Liquidity Worries and Fish Attacks

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
Read More.
a | A

Bonds and bubbles.

Hey did you hear that people are worried about bond market liquidity? The latest version of the story is the Financial Times on liquidity-crunch worries, lack of dealer inventory, possible stress-testing for asset managers, etc. ("If everyone wants to redeem at once, there could be a liquidity crunch because without the banks, there won’t be anyone bidding for the bonds."). Some people, though -- well, BlackRock and Vanguard anyway -- are relatively sanguine:

Barbara Novick, vice-chairman at BlackRock, adds: “There is a conflation from regulators on what is the risk of investors and what is the risk of investment managers. The market risk is with investors as an asset manager does not guarantee the funds. The idea that the asset manager creates risk or might fail and create risk is not the case.”

Elsewhere, banks are designating increasing chunks of their bond holdings as "held to maturity" securities, meaning that rising rates, which will reduce the economic value of those bonds, will not reduce their accounting value to the banks (or require more capital). (We talked about this story last year too.) How does that play into the liquidity concerns? The Wall Street Journal worries:

The change shields banks’ capital if interest rates move higher, as many expect them to later this year, but could put them in a bind if financial conditions deteriorate and they need to raise cash fast.

Umm I think I will take the other side of that. First of all, it is not, like, physically impossible to sell held-to-maturity securities. (In fact many banks include those securities in their Basel III liquidity buffers!) But second: The point of this designation is that banks don't have to mark held-to-maturity bonds to market. This makes it less necessary to sell them if conditions deteriorate. The problem of a "liquidity crunch" is that people will be forced to sell, driving prices down, causing withdrawals, causing more sales, driving prices down, etc., in a vicious and somewhat run-like cycle. But if you don't mark your bonds to market, then you can sail through that crunch without having to sell the bonds, because no one ever knows that you lost money. 

The liquidity stuff -- "the market can't handle a drop in bond prices" -- is intimately tied up with worries about asset price bubbles -- "bond prices are too high and are going to drop." So James Bullard of the St. Louis Fed worries about asset bubbles and is urging the Fed to raise rates to pop them sooner rather than later. But Duncan Weldon points out that "The inflows into assets like corporate bonds and the associated high valuations are a not a bug of policy, they are feature": They are an artifact of the portfolio rebalancing channel of quantitative easing. Central banks wanted high asset prices, and that's what they got. But still there are lots of investment managers who worry about a crash, which I guess is sort of their job. And here is the San Francisco Fed on the "Great Mortgaging" and business cycles.

Meanwhile in bond funds, a levered bet on a rise in long-term rates has not worked out for anyone:

The ProShares UltraShort 20+ Year Treasury fund has lost $6.1 billion of investor money since its inception in 2008, more than any other ETF has lost during its existence.

Oops! Actually not oops at all; ProShares (quite correctly) points out that "During its life -- a vigorous, extended bull market for bonds -- TBT delivered the performance its shareholders should have received based on its investment objective." Though that performance was obviously bad. 

A tuna.

The classic Bill Gross Investment Outlook format is:

  1. Crazy story about cats, dogs, Vietnam, cellulite, etc.
  2. Jarring or non-existent transition.
  3. Stuff about bond markets.

I sometimes worry that at Janus he's losing his love for this format, or maybe he has an editor. So I was relieved to read this story about an (alleged) giant tuna attack on Glenview Capital manager Larry Robbins and his son Ryan, not only because they survived the attack but also because it made for a heck of an investor letter:

“We will never know what type of fish pulled us down. From the location and the fact that it never surfaced, we think it was most likely a large tuna,” Robbins wrote. “Despite marking the spot where the boat sank, the charter company has yet to recover the boat or our things on it (or so they say).”

Okay, check, fish attacks, but what are your views on asset allocation?

The letter didn’t just detail his fishing misadventures. Robbins said debt markets are largely unattractive and inappropriate for investment, and that Glenview is betting against sovereign and corporate credit. The firm, which gained 25 percent in 2014, remains constructive on U.S. equities, including McDonald’s Corp.

Ah perfect. Robbins has a track record of investor-letter excellence and I look forward to reading more of his work. Elsewhere in not-quite-Bill-Gross news, here is a story about how Janus's equity funds are doing well and attracting assets, while Bill Gross's Janus Global Unconstrained Bond Fund has mediocre performance and is actually shrinking a bit.

Some regulation.

Here is an article with the headline "Despite Regulatory Advances, Experts Say Risk Remains a Danger to Large Banks," and, right? That is the problem with risk: It's a danger. Even if your regulation is advanced. That headline is evergreen and tautological: Despite whatever regulatory advances you can think up, experts will still say that risk remains a danger. Experts are boring in that way. The trick is to occasionally get some sleep anyway.

Still. Here is Peter Henning on the opposition that the Securities and Exchange Commission will face in holding brokers to a fiduciary standard. Some of that opposition will come from the House of Representatives, which in 2013 passed the hilarious "Retail Investor Protection Act" to prevent the Labor Department from imposing a fiduciary standard on brokers. And some, obviously, will come from the brokers, "arguing that it will raise costs for clients and lead firms to shun smaller investors because of the increased record-keeping requirements." Also the main effect of a fiduciary standard will be to make investor lawsuits easier, which is in some sense good (deterrence, compensation for wronged investors, etc.), though politically dicey, since "anything that further enriches lawyers is a surefire argument against most rules."

Elsewhere, "Corporations have begun to displace individuals as the direct beneficiaries of the First Amendment," which strikes me as more a problem of constitutional-law statistics than of substantive constitutional law. And "Macroprudential oversight, risk communication and visualization." And here is a story about SEC waivers that I can't even. (Previously.) 

Où sont les banquiers d'antan.

In Vanity Fair, William Cohan checks in on the post-crisis lives of the bank executives who were in charge in 2008. Jimmy Cayne "has become a jovial but forgetful old man," though he "continues to be a force in the world of contract bridge." Dick Fuld is somehow an M&A banker. Vikram Pandit works "at TGG Group, a consulting-and-investment firm that is the brainchild of Steven Levitt, the co-author of the Freakonomics series of books, and Daniel Kahneman, the Nobel Prize-winning economist and the author of the best-seller Thinking, Fast and Slow." And then there is Stan O'Neal. Poor Stan O'Neal:

It is not exactly clear what he does these days, other than serve on the board of directors of Alcoa. He doesn’t much keep in touch with his old friends, and he has moved from his Park Avenue apartment to the Upper West Side of Manhattan. “He seems to have retreated from the world,” a friend says.

Imagine the horror of serving on only one S&P 500 board and retreating to the Upper West Side.

What's going on with Herbalife?

I don't know, I'm asking sincerely. The stock was up almost 11 percent on Friday and another 6.9 percent yesterday, closing at $44.99. There was some big news last week -- Herbalife got a shareholder pyramid-scheme lawsuit dismissed -- but that was last Monday; since then there doesn't seem to have been a lot of new news. Charlie Gasparino at Fox Business is reporting that Herbalife is "going on the offensive with a major media buy designed to bolster the company’s image in key markets around the country," which I guess is good news, but it's not that exciting, and anyway it was reported late yesterday afternoon. What has been driving the price up? CNBC's theory is that Herbalife's investor-relations campaign is paying off:

Herbalife's CFO, John DiSimone, is currently traveling the country speaking to investors, according to one analyst who declined to be named. Another source on the Street confirmed that corporate management is meeting and arranging dinners with big investors in several cities.

But there are ominous rumblings about technical factors, like a short squeeze or the possible near-term expiry of some of Bill Ackman's option contracts. I should say: I have no idea when Ackman's options expire, or what price they're struck at, but they have some expiry and some strike price. That is the problem with Ackman's shift from being directly short stock to being short via options: There's now some date-and-price target for the other side to shoot at.

Money and politics.

Don't you just love this story that Ted Cruz tells about his wife:

“She and her brother compete baking bread. They bake thousands of loaves of bread and go to the local apple orchard where they sell the bread to people coming to pick apples,” said Cruz, 44. “She goes on to a career in business, excelling and rising to the highest pinnacles, and then Heidi becomes my wife and my very best friend in the world.”

The particular pinnacle to which Heidi Cruz rose was a job as a managing director in private wealth management at Goldman Sachs's Houston office. (Disclosure: I used to work at Goldman and spent a lot of time in that office, though not with PWM.) Is it possible that her earlier bread-baking experience is more ... I was going to say "relevant," but to what? Cruz's qualifications to be president? Was the baking more impressive than the banking? More, um, on-message?

Anyway, Heidi Cruz is taking a leave of absence from Goldman for the campaign, and I wonder if it was at all tempting to invest with her to ingratiate yourself with her possible-future-president husband? Consider this weekend's New York Times story about Marc Mezvinsky, Bill and Hillary Clinton's son-in-law who manages a small hedge fund with an impressive client roster of Clinton buddies. That story is probably more smoke than fire -- most of the money seems to have been raised by Mezvinsky's partners, not by his family connections -- but only because of stuff like this:

A person briefed on the matter and close to the firm said the amount of investor money recruited by Mr. Mezvinsky is not large, amounting to less than 10 percent of the firm’s total outside capital. Clinton supporters also say there are more direct ways to cultivate favor with the family, such as giving to the foundation, where Chelsea Clinton is vice chairwoman, than by investing with a hedge fund that her husband co-founded.

Those are Clinton supporters saying that "there are more direct ways to cultivate favor with the family" than investing with Mezvinsky.

Do you like reading journalism on the Internet?

Hahaha you've got about six more months of that before Facebook burns it down. I've enjoyed our time together.

Things happen.

"Economists agree: deflation is either good, or bad, or irrelevant." Pension funds are worried about the strong dollar. So long open-outcry trading pits. Peer-to-peer surgery. Joseph Cotterill on Citi's Argentine bond reprieve. Helaine Olen on Paul Tudor Jones's JUST Capital. Bhutan, Wall Street and water. "You may know that you can earn $13,000 a year selling your own feces, but now it seems that the U.S. government stands to make bank on your solid waste, as well." A vodka app. 'Flash Boys' Michael Lewis: Markets still rigged. Guess which NCAA tournament school has the highest SAT scores. The most popular book at the Bank of England's library is an A-level economics textbook. "Check out some of the insanely fancy cars spotted at Goldman Sachs Asia." I Played 'The Boys Are Back in Town' on a Bar Jukebox Until I Got Kicked Out.

If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks!

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net