Minsky moment and the three types of borrowers

Types of borrowers

  • Hedge borrowers – cashflow can pay both debt and interest
  • Speculative borrowers – cashflow can pay only interest. Needs to regularly refinance to repay debt
  • Ponzi borrowers – believes future appreciation can finance both debt and interest

Crash happened when too high a percentage of borrowers in the system are Ponzi borrowers.

https://en.m.wikipedia.org/wiki/Hyman_Minsky

Observations on our news reporting system as well as investment bank forecasting.

On the quality news reporting

Good news reporting should seeks to inform rather than sensationalize with attention grabbing headlines. Its easy to appear data driven but still be misleading if you do not use the proper frame for understanding the numbers

An example of bad news reporting
An example of bad news reporting
An example of quality news reporting

On investment bank predictions

When on the receiving end of predictions made by external parties it is important to understand the underlying agenda they are trying to achieve. When examined thoroughly, predictions made by investment banks are so bad and contradictory, they should just stop making public declarations.

However if taking into account their objective is not to inform but to incite a trading decision by their clients so as to make a commission or offload losing positions on their trading books, it makes perfect sense.

Related references

The AI economy, Roger Bootle

Paradoxes

  • Polanyi Paradox
  • Moravec’s paradox

Key skill sets for the AI era

  • complex communication
  • Creativity
  • Strategic thinking / critical thinking
  • Empathy / humanity

Key themes

  • AI as labor cost versus AI as capital expenditure
  • Taxes on AI development versus edge in global competition
  • Labor versus leisure
  • Global positioning
  • Population size as advantage for big data

Chat with Johnson and Dad on CoronaVirus and crisis investing

  • A company is only likely to go bankrupt if its creditors recalls debts and it is not able to pay back.
  • In the event of a major wide spread disaster and there is no one around to take advantage of it, it is unlikely the creditors recall debts
  • creditors of airlines would more likely want to have all their clients continue generating revenue with the planes to pay off debt than to foreclose of them and take back planes which are at that point worthless inventory for them
  • Labor unions will not want to have all their union members laid off, they will likely go into negotiations to deal with salary issues.
  • Ships of cruises are likely to deteriorate fast and require Capex to upkeep
  • Credit lines and payment schedule can always be renegotiated if impact is industry wide
  • If creditors are not willing to recall debts, then what would be the cause of bankruptcy? Beware of fake news that preach doom and gloom with no underlying basis
  • If you bought too early into the dip and you are more than half way into the dip might as well hold on for the recovery. Trying to exit too late into the dip will only cause more losses to be unnecessarily incurred.
  • Oil specialists are either producers or consumers, it is hard to determine the demand unless you are an insider
  • Wait till all the bad news are out and sentiment has turned before entering into position. Its ok to only go into position after the company share price has advanced 100% from its lowest levels.

Thoughts on the Corona Virus stock market crash

Key takeaways on White house press releases

  • White house has taken very decision steps since the start of the spread in China to limit the import of viruses within the US
  • It has followed through with further travel bans of air travel from Europe
  • The next step is the 15 day shelter at home notices as of 15th March 2020
  • Its a trade off between financial markets turmoil and health system turmoil
  • To reduce maximum potential casualties, White house has opted to drag out the time it takes for the virus to spread throughout the community through social distancing measures.
  • The process can be modified to have each state go through its own bell curve of peaking
  • When health facilities are not overload, healthcare workers can afford to provide the necessary level of care to patients so as to limit the number of fatalities
  • In times of crisis, democratic systems after much bickering will align and perform execution with tremendous velocity. Private sectors will get mobilized to deal with the crisis as well.
  • Crisis are opportunities to remove red tapes and refresh platforms that are otherwise outdated. This makes the system more robust and able to handle future scenarios
  • Media do not always accurately report what is the official communication from the White House. When possible always seek out the original communication.
  • Targeting to reopen the country by 12th April 2020, Easter

Stock market price actions

 

  • In prior two pandemics (2003 SARS, 2009 H1N1), the height of the shock was experienced during the month of March before a subsequent rebound was observed
  • Federal reserve announcements of interest rate cuts ironically caused markets to dip
  • During period of turbulence, euphoria and subsequent price spikes due to government promise of bail out will not be long lasting
  • Oil is a leading indicator
  • Percentage coverage of media on pandemic is also a leading indicator of drops in markets
  • SPY might go through periods of denial before acknowledging pandemic is cause for concern
  • Gold which is considered a safe haven during time of crisis will dip when traders experiencing margin calls on their equity positions start unloading their gold to fulfill margin calls
  • US Treasury yield curve will start steepening when Federal reserve starts lowering interest rates and performing quantitative easing
  • Gold and bond prices decline will quickly follow the steepening of the yield curve.
  • Global markets will experience sharp retreat as funds exit from global markets for US treasury when steepening compared to negative interest rates worldwide
  • US dollar exchange rates will start surging as liquidity exit from emerging markets
  • Execution of fiscal policies will usually lag monetary policies
  • Share prices levels of directly impact companies can be seen trading at
    • ratios on 19th March 2020
      • PE ratio: 1.5 – 2.5X
      • PB ratio: 0.25-0.30
      • Discount from peak: 80-90%
        • 2020 Corona Pandemic: NHCL, RCL, CUK, CAR, MGM
        • 2019 California forest: PCG
    • affected industries: cruises, hotels, airlines

Related references

 

Federal reserve rate cuts

3rd March 2020

  • reduce interest rates from 1.5-1.75% to 1-1.25%
  • purchase of government bonds
  • purchase of agency back mortgage securities

15th March 2020

  • reduce interest rates from 1-1.25% to 0-0.25%
  • effects are in very early stage within the US
  • First signs affected industries
    • Tourism
    • Hotel
    • Travel industry
    • otherwise not showing up in data but sentiment forecasts

Key take aways

  • mandate
    • maximum employment
    • price stability
  • Context
    • Economy propped up by US consumers
    • US unemployment is low
  • Dealing with corona issue
    • Actual impact of US economy is uncertain
    • Ultimate solution will come from health professionals
    • Broader spread of the virus is what changed hence potential risk to the economy
    • Uncertain how long the economy will take to recover
    • Health care, Fiscal and Monetary policies

Thoughts on Fake News

A stroll through the peaceful streets of Rome. In contrast, it felt like the end of the world is here if you read news about Italy recently.

The human brain is a remarkable pattern recognition engine. When given incomplete information it will conjure up the “missing” pieces to generate a coherent whole that could be comprehended. More often than not what gets generated is the worst case imaginable scenario. In a normal time and age this is a wonderful function to have running automatically in the background to keep this primate alive.

However, this automatic function becomes problematic as three trends converge.

Trend 1 – big tech like Google and Facebook consolidated advertising revenue putting news entity under increasingly pressure to sustain themselves as their advertising revenue dwindled

Trend 2 – the proliferation of publication medium means anyone can now claim to be a news entity.

Trend 3 – Proliferation of Growth hacking techniques perfected by tech companies like Facebook that hijacks the human brain’s automatic fight or flight to generate user action that gets converted to revenue.

News entity generate revenue with hyper inflated news that drives readership and vitality by tapping into fear and anger. This drives wide spread panic. Corona  is perfect catalyst.

Conversations with Garis

  • When trading Forex the most important skill is to master the reversal.
  • Unlike shares of individual companies, due to heavy daily trading volume price movements goes both ways
  • It makes better sense to execute on the reversal instead of opting to totally exit the market