Money Stuff

Cabinet Jobs and Fake News

Also quants, Warren Buffett, boutiques, duration and unicorns.


Donald Trump's closing argument in this presidential campaign was a two-minute advertisement blaming America's problems on a conspiracy of global financiers like George Soros and Goldman's Lloyd Blankfein, so it seems fitting that the two leading candidates to be his Treasury Secretary are Steven Mnuchin and Wilbur Ross. Mnuchin is a former Goldman Sachs Group Inc. partner, used to work with Soros, and is in Skull and Bones. Ross was literally the president of a secret Wall Street fraternity that holds black-tie dinners where they perform in drag and make fun of the less fortunate. If you voted for Trump to kick the Illuminati out of Washington, this must be a disappointment. Sadly, Jamie Dimon didn't want the job, though he "would be available to offer help and advice to the new administration." 

Meanwhile, Mary Jo White, the chairwoman of the Securities and Exchange Commission, has announced that she will step down at the end of the Obama administration. That creates an opening for ... me, I guess? No, White's departure opens "the door to a new Republican-appointed leader who could move to loosen rules on Wall Street and curb the aggressive enforcement approach Ms. White prosecuted." The SEC strikes me as a relatively apolitical agency; a lot of White's rulemaking was dictated by Congress, and in fact she was accused of dragging her feet on some of it. Her agency-led rulemaking -- on disclosure modernization, on money-market fund reform -- doesn't seem particularly partisan. And a lot of the enforcement has been pretty straightforward, shutting down and punishing obvious frauds. But there could always be less, as Anthony Scaramucci points out:

“As the head of the S.E.C., you’ve got to get back into reffing the game properly and end the demonization of Wall Street,” Mr. Scaramucci said in an interview last week before his appointment to Mr. Trump’s transition team.

Elsewhere in Goldman alumni in the Trump administration, former Ku Klux Klan leader David Duke and American Nazi Party chairman Rocky Suhayda are very excited about the appointment of Steve Bannon as chief White House strategist. The Anti-Defamation League and the Southern Poverty Law Center are more critical. So there's that! My Bloomberg View colleague Jonathan Bernstein calls Bannon "a longtime professional bigot," a profession that, a week ago, I would have thought would have declining career prospects. Anyway, I have a feeling we're going to see a lot of resume inflation among Trump's advisers. Campaign manager Kellyanne Conway has already called Bannon a "Goldman Sachs managing partner," when he was in fact a vice president. For context: I was also a vice president at Goldman.

Fake news.

It's possible that the single person who did the most to get Donald Trump elected president is Mark Zuckerberg. That seems about right! There is a karmic accounting where, if you become a multibillionaire in your 20s, announce that you will give away almost all of your money to ambitious philanthropy like "curing all disease," and model a lifestyle of reading books and killing your own meat, then your billions really should come from doing something horrific. "Behind every great fortune there is a great crime," you know, and Zuckerberg's well-known sins -- fighting with the Winklevoss twins, being rude in depositions, building a website for the oversharing of baby pictures -- don't seem serious enough to account for the vastness of his wealth.

But undermining democracy by creating a world in which every person can have their own custom-tailored facts that have nothing to do with objective reality: That's bad! And Facebook Inc. seems to have done it intentionally:

According to two sources with direct knowledge of the company’s decision-making, Facebook executives conducted a wide-ranging review of products and policies earlier this year, with the goal of eliminating any appearance of political bias. One source said high-ranking officials were briefed on a planned News Feed update that would have identified fake or hoax news stories, but disproportionately impacted right-wing news sites by downgrading or removing that content from people’s feeds. According to the source, the update was shelved and never released to the public.

And so Facebook promoted lots of fake news in the lead-up to the election. It is not alone in this; as of yesterday, Google's top result for "final election count" was fake. Google is working on the problem: "Alphabet Inc.’s Google plans to prohibit fake-news websites from using its ad-selling software, a move that could crimp revenue at those sites." Facebook is working on the problem in a more Facebooky way, with a secret team of insurgents:

The employees declined to provide many details on the task force. One employee said “more than dozens” of employees were involved, and that they had met twice in the last six days. At the moment, they are meeting in secret, to allow members of the group to speak freely and without fear of condemnation from senior management.

A New Yorker article a while back mentioned that "Many people in Silicon Valley have become obsessed with the simulation hypothesis, the argument that what we experience as reality is in fact fabricated in a computer; two tech billionaires have gone so far as to secretly engage scientists to work on breaking us out of the simulation." But the interesting question is whether tech billionaires at Facebook and Google are themselves creating a simulation, taking small steps to slowly alter and fabricate the reality around us. And for all its world-changing rhetoric, Facebook is too timid to do anything -- even to put a disclaimer next to fake news saying "hey this is fake" -- to break us out of that simulation.

Hedge funds.

Doesn't it feel like we're in a bit of a financial regime change? Rates went down forever, now they're going up. We had years of post-crisis stability preserved by central-bank policies and broad international consensus; now everything is ... weird and unsettled. There's a possibility of volatility, of divergence between sectors and asset classes, of big sudden changes where historical relationships break down.

One thing you might think is that the former regime -- the stable, correlated, low-rates regime -- has been particularly favorable to some kinds of investing. Like passive index investing. Or quantitative investing in which robots make investment decisions based on historical relationships. And you might think that the new regime, in which things are weird, might be more suitable to active, aggressive, gut-level human investment decision-making. Or not, whatever; it is not impossible that indexing and robots are in the long run everywhere superior to humans, or that they deal with stress better.

All the articles that I read about hedge funds feel like the old regime. Here's one about how "pensions in states like Illinois, New York and Rhode Island are slashing their allocations to hedge funds," because hedge-fund performance hasn't been great and passive investing is so much cheaper. Here's "The Next Generation of Hedge Fund Stars: Data-Crunching Computers." Here's a story about how Quantopian, "the online platform for DIY quants that manages a crowdfunded hedge fund," keeps raising venture-capital money. Here's a story about famous quants' Erdos Numbers.

It's not that quantitative strategies demand a logical world, or that they only work when outside events are rational. They just rely on data, and if the data are weird, maybe computers will be more calm and open-minded than humans at interpreting them. Still, if you are good at trading with your gut, you might see this as an opportunity.

Elsewhere: "Chris Rokos Said Seeking $2 Billion to Boost Hedge-Fund AUM."

Should Warren Buffett be illegal?

Yesterday was 13F day, so you can see what David EinhornDavid TepperJohn PaulsonGeorge Soros, Carl Icahn, and lots of other investment managers were up to as of September 30, which feels like a lifetime ago. Probably don't go invest based on what those guys owned six weeks ago. But there's Warren Buffett, too:

Berkshire Hathaway said in a regulatory filing that it had taken stakes in American Airlines Group Inc., Delta Air Lines Inc. and United Continental Holdings Inc., with the latter scheduled to hold its investor day on Tuesday. Two of the Berkshire stakes each totaled less than $500 million while that in American was almost $800 million.

You might remember Warren Buffett from his folksy jokes that he would never do this and that if he did you should stop him:

Mr Buffett had sworn off airline stocks since suffering heartburn on an investment he made in US Airways in 1989. In 2003, he joked he had set up a freephone number to call counsellors who would talk him down if he got the urge to buy airline stocks. “My name is Warren and I’m an aeroholic,” he said.

What has changed?

US airlines have exercised restraint in adding capacity and launching price wars since emerging from the Great Recession and, together with the effects of lower fuel costs, they managed record profits in 2015

Hmm! We talk sometimes about the theory that diversified mutual funds are anti-competitive. The idea is that if multiple companies in the same industry have the same overlapping groups of owners -- even if those owners are passive mutual funds -- then those companies won't have much incentive to compete with each other. The owners want high overall industry profits; they don't care which individual companies win or lose. And so you'd expect companies in such an industry not to compete too hard on price, and to constrain capacity so that profits can remain high. And in fact the advocates for that theory started with a paper looking at the airline industry, and finding exactly that sort of anti-competitive dynamic. And we all giggled, because airlines go bankrupt all the time.

But now ... maybe they don't? Maybe now, through the virtue of price discipline and (perhaps!) common ownership, the airlines have finally found a way to be profitable, and that way involves not competing too much against each other. And maybe even Warren Buffett has recognized it, and decided that the industry is investable now. The industry is investable. There's no particular point in picking any one airline, though; on this theory, they're all kind of the same. So Buffett bought a sampling of them.

By the way, what if he wasn't kidding about the hotline? What if there was actually a counsellor waiting by the phone for 13 years, ready to talk Buffett out of buying airlines? And then the phone rang, and the counsellor excitedly leapt into action, but Buffett persuaded him that airline stocks are good now? And he emerged from his bunker (in my vision he's in a bunker), blinked in the sudden sunlight, and asked himself: Well, what do I do now? I would read a short story about Buffett's anti-airline hotline counsellor.


A phrase that floats vaguely around the Trump world is "reinstating Glass-Steagall," the old law separating depository banks and investment banks. It is not too much worth worrying about whether that will actually happen, but it is a little fun to imagine what would happen if it did. Presumably Goldman Sachs Group Inc. and Morgan Stanley would just discard their bank charters and go back to being full-time investment banks, though Goldman would be a bit sad to say goodbye to Marcus. But JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corp. would all have complicated work to do in separating their investment banks. You'd end up with a handful of giant, systemically important, near-universal investment banks that happen not to offer deposit products and loans.

One thing that I've wondered about since the Volcker Rule is: When will someone build the next big investment bank? After all, Goldman and Morgan Stanley got by without being actual banks for decades, even after the Glass-Steagall restrictions went away and they had to compete with the likes of JPMorgan. With the Volcker Rule and capital requirements constraining the banks, why haven't we seen a rise of big non-bank investment banks that can compete without those constraints? One possibility is that the big banks' advantage comes from being banks, and that their access to deposits and the Fed is important enough to overcome the annoyances of the Volcker Rule.

A new Glass-Steagall would get rid of those advantages and might make competition in investment banking more interesting. Here's a story about Perella Weinberg Partners, a boutique investment bank, acquiring Tudor Pickering Holt & Company, another one. They are basically small advisory boutiques, though they also have asset management arms, and Tudor Pickering has research and sales and trading. The combined company is not exactly going to be a mega-scale full-service competitor to the big investment banks. But give it a new Glass-Steagall and 20 years, and we'll see. 

People are worried about duration.

Last week Robin Wigglesworth wrote that duration was both "a long-ticking bomb" and "a double-edged sword," and the election of Donald Trump seems to have lit the fuse, or started ... waving ... the sword ... the other way? Anyway if you bought 100-year debt last month you feel dumb now. But it could be worse; you could own 2000-year debt:

Consultancy professional Andreas Drymiotis made quite a revelation in an article published in Sunday’s Kathimerini: According to a decision by three ministers in April 2015, the repayment of the debts three Attica municipal authorities owe to the state and the social security funds – totaling 535 million euros – was extended up to another 2,129 years (i.e. over 21 centuries from today).

I feel like that debt should trade above its fair value, though, right? Like the novelty value of getting a check from a Greek municipality every month for the next 2,129 years is surely worth more than the present value of those checks? I feel like I am always reading articles about quaint ceremonies where London pays rent to the Queen of England by giving "a knife, an axe, six oversized horseshoes, and 61 nails to Barbara Janet Fontaine, the Queen’s Remembrancer, the oldest judicial position in England." In 2,129 years, getting a wire transfer from a Greek city might seem just as quaint. Don't you kind of want your children's children's children's etc. to be the ones getting it?

People are worried about unicorns.

Here's the Bloomberg U.S. Startups Barometer, a handy chart that tells you how much to worry about unicorns. ("Our index incorporates both the money flowing into VC-backed startups, as well as the exits that are making money for investors.") It's down 12.5 percent year-over-year. So: You should worry a certain amount. And people are. Now boring old companies like General Electric Co. are able to poach in the Enchanted Forest:

“You’re betting on a lottery ticket,” he said he tells prospects who like the idea of getting stock in a startup. “There’s lots of ups and downs. GE is stable.” Since he joined in June, he’s recruited several engineers from unicorns -- startups valued at $1 billion or more -- a move he said would have been much harder last year when unicorns were riding high.

People are worried about stock buybacks.

Here's an interview with Martin Lipton, who founded Wachtell, Lipton, Rosen & Katz, where I used to work, and who is worried about short-termism. He doesn't specifically mention stock buybacks, though.

People are worried about bond market liquidity.

Here are Stephen Cecchetti and Kim Schoenholtz, who are worried about open-ended mutual funds that provide daily liquidity but invest in relatively illiquid assets. They have a solution: Convert the funds to exchange-traded funds:

What this means is that, so long as liquidity in the underlying assets backing the ETF is sufficient, the APs will execute an arbitrage that keeps the market price of the ETF close to the net-asset value of the underlying portfolio. But, during periods of market stress, should it become difficult to trade underlying assets, investors wanting to sell their shares may have to settle for prices below the NAV. That is, those who want to sell may have to do it at a discount. Put another way, when markets are liquid, ETFs operate like open-end mutual funds; but should markets become illiquid, ETFs then operate like closed-end funds. As a consequence, ETFs face no run risk.

This strikes me as basically correct. You sometimes see people worrying that bond ETFs provide a "liquidity illusion" and face run risk, but that is a strange argument. Certainly compared to regular mutual funds, ETFs have way less run risk, so converting mutual funds into ETFs would probably reduce overall liquidity risk.

Elsewhere, there's a Brookings Institution conference today on "Do we have a liquidity problem post-crisis?"

Things happen.

The Spy Who Added Me on LinkedIn. Federal Watchdog Agency Steps Up Inquiry Into Home Contracts. American Spirit and "natural" cigarettes. Nasdaq Names a New Chief Executive: Adena Friedman. IEX has a new Head of Listings. CEO of Online Lender Prosper Steps Down. Investors Could Lose Influence Over Executive Pay. Audit of U.S. stress test ready, may aid Dodd Frank overhaul fight. SEC Issues $20 Million Whistleblower Award. Investment bank cuts in Asia belie long-term ambitions. UK faces Brexit bill of up to €60bn as Brussels toughens stance. McKinsey: Bracing for seven critical changes as fintech matures. Goldman Sees the Possibility of Stagflation Under Trump Presidency. FBI Says Alleged Hackers Used FIFA To Steal Millions From EA. Martin Shkreli May Point the Finger at His Lawyers. How India Plans to Wipe Out ‘Black Money.’ Regency Centers to Buy Equity One for About $5 Billion. Part of Fifth Avenue May Be Closed Whenever Trump Is in New York. Buy some skulls

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