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2023-12-02 09:17 by Karl Denninger
in Market Musings , 547 references
[Comments enabled]  

The last few days have been interesting.

Powell allegedly was expected to make people believe "rate cuts" are coming.  Indeed, some of the callers on the various media channels are now claiming six rate cuts will come next year.

I'll take the under on that: No they won't because the only way that can happen is if Congress balances the budget, which it has shown zero inclination to do.

I don't expect there will be any "rate cuts" next year; if anything short rates are going higher, not lower.  Why?  Because until Congress cuts it out the only other alternative is that the roughly 8% inflation created by Congressional deficit spending, none of which has any source of absorption anymore outside the country (the slacking of trade growth and US/EU sanctions imposition due to the Ukraine mess destroyed that and it isn't coming back) is going to show up in inflation and that means real rates are still negative.

A 5% interest rate in an 8% inflation economy is a real rate of -3%.  Period.  That is, not a thing has changed in terms of the actual tenor of borrowing rates despite the fact that Americans in general are getting screwed and that cannot change until real borrowing rates are positive.  Therefore either Congress has to cut it out or rates have to go higher -- period.

I remind you that simply on the math the only place Congress can cut it out is to fix CMS -- Medicare and Medicaid.  No, that doesn't mean "cutting" either per-se; it means getting rid of the grift, fraud and similar that lace our medical system top-to-bottom.  I've written literal tomes on this over the last 15 years; the "seminal piece" if you just want it in one dose (ok, two, because there's a follow-up implementation article that is linked off the first) you can find it here.  Beware, its not light reading.

Resolving this would be an economic earthquake, but at this point that's not avoidable.  The lobbying interests and political ads it would generate would be wildly misleading or even outright false -- and imply if not state that any politician doing it was intending to literally throw Granny off a cliff.  If you're older than 30 or so you've seen those ads as an adult; they featured prominently until Obama came in and basically underwrote the entire medical and pharma industry at the federal level, but did nothing about the grifting, extortionate pricing and schemes, despite there being 100+ year old felony federal law on the books (not fines, prison terms) available and applicable, as the Supreme Court has previously ruled -- twice (Royal Drug and Maricopa County.)

So here we are with a locked housing market that will almost-certainly disruptively unlock as forced sales eventually do happen, and when they do they wind up nailing appraisals of everything else in the immediate area which then makes HELOCs and refis impossible, even under duress (since you then are "upside down") and that, in turn sets off the cascade.

All the Happy Feet dancing in the world won't do a thing to prevent this, and there isn't realistically a way out of the box other than for prices to come down, dramatically so, in the places where they've gone up the most: Housing, medical care and personal transportation, which in turn will flow through to insurance of various sorts.

That of course means the "E" part of P/E will also go down, which you would expect will lead to "P" (stock prices) coming down too, and since stock prices are a leveraged multiple of earnings that's not going to be a "small" decline either.

I know, I know, its an election year and they will keep the plates in the air -- so it is claimed.

Just ask yourself this: Was 2000 -- or 2008 -- an election year?

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2023-11-29 07:00 by Karl Denninger
in Market Musings , 286 references
[Comments enabled]  

Note that Disney ($DIS) has posted-up multiple box-office flops in a row, with the latest, Wish, being pretty much indistinguishable from having a zero opening weekend.  For Thanksgiving weekend, which is usually a good time to release a movie (especially when nothing else high-ticket is running opposite it) that's a disaster.

Some of this is being blamed on "woke" elements, but the contribution of that is unclear.

What is clear, however, is that American business political leanings, expressed in their merchandising and public views, are wildly out of whack with the American mainstream.


Part of the problem, I believe, can be traced to how we do stock ownership and voting in America.  That is, if you own Disney stock outright (you bought DIS in your portfolio) you vote the shares.  But if you own them in an ETF, say by buying the SPY or one of the many others in the marketplace you don't vote the shares -- the fund manager does.

This is wrong; it is akin to saying that if you rent an apartment the apartment owner gets to cast your vote in an election.  We would never tolerate this.  We used to tolerate the gating factor of voting being the ownership of property early in America's history, and perhaps we should return to that or some other measure that you actually produce net-net from a tax perspective, but transferring someone's vote to another person on an involuntary basis harkens back to the days of three-fifths apportionment even though slaves themselves had no vote at all and thus such was less of an outrage than what we do today in the corporate world.

This is resolvable with a change in Federal Law:

For any corporation or other entity holding a tax ID number in the United States or traded on any United States public exchange said status is conditioned on voting, nominating and proposal rights only being vested in the actual human beneficial owner of the shares.

This would mean you (and not Blackrock, Vanguard or some other fund manager) could vote the Disney shares you held in an ETF.  This would have to be figured out as to the "how" but in today's world of computers this is not difficult at all.  It would mean that fund managers could not propose slates of directors, they could not vote in or out shareholder proposals and similar.  Only the actual humans that hold the shares, through whatever chain of custody as the actual beneficial owners, could do that.

Now think about how and why this is important.

As a shareholder your best and highest interest is in the total return of your holdings, measured by dividends and share price appreciation over time.  That's the entire point of owning shares in a corporation; you expect the company to make a profit and if and when it does you expect to share in the profits.  How the firm allocates research and development, capital expense, employee compensation and similar all goes into whether they succeed or fail.  Common stock is the bottom of the capital stack and has no protections; a bond issued by the company, which you can also buy, does have capital protection in that the equity holders lose their money first.  You choose to be in that "least-favored" position because when good decisions are made you profit at a variable and hopefully higher rate, unlike a bondholder who has a fixed coupon that they will receive over the life of the bond (and thus, other than if the firm goes under, their return does not rise with the company's success.)

The fund manager does not make any more money if the firm succeeds nor do they lose money if the firm fails!  Their entire source of revenue is feeswhich they collect irrespective of the success of the company and thus also, to a large degree, irrespective of the gains or losses in the beneficial owners.  Only through the derivative loss of business if the beneficial owners take their money and go somewhere else does the fund manager potentially lose prospective profits.  They cannot lose capital as their capital is never at risk; they don't put up their capital to buy the shares they put up yours!

There is no way to align these interests.  They are by necessity of the business in question divergent; you care if the firm makes more money or less but the fund manager only cares about how much he has under management.  Therefore he wants to create new vehicles (e.g. new ETFs) which he believes can attract more investors, but the actual company performance in them doesn't change his income either up or down.

This in turn means the fund manager can apply pressure to the company even if it results in the firm making less money without his taking a loss!  If he is allowed to vote shares held in the fund he can thus demand various policies, whether it be "DEI" or whatever and put into place directors on the board that will implement what the fund manager wants.  Since the amount of money said manager gets is not inextricably tied to the performance of the firms in the fund this leaves him free to vote for whatever sort of social and political positions he wants the company to take whether it makes the firm money or not.

You, as the beneficial owner, obviously would see things differently.  Perhaps you would consider such a policy "worth the cost" but I rather doubt it if it resulted in the company making less money, and more to the point many others would likely disagree -- probably enough of them to prevent your desire from becoming an elected winner.

Thus the fix is to change the law: Only the actual beneficial owner of a share may vote that share and only actual beneficial owners may issue proposals -- period.  A holding company, whether its Blackrock in an ETF or Berkshire which is also publicly traded but is not operating a business that it holds stock in, may not issue such proposals, back them or vote any of their shares; they must instead solicit and have their shareholders, who are the true beneficial owners, do so.

If you want to solve this problem -- and the proliferation of money-losing (or less-profitable) actions that fund managers may like but your preference would be for the firm to make more money that's the only way you will resolve it.

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2023-11-28 12:35 by Karl Denninger
in POTD , 116 references


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2023-11-26 07:00 by Karl Denninger
in Macro Factors , 360 references
[Comments enabled]  

This sort of twaddle is ridiculous and points to the sort of nonsense that the "media" peddles nowdays.

But the problem with deflation is that when people begin to expect lower prices in the future, they have little incentive to make purchases right now. For instance, unless it was absolutely necessary, why would you buy a new oven today if you thought the price would go down significantly in a month?


Why would you buy a new oven today if there's nothing wrong with your current one?  Who, other than someone interested in both environmental destruction and your personal financial destruction, would suggest that you should buy something that has no current purpose?

We're not talking about purely-discretionary purchases, which are a different thing entirely.  The night out at the pub is not a necessary thing -- either today or tomorrow.  Deflation in the price of beer at said local pub is rather likely to increase your desire to go do that.  If you've looked around you might have noticed that there's a fair bit of retrenchment in many areas of the country when it comes to dining out, for example -- and inflation in said cost is a big part of that.

No, the example CNN used here was one of a consumer durable good: A thing where buying "just to buy" makes absolutely no sense.

If your air conditioner is long in the tooth but still working you might well buy a new one before the old one fails.  I did, and the reason to do it was that you can actually shop both for the product and the installation when you're not under the gun.  If it fails in the middle of July when its 95F outside you are more-likely to be effectively forced to take whatever you can get at whatever price is offered, and this will probably wind up costing you more money.  If you can at the same time get a more-efficient unit then you win twice; once up front and again in a lower power bill.

That doesn't apply to an oven; they're resistive heating devices and thus there is no energy savings to be had.  If you buy on the basis of anything its feature set (e.g. convection .vs. not) or actual need -- your current oven isn't working or is in some other way compromised such as cosmetically falling apart.

Incidentally the same sort of argument is often applied to houses but that's false too.

Everyone needs somewhere to live so if you currently live in a house that has a "bubble" price and you need or want to move you will both get more for your house than you would otherwise and pay more for its replacement.  There's no "win" in this for you; the only way to "win" from such is to die, and then your heirs are the ones who "win", obviously -- not you.

Likewise if house values go down and you need to move unless you're underwater on your mortgage the same applies.  You get less for your current house but you also pay less for the new one, so on-balance there is no "detriment" to you either.  If you were over-levered you can become "stuck" (your current home is worth less than the outstanding mortgage in the market) but other than that circumstance nothing has actually changed for you; if, for example, you only have 10% equity in your current home but had 50% (and prices crashed) whether you sell and move or not hasn't changed a thing.  That 10% equity position is still 10%, whether its here or there.

The problem we face today, and its serious, is that suppressing interest rates drove prices up but also drove inflation.  We had an "absorption" of this through the increase in global trade over the last 20 years, mostly driven by offshoring of production and some services (e.g. call centers, etc.)  Nothing can ever expand on a permanent basis without limit, however, because Earth is of finite size; that is, such an expansion that was to go on "forever" was always destined to end and it is the expansion, not its size, that sequestered inflationary pressure.

Our Congress has come to believe this is permanent and so have a lot of individuals.  That was always false and foolish, but its what we've come to expect.  No less than Ben Bernanke explicitly and publicly warned Congress of this, and he put a time line on it too -- and it has now basically expired.

20 years of "conditioning" is tough to break but break it will, and what we all ought to be paying attention to is how to come back into alignment with actual fiscal sanity which can be maintained on an indefinite forward basis.

Plenty of people are not going to like how this sorts out for them personally, but whether you like it or not its coming -- and you'd be wise to contemplate where you are personally and adjust to it voluntarily before the change occurs on an involuntary basis.

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2023-11-24 07:12 by Karl Denninger
in Technology , 312 references
[Comments enabled]  

The OpenAI/Altman saga brings a wry smile to my face.

"AI", otherwise known as an implementation of large language models in the modern parlance, is a "generalist" alleged attempt to create an "intelligence" in a computer.  It of course is no such thing because it can't be such a thing; we can't even model the human mind so creating an "intelligence" that mimics same is impossible.

But it does make good press.

Do recall that "Deep Blue" did beat a human chess master.  How much did the computer cost, how much programming time went into it and how much power did it consume in the pursuit of said game of chess?  How does this compare with the human endeavor?  Nobody really can functionally compare the two; I learned how to play chess as a young child but was never good enough at it to be "rated" formally -- although I did enjoy various forms of "club competition" including speed chess (where each participant typically has 5 minutes -- total -- for their entire half of the game.  Run out of time and you lose as if you were checkmated.)

I've opined that there are multiple intractable issues in this alleged "technology" within the "general" space.  In the context of, for example, customer service for a company, maybe not so much since the training set is much smaller and can exclude access to anything the company doesn't have rights to, or which is not explicitly known to be in the public domain.  For "general" AI this is an extremely serious problem because most of the content it can "inhale" in the process of training is owned by someone, and that someone has rights to the material.  At the same time the Copyright Office has ruled that the output of an AI is not protectable because it lacks human cognition.  This means the owners of said AIs will get sued repeatedly but they cannot sue if someone takes the output and "steals" it, since they don't have a protectable copyright interest in it.  The only place you could conceivably go with that would be via trade secret or similar negotiated protection (e.g. "non-disclosure agreements") and that precludes general public access, which of course everyone wants to "incorporate."

I've got all manner of trouble coming up with a business model that has any sort of "moat" around it, and that leaves aside the cost problem.  These models all require extremely expensive computers and the power to operate them.  Neither is free and both have to be paid for somehow, as do the salaries of those coding, feeding, maintaining and checking the output for "hallucinations".  In addition there's a further problem with public access where liability is not formally assigned by agreement in that the "AI" might make a statement or reach a "conclusion" that is factually false and which harms someone, either reputationally or directly, and the obvious question then when everyone sues everyone (and they will) is "who eats that?"

That's a lot of challenges -- and thus far, few answers.

But into this steps OpenAI and Altman.  The board, for reasons that are not entirely clear, fired said CEO.  OpenAI is a non-profit organization; ChatGPT is run, in part, by Altman which is part of a commercial subsidiary.  If you find that in and of itself problematic you're not alone, but OpenAI is hardly the only non-profit with one or more commercial subs -- that's actually pretty common.

The interim CEO was then replaced -- so now OpenAI has had three CEOs in the space of a few days.  A huge percentage of the company threatened to quit unless the board quit after re-hiring Altman.  They refused and Microsoft, which had a stake in OpenAI, turned around and hired Altman along with one of his close colleagues.

Some 600 of the 700 employees who threatened to quit went further and threatened to join the new unit at Microsoft, which would effectively gut OpenAI -- to say this would leave the outfit with an uncertain future would be quite an understatement.

One of the problems Microsoft may face is that this sort of concentration is likely to draw quite a bit of attention from the anti-trust folks in the US -- and Europe.  The model itself that was built there (which powers ChatGPT) remains with OpenAI.  But building another one is not hard -- Musk's "X" rather quickly spun up "Grok" in just a few months, and if the entire staff that built the ChatGPT model departed (and was able to pull it off without everyone suing everyone and effectively locking everyone up in terms of affiliation for months or years in litigation.)

Now, it appears, the "breach" has been filled and Altman is back -- with a bunch of the board members gone.

But while the strum and furor over this continues I remain unconvinced that all of this effort and money has a positive commercial outcome.  This is not a trivial question; it is not like much in the software development world is required to come up with a competitor as Grok has shown -- 4 months is nothing when you get down to it, so we have a technology that has enough out in the public building blocks that, if someone wants to replicate it, they can at modest cost.

The question is whether the operating cost is recoverable.  That is not clear by any means; that we can do a given thing doesn't mean it makes economic sense.  Often what is possible doesn't pencil out, and I have long been skeptical that this technology, at least as envisioned as "doing human style things" (as opposed to, for example, learning how far in advance to turn your A/C down before you get home in the evening and adapting your schedule automatically) will pencil out in a way that is worth doing.

Take coding, for example.  Is an AI writing code actually more-efficient than a human?  That's unproven; nobody has demonstrated, for example that an AI can actually "think" and suss out the organization of data and code to optimize for anything.  Can it pull together snippets from stackoverflow faster than marginally-capable and inexpensive labor in India?  Probably, but can it do so cheaper than the people doing it in India when you add up the amortized cost of the computer equipment and power to run it?  That's not known -- and I'm deeply skeptical that the balance tips in favor of the robot -- at least for now.

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