What to do now, after the SVB bank run

12 March 2023 ~ CFOs in Silicon Valley apparently forgot about FDIC insurance limits. Apparently that's alright since the FDIC announced a few moments ago on this Sunday afternoon that all depositors would get their money, using their systemic risk exception tool. On the one hand, this rewards the careless bankers who made risky business decisions, but on the other hand it will likely curtail systemic contagion.

What to do now: Put your cash in a safer place! Call me at 530 320 3287 and we will invest your cash deposits in US government t-bills yielding 4.5% plus, with laddered maturities to meet your cash flow needs. $500,000 SIPC insurance. With the debt ceiling debate looming (spoiler alert: After a lot of drama, they will raise the debt ceiling again, as they always do) some may question even that, but it's as safe as cash can get in the US.

While we waited patiently in cash, the markets lost $40 trillion

30 December 2022 ~The stock and bond markets lost $40 trillion since the peak in January, according to Bespoke.com. How much is that? The total US GDP was $21.4 trillion in 2021, so $40 trillion is almost double the value of the total goods and services in the country. It is the largest dollar loss ever experienced by market investors. The graphic above compares 2022 with previous drawdowns in 2001 and 2009.

We called the top on January 16th, 2022 thanks to our proprietary algorithm, and allocated to cash.

Biggest manager predicts recession

9 December ~The planets largest asset manager, BlackRock, predicts a recession in 2023. Click here to read their 2023 Global Investment Outlook.. In our analysis, we don't give a lot of weight to economists' predictions, but thought this was worth noting. Also worth noting is that even though they predict a recession, on page 14 their strategic view is still to be 'overweight stocks'. Wouldn't it make more sense to keep cash handy to invest at the depth of their predicted recession? On page 15 their tactical view is to be 'underweight stocks'. Perhaps this way they can 'be right' either way.

In July Daily Wire reported that BlackRock lost $1.7 trillion of its clients' money since the beginning of the year --- the largest sum ever lost by a single firm over such a short period.

You can be like GE on tax day

Brett Arends wrote this for the WSJ a dozen years ago. Though some of the numbers have changed, the spirit of it remains timely, especially now at tax time.

There's been a firestorm this week over the news that General Electric will pay no tax -- at least, no federal corporate income tax -- on last year's profits.

But if you're like a lot of people, your first reaction was probably: "Hmmm. How can I get that kind of deal?"

You'd be surprised. You might. And without being either a pauper or a major corporation.

I spoke to Gil Charney, principal tax researcher at H&R Block's Tax Institute, to see how a regular Joe could pull a GE. The verdict: It's more feasible than you think -- especially if you're self-employed.

Let's say you set up business as a consultant or a contractor, something a lot of people have been doing these days. And, to make this a challenge on the tax front, let's say you do well and take in about $150,000 in your first year.

First off, says Mr. Charney, for 2010 you can write off up to $10,000 in start-up expenses. (In subsequent years it's only $5,000.)

Okay, let's say you claim $7,000. That takes your income down to $143,000.

You can also write off all legitimate business expenses. Mr. Charney emphasizes that this only applies to legitimate expenses.

He didn't say, but everyone seems to understand, that this can be quite a flexible term. Even if you buy a computer, a cellphone and a car primarily for business use, you can use them for personal purposes as well. If you happen to take a business trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine or taking a dip in the pool.

So let's say you manage to write off another $10,000 a year in business expenses.

That brings your income, for tax purposes, down to $133,000.

You'll have to pay Medicare and Social Security taxes (just like GE). Because you're self-employed, you have to pay both sides: the employee and the employer. That will come to about $19,000.

However, you can deduct half of that, or $9,500, from your taxable income. So that brings your total down to $123,500 so far.

Now comes the creative bit. The self-employed have access to terrific tax breaks on their investment and retirement accounts. The best deal for many is going to be a self-employed 401(k), sometimes known as a Solo 401(k).

This will let you save $43,100 and write it off against your taxes. That money goes straight into a sheltered investment account, as with a regular 401(k).

Why $43,100? That's because with a Solo 401(k), you're both the employer and the employee. As the employee you get to contribute a maximum of $16,500, as with any regular 401(k). But as the employer you also get to lavish yourself with an incredibly generous company match of up to 20% of net income.

Yes, being the boss has its privileges. (And if you're 50 or over, your limit as an employee is raised from $16,500 each to $22,000.)

You can save another $10,000 by also contributing to individual retirement accounts -- $5,000 for you, $5,000 for your spouse. If you use a traditional IRA, rather than a Roth, that reduces your taxable income as well. If you're 50 or over, the limit rises to $6,000 apiece.

If you contribute $43,100 to your Solo 401(k), and $10,000 to two IRAs, that brings your income for tax purposes down to just over $70,000.

We haven't stopped there either, says Mr. Charney.

Now come the usual itemized deductions. You can write off your state and local taxes. Let's say these come to $10,000.

You can write off interest on your mortgage. Call that another $10,000. That's enough to pay 5% interest on a $200,000 home loan.

That gets us down to about $50,000 And we're not done.

If you're self-employed, health insurance is probably a big headache. But the news isn't all bad. You can write off the premiums for yourself, your spouse, and your kids.

And if you use a qualifying high-deductible health insurance plan -- there are a variety of rules to make sure a plan qualifies -- you get another break. You can contribute $3,050 a year into a tax-sheltered Health Savings Account, or $6,150 for a family. You can write those contributions off against your taxable income. The investments grow sheltered from tax. And if you spend the money on qualifying health costs, the withdrawals are tax-free as well.

So call this $10,000 for the premiums and $6,150 for the HSA contributions. That gets your income, for tax purposes, all the way down to about $34,000.

If you have outstanding student loans, you can write off $2,500 in interest. And you can write off $4,000 of your kid's college tuition and fees.

Then there's a personal exemption: $3,650 per person. If you're married with one child, that's $10,950.

Taxable income: just under $17,000. That's on a gross take of $150,000. You'd owe less than $1,700 in federal income tax.

And it doesn't stop there. Because now you can bring in some of the tax credits. Unlike deductions, these come off your tax liability, dollar for dollar.

GE got big write-offs related to green energy. There are some for you too, although on a small scale. You can claim credits for things like installing solar panels, heat pumps or energy-efficient windows or boilers in your home. Let's say you use a home equity loan to pay for the improvements and take the maximum $1,500 write-off.

That gets your tax liability down to $200.

Can we get rid of that? Sure, says Mr. Charney.

If your spouse spends, say, $1,000 on qualifying adult-education courses or training programs, you can claim $200, or 20% of the cost, in Lifetime Learning Credits. (The maximum is $2,000.)

That wipes out the remaining liability.

Congratulations. You've pulled a GE. You owe no federal income taxes at all.

OK, it's just an illustration. Few will be quite so fortunate. On the other hand, it's not comprehensive either. There are plenty of other deductions and credits we didn't mention. You could have written off up to $3,000 by selling loss-making investments. Your spouse may be able to use a 401(k) deduction as well. There are lots of ways to tweak the numbers.

In this case, you've paid no federal income tax, and meanwhile you've saved $19,000 toward your retirement through Social Security and Medicare, and $53,000 through your 401(k) and IRAs. You've paid most of your accommodation costs (that is, the interest and property taxes on your home), covered your health-care costs and quite a lot of personal expenses through your business account, paid $4,000 toward your child's college costs and had about $2,000 a month left over for cash costs.

Who says GE has all the fun?

Clipping Coupons

30 September ~ I recall as a child going with my parents to their safe deposit box at the bank, watching them clip the current coupon on their corporate bonds, present them at the teller window in exchange for cash. Those days of clipping coupons are long gone. The safety of investment grade corporate bonds remains.

These days investment is all about the Fed.The FOMC delivered a third consecutive 75bp rate hike in line with consensus expectations. A close reading of their report revealed significant changes to their projections – slower growth, upward revisions to both headline and core PCE inflation as well as the unemployment rate, and a steeper rate path. (See 'Bullard was Right') below.

On an early morning in August at the annual Jackson Hole Symposium, Chair Powell said that the Fed will "keep at it until the job is done," adding that higher rates are needed to curb inflation, and there's no "painless way to do that." Consequently we've seen spikes in yields and a further sell-off in equities.

Yields are at decade highs amid bearish sentiment. I think that US investment grade corporate credit bonds, particularly at the front end of the curve, provide a safer place for investors.

The front end is a liquid market: about $3 trillion. At current prices, the average yield is over 2% with a duration of 2.64 and A3/Baa1 credit quality. These levels already anticipate the hikes ahead that the Fed has signaled at their recent meeting. The short duration of these bonds makes them less sensitive to higher rates.

What about creditworthiness? Won’t issuers have problems if the economy slows or, worse, enters a recession and earnings decline? Interest coverage is the important metric. Interest coverage is now at 12.6x, the highest levels since the early 1990s, so higher rates are unlikely to affect credit due to these healthy coverage ratios. The combination of credit fundamentals, low duration and yields at decade highs tell me that this part of the credit market offers a relatively safe investment. These investment grade fixed and floating rate corporate bonds as well as commercial paper comprise our biggest positions now. Our average duration is 0.38 years


Bullard was right

13 September ~At Jackson Hole a few weeks ago I chatted with James Bullard and he said based on his review of core CPI data, inflation has not yet peaked. Today's CPI was higher. He was right. With this information and my hawkish view (see below), today our investment group values declined only 1% even though the indexes lost more than 4%.

Was this inside information? No. He had said the same thing to Steve Liesman a few minutes before on live TV.

Jim said Kansas City Fed President Esther George held the same view on the inflation trend.

Fed Speaks. Market Shrieks.

29 August ~ Last week I was again at Jackson Hole where the 45th annual Federal Reserve Symposium was in full swing.

On Wednesday I saw two large live hawks in the lobby. Here's a photo of one.

Friday morning at 7 am the Chair spoke. I was poised with my laptop and as soon as I heard his 'hawkish' tone, reallocated our investment group to cash and consequently avoided the -5% decline since. The Dow finished the day down 1,008 points. I reallocated based on a proprietary algorithm backed by years of R&D, and the hawk was an interesting coincidence.

Why don't more investment managers do this? One reason: the Vanguards and Blackrocks of the world can't because they are much too big. They are the market. In this case, small is beautiful, as economist E.F. Schumacher published in 1973, and The Times Literary Supplement ranked as one of the hundred most influential books since World War II.

As one who vividly recalls Volker's response to inflation, I believe Powell, with his measured, logical, data-driven pronouncements, is also courageously applying the same unpopular remedy with remarkably skill.


What does 备 战 mean?

1 August ~The CCP objected to Nancy Pelosi visiting Taiwan. In their subsequent directive to the PLA are these two glyphs : 备 战. According to Google translate, 备 means "prepare for" and 战 means "war".

Read more here.

Investment Giant BlackRock loses $1.7 trillion in 6 months

23 July ~BlackRock lost $1.7 trillion of its clients' money since the beginning of the year --- the largest sum ever lost by a single firm over such a short period. Read more here. ...

From Crypto to Kryptonite

UPDATE 30 June ~As we mentioned a couple weeks ago, biggest crypto hedge fund is being liquidated. Read here.

16 June ~ Kryptonite is that mythical substance, the only thing that can hurt Superman. Crypto is that mythical set of currencies, the only thing that can escape government scrutiny, avoid fiat debauchery and defy inflation. Kryptonite lives on in the imagination of science fiction enthusiasts. Crypto currencies are alive and well in the minds of promoters. However, crypto turns out to be even easier than other forms of wealth for governments to track, its value has declined by several factors more than inflation has increased, and it is the ultimate fiat, meaning created out of nothing. But it's limited, promoters say quantity is limited. Yes, imaginative folks got around that by creating over a thousand varieties. Others decided it was a good idea to leverage their positions, such as Three Arrows Capital. One can't actually buy much with crypto, even if the crypto banks allow withdrawals. Can't even buy a Tesla anymore. Kryptonite has no useful qualities either except to Lex Luthor.

186 more banks in danger 3 March 2023

A recent study analyzes regional banks. Read more here

The Global Margin Call 10 October

The gilt and bund derivative crisis. Hedge pricing most expensive ever. Read more here

Shakespeare, the Capitalist 14 March

The Bard arbitraged grain and lent money. Click here for the revelation by researchers from Aberystwyth University in Wales.

Bank Run in China 14 June 2022

Ignored by media, there are bank runs in China. Click here.

Digital Dollars 26 March 2022

To read about the US digital dollar, click here.

OMFIF says dollar safe 25 March 2022

No threat to dollar global dominance. To read the report, click here.

The $5 billion Roth IRA 25 June 2021

How Peter Thiel did it. Click here.

Negative Rates Checklist 22 December 2020

Read the Securities Industry and Financial Markets Association white paper on what to do about possible negative interest rates in the US here.

50th Anniversary of NYT publication of the Friedman Doctrine 22 September 2020

The late celebrity economist Milton Friedman's surprising statement on social responsibility NYT Magazine September 13, 1970

Summer Reading 21 September 2020

Well-known economist James Grant's little-known history of a couple of years in the early 20th century The Forgotten Depression, 1921: The Crash That Cured Itself

Long-Term Effects of Pandemics 22 April

A peer-reviewed paper with surprising conclusions. Click here to read.

The Most Consistent Constant is Change 29 March

White paper on the Evolution of Risk Premia Click here to review.

Ninety Years of Minutes 2 January

90 years of Fed Minutes, which you can view here.

Million to Billion 8 July

How Long did it take billionaires to make their first million? View infographic here.

Older Entrepreneurs have 70% success rate 11 March

A 66-year young entrepreneur tells his story, which you can read by clicking here.

Brokers and Order Flow Leakage: Evidence from Fire Sales 11 February

A study from the Swiss Finance Institute, which you can read by clicking here.

New Study on Bias 4 September

The first step toward overcoming investment bias is to realize we are biased, according to a just-released paper from the Institute of Cognitive Neuroscience, which you can read by clicking here.

World Awash in Capital 27 February

There is cash available like never before. Click here to read a Harvard Business Review essay on how companies adapt.

Why Sports are a terrible metaphor for business 3 February

It's Superbowl season, so read a Harvard Business Review essay about how games relate to business by clicking here.

A 2016 View of the Future 15 December

Read about future mega-trends by clicking here.

Dallas Pension Stops "Bank Run" 8 December

The Dallas Police & Fire Pension stopped lump sum withdrawals. This is a watershed moment in the pension world, as many other pension plans are also underfunded. John Bury, the great actuary we work with, reported the Dallas problems back in August, which you can read here in his blog.

NIRP arrives in Japan29 January

For years I've written about a solution to the world debt problem: negative interest rate policy, or NIRP. To everyone's surprise, Japan announced that very event today, and so joins Germany, Denmark and Swizterland in the NIRP club. Read more here.

Fed Funnies20 January

Friday the Fed released transcripts of previous meetings. In one meeting, staffer Brian Sacks says "To help gauge market expectations, we conducted an extensive survey that asked respondents about how they expect the FOMC to exit from its current policy stance. We expanded the survey beyond the economists who are typically included in our dealer survey, because many of you at the last meeting indicated that you don’t actually trust economists. [Laughter] This may be a good time to remind you that most of you are economists."

Where is all that "cash on the sidelines"? 2 June

Famed market research analyst, Ned Davis, can't find any. Click here to read full story

Latest research: Money does buy happiness 15 April

On this tax day, thought you would like to know a recent scholarly study shows a high correlation between wealth and well-being. Click here to download the 79-page pdf.

Deflation = Progress 24 January

"Many years ago, falling prices were a sign of improved efficiency and expanding wealth, and of widening consumer choice. Thanks to the spread of electricity and other such wonders in the final quarter of the 19th century, prices dwindled year by year at a rate of 1.5% to 2% per year. People didn’t call it deflation – they called it progress." ~ Jim Grant

Private Debt an Indicator 10 December

A new study of past crises reveals private debt levels are a better indicator than government debt levels. A solution included. To read more, click here.

Central Banks Have Bought Equities 16 June

A survey of 157 central banks reveals they have increased investments in stocks. To read more, click here.

Disney Family Feud 21 May

A report on the sad saga of Disney heirs. Click here to read about their decade's long money squabbles.

Working, Happiness & Retirement 11 April

A surprising new study indicates those who voluntarily work past retirement age are generally happier than those who retire. Click here to read the entire 30-page scholarly paper.

Volatility and Illness Measured 6 January

Scientists correlate -1.5% market drops with more hospital admissions. To read more, click here.

Many holding cash 5 November

Wealthy families have about 39 percent of their assets in cash, according to a recent poll of more than 50 large family office representatives from 20 countries conducted by Citi Private Bank.

Retirement Myths 14 May

Generally I'm not a fan of The Motley Fool, but this article has interesting statistics to frame how we think about retirement. To read, click here.

Keeping it in the family 10 May

Japan is home to some of the oldest family-run businesses in the world. How do they do it? The answer may surprise. To read The Economist article, click here.

39,000 citizens declare $5.5 billion 26 April

The IRS amnesty programs have inspired thousands of US citizens to report foreign bank accounts. To read the GAO summary click here.

Optimism vs Fear 14 December

What makes investors bold or fearful? As Hoffman and Post demonstrate in their recent white paper, investors tend to risk more money when they have experienced profit without regard for risk.

Jeff Bezos Says

The CEO of Amazon shares a character trait he's noticed in those who are right a lot of the time. Read more.

A BIG Money chart

22 Nov ~ Don't click this link unless you want to spend a few minutes mousing around a huge chart which puts money in perspective. Click here.

Ever wondered what happens to your gas money?

About 12% to taxes, 8% to refiners, 5% to gas stations, and most of it to the crude producers, who pay big royalties to Saudi Arabia. How is your former money distributed in the house of Al Saud? Click here to to read the amazing numbers uncovered by Wikileaks.

The Crisis in Household Terms

We are bombarded daily with reports in the trillions, couched in language designed to obfuscate. It's really pretty simple. Click here to see the debt crisis expressed in household terms.

Value Investing Not Working

Famous value investor Whtney Tilson writes to clients that his fund is down -13% in August and -21.9% for the year. Click here to read his letter. He is not alone, as most value funds are down big this year.

Conversely, Jim Simon's secretive Renaissance Fund is unofficially +25% year-to-date, according to a source I spoke with this afternoon..

And smartest-of-the-smart, Goldman Sachs giant hedge fund GlobalAlpha is down -12% this year. They've announced plans to close it. Why would they do that? Because the have only a small chance of collecting their 20% profit, since they have to dig out of the loss first. More profitable for them to just close Alpha and start a new fund.

A City with No Debt

Most cities are drowning in debt. Is it possible to run a city at a surplus? Less than an hours drive from Washington, you can find one. Welcome to....

Why didn't India have a financial crisis?

India and Canada avoided the 2008 deflationary collapse due to their sound banking practices. Who in India made those good decisions? Read the answer here.

© 2010 Easan Katir. Right to link granted.