The Digest #86
The Fed's Epistemic Arrogance, A World Without Yield, 10-K Diver on Dividends
“Today is a milestone for me. In 2006, I pledged to distribute all of my Berkshire Hathaway shares – more than 99% of my net worth – to philanthropy. With today’s $4.1 billion distribution, I’m halfway there.”
— Warren Buffett, Press Release, June 23, 2021
Pounds of Salt: The Fed’s Epistemic Arrogance, June 17, 2021. “The Federal Reserve appears more and more to be the genesis of market-moving news rather than a dispassionate observer of economic indicators and market sentiment. It is as if the Federal Reserve wishes to test its theories and trial balloons out on the market to see how it reacts and uses this information to set policy. Make no mistake, financial market participants have long been obsessed with Fed policy but prior to the new hyperactive communication strategy, much had to be inferred and the obsessing was concentrated during the periods surrounding policy meetings. Now, the obsession is constant.” (The Rational Walk)
Wishful Thinking in a World Without Yield by Jason Zweig, June 18, 2021. Just because you “need” a certain level of returns from your investments does not mean that the market has to cooperate. Pensions funds and other institutions have been slow to recognize this reality, with many moving into alternative assets. But as Jason Zweig points out, the same hard reality is true for individuals: “The message for you and me? You can’t earn a higher return from alternative assets just because you need to. Only the earliest and most skillful (or luckiest) can get the best returns.” (WSJ)
Bitcoin, Currencies, and Bubbles by Nassim Nicholas Taleb, June 2021. In this draft paper, Nassim Taleb explains his views on Bitcoin: “In its current version, in spite of the hype, bitcoin failed to satisfy the notion of "currency without government" (it proved to not even be a currency at all), can be neither a short or long term store of value (its expected value is no higher than 0), cannot operate as a reliable inﬂation hedge, and, worst of all, does not constitute, not even remotely, safe haven for one’s investments, shield against government tyranny, or tail protection vehicle for catastrophic episodes.” (Academia)
10-K Diver on Dividends, June 20, 2021. This 43-part Twitter thread covering the topic of dividends starts with an interesting thought experiment: “Suppose a rich uncle gives us $1M. We're allowed to invest this $1M for our own benefit. But there are 2 conditions: 1. Within a week, we must put the entire $1M into a *single* stock. And, 2. We can *never* sell any shares.” I recommend following 10-K Diver on Twitter and checking out his website which includes a list of his other useful Twitter threads. (Twitter)
The Precautionary Principle: Better Safe than Sorry?, June 21, 2021. “Also known as the Precautionary Approach or Precautionary Action, the Precautionary Principle is a concept best summed up by the proverb “better safe than sorry” or the medical maxim to “first do no harm.” While there is no single definition, it typically refers to acting to prevent harm by not doing anything that could have negative consequences, even if the possibility of those consequences is uncertain. In this article, we will explore how the Precautionary Principle works, its strengths and drawbacks, the best way to use it, and how we can apply it in our own lives.” (Farnam Street)
How Much Do You Need to Be Financially Independent? by Nick Maggiulli, June 22, 2021. This is a good article on a familiar topic for readers of this newsletter. Most of the concepts for determining financial independence are not complicated. The real issue is determining the assumed long-run rate of return. “When it comes to figuring out how much you will need to be financially independent, we only need to know two things: (1) your annual spending and (2) how many years you need to spend for. Once we know these two things, we can estimate how much you will need to be financially free.” (Of Dollars and Data)
High Housing Valuations Move Inland by William R. Emmons, June 21, 2021. The current housing boom (bubble?) has not impacted all regions of the country equally, as this article published by the St. Louis Federal Reserve discusses in more detail: “In the current housing boom, three of the five divisions with average housing valuations above the national average are inland—namely, the Mountain, West North Central and West South Central divisions. Even more striking, average housing valuations in all five inland divisions are higher now relative to the national average than they were at the peak of the previous housing boom. Conversely, average housing valuations in all four coastal divisions are lower now relative to the national average than they were at the previous boom’s peak. Thus, compared to last time, the housing boom has moved inland.” (St Louis Fed)
Kids Need Dirt and Danger by Matti Friedman, June 16, 2021. Would you let your kids play in a junkyard? Most Americans would not, but it might be time to rethink whether children are suffering from being over-protected. “The kindergarten junkyard is countercultural at a moment preoccupied with safety and litigation—but may have something to teach parents who’ve just been through a yearlong education on the limits of education itself. The junkyard is one answer to a pressing question: When we teach kids, should we prepare them to climb an orderly ladder of tests that lead to other tests, grades, and degrees—or should we prepare them for chaos?” (The Atlantic)
Are continuous glucose monitors a waste of time for people without diabetes? by Peter Attia, June 20, 2021. The increasing availability of continuous glucose monitoring systems has made it possible for people without diabetes to acquire these devices at reasonable cost. But is it necessary or a waste of time and money to buy one? “… it may be true that aside from anecdotal accounts, there’s little evidence that people with normal glucose responses benefit from tracking their blood glucose, but don’t confuse an absence of evidence with evidence of absence. I can’t point you to a long-term randomized-controlled clinical trial rejecting the hypothesis that people with normal glucose responses don’t benefit from tracking their blood glucose because those trials don’t exist (yet, hopefully), but don’t confuse an absence of evidence with evidence of absence.” (Peter Attia MD)
Why bankers can’t stop running by Laura Noonan, June 7, 2019. “So what is it that binds running and finance so tightly? The easy answer is that both attract “type A” personalities. The intense preparation demanded by a marathon isn’t that different from what it takes to win a big client. Similarly, the stamina to keep going when your legs have given up is the same trait that powers investment analysts through 16-hour days.” (Financial Times)
Podcasts and Videos
Howard Marks - Embracing the Psychology of Investing, June 21, 2021. “So it just seems to me that if I were running Fed, which I'm absolutely unqualified to do, I would opt for leaving it alone most of the time, the economy, and having it do what it does naturally. All of us in the investment business, I don't think there are any socialists in the investment business. We're all in the investment business because we believe in the efficacy of the free market as an allocator of resources. So if you do, then shouldn't you leave the economy and the capital market alone as much as you can so that it can freely allocate resources? So I guess I would not be an activist. Now having said that, what they did in 2020 they had to do. And if they hadn't done it, we'd have a worldwide depression now.” (Invest Like the Best)
Profiles in Credit – James Grant, June 17, 2021. “In this episode Geoff Castle, Fixed Income Portfolio Manager, chats with James Grant, editor of the iconic Wall Street newsletter, Grants Interest Rate Observer. They discuss James’ early years in Long Island, his start in journalism at the Baltimore Sun, his tenure at Barron’s, where he first gained national recognition and how his interest in credit markets and capital markets formulated there. In particular they talk about the three big anniversaries rolling around for the American economy in 2021, as well as where James sees the market heading in the next decade.” (PenderFund)
Litquidity — Up Close with the Meme King of Wall Street, June 17, 2021. This is an interesting podcast with the man behind the @litcapital Twitter account, a good one to follow if you enjoy finance related memes. For more background on Litquidity, check out this recent New York Magazine article: “In 2017, inspired by a Greek-life parody blog he’d followed as a frat guy in college, he decided to start Litquidity Capital. “It was just going to be a funny thing,” he says: a satire of the “partyish lifestyle” of finance bros. “So, you know, lit is a word for that.” (Infinite Loops)
Building Berkshire 2.0 w/Chamath Palihapitiya, June 19, 2021. “Chamath is the founder and CEO of Social Capital, his conglomerate focused on solving climate change and inequality, which he has referred to as Berkshire Hathaway 2.0. Chamath was an early executive at Facebook and then went on to become a super successful Venture Capitalist, with early investments into Amazon, Tesla, Slack, and Bitcoin.” (We Study Billionaires)
So, is Chamath really Warren Buffett version 2.0? I’d suggest reading Christopher Bloomstran’s tweet-storms on May 30 and June 19 dissecting the recent Social Capital annual letters. To put it mildly, the record does not come close to matching the hype.
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