Sunday, June 19, 2022

Sunday Night Links

  • The so-called new economy stocks hardest hit in today’s markets have been those Kupperman has christened “the Tiger 40” — the 40 top stock holdings Tiger Global disclosed at the end of 2021 — and which short sellers say they are targeting. “The Tiger-40 is a list of the most over-owned hedge fund hotels I can think of,” Kupperman wrote on his blog, Adventures in Capitalism, in January. (“Hedge fund hotel” is industry slang for an investment that’s very popular among hedgies.) “Most of the large portfolio managers all know each other. They share the same notes. They copy each other and they copy what’s been working.” Indeed, a number of other Tiger cubs show up in these crowded trades — names including Coatue Management, Lone Pine Capital, Maverick Capital, Viking Global Investors, and D1 Capital Partners. (These hedge-fund firms have also followed Tiger Global into investing in venture capital. All are facing significant losses this year.) As the Tiger 40 stocks have tanked, the hedge funds that own them have gotten margin calls asking for more cash or collateral for their loans and redemption notices from investors wanting their money back. That in turn created more selling, which created even more selling, and so on. The same feedback loops that were operative on the way up are working in reverse on the way down. Bloomberg recently highlighted 13 of the worst-performing stocks held in common among these funds. The more familiar names are former high-fliers Carvana, Netflix, Shopify, and electric-vehicle start-up Rivian. All have fallen more than 70 percent, and Tiger Global was in all of them. While those names are well known to many American consumers, less familiar are the Chinese tech companies in Tiger Global’s portfolio. Last year, Tiger Global owned more stakes in U.S.-listed Chinese stocks than any other hedge fund, according to a Bloomberg analysis. [NY Mag]
  • In some future circumstances, CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money. It is also important to consider the potential risks of a CBDC associated with disintermediating banks, given their critical role in credit provision, monetary policy transmission, and payments. In some circumstances, a widely available CBDC could serve as a substitute for commercial bank money, possibly reducing the aggregate amount of deposits in the banking system. And a CBDC would be attractive to risk-averse users during times of stress. Accordingly, if the Federal Reserve were to move forward on CBDC, it would be important to develop design features that could mitigate such risks, such as offering a non-interest bearing CBDC or limiting the amount of CBDC a consumer could hold or transfer. [Vice Chair Lael Brainard]
  • I think the first order of business is to ask whether there is compelling need for the Fed to create a digital currency. I am highly skeptical. In all the recent exuberance about CBDCs, advocates point to many potential benefits of a Federal Reserve digital currency, but they often fail to ask a simple question: What problem would a CBDC solve? Alternatively, what market failure or inefficiency demands this specific intervention? After careful consideration, I am not convinced as of yet that a CBDC would solve any existing problem that is not being addressed more promptly and efficiently by other initiatives. [Governor Christopher J. Waller]
  • Canadian oil majors, royalty owners, and hydrocarbon pipelines are all priced as though disruption - actual replacement by wind and solar and electric vehicles - is going to happen in the next five years or so. But simple back of envelope economic calculations based on physics and energy density tell us that replacing fossil fuels (again, 80% of current world energy consumption) with those energy sources, the so-called "energy transition," is impossible. That means that the world is seriously under-investing in hydrocarbon production and traditional energy infrastructure, and over-investing in electric vehicles (TSLA) and in wind and solar boondoggles that will collapse the way the previous iteration (e.g. Suntech Power, Evergreen Solar, A123 Systems) did a decade ago. [CBS
  • I appreciate hearing ideas I never would have thought of myself, and I never ever would have thought of this. I like how it simultaneously avoids starry-eyed “all people must be free” romanticism, and hard-headed “the strong do what they will, the weak suffer what they must” realpolitik, in favor of the vibe of some guy from a private equity firm trying to cut operating expenses: “Did anyone here notice that we have 195 countries, some duplicating each other’s portfolios? Do we really need both a Netherlands and a Belgium? And why do we still have an Egypt? People haven’t wanted Egypts for two thousand years!” [Scott Alexander]
  • I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States. Now, what is this action—which is very technical—what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar. [CBS]
  • Energy prices in particular, which seemed to have stabilized by the end of 2021, have marched upward since Russia’s invasion of Ukraine. This contributes, perhaps more than anything else, to the sense of panic around inflation. And yet as the chairman says, “Gas prices are … not something we can do anything about.” What the Fed can do is discourage new housing construction (housing starts fell 14% in May), in the long run making housing more expensive, not less. What the Fed can do is shift bargaining power in the labor market from workers to employers, causing wages to fall even further short of the cost of living. What the Fed can do, if it pushes hard enough, is tip the economy into recession. As the press conference made clear, Powell knows perfectly well that none of this will address the real sources of rising prices. But it’s his job, and he intends to go on doing it. [Barron's]
  • Certain smoke-free products can dominate different markets depending on consumer tastes and local laws. IQOS has been a big success in Japan, where consumers have a record of openness to new innovations. It must have also helped PMI that e-cigarettes containing nicotine are banned. The situation is flipped in the U.S.: Vaping has a 7% share of the overall nicotine market, according to BAT, compared with 1% for modern oral nicotine pouches like Zyn and less than 1% for heated tobacco. [WSJ]
  • This finding that the smaller stocks outperform the larger stocks immediately explains the consistent outperformance of equal weighting over market capitalisation weighting. Equal weighting has consistently given greater exposure to the smaller stocks than market capitalisation weighting does. It is as simple as that. The finding of a distribution of individual stock returns that is shaped as described above and that is non-ergodic when size is considered is a strong effect that cannot be ignored. Any analysis of relative performance between two different portfolios should isolate the effect of these two characteristics before trying to argue that any other effect is present. Past suggestions that the explanation of equal weighting’s outperformance lies in what happens when an equal weight portfolio rebalances are thrown into doubt. The data
    sets above show outperformance even though there is no rebalancing. A possible line of future research is whether, after adjusting for the exposure to smaller stocks, rebalancing adds or detracts from the performance. [VanEck]

No comments: