Home Blog Page 13

Musings on Markets: Catastrophic Risk: Investing and Business Implications

By
1_healthytip
-
0
Musings on Markets: Catastrophic Risk: Investing and Business Implications

    In the context of valuing companies, and sharing those valuations, I do get suggestions from readers on companies that I should value next. While I don’t have the time or the bandwidth to value all of the suggested companies, a reader from Iceland, a couple of weeks ago, made a suggestion on a company to value that I found intriguing. He suggested Blue Lagoon, a well-regarded Icelandic Spa with a history of profitability, that was finding its existence under threat, as a result of volcanic activity in Southwest Iceland. In another story that made the rounds in recent weeks, 23andMe, a genetics testing company that offers its customers genetic and health information, based upon saliva sample, found itself facing the brink, after a hacker claimed to have hacked the site and accessed the genetic information of millions of its customers. Stepping back a bit, one claim that climate change advocates have made not just about fossil fuel companies, but about all businesses, is that investors are underestimating the effects that climate change will have on economic systems and on value. These are three very different stories, but what they share in common is a fear, imminent or expected, of a catastrophic event that may put a company’s business at risk. 

Deconstructing Risk

   While we may use statistical measures like volatility or correlation to measure risk in practice, risk is not a statistical abstraction. Its impact is not just financial, but emotional and physical, and it predates markets. The risks that our ancestors faced, in the early stages of humanity, were physical, coming from natural disasters and predators, and physical risks remained the dominant form of risk that humans were exposed to, almost until the Middle Ages. In fact, the separation of risk into physical and financial risk took form just a few hundred years ago, when trade between Europe and Asia required ships to survive storms, disease and pirates to make it to their destinations; shipowners, ensconced in London and Lisbon, bore the financial risk, but the sailors bore the physical risk. It is no coincidence that the insurance business, as we know it, traces its history back to those days as well.

    I have no particular insights to offer on physical risk, other than to note that while taking on physical risks for some has become a leisure activity, I have no desire to climb Mount Everest or jump out of an aircraft. Much of the risk that I think about is related to risks that businesses face, how that risk affects their decision-making and how much it affects their value. If you start enumerating every risk a business is exposed to, you will find yourself being overwhelmed by that list, and it is for that reason that I categorize risk into the groupings that I described in an earlier post on risk. I want to focus in this post on the third distinction I drew on risk, where I grouped risk into discrete risk and continuous risk, with the later affecting businesses all the time and the former showing up infrequently, but often having much larger impact. Another, albeit closely related, distinction is between incremental risk, i.e., risk that can change earnings, growth, and thus value, by material amounts, and catastrophic risk, which is risk that can put a company’s survival at risk, or alter its trajectory dramatically.

    There are a multitude of factors that can give rise to catastrophic risk, and it is worth highlighting them, and examining the variations that you will observe across different catastrophic risk. Put simply, a  volcanic eruption, a global pandemic, a hack of a company’s database and the death of a key CEO are all catastrophic events, but they differ on three dimensions:

  1. Source: I started this post with a mention of a volcano eruption in Iceland put an Icelandic business at risk, and natural disasters can still be a major factor determining the success or failure of businesses. It is true that there are insurance products available to protect against some of these risks, at least in some parts of the world, and that may allow companies in Florida (California) to live through the risks from hurricanes (earthquakes), albeit at a cost.  Human beings add to nature’s catastrophes with wars and terrorism wreaking havoc not just on human lives, but also on businesses that are in their crosshairs. As I noted in my post on country risk, it is difficult, and sometimes impossible, to build and preserve a business, when you operate in a part of the world where violence surrounds you. In some cases, a change in regulatory or tax law can put the business model for a company or many company at risk. I confess that the line between whether nature or man is to blame for some catastrophes is a gray one and to illustrate, consider the COVID crisis in 2020. Even if you believe you know the origins of COVID (a lab leak or a natural zoonotic spillover), it is undeniable that the choices made by governments and people exacerbated its consequences. 
  2. Locus of Damage: Some catastrophes created limited damage, perhaps isolated to a single business, but others can create damage that extends across a sector geographies or the entire economy. The reason that the volcano eruptions in Iceland are not creating market tremors is because the damage is likely to be isolated to the businesses, like Blue Lagoon, in the path of the lava, and more generally to Iceland, an astonishingly beautiful country, but one with a small economic footprint. An earthquake in California will affect a far bigger swath of companies, partly because the state is home to the fifth largest economy in the world, and the pandemic in 2020 caused an economic shutdown that had consequences across all business, and was catastrophic for the hospitality and travel businesses.
  3. Likelihood: There is a third dimension on which catastrophic risks can vary, and that is in terms of likelihood of occurrence. Most catastrophic risks are low-probability events, but those low probabilities can become high likelihood events, with the passage of time. Going back to the stories that I started this post with, Iceland has always had volcanos, as have other parts of the world, and until recently, the likelihood that those volcanos would become active was low. In a similar vein, pandemics have always been with us, with a history of wreaking havoc, but in the last few decades, with the advance of medical science, we assumed that they would stay contained. In both cases, the probabilities shifted dramatically, and with it, the expected consequences.

Business owners can try to insulate themselves from catastrophic risk, but as we will see in the next sections those protections may not exist, and even if they do, they may not be complete. In fact, as the probabilities of catastrophic risk increase, it will become more and more difficult to protect yourself against the risk.

Dealing with catastrophic risk

    It is undeniable that catastrophic risk affects the values of businesses, and their market pricing, and it is worth examining how it plays out in each domain. I will start this section with what, at least for me, I is familiar ground, and look at how to incorporate the presence of catastrophic risk, when valuing businesses and markets. I will close the section by looking at the equally interesting question of how markets price catastrophic risk, and why pricing and value can diverge (again).

Catastrophic Risk and Intrinsic Value

    Much as we like to dress up intrinsic value with models and inputs, the truth is that intrinsic valuation at its core is built around a simple proposition: the value of an asset or business is the present value of the expected cash flows on it:

Musings on Markets: Catastrophic Risk: Investing and Business Implications

That equation gives rise to what I term the “It Proposition”, which is that for “it” to have value, “it” has to affect either the expected cashflows or the risk of an asset or business. This simplistic proposition has served me well when looking at everything from the value of intangibles, as you can see in this post that I had on Birkenstock, to the emptiness at the heart of the claim that ESG is good for value, in this post. Using that framework to analyze catastrophic risk, in all of its forms, its effects can show in almost every input into intrinsic value:

Looking at this picture, your first reaction might be confusion, since the practical question you will face when you value Blue Lagoon, in the face of a volcanic eruption, and 23andMe, after a data hack, is which of the different paths to incorporating catastrophic risks into value you should adopt. To address this, I created a flowchart that looks at catastrophic risk on two dimensions, with the first built around whether you can buy insurance or protection that insulates the company against its impact and the other around whether it is risk that is specific to a business or one that can spill over and affect many businesses.

As you can see from this flowchart, your adjustments to intrinsic value, to reflect catastrophic risk will vary, depending upon the risk in question, whether it is insurable and whether it will affect one/few companies or many/all companies. 

A.  Insurable Risk: Some catastrophic risks can be insured against, and even if firms choose not to avail themselves of that insurance, the presence of the insurance option can ease the intrinsic valuation process. 

  • Intrinsic Value Effect: If the catastrophic risk is fully insurable, as is sometimes the case, your intrinsic valuation became simpler, since all you have to do is bring in the insurance cost into your expenses, lowering income and cash flows, leave discount rates untouched, and let the valuation play out. Note that you can do this, even if the company does not actually buy the insurance, but you will need to find out the cost of that foregone insurance and incorporate it yourself. 
  • Pluses: Simplicity and specificity, because all this approach needs is a line item in the income statement (which will either exist already, if the company is buying insurance, or can be estimated). 
  • Minuses: You may not be able to insure against some risks, either because they are uncommon (and actuaries are unable to estimate probabilities well enough, to set premiums) or imminent (the likelihood of the event happening is so high, that the premiums become unaffordable). Thus, Blue Lagoon (the Icelandic spa that is threatened by a volcanic eruption) might have been able to buy insurance against volcanic eruption a few years ago, but will not be able to do so now, because the risk is imminent. Even when risks are insurable, there is a second potential problem. The insurance may pay off, in the event of the catastrophic event, but it may not offer complete protection. Thus, using Blue Lagoon again as an example, and assuming that the company had the foresight to buy insurance against volcanic eruptions a few years ago, all the insurance may do is rebuild the spa, but it will not compensate the company for lost revenues, as customers are scared away by the fear of  volcanic eruptions. In short, while there are exceptions, much of insurance insures assets rather than cash flow streams.
  • Applications: When valuing businesses in developed markets, we tend to assume that these businesses have insured themselves against most catastrophic risks and ignore them in valuation consequently. Thus, you see many small Florida-based resorts valued, with no consideration given to hurricanes that they will be exposed to, because you assume that they are fully insured. In the spirit of the “trust, but verity” proposition, you should probably check if that is true, and then follow up by examining how complete the insurance coverage is.

2. Uninsurable Risk, Going-concern, Company-specific: When a catastrophic risk is uninsurable, the follow up questions may lead us to decide that while the risk will do substantial damage, the injured firms will continue in existence. In addition, if the risk affects only one or a few firms, rather than wide swathes of the market, there are intrinsic value implications.

  • Intrinsic Value Effect: If the catastrophic risk is not insurable, but the business will survive its occurrence even in a vastly diminished state, you should consider doing two going-concern valuations, one with the assumption that there is no catastrophe and one without, and then attaching a probability to the catastrophic event occurring. 

    Expected Value with Catastrophe = Value without Catastrophe (1 – Probability of Catastrophe) + Value with Catastrophe (Probability of Catastrophe)

    In these intrinsic valuations, much of the change created by the catastrophe will be in the cash flows, with little or no change to costs of capital, at least in companies where investors are well diversified.

  • Pluses: By separating the catastrophic risk scenario from the more benign outcomes, you make the problem more tractable, since trying to adjust expected cash flows and discount rates for widely divergent outcomes is difficult to do.
  • Minuses: Estimating the probability of the catastrophe may require specific skills that you do not have, but consulting those who do have those skills can help, drawing on meteorologists for hurricane prediction and on seismologists for earthquakes. In addition, working through the effect on value of the business, if the catastrophe occurs, will stretch your estimation skills, but what options do you have?
  • Applications: This approach comes into play for many different catastrophic risks that businesses face, including the loss of a key employee, in a personal-service business, and I used it in my post on valuing key persons in businesses. You can also use it to assess the effect on value of a loss of a big contract for a small company, where that contract accounts for a significant portion of total revenues. It can also be used to value a company whose business models is built upon the presence or absence of a regulation or law, in which case a change in that regulation or law can change value. 

3. Uninsurable Risk. Failure Risk, Company-specific: When a risk is uninsurable and its manifestation can cause a company to fail, it poses a challenge for intrinsic value, which is, at its core, designed to value going concerns. Attempts to increase the discount rate, to bring in catastrophic risk, or applying an arbitrary discount on value almost never work.

  • Intrinsic Value Effect: If the catastrophic risk is not insurable, and the business will not survive, if the risk unfolds, the approach parallels the previous one, with the difference being that that the failure value of the business, i.e, what you will generate in cash flows, if it fails, replaces the intrinsic valuation, with catastrophic risk built in:

    Expected Value with Catastrophe = Value without Catastrophe (1 – Probability of Catastrophe) + Failure Value (Probability of Catastrophe)

    The failure value will come from liquidation the assets, or what is left of them, after the catastrophe.

  • Pluses: As with the previous approach, separating the going concern from the failure values can help in the estimation process. Trying to estimate cash flows, growth rates and cost of capital for a company across both scenarios (going concern and failure) is difficult to do, and it is easy to double count risk or miscount it. It is fanciful to assume that you can leave the expected cash flows as is, and then adjust the cost of capital upwards to reflect the default risk, because discount rates are blunt instruments, designed more to capture going-concern risk than failure risk. 
  • Minuses: As in the last approach, you still have to estimate a probability that a catastrophe will occur, and in addition, and there can be challenges in estimating the value of a business, if the company fails in the face of catastrophic risk.
  • Applications: This is the approach that I use to value highly levered., cyclical or commodity companies, that can deliver solid operating and equity values in periods where they operate as going concerns, but face distress or bankruptcy, in the face of a severe recession. And for a business like the Blue Lagoon, it may be the only pathway left to estimate the value, with the volcano active, and erupting, and it may very well be true that the failure value can be zero.

4 & 5 Uninsurable Risk. Going Concern or Failure, Market or Sector wide: If a risk can affect many or most firms, it does have a secondary impact on the returns investors expect to make, pushing up costs of capital.

  • Intrinsic Value Effect: The calculations for cashflows are identical to those done when the risks are company-specific, with cash flows estimated with and without the catastrophic risk, but since these risks are sector-wide or market-wide, there will also be an effect on discount rates. Investors will either see more relative risk (or beta) in these companies, if the risks affect an entire sector, or in equity risk premiums, if they are market-wide. Note that these higher discount rates apply in both scenarios.
  • Pluses: The risk that is being built into costs of equity is the risk that cannot be diversified away and there are pathways to estimating changes in relative risk or equity risk premiums. 
  • Minuses: The conventional approaches to estimating betas, where you run a regression of past stock returns against the market, and equity risk premiums, where you trust in historical risk premiums and history, will not work at delivering the adjustments that you need to make.
  • Applications: My argument for using implied equity risk premiums is that they are dynamic and forward-looking. Thus, during COVID, when the entire market was exposed to the economic effects of the pandemic, the implied ERP for the market jumped in the first six weeks of the pandemic, when the concerns about the after effects were greatest, and then subsided in the months after, as the fear waned:

    In a different vein, one reason that I compute betas by industry grouping, and update them every year, is in the hope that risks that cut across a sector show up as changes in the industry averages. In 2009, for instance, when banks were faced with significant regulatory changes brought about in response to the 2008 crisis, the average beta for banks jumped from 0.71 at the end of 2007 to 0.85 two years later.

Catastrophic Risk and Pricing
    The intrinsic value approach assumes that we, as business owners and investors, look at catastrophic risk rationally, and make our assessments based upon how it will play out in cashflows, growth and risk. In truth, is worth remembering key insights from psychology, on how we, as human beings, deal with threats (financial and physical) that we view as existential.

  • The first response is denial, an unwillingness to think about catastrophic risks. As someone who lives in a home close to one of California’s big earthquake faults, and two blocks from the Pacific Ocean, I can attest to this response, and offer the defense that in its absence, I would wither away from anxiety and fear. 
  • The second is panic, when the catastrophic risk becomes imminent, where the response is to flee, leaving much of what you have behind. 

When looking at how the market prices in the expectation of a catstrophe occurring and its consequences, both these human emotions play out, as the overpricing of businesses that face catastrophic risk, when it is low probability and distant, and the underpricing of these same businesses when catastrophic risk looms large. 

    To see this process at work, consider again how the market initially reacted to the COVID crisis in terms of repricing companies that were at the heart of the crisis. Between February 14, 2020 and March 23, 2020, when fear peaked, the sectors most exposed to the pandemic (hospitality, airlines) saw a decimation in their market prices, during that period:

With catastrophic risk that are company-specific, you see the same phenomenon play out. The market capitalization of many young pharmaceutical company have been wiped out by the failure of blockbuster drug, in trials. PG&E, the utility company that provides power to large portions of California saw its stock price halved after wildfires swept through California, and investors worried about the culpability of the company in starting them. 

    The most fascinating twist on how markets deal with risks that are existential is their pricing of fossil fuel companies over the last two decades, as concerns about climate change have taken center stage, with fossil fuels becoming the arch villain. The expectation that many impact investors had, at least early in this game, was that relentless pressure from regulators and backlash from consumers and investors would reduce the demand for oil, reducing the profitability and expected lives of fossil fuel companies.  To examine whether markets reflect this view, I looked at the pricing of fossil fuel stocks in the aggregate, starting in 2000 and going through 2023:

In the graph to the left, I chart out the total market value for all fossil fuel companies, and note a not unsurprising link to oil prices. In fact, the one surprise is that fossil fuel stocks did not see surges in market capitalization between 2011 and 2014, even as oil prices surged.  While fossil fuel pricing multiples have gone up and down, I have computed the average on both in the 2000-2010 period and again in the 2011-2023 period. If the latter period is the one of enlightenment, at least on climate change, with warnings of climate change accompanied by trillions of dollars invested in combating it, it is striking how little impact it has had on how markets, and investors in the aggregate, view fossil fuel companies. In fact, there is evidence that the business pressure on fossil fuel companies has become less over time, with fossil fuel stocks rebounding in the last three years, and fossil fuel companies increasing investments and acquisitions in the fossil fuel space. 

    Impact investors would point to this as evidence of the market being in denial, and they may be right, but market participants may point back at impact investing, and argue that the markets may be reflecting an unpleasant reality which is that despite all of the talk of climate change being an existential problem, we are just as dependent on fossil fuels today, as we were a decade or two decades ago:

Don’t get me wrong! It is possible, perhaps even likely, that investors are not pricing in climate change not just in fossil fuel stocks, and that there is pain awaiting them down the road. It is also possible that at least in this case, that the market’s assessment that doomsday is not imminent and that humanity will survive climate change, as it has other existential crises in the past. 

    

Mr. Market versus Mad Max Thunderdome

    The question posed about fossil fuel investors and whether they are pricing in the risks of gclimated change can be generalized to a whole host of other questions about investor behavior. Should buyers be paying hundreds of millions of dollars for a Manhattan office building, when all of New York may be underwater in a few decades? Lest I be accused of pointing fingers, what will happen to the value of my house that is currently two blocks from the beach, given the prediction of rising oceans. The painful truth is that if doomsday events (nuclear war, mega asteroid hitting the earth, the earth getting too hot for human existence) manifest, it is survival that becomes front and center, not how much money you have in your portfolio. Thus, ignoring Armageddon scenarios when valuing businesses and assets may be completely rational, and taking investors to task for not pricing assets correctly will do little to alter their trajectory! There is a lesson here for policy makers and advocates, which is that preaching that the planet is headed for the apocalypse, even if you believe it is true, will induce behavior that will make it more likely to happen, not less.

    On a different note, you probably know that I am deeply skeptical about sustainability, at least as preached from the Harvard Business School pulpit. It remains ill-defined, morphing into whatever its proponents want it to mean. The catastrophic risk discussion presents perhaps a version of sustainability that is defensible. To the extent that all businesses are exposed to catastrophic risks, some company-level and some having broader effects, there are actions that businesses can take to, if not protect to themselves, at least cushion the impact of these risks. A personal-service business, headed by an aging key person, will be well served designing a succession plan for someone to step in when the key person leaves (by his or her choice or an act of God). No global company was ready for COVID in 2020, but some were able to adapt much faster than others because they were built to be adaptable. Embedded in this discussion are also the limits to sustainability, since the notion of sustaining  a business at any cost is absurd. Building in adaptability and safeguards against catastrophic risk makes sense only if the costs of doing so are less than the potential benefits, a simple but powerful lesson that many sustainability advocates seem to ignore, when they make grandiose prescriptions for what businesses should and should not do to avoid the apocalypse.

YouTube

Yield Farming and Liquidity Mining: Assessing Risks and Rewards

By
1_healthytip
-
0
Yield Farming and Liquidity Mining: Assessing Risks and Rewards

Yield farming and liquidity mining have become key components of the decentralised finance (DeFi) ecosystem. These strategies allow crypto holders to earn passive income by lending or staking their assets. While the potential returns are attractive, the risks involved can be significant. At Fintech Review we explore yield farming and liquidity mining, analysing the rewards and inherent risks associated with these strategies.

What is Yield Farming?

Yield Farming and Liquidity Mining: Assessing Risks and Rewards

Yield farming refers to the practice of earning interest or rewards by providing liquidity to DeFi protocols. Users lend or stake their cryptocurrencies in liquidity pools, which are used by others to facilitate trading, lending, or borrowing. In return, the liquidity providers earn rewards, often in the form of tokens or interest payments.

The appeal of yield farming lies in the high returns it can generate. These returns are usually higher than traditional bank savings rates, sometimes reaching double or triple-digit percentages. However, the sustainability of these high yields often depends on several factors, including market demand and tokenomics.

The main goal of yield farming is to maximise the value of one’s crypto holdings by continually shifting assets across different platforms. This strategy requires active management, as the most profitable pools can change frequently. Yield farmers often seek out new opportunities to ensure they are earning the highest possible returns.

Understanding Liquidity Mining

Liquidity mining is a type of yield farming where users provide liquidity to a decentralised exchange (DEX) or DeFi protocol. In return, they receive tokens as a reward for their contribution. These tokens can represent a share of the platform’s revenue or governance rights within the protocol.

Liquidity mining aims to encourage users to deposit their assets into liquidity pools to ensure smooth trading. When a user provides liquidity, they are rewarded with native tokens, which can sometimes have significant value. This strategy aligns the interests of the platform and its users, creating a mutually beneficial system.

The rewards from liquidity mining can be lucrative, especially in the early stages of a protocol’s development. New projects often incentivise liquidity providers with high token rewards to attract more users. However, this high-yield phase is not always sustainable, and rewards can decrease as the protocol matures.

Potential Returns from Yield Farming and Liquidity Mining

Yield farming and liquidity mining can offer impressive returns compared to traditional investments. Annual Percentage Yields (APYs) in DeFi protocols can range from 5% to over 1,000%, depending on the platform and market conditions. These high rates attract investors looking to maximise their crypto assets.

The most significant returns are often found in new or less-established DeFi projects. These projects use high APYs as a marketing strategy to attract liquidity providers quickly. However, these returns tend to decrease over time as more users join the platform and liquidity grows.

Rewards are typically paid in the form of the platform’s native token, which introduces both opportunity and risk. If the token’s value rises, the returns can be substantial. Conversely, a decline in the token’s price can significantly reduce the value of the rewards earned.

Risks Inherent in Yield Farming and Liquidity Mining

While the potential returns from yield farming and liquidity mining are enticing, the risks are substantial. One of the biggest risks is smart contract vulnerabilities. DeFi platforms rely on smart contracts to automate transactions. If a smart contract has bugs or is exploited, it can lead to significant financial losses.

Market volatility is another critical risk. Cryptocurrency prices can fluctuate wildly in short periods. If the value of the token in which you’re earning rewards drops sharply, your returns can quickly diminish. Yield farming is particularly susceptible to these market swings, as it often involves less stable tokens.

Impermanent loss is a specific risk associated with providing liquidity to DeFi pools. It occurs when the value of the assets you have deposited changes compared to when you initially provided them. This can result in lower returns than if you had simply held the tokens in your wallet.

Smart Contract Vulnerabilities

Smart contracts are the backbone of DeFi protocols, executing transactions without the need for intermediaries. However, smart contracts are not foolproof. Bugs or flaws in the code can be exploited by hackers, leading to severe losses for users.

One of the most well-known examples of this is the 2020 hack of the Harvest Finance protocol, where attackers exploited a vulnerability and siphoned off $24 million. Such incidents highlight the importance of thoroughly auditing smart contracts before investing in any DeFi platform.

Investors should prioritise platforms that undergo regular security audits by reputable firms. Even then, no audit can guarantee complete safety, as new vulnerabilities can emerge over time. Understanding the risks of smart contract failures is essential before participating in yield farming or liquidity mining.

Market Volatility and Impermanent Loss

Market volatility is an inherent risk in the cryptocurrency space. Price swings can significantly affect the value of the tokens in which you’re earning yield. When token prices drop, the value of your earnings decreases, and you could end up with much less than you initially invested.

Impermanent loss is a risk specific to liquidity providers. It occurs when the price of the tokens in the liquidity pool diverges significantly from their price when you deposited them. This loss is termed ‘impermanent’ because it might recover if the token prices return to their original state, but there is no guarantee this will happen.

To mitigate impermanent loss, many investors choose to provide liquidity to pools with stablecoins or pairs that have lower volatility. While this strategy may reduce potential returns, it also decreases the risk of experiencing significant impermanent losses.

Sustainability of High Yield Rates

The high yields offered by many DeFi protocols are often not sustainable in the long term. Initial high returns are commonly used as a marketing tactic to attract liquidity providers and grow the user base. As more participants join, the rewards are spread thinner, leading to lower returns for everyone.

The sustainability of these yields depends largely on the project’s fundamentals and market conditions. If the demand for the platform’s services or tokens decreases, the APYs can drop quickly. Investors need to be cautious and evaluate whether a project’s high yields are based on sound economics or if they are artificially inflated.

It is essential to conduct thorough research into the platform’s tokenomics, demand for its services, and overall market trends. This due diligence helps in assessing whether the high yield rates are likely to be maintained or are a temporary phenomenon.

Conclusion: Balancing Risks and Rewards in DeFi

Yield farming and liquidity mining present exciting opportunities for generating passive income in the DeFi space. However, the high potential returns come with significant risks, including smart contract vulnerabilities, market volatility, and impermanent loss. Understanding these risks and how to manage them is crucial for anyone looking to participate in these strategies.

Investors should approach yield farming and liquidity mining with caution, conducting thorough research into the platforms and protocols they choose. Diversifying across multiple projects and regularly reassessing risk exposure can help in managing potential losses. As DeFi continues to evolve, staying informed about security practices and market trends will be key to navigating this dynamic landscape successfully.

Third Cornerstone: Change

By
1_healthytip
-
0
Third Cornerstone: Change

Third Cornerstone: Change

Embracing CHANGE at CH Insurance Your business is experiencing change. Your family and your community are changing. Just like for you, at CH Insurance, change isn’t just inevitable, it’s essential. Building on our first two cornerstones of Conversation and Collaboration, we introduce our third: CHANGE. As we continue to super-serve the communities we live and work in, we understand that embracing change is key to growth and innovation!

Employees, clients and partners can attest, the Team here is committed to ever-adapting and evolving. That includes new technologies, systems, policies, training/onboarding, wellness initiatives, and certainly the products and services we continue to expand. These aren’t just words for us – they’re the foundation for ensuring we’re in your corner… every day, every way.

We’re talking about the four cornerstones at CH Insurance, and Joe today is the third cornerstone, and that cornerstone is really the essence of today’s world: Change. How does CH Insurance embrace change… ensuring it always stays true to its commitment?

Well, I think in all businesses, change is constant. We’ve embrace it as an opportunity to innovate these last few years. We have the marketplace, we have the different changes with regulations, and we have to accept change. And by adapting to cutting edge technologies, it evolves. Our strategies makes us better. We’re always one step ahead by adapting to change. Here at CH, we better support our clients by demonstrating to them we’re in their corner, no matter what shifts or changes come their way in their personal or business lives. Being adaptable in today’s world is the only way we thrive here at CH Insurance,

The four cornerstones allow us to live our promise to you. We’re in your corner every day, every way.

Weekend reading: It’s the final Budget countdown

By
1_healthytip
-
0
Weekend reading: It’s the final Budget countdown

What caught my eye this week.

Just 26 sleeps to go until the new government’s first Budget on Wednesday 30 October. And I cannot recall there ever being so much pre-match jitters.

I could have filled the links below with forecasts, evasive action tips, and threats to emigrate. Hardly what anyone would call a honeymoon period, let alone the good vibes of Tony Blair’s 1997 win.

Even those who didn’t vote for Blair admitted the national mood music went up a level overnight. This time the change has been more like somebody coming in, turning the music off and the lights on, and telling everyone to sod off home.

And I say that as someone who has more sympathy than most with the view that the State’s finances are atypically feeble.

There have been worse economic periods, for sure. Seldom did they unfold though while so many in power gaslighted us with tall tales about how great things were – and millions believed them.

(In short: where did you spend your ‘Brexit dividend’, eh?)

Black rod

With that said, Labour made a rod for its own back by waiting so long to hold the Budget.

It’s like sitting outside the headmasters’ office all day before you’re seen. Almost as bad as the punishment!

For my part I haven’t much to add beyond what I wrote in my articles on the potential capital gains tax (CGT) hike and whether CGT fears could be presenting us with opportunities.

Monevator readers added tons of value in the comments to both articles, incidentally. Go read them if you haven’t.

I would also note that in less than four week’s time the picture will be clear.

ISAs

If you plan to fill your ISA, I say get on with it ASAP. It’s hard to see a downside, given the risk of a cut to the annual allowance.

In practice I suspect any new ISA rules would begin from April next year. Still, why risk it?

However I certainly wouldn’t take out ISA money fearing withdrawals could be taxed in the future. I wouldn’t risk shrinking my ISA tax shield on the very unlikely odds of retrospective taxation.

(Exception: if you have a flexible ISA and if you can definitely put the money back in post-Budget Day if required, different story…)

Pensions

Pensions are trickier. There are reports of people cashing in their tax-free lump sums now or maximising their contributions, in case the rules change.

Yet the former might not be tax optimal for you if nothing changes (depending on wildly varying personal circumstances) while if you’re stretching yourself to load up your pension, you could face other day-to-day spending difficulties. Remember, pension money is locked away for the long-term.

This is not to go into the myriad edge cases that dance around on the threshold of pension drawdown and the like. Take care whatever you do.

Calm before the storm-let

Finally beware of excessive panic due to someone else’s political agenda.

The right-wing papers are having a field day – and worries around pensions and the like are a pre-Budget staple anyway.

But usually not too much happens in practice.

Personally I do expect some things to change but not everything. And I’m not going to do anything hugely radical on the back of that.

Have a great weekend.

From Monevator

The Slow and Steady passive portfolio update: Q3 2024 – Monevator

From the archive-ator: Fixing your financial posture – Monevator

News

Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Huge shift in interest rate predictions as BoE chief says cuts could be more ‘aggressive’ – Sky

The US added 250,000 jobs in September, defying fears of a slowdown… – Guardian

…but UK economic growth was slower than thought in spring – BBC

New HMRC figures show £1.4bn sits unclaimed in Child Trust Funds – Which

Reeves urged to end panic over pension tax raid… – Telegraph via Yahoo Finance

…while chancellor vows to “Invest, invest, invest” [Search result] – FT

OpenAI raises $6.6bn in largest venture capital round ever – Axios

Record quarterly global ETF flows just topped half a trillion dollars – FT

England urged to bring in minimum price on alcohol – Guardian

The listed companies still adding Bitcoin to their balance sheet – BlockWorks

Weekend reading: It’s the final Budget countdown

The Chinese market has suddenly gone vertical – Axios

Products and services

Five big banks cut their mortgage rates – This Is Money

Lloyds Bank offering a £200 switching bonus – Which

Get £100-£2,000 cashback when you open a SIPP with Interactive Investor (T&Cs apply. Capital at risk) – Interactive Investor

How to get a mortgage if you’re self-employed – This Is Money

Supermarket Christmas delivery slots – Be Clever With Your Cash

Nearly one in three who check their credit report find mistakes – Which

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

eBay scraps fees for most sellers – This Is Money

How to get a free will this month – Which

Homes for sale close to British woodland, in pictures – Guardian

Comment and opinion

Single people feel penalised on prices – Guardian

Bill Bengen: 4% and beyond! [Podcast] – Humans vs Retirement

Perfection versus greatness – Root of All

The S&P 500 is having its best year of the 21st Century so far – Sherwood

As withdrawals surge, five questions to ask before accessing your pension – Which

Retiring smarter – Humble Dollar

Does the bucket approach to retirement income work in practice? – Morningstar

Once again: imports do not subtract from GDP – Noahpinion

Artificial advisor mini-special

Can A.I. turn you into Warren Buffett? – The Hungarian Contrarian

Your next financial advisor will be on an app – Bloomberg via W.M.

Naughty corner: Active antics

New titans of Wall Street: How trading firms stole a march on big banks [Search result] – FT

The beginning’s of a private equity ‘super-cycle’? [PDF] – Dawson

How Manchester United loses money – Sherwood

Even enemies of the US hold dollar reserves – Klement on Investing

A majority of US active bond managers beat the market – II

Kindle book bargains

Failed State: Why Nothing Works and How to Fix It by Sam Freedman – £0.99 on Kindle

Technofeudalism: What Killed Capitalism by Yanis Varoufakis – £0.99 on Kindle

Bad Blood: Elizabeth Holmes and the Theranos Scandal by John Carreyrou – £0.99 on Kindle

Casino: The Rise and Fall of the Mob in Las Vegas by Nicholas Pileggi – £0.99 on Kindle

Environmental factors

Solar boom in China turns energy prices negative – Semafor

UK to finish with coal power after 142 years – BBC

The poachers who could save Mexico’s mini-porpoises – Hakai

Robot overlord roundup

Ray Ozzie on the future of intelligent machines [Podcast] – I.L.T.B.

Chatbots might ease the loneliness epidemic – Freethink

A.I. put my dad out of a job and I’m worried – Financial Samurai

A day in the life of a food delivery robot – Sherwood

The Contentapocalypse is coming – Epsilon Theory

The US dockers strike is a microcosm of Us vs The Machines – Kyla Scanlon

How the steam engine can help us make sense of AI – Morningstar

Off our beat

Even Americans think their anachronistic democracy needs reform – Pew Research

Can liberals be trusted with liberalism? [Search result] – FT

The Gambler’s (non) Fallacy – The Leap

How bad is inflammation, really? – Vox

Evidence of ‘negative time’ found in physics experiment – Scientifica American

What Wall Street’s pioneering women put up with – WSJ [h/t Abnormal Returns]

Living in a material world [Podcast] – A Long Time in Finance

A brief history of Lebanon – Uncharted Territories

Growth means choosing a different kind of pain – Raptitude

And finally…

“If he had learned anything from his parents, he learned that business was a matter of relationships.”
– T.J. Stiles, The First Tycoon: The Epic Life of Cornelius Vanderbilt

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The Market’s Compass Emerging Markets Country ETF Study

By
1_healthytip
-
0
The Market’s Compass Emerging Markets Country ETF Study

The Market’s Compass Emerging Markets Country ETF Study

Welcome to The Market’s Compass Emerging Market’s Country ETF Study, Week #509. As always, it highlights the technical changes of the 20 EM Country ETFs that I track on a weekly basis and publish every third week. Paid subscribers will receive this week’s unabridged Emerging Market’s Country ETF Study sent to their registered e-mail. Free subscribers wi…

More than 100 killed in Nigeria fuel tanker explosion

By
1_healthytip
-
0
More than 100 killed in Nigeria fuel tanker explosion

Unlock the Editor’s Digest for free

More than 100 people have been killed in Nigeria after they rushed to scoop up petrol from a tanker that overturned and then caught fire, police said on Wednesday, as the country’s citizens struggle with a surge in fuel prices.

The incident was the latest fatal tanker explosion in Nigeria, where petrol and other fuels are transported in lorries over long distances and often on poorly maintained roads.

The accident took place late on Tuesday in the town of Majia in northern Jigawa state, nearly 600km from the capital Abuja. Lawal Shiisu Adam, the state’s police spokesperson, said the tanker had been ferrying fuel from Kano, the economic capital of northern Nigeria, to Yobe state via Jigawa when the driver “lost control” of the tanker.

Adam said police cordoned off the area after the crash but were soon overwhelmed by a crowd who rushed to collect spilled fuel. Videos posted on social media showed a fiery inferno. Scores of people were also injured in the blast.

More than 100 killed in Nigeria fuel tanker explosion

Fuel prices have increased nearly fivefold over the past year following the government’s decision to cut fuel subsidies and a slide in the naira currency, which has lost about 70 per cent of its value against the dollar since June.

Nigeria’s state-owned oil company last week increased petrol prices by more than 15 per cent, marking the second rise in less than a month and the formal end of its costly subsidy programme.

In the absence of an efficient rail network to move goods across the vast nation, fuel is usually transported in tankers over long distances by road. The country has an under-developed road network that is patchy in many areas and traffic rules are not strictly followed or enforced.

Accidents involving fuel transportation in Africa’s most populous nation are frequent, with Nigerians often rushing to accident scenes to salvage fuel in buckets and other containers from the tankers.

Last month, almost 60 people died after a collision between a fuel tanker and a truck containing passengers and cattle in north-central Niger state. Nigeria’s road safety agency reported that more than 5,000 people were killed in road crashes last year, but the World Health Organization estimated the number at closer to 40,000, arguing that many accidents are not reported to authorities.

Africa accounts for 19 per cent of road traffic deaths despite having 15 per cent of the global population and only 3 per cent of the world’s vehicle fleet, according to WHO data.

Sani Umar, a resident who escaped the fire, was quoted by the local Channels TV that the episode was “terrifying”.

Umar added: “People were running in all directions, screaming for help. The fire spread so quickly that many couldn’t escape.”

Trump, Harris Housing Policies Emerging From The Rhetoric

By
1_healthytip
-
0
Trump, Harris Housing Policies Emerging From The Rhetoric

Whether it’s refining your business model, mastering new technologies, or discovering strategies to capitalize on the next market surge, Inman Connect New York will prepare you to take bold steps forward. The Next Chapter is about to begin. Be part of it. Join us and thousands of real estate leaders Jan. 22-24, 2025.

With less than a month to go until the Nov. 5 election, voters are starting to get a clearer picture of where the candidates in the 2024 presidential race stand on housing issues — although sifting through the rhetoric for the details of actual policies can be a challenge.

Housing policy got short shrift in the Sept. 10 debate between candidates Donald Trump and Kamala Harris, with Harris touching only briefly on a couple of her housing proposals, and Trump providing no insight on his.

Just one example of how the housing discussion often went off the rails: When Harris invited Trump to “talk about our plans” — including her proposal to provide $25,000 in down payment assistance to first-time homebuyers — Trump responded with three assertions that fact-checkers deemed false.

“She is destroying our country,” Trump said. “She has a plan to defund the police. She has a plan to confiscate everybody’s gun. She has a plan to not allow fracking in Pennsylvania or anywhere else. That’s what her plan is until just recently.”

Harris was also taken to task by fact checkers for some of her assertions — including a claim that “Donald Trump left us the worst unemployment since the Great Depression.”

As PolitiFact noted, unemployment soared to 14.8 percent at the outset of the pandemic. But by the time Trump left office, unemployment had fallen to 6.4 percent.

With economists at Fannie Mae predicting 2024 might be the worst year for home sales since 1995, anyone who tuned in to last month’s debate hoping to hear how the next president plans to turn things around might have been disappointed.

National Association of Home Builders executives Jim Tobin and Paul Lopez devoted the trade group’s weekly podcast to the subject, “Why Was Housing Not at the Forefront of the Presidential Debate?”

Tobin, for one, blamed the lack of substantive discussion on the moderators.

“I’m completely disappointed in the lack of a real policy discussion,” Tobin said. “Certainly, going into this, we were fully expecting housing to at least be one of the main questions. Turns out that the moderators didn’t want to go down that road for some reason. So that was really, really frustrating.”

Vice presidential candidates tackle housing

But the Oct. 1 faceoff between the candidates’ vice presidential running mates — Democrat Tim Walz and Republican J.D. Vance — was widely praised as more substantive. Thanks in part to prompts from CBS News moderator Margaret Brennan, both candidates managed to at least dip their toes into housing policy.

Walz talked up the Harris campaign’s promise to provide tax incentives and government funding with the goal of helping build 3 million homes.

Vance stayed focused on Trump’s claims that inflation and illegal immigration are driving up home prices, and that federal lands could provide cheap land for new housing.

In broad terms, the Harris campaign’s housing platform sees a lack of housing supply as the main problem, and government as the solution, promising “the most significant effort to expand housing supply since World War II.”

Harris and Walz have also cast “large corporate landlords” and “Wall Street investors” as villains, claiming algorithmic price fixing is driving up rents, and that institutional investors are making single-family homes more scarce by buying them up in bulk.

Trump’s platform and campaign rhetoric portray inflation, burdensome regulations, and demand from illegal immigrants as drivers of America’s housing woes — and points the finger of blame for all of those issues at the Biden administration.

Apart from a crackdown on illegal immigrants — if reelected, he has promised to “carry out the largest deportation operation in American history” — Trump’s solutions for housing largely consist of getting the government out of the way.

Although not mentioned in his platform or during either debate, during his first term in office Trump initiated the process of privatizing Fannie Mae and Freddie Mac. The mortgage giants have been seen by Democrats as vital in achieving affordable and equitable housing goals — particularly since they were placed in government conservatorship in 2008.

While former Trump administration officials are once again reportedly formulating plans to remove Fannie and Freddie from government conservatorship, that was seen as too wonky of a subject to delve into during the Oct. 1 vice presidential debate.

Nor was there a discussion of federal policy and legislative issues that are top concerns for housing industry groups like the National Association of Realtors (NAR), the Mortgage Bankers Association (MBA) and the National Association of Home Builders (NAHB).

For housing industry groups, those issues include increasing the capital gains tax exclusion for homeowners who sell their homes for a profit, reducing capital requirements for nonbank mortgage lenders, and converting the mortgage interest deduction to a tax credit.

Housing supply and demand

With candidates at the vice presidential debate asked to address a range of issues in addition to housing, viewers mostly got the CliffsNotes versions of policies outlined by the Trump and Harris campaigns.

Asked by CBS News moderator Brennan where homes might be built on federal land, Vance couldn’t say for sure.

“Well, what Donald Trump has said is we have a lot of federal lands that aren’t being used for anything,” Vance said. “They’re not being used for national parks. They’re not being used. And they could be places where we build a lot of housing.”

“We have a lot of Americans that need homes. We should be kicking out illegal immigrants who are competing for those homes, and we should be building more homes for the American citizens who deserve to be here,” Vance concluded.

Walz made light of the idea, saying federal lands are “there for a reason” and should be protected. “They belong to all of us.”

“When you view housing, and you view [federal lands] as commodities — like, ‘There’s a chance to make money here; let’s take this federal land and let’s sell it to people for that.’ I think there’s better ways to do this,” such as refurbishing existing housing stocks.

Brennan asked Walz whether Harris’ plan to provide $25,000 in down payment assistance to first-time homebuyers might do more harm than good.

“Won’t handing out that kind of money just drive prices higher?” Brennan asked — an assertion also made by the conservative-leaning American Enterprise Institute in an analysis released shortly after the debate.

Walz answered the question in a roundabout way, arguing that the solution to housing affordability is to build more housing by cutting red tape at the local level and providing tax credits and funding.

Pace of home construction 1991-2024

The pace of construction of privately-owned housing units dipped below 1.2 million a year during the Great Recession of 2007-09, and took nearly a decade to rebound. Source: U.S. Census Bureau and U.S. Department of Housing and Urban Development via FRED, Federal Reserve Bank of St. Louis

The Minnesota governor pointed to a program in Minneapolis that provides low-income homebuyers with up to $20,000 in down payment assistance in the form of a zero-interest, 30-year deferred mortgage.

“We get it back from people, because here’s what we know,” Walz said. “People with stable housing end up with stable jobs. People with stable housing have their kids able to get to school. All of those things, in the long run, end up saving our money. And that’s the thing that I think we should be able to find some common ground in.”

Last month, the Urban Institute published a proposal for a comprehensive national housing strategy that noted growth in households of color with less access to generational wealth point to “an increased need for starter homes and down payment assistance.”

Homebuyers in any state can find programs that provide down-payment assistance using services like Down Payment Resource, which makes information available about programs and eligibility requirements through sites such as Zillow and Redfin, as well as through integrations with multiple listing services (MLSs), lenders and agents.

In a 2021 analysis, Urban Institute researchers Michael Stegman and Mike Loftin noted that down payment assistance (DPA) has become “an integral part of the post–Great Recession business model” for state housing finance agencies (HFAs).

In 2019, “nearly three-quarters of the single-family mortgages HFAs funded carried DPA, with the typical agency financing nearly 3,000 loans each carrying about $7,200 in DPA,” their analysis noted.

However, the Urban Institute researchers warned, “It will not be easy to find sufficient revenues to expand DPA at a level that would meaningfully reduce the racial homeownership gap.”

The Harris campaign says it will raise revenues for all of its programs, not just housing, by increasing the corporate tax rate to 28 percent and undoing “huge tax breaks for the very wealthy” granted in the 2017 overhaul of the tax code signed into law by Trump.

The nonpartisan, research-based Penn Wharton Budget Model (PWBM) projects that across the board, the Harris campaign’s tax and spending proposals would grow the national deficit by $1.2 trillion over the next 10 years.

But PWBM projects that policies outlined by the Trump campaign would increase the deficit by $5.8 trillion over the same period, due to a protracted drop in tax revenue.

Immigration claims

Walz took a jab at claims by Trump and Vance — who have faced criticism (and a lawsuit) for spreading unsubstantiated rumors that Haitian migrants in Springfield, Ohio, were eating pets — that immigrants are to blame for rising home prices.

“We can’t blame immigrants for the only reason [home prices are rising] … that’s not the case,” Walz said. “That’s happening in many cities. The fact of the matter is we don’t have enough naturally affordable housing, but we can make sure that the government’s there to help kickstart it, create that base.”

Many of the Haitians who have moved to Ohio and other parts of the country are in the U.S. legally, and real estate industry groups including NAR and the National Association of Hispanic Real Estate Professionals (NAHREP) view legal immigration as a healthy driver of growth.

Vance has disputed that Haitians who have been granted Temporary Protected Status to live in the U.S. are here legally. But he said he’s not opposed to legal immigration — and blamed Harris for a surge in illegal immigration.

“We don’t want to blame immigrants for higher housing prices,” Vance said. “But we do want to blame Kamala Harris for letting in millions of illegal aliens into this county, which does drive up costs, Tim. Twenty-five million illegal aliens competing with Americans for scarce homes is one of the most significant drivers of home prices in the country.”

According to the nonpartisan Pew Research Center, there were an estimated 11 million unauthorized immigrants living in the U.S. in 2022, down from 12.2 million in 2007.

Although Pew researchers also recognize that attempts to enter the country illegally surged last year — the 249,741 Border Patrol apprehensions in December were the most ever recorded in a single month — such “encounters” have dropped by 77 percent, to 58,038 in August.

Walz pushed back on the claim that Harris is to blame for illegal immigration, noting her support for what he characterized as “the fairest and the toughest bill on immigration that this nation’s seen” — a reference to the bipartisan border agreement negotiated by Republican Sen. James Lankford of Oklahoma that was scuttled after Trump came out against it.

“I know him,” Walz said of Lankford. “He’s super conservative, but he’s a man of principle, wants to get it done.”

Research by the nonpartisan Congressional Budget Office (CBO) and Harvard University’s Joint Center for Housing Studies (JCHS) does support the premise that immigration — both legal and illegal — contributes to demand for housing.

Immigration boosts US population growth

Trump, Harris Housing Policies Emerging From The Rhetoric

Net international migration jumped from less than 500,000 in 2019 to 2.6 million in 2022 and 3.3 million in 2023. Source: JCHS tabulations of Congressional Budget Office data, “The State of the Nation’s Housing 2024.”

But according to Pew’s research, 77 percent of the 48 million U.S. residents who were born in another country are here legally. As of 2022, 49 percent were naturalized U.S. citizens, 24 percent were lawful permanent residents and 4 percent were legal temporary residents. “Unauthorized immigrants” constituted an estimated 23 percent of the U.S. foreign-born population.

Vance promised after the debate he would share “a Federal Reserve study” that he said “really drills down on the connection between increased levels of migration, especially illegal immigration, and higher housing prices.”

But what Vance ended up posting on the social media platform X were brief remarks by Federal Reserve Governor Michelle Bowman about the potential for immigration — she did not specify whether legal, illegal or both — could impact rents.

“Given the current low inventory of affordable housing, the inflow of new immigrants to some geographic areas could result in upward pressure on rents, as additional housing supply may take time to materialize,” Bowman said in remarks she delivered in May at the annual convention of the Massachusetts Bankers Association.

Inflation as a driver of housing costs

Inflation is another hot-button issue with voters. The Federal Reserve’s efforts to head off a recession during the pandemic by buying up mortgage bonds and government debt and slashing short-term interest rates to zero helped bring mortgage rates to historic lows — fueling demand for housing and sending prices climbing.

Affordability challenges got even worse when the Fed started raising rates to combat inflation to the highest level in more than 20 years, sending mortgage rates climbing back up over 7 percent. With inflation descending toward the Fed’s 2 percent goal, mortgage rates have retreated closer to 6 percent.

But Vance said that following Trump’s call to “Drill, baby drill” for domestic oil could help bring down housing prices — claiming that assuming the cost of energy is “one of the biggest drivers of housing costs, aside from illegal immigration.”

“Think about it: If a truck driver is paying 40 percent more for diesel, then the lumber he’s delivering to the job site to build the house is also going to become a lot more expensive,” Vance asserted. “If we open up American energy, you will get immediate pricing relief for American citizens not just in housing, but in a whole host of other economic goods, too.”

According to the National Association of Homebuilders (NAHB), a four-fold spike in the cost of lumber in 2021 added more than $30,000 to the price of an average single-family home, and the cost of building materials remains 38 percent higher since the pandemic.

But in releasing a 10-point plan in May to ease the housing affordability crisis, NAHB blamed faulty supply chains and called on federal policymakers to end tariffs on Canadian lumber shipments and building materials from China.

Trump has proposed a 60 percent tariff on Chinese imports and a universal tariff of 20 percent on goods coming from everywhere else. The Tax Foundation, a nonprofit think tank that advocates tax policies that promote economic growth, has criticized Trump’s proposed tariffs as a “narrowly targeted consumption tax” that would bring tariff rates to levels not seen since the Great Depression.

A deeper dive into housing policy

While the presidential and vice presidential debates didn’t get deep into the weeds on housing policy, the Harris campaign’s 82-page platform devotes 10 pages to housing.

To expand housing supply, the Harris platform proposes to:

  • Expand the existing Low-Income Housing Tax Credit (LIHTC) to provide developers the incentive to build 1.2 million rental homes
  • Create a new “Neighborhood Homes Tax Credit” to support the construction or rehabilitation of more than 400,000 owner-occupied homes in lower-income communities.
  • Create a tax incentive that rewards builders who construct affordable homes for first-time homebuyers
  • Provide $40 billion to state and local governments and private developers and homebuilders through a “results-driven” innovation fund

In addition to expanding housing supply, the Harris campaign is backing legislation targeting corporate landlords and single-family home investors.

“Large corporate landlords have increasingly used private equity–backed price-setting tools to dramatically raise rents in communities across the country,” the Harris campaign alleges in urging passage of legislation that would make “algorithmic price fixing” illegal under antitrust law.

The Harris platform also targets large institutional investors “who have bought thousands of single-family homes during recent downturns,” calling on Congress to remove tax breaks for corporate investors that buy properties in bulk by passing the Stop Predatory Investing Act.

Trump’s platform — and Project 2025

The Republican Party’s 16-page platform summarizes the campaign’s housing goals in a single sentence:

“To help new home buyers, Republicans will reduce mortgage rates by slashing inflation, open limited portions of federal lands to allow for new home construction, promote homeownership through tax incentives and support for first-time buyers, and cut unnecessary regulations that raise housing costs.”

For more detailed insights into what some of Trump’s supporters would like to see him do if reelected, the Heritage Foundation and an advisory board of more than 100 conservative organizations have put together Project 2025, a 922-page policy document they hope the next Republican president will embrace.

Although Trump has distanced himself from Project 2025 — in his debate with Harris, he claimed not to have read it, and has called some of the ideas it lays out “abysmal” — its authors include officials from his first administration, including former Office of Management and Budget Director Russ Vought and Chris Miller, who Trump appointed as acting defense secretary six days after the Nov. 9, 2020, election.

The chapter outlining Project 2025’s approach to the Department of Housing and Urban Development (HUD) was authored by Ben Carson, who served as Trump’s Secretary of Housing from 2017 to 2021. It calls for a “reset” of HUD, “to include a broad reversal of the Biden Administration’s persistent implementation of corrosive progressive ideologies across the department’s programs.”

Carson advocates putting an end to HUD’s efforts under the Biden administration to address climate change issues and combat appraisal bias, for instance, and initiating a HUD task force “consisting of politically appointed personnel to identify and reverse all actions taken by the Biden Administration to advance progressive ideology.”

[Climate change is seen by Fannie Mae and Freddie Mac’s federal regulator, the Federal Housing Finance Agency (FHFA), as “an emerging and increasing threat to U.S. financial stability.” Climate change “poses a serious threat to the U.S. housing finance system,” FHFA Director Sandra Thompson said in 2022, and Fannie and Freddie “have an important leadership role to play in addressing this issue.”]

More broadly, Carson proposes raising mortgage insurance premiums on FHA loans, and eliminating the Biden administration’s Housing Supply Fund, aimed at providing grants to state and local governments to build more affordable housing.

Ben Carson

“Housing supply does remain a problem in the U.S., but constructing more units at the low end of the market will not solve the problem,” Carson wrote in his Project 2025 chapter. “Investors and developers can deliver at more efficient cost new units that will allow for greater upward mobility of rental and ownership housing stock and better target increased construction of mid-tier rental units.”

Similarly, Project 2025’s plans for the Treasury Department are grounded in the assumption that under the Biden administration, there’s been a “drift into a ‘woke’ agenda.”

“Under the leadership of Treasury Secretary Janet Yellen, the department has made ‘equity’ and ‘climate change’ among its top five priorities,” Project 2025 authors William “Bill” Walton (a private equity investor), Stephen Moore (an economist) and David R. Burton (a lawyer) complain.

Walton, the founder and chairman of private equity firm Rappahannock Ventures LLC, served on Trump’s 2016 transition team as co-head of economic issues for federal agencies.

As chairman, president and chief executive officer of Allied Capital Corp., Walton famously tangled with short seller David Einhorn and in 2007 settled a four-year investigation by the Securities and Exchange Commission into Allied’s valuation practices without admitting to or denying agency allegations, The New York Times reported.

“Regulators possess a great deal of unilateral and, too often, arbitrary power,” Walton told Bloomberg when he was named to Trump’s transition team. “So in addition to Mr. Trump’s call to reduce the number of regulations, I believe we need to rethink how the regulatory process should work.”

Project 2025 advocates that the Treasury Department wind down Fannie Mae and Freddie Mac “in an orderly manner” and move toward “privatization of these massive housing finance agencies. This would restore a sustainable housing finance market with a robust private mortgage market that does not rely on explicit or implicit taxpayer guarantees.”

Harris claimed at a campaign in August that privatizing Fannie Mae and Freddie Mac could add $1,200 a year in additional interest costs to the typical American mortgage.

Experts consulted by PolitiFact said that “although privatization would likely affect mortgages, it’s difficult to parse out with certainty how profound the changes would be.”

The Harris campaign told PolitiFact that the $1,200-a-year estimate was based on a 2015 analysis by Moody’s Analytics and The Urban Institute.

Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter

Pulling the Future Forward – by CJ Gustafson

By
1_healthytip
-
0
Pulling the Future Forward – by CJ Gustafson

Pulling the Future Forward – by CJ Gustafson
Mostly Metrics is supported by Equals, the fastest and most flexible way to report on your SaaS business.

As a SaaS CFO, I know how tough it is to get ARR reporting right.

Nonstandard definitions. Edge cases. 300-line SQL queries. The list goes on.

The Equals team has decades of experience standing up ARR reporting at Intercom, Stripe, Box, Atlassian, and dozens of other companies.

They’ve packed their expertise into The Ultimate Guide to ARR. It covers everything you need to know to define, build, and report on ARR from scratch.

This is a must-read. And it’s completely free.

Download the Ultimate Guide to ARR

Palantir is trading at 27x forward revenues, nearly 5x the median publicly traded tech company and double the top ten median.

The stock is up 141% year to date, thanks in part to the AI wave, and has almost quintupled since 2022. And last week it officially made it into the S&P 500.

Palantir’s financials are really solid. Their Rule of 40 is 57%, and their revenue is actually expected to accelerate next year.

But the valuation they’re garnering goes above and beyond the numbers – it’s about people (namely retail investors) buying into their narrative.

And this allows Palantir to pull the future forward.

Pull Rope GIFs | Tenor
CEO Alex Karp right now

Palantir’s CEO Alex Karp has a cult-like following. And the way he tells the company’s story, shrouded with a heavy dose of mystery, enables him to walk the line between cheap capital and a combustible valuation.

Alex Karp Has Money and Power. So What Does He Want?

Palantir is getting credit for revenues far out into the future. Instead of looking 12 months out, investors are theoretically pulling forward their revenues from a distant far off land, perhaps more than three years out.

Make no mistake – this wouldn’t be possible if Palantir was not already crushing it. They’re putting numbers on the board, and have long term contracts with government agencies who aren’t going anywhere. And then, on top of that, they layer in the power of narrative. The best CEOs leverage this as a super power to pull the future forward.

Prof. Scott Galloway recently commented on this:

“As a CEO you’re trying to tell a story such that you can pull the future forward, right…

That ability to raise capital at a cheaper price than your competitors gives you the ability to pull the future forward and maybe grow into that stock price.

So what this guy’s done is absolutely, I think he’s being a great fiduciary. His employees are getting rich and he’s now gonna have access to cheaper capital to build out infrastructure technology, hire better, brighter, faster, smarter people and make investments his competitors can’t keep up with and sort of pull away with it. And that’s kind of the job of a CEO.”

-The Prof G Show on Spotify

In 2020 and 2021, every tech CEO got to pull the future forward (even the not so credible story tellers).

Most are still growing into that future they mortgaged.

The question becomes how far is too far? When have you lost the plot? When have you jumped the shark?

Fonz

Palantir seems to be teetering on the edge. They trade a full eight turns higher than the next highest EV / NTM Revenue company, Samsara, at 18.9x.

Keep in mind – traditionally anything over 10x forward revenue is considered a “premium” valuation.

This newsletter is not about picking stocks. I have a team of monkeys throwing darts in the back room who shoulder that burden.

This newsletter is an exploration of metrics, business models and strategic narratives. Palantir operates at the nexus of all three. And the ingredients they’re working with are fascinating.

For operators out there working on their own stories, watch this one to see how much is too much before the recipe spoils.

TL;DR: Multiples are DOWN week-over-week.

Top 10 Medians:

Upgrade for full data set

Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.

NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.

However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.

Reasons may include:

From a macro perspective, multiples trend higher in low interest environments, and vice versa.

Multiples shown are calculated by taking the Enterprise Value / NTM revenue.

Enterprise Value is calculated as: Market Capitalization + Total Debt – Cash

Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week – to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.

Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.

Companies that can do more with less tend to earn higher valuations.

Three of the most common and consistently publicly available metrics to measure efficiency include:

CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.

Here’s how I do it:

  • Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smooths for seasonality and recognizes the lead time required to generate pipeline.

  • Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).

  • Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer

  • Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise – there’s nowhere to hide.

Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)

Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %

A few other notes on efficiency metrics:

  • Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.

  • Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.

Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.

The most common buckets companies put their operating costs into are:

  • Cost of Goods Sold: Customer Support employees, infrastructure to host your business online, API tolls, and banking fees if you are a FinTech.

  • Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools

  • Research & Development: Product and Engineering employees, development expenses, tools

  • General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”

All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.

Want to build your own comp set?

Illustrative

Upgrade to paid to download the company level workbook.

Factor Premiums: An Eternal Feature of Financial Markets

By
1_healthytip
-
0
Factor Premiums: An Eternal Feature of Financial Markets

A broad segment of the industry invests based on established factors such as value, momentum, and low-risk. In this post, we share the key results from our study of out-of-sample factors over a sizable and economically important sample period. Using the longest sample period to date — 1866 to the 2020s — we dispel concerns about the data mining and performance decay of equity factors. We find that equity factors are robust out-of-sample and have been an ever-present phenomenon in financial markets for more than 150 years.

Data Mining Concerns are Real

Why did we conduct this study? First, more research on factor premiums is needed, especially using out-of-sample data. Most practitioner studies on equity factors use samples that date back to the 1980s or 1990s, covering about 40 to 50 years. From a statistical perspective, this is not a substantial amount of data. In addition, these years have been unique, marked by few recessions, the longest expansion and bull market in history, and, until 2021, minimal inflationary episodes. Academic studies on equity factors often use longer samples, typically starting in 1963 using the US Center for Research in Security Prices (CRSP) database from the University of Chicago. But imagine if we could double that sample length using a comprehensive dataset of stock prices. Stock markets have been essential to economic growth and innovation financing long before the 20th century.

Second, academics have discovered hundreds of factors—often referred to as the “factor zoo.” Recent academic research suggests many of these factors may result from data dredging, or statistical flukes caused by extensive testing by both academics and industry researchers. A single test typically has a 95% confidence level, implying that about one in every 20 tests will “discover” a false factor. This issue compounds when multiple tests are conducted. It is critical given that millions of tests have been performed in financial markets. This is a serious concern for investors, as factor investing has become mainstream globally. Imagine if the factors driving hundreds of billions of dollars in investments were the result of statistical noise, and therefore unlikely to deliver returns in the future.

Figure 1 illustrates one of the motives behind our study. It shows the test statistics for portfolios of size, value, momentum, and low-risk factors over the in-sample and out-of-sample periods within the CRSP era (post-1926). Consistent with earlier studies, most factors exhibit significance during the in-sample period. However, results look materially different over subsequent out-of-sample periods with several factors losing their significance at traditional confidence levels. This decline in the performance of equity factors can be attributed to multiple reasons, including limited data samples, as discussed in the literature. Regardless, it underscores the need for independent out-of-sample tests on equity factors in a sufficiently sizable sample. In our research paper, we tackle this challenge by testing equity factors out-of-sample in a sample not touched before by extending the CRSP dataset with 61 years of data.

Figure 1.

Factor Premiums: An Eternal Feature of Financial Markets

Source: Global Financial Data, Kenneth French website, Erasmus University Rotterdam

Stock Markets in the 19th Century

Before diving into the key results, let’s outline the US stock market in the 19th century. In our paper, we collect information from all major stocks listed on the US exchanges between 1866 and 1926 (the start date of the CRSP dataset). This period was characterized by strong economic growth and rapid industrial development, which laid the foundation for the United States to become the world’s leading economic power. Stock markets played a pivotal role in economic growth and innovation financing, with market capitalizations growing more than 50-fold in 60 years — in line with US nominal GDP growth over the same period.

Subscribe Button

In many ways, 19th- and 20th-century markets were similar. Equities could be easily bought or sold across exchanges via dealer firms, traded via derivatives and options, purchased on margin, and shorted, with well-known short sellers. Major 19th century technological innovations such as the telegraph (1844), the transatlantic cable (1866), the introduction of the ticker tape (1867), the availability of local telephone lines (1878), and direct phone links via cables facilitated a liquid and active secondary market for stocks, substantial brokerage and market-making activities, quick arbitrage between prices, fast price responses to information, and substantial trading activities. Price quotations were known instantly from coast to coast and even across the Atlantic. Much like today, investors had access to a wide range of reputable information sources, while a sizable industry of financial analysts provided market assessments and investment advice.

Further, trading costs in the 19th century were not very different from 20th century costs. Market information and academic studies reveal transaction costs on higher-volume stocks and well-arbitraged NYSE stocks to be around 0.50% but have traded at the minimum tick of 1/8th during both centuries. Further, in the decade prior to World War I, the median quoted spread at the NYSE was 86 basis points and a quarter of trades took place with spreads less than 36 basis points. Moreover, share turnover on NYSE stocks was higher between 1900 and 1926 than in 2000. Overall, US stock markets have been a lively and economically important source of trading since the 19th century, providing an important and reliable out-of-sample testing ground for factor premiums.

The Pre-CRSP Equity Dataset  

Constructing this dataset was a major effort. Our sample includes stock returns and characteristics for all major stocks since 1866. Why 1866? It’s the start date of the Commercial and Financial Chronicle, a key source also used by the CRSP database. You may wonder why CRSP starts in 1926. While the exact reason remains speculative, it seems arbitrary, ensuring the inclusion of some data from before the 1929 stock market crash.

In our paper, we hand-collected all market capitalizations — highly relevant to study factor premiums and stock prices. In addition, we hand-validated samples of price and dividend data obtained from Global Financial Data — a data provider specialized in historical price data. Unlike CRSP, we focused our data collection on all major stocks traded across the key exchanges. This includes not only the NYSE, but also the NY Curb (which later became the American Stock Exchange, AMEX), and several regional exchanges. You can imagine the amount of work this has taken and the tremendous amount of research assistants’ time we utilized at the Erasmus University Rotterdam. But the results have been worth the effort. The result is a high-quality dataset of US stock prices from 1866 to 1926, covering approximately 1,500 listed stocks.

Bloomberg Event

Out-of-Sample Performance of Factors Are Eternal

So, how do the out-of-sample results from the 1866-1926 pre-CRSP period look? Before we discuss, please recall that this period has not been well-studied before and hence it allows us to conduct a true out-of-sample test to equity factor premiums.

Figure 2 summarizes the key results from our research. It shows the alpha of the established equity factor premiums over the longest CRSP sample possible (in grey) and the pre-CRSP out-of-sample period (in black). Interestingly, the out-of-sample alphas for value, momentum, and low-risk factors are very similar to those observed in the CRSP sample. In fact, differences between the two samples are statistically insignificant. The 150+ years of evidence on factor premiums (the black bars) confirm this conclusion, showing attractive premiums that are both economically and statistically highly significant. Overall, the independent sample confirms the validity of key equity factor premiums such as value, momentum, and low-risk.

Figure 2.

Factor Premiums: An Eternal Feature of Financial Markets

Source: Global Financial Data, Kenneth French website, Erasmus University Rotterdam

These findings allow for several strong conclusions. First and most importantly, factor premiums are an eternal feature in financial markets. They are not artifacts of researchers’ efforts or specific economic conditions but have existed since the inception of financial markets, persisting for more than 150 years. Second, factor premiums do not decay out-of-sample but tend to remain stable. Third, given their enduring nature, factor premiums offer significant investment opportunities. These results should give investors greater confidence in the robustness of factor premiums, reinforcing their utility in crafting effective investment strategies.

Financial Analysts Journal Current Issue Tile

Animal Spirits: The 1990s Really Were Better

By
1_healthytip
-
0
Animal Spirits: The 1990s Really Were Better

Today’s Animal Spirits is brought to you by Nasdaq and Fabric:

See here for more information on the largest U.S. equities exchange by market share

Go to meetfabric.com/spirits for more information on life insurance from Fabric by Gerber Life

On today’s show, we discuss:

Listen here

 

Recommendations:

Charts:

Animal Spirits: The 1990s Really Were Better

Tweets:

Follow us on Facebook, Instagram, and YouTube.

Check out our t-shirts, coffee mugs, and other swag here.

Subscribe here:

Nothing in this blog constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security.  Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Ritholtz Wealth Management or its employees. 

The Compound, Inc., an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investing in speculative securities involves the risk of loss. Nothing on this website should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

1...121314...43Page 13 of 43

EDITOR PICKS

POPULAR POSTS

POPULAR CATEGORY

©