, C.P goes down which at first glance is a good thing. The consumer now has the option to allocate the difference between the old and the new payment to other purposes. The downside of lower payments is that somebody else is now receiving less, and likely that somebody else is a pension fund, life Insurance Company or another entity which needs long dated cash flows. Chances are that as the homeowner refinances the NPV of his/her pension or insurance decreases at the same time. The economic effect of the increased cash flows to the household sector and the decreased cash flows to pension funds, life insurance companies et al . is not symmetrical because the household sector has a high marginal propensity to consume – they spend most of the savings – whereas the financial savings institutions buy financial assets (in
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