It’s based on the mechanics of asset allocation theory. As long as an asset class is performing within 2 standard deviations its percentage of the overall portfolio should be maintained. If it is performing more than 2 standard deviations to the positive a bubble has formed and it should be avoided. If it is performing more than 2 deviations to the negative it should be overweighted for future performance. In other words buy low, sell high.
Oh yeah. I got that from the earlier description…
Looking at the actual yield of short duration cash instruments showed that it was held below -2 deviations by central bank actions. QE dialed pressure into the bubble until inflation finally burst the bubble. Yields being the measure of the bubble and it falling well below historic average yields. As you pointed out, if you can hod the debt instrument to maturity no problem, but if you are forced to convert it back into legal tender early, it’s going to hurt.
I am not surprised.
In my economics background (back in the days when computer monitors were either gray-on-black, green-on-black or orange-on-black) we learned a lot about mean reversion and equilibrium.
I could have taken the same stat-heavy direction that you are describing but opted instead to veer off into accounting.
So in my case I made and/or looked at things like the charts below and could see that things were out of whack, ---- without knowing if they were 1, 2 or 3 standard deviations out of whack nor when the market would return
I went into asset allocation model design and analysis of mathmatical market indicators. This coupled with the emotional mentality reflex of the investing herd taught me that you can’t predict the next winner, and shouldn’t try. But the market most definitely signals the next big loser. Essentially the market chugs along until something triggers greed induced herd mentality in an asset. Then a bubble forms around said asset. Eventually the bubble bursts and that asset collapses. But now you have to add in the foolishness of politicians thinking they can control markets. They dial in pressure with money supply manipulation and capital cost (interest rate yield) manipulation. And of course individuals think they can game these forces, that they usually don’t fully understand, on an institutional level.
Most people who win (or inherit) a large sum of money are back to square 1 a few years later. This is not because only morally deficient win or inherit money. I never studied psychology but time and again when money is “free” either by inheritance or artificially low interest rates people tend to become recklessly speculative with it.
So yeah, we agree that while no one can predict when a bubble will pop we can know that bubbles tend to pop. Dr. Burry believes that one sign a bubble is getting close to popping is when an increasing amount of fraud develops around it.
That is the greed factor. Greed makes people act foolish, including executives. Add to that the difference between those seeking immediate gratification and those capable of seeing the potential in deferred gratification.
I do not disagree, but to put a finer point on it
It is the same people. I don’t see it as people “become greedier.”
X% of people who swear up-and-down they are “old school” non-greedy, in favor of “deferred gratification” get taken in by
- the dot.com bubble
- the sol-called housing bubble
- the tech bubble.
If your town can support 3 supermarkets, I promise you when interest rates are cheap enough 6 supermarkets will open.
When the inevitable crash comes, policy-makers have two choices:
- Subsidize supermarkets, keeping all six open
- Allow three of them to fail, leading to temporary 50% unemployment rate in among retail workers.
My point is people did not become “Greedier.” Their morals did not change.
Human nature did not change. Nor did people enter or leave the human race. The same people were always there, with the same “entrepreneurial spirit.” When money became free they behaved the same way people always have.
Good old human temptation at work. It takes great discipline to avoid its clutches.
From a policy standpoint, policy makers will never be able to change the amount of greed vs discipline in a society. If you give people free money or money at below-market interest, they will spend in a mix of greedy vs disciplined ways. What a policy maker can change is how much
Imagine the sharks of Shark Tank fame.
These are successful intelligent people. All of them are reasonably “good with money.”
- If they can borrow money at 2% on they will invest in more risky scheme by unproven entrepreneurs -vs- if they must borrow at 20%.
IMPORTANTLY the Sharks did not become greedier (less moral) they did not lose IQ points. They are the same people responding to free-market rates vs artificially-low interest rates.
Imagine John Q America.
He is no more disciplined or less disciplined, no greedier or less greedy than you and I.
- If you allow the free market to set interest rates (I dunno, a 7% 30-year??) he has a specific likelihood to buy a house. The public as a whole will buy ‘X’ houses and pay ‘Y’ for them.
- If you artificially lower interest rates (a 3% 30-year??) he has a greater likelihood to buy a house. The public as a whole will buy more houses and pay more for them.
IMPORTANTLY the public did not become greedier (less moral) they did not lose IQ points. They are the same people responding to free-market rates vs artificially-low interest rates.
Push the lie, Pocahontas
Yeah seems like a like.
From the article
"Warren said during an interview on CBS’s “Face The Nation.” “And then Jerome Powell just literally took a flamethrower to these regulations, in order to make them less and less effective.”
From what I have read SVB, Signature Bank etc, did not violate any of the regulations under old or new Dodd-Frank.
In fact SVBs failure, in particular, was caused by SVB doing “too much of” what Dodd-Frank wanted. In simplest terms
– According to Dodd-Frank, bad banks in 2008 invested too little in conventional loans and gov’t bonds, they invested too much in insurance “swaps.”
– SVB failed because it did not invest in enough swaps. It had no insurance against a rapid change in interest rates.
There are more banking regulations today than ever before in US history.
They are all but officially nationalized at this point.
Greed is an emotional condition, intelligence is an individual trait, as is discipline. Intelligence is more a fixed trait, while discipline is subject to manipulation by temptation. Markets, like all things in nature, seek equilibrium. Humans are the great source of artificial influences in nature, and in markets.
Some people think fractional reserve banking is a bad idea.
I wonder how they would feel about zero reserve banking?
Following quote is from the Forbes article.
I have added the bullet marks to make it easier-to-read.
Silicon Valley Bank Collapse Suggests 0% Reserve Requirement Won’t Halt Bank Runs
In May 2002, the reserve requirement was 10%, according to Economic Policy Review. . . .
In November 2022, the Fed reiterated its reserve requirements were still 0% with a twist. That is when the Fed noted “technical details related to reserve requirements for depository institutions” would go into effect in January 2023.
Banks have exceeded that reserve requirement. For example, at the end of December,
- Bank of America had 2% of its $1.93 trillion in deposits in cash;
- JP Morgan held 2% of its $2.3 trillion in deposits in cash and
- Silicon Valley Bank had 5% of its $175 billion in deposits in cash.
One of the biggest problems we face with regard to the current “Federal Reserve System” is, government schools do not teach how paper money systems, since their invention, have been used to plunder the real material wealth created by the sweat of labor.
“Of all the contrivances for cheating the laboring class of mankind, none have been more effectual than that which deludes them with paper money. This is the most effectual of inventions to fertilize the rich man’s field by the sweat of the poor man’s brow.”_____ Daniel Webster.
And that is what you get with a paper currency which is made a “legal tender” and forced upon the people without their consent, and in violation of our written Constitution.