Biden's First 100 Days in Charts

Today marks President Biden's 100th day in Office. Basically every news outlet has some combination of timeline, accomplishments and comparisons as well as op-eds either extolling his "complete success" or decrying his "complete failure." Well here are some more "important" Biden numbers from BI and the WSJ:

First, who's Mr. Popular? Obama, it seems. Biden's more popular than Trump at the 100-day mark but lags both Clinton and Bush (click chart to enlarge).

Next, federal spending. No competition here. Biden's planned six trillion of spending introduced in the first 100 days is more than Clinton, Bush and Obama combined! What's remarkable is the paltry spending plan Obama undertook to revive the economy in the midst of the Great Recession. The lack of sufficient spending led to a very weak recovery. Biden's not repeating that mistake (click chart to enlarge).

To put that spending into context. Here's what the unemployment situation was in the first year of the presidency for the last eight presidents (click chart to enlarge). Unemployment was high and rising when Obama came into office, but his response, in retrospect, was woefully lacking. To be fair, he did carry the burden of being the first Black president and had to be careful not to antagonize political opponents. 

Showing Congress who's the boss? Biden, definitely, with 41 Executive Orders...speaks softly, but carry a big stick?

And the big one? Depending on your point of view, the most important or most meaningless metric of Presidential success is the stock market. And Biden is the clear winner! The Dow Jones returned 9.34% in the first 100 days under his watch, versus 6.12% under Trump and -1.15% under Obama.

Earnings Week and May Sweeps

This is a big week for earnings, with AAPL, AMZN, FB, MSFT, and GOOG all reporting. And of course, Tesla.

But Tesla is less about company fundamentals and more about Elon Musk the personality. And his big day is in a couple of weeks on SNL:

Yup, the Boring guy is hosting SNL. Why? Who knows, who cares? It will surely generate a lot of publicity for NBC and maybe some ratings. Will Tesla stock pop if he has a good performance? Will it drop if he bombs? My guess is it'll be curiously entertaining, Musk is a world-class showman after all:

Poor Little Rich Scions: Inequality Among Billionaires

Our last post was about how wealth naturally flows from the poor to rich in society due to imbalances in power, access, opportunities, etc. And how inequality has been on the rise in the U.S. for decades. Today, according to the Fed, the top 1% of U.S. households controls $38.6 trillion of wealth or 31% of all wealth in the country. That's about 15.5x more than the bottom 50% combined!!

Well, if we took something like the top 0.001% of the Top 1%, would we get a similar distribution of wealth? Forbes puts out a list of the 50 richest families in the U.S. (This list covers multiple generations and is separate from the richest individuals list, who are considered self-made). Well the 50 richest families collectively control about $1.2 trillion of wealth. But it's certainly not evenly distributed. Not even close. (Click to enlarge)

The Waltons ($247B), the Kochs ($100B) and the Mars family ($94B) together control 30% of that $1.2 trillion. In fact, the top 5 families control ~60% of the wealth in this tiny, tiny, tiny slice of America. Yup, everything really is relative...

Is Economic Inequality Inevitable?

Income inequality is a big problem in the U.S. and increasingly so as the chart below highlights (click to enlarge). There are many possible reasons for this, including regressive tax policies, deregulation, weaker unions, globalization, access to education, eroding transfer payments (social security and unemployment benefits), etc.    

But what if we cleared the deck and started anew, giving everyone the same starting wealth? Would we be able to mold a more egalitarian economy? No, I'm not taking about the Bolshevik model, which replaced "unequal share of blessings with equal sharing of miseries" (to quote Churchill). I'm thinking more of the "Yard Sale" model, a mathematical framework of free-market economics that, with a few tweaks, accurately predicts wealth distributions in the U.S. and Europe. Bruce Boghasian has a  fascinating article in Scientific American magazine about the economic work he and other physicists (yes, physicists) are doing. 

The Yard Sale model was introduced by Anirban Chakraborti, an Indian physicist, in 2002. It mimics real one-on-one economic transactions as the box below shows (click to enlarge) and helps explain "the movement and distribution of wealth [arising] from pairwise transactions among a collection of economic agents."  

Imagine an economy with 1,000 individuals. Assume everyone has $100 to start with. Assume a fair coin flip determines the winner/loser in any transaction as defined above. Also assume every time you "win"/"lose" in a trade your wealth rises/ falls 20%. Now "choose two agents at random and have them transact, then do the same with another two, and so on. [The] model assumes sequential transactions between randomly chosen pairs of agents...[conducting] millions or billions of such transactions in our population of 1,000."

To better approximate reality the researchers added a constraint. As Boghasian writes "people have a natural aversion to going broke, so we assume that the amount at stake, which we call Δω...is a mere fraction of the wealth of the poorer person, Shauna. That way, even if Shauna loses in a transaction with Eric, the richer person, the amount she loses is always less than her own total wealth." 

What happens? Well, after a large number of transactions, "one agent ends up holding practically all the wealth of the economy, and the other 999 end up with virtually nothing[!]" Every time! Any single agent in this economy could have become the oligarch (in that sense, there was an equality of opportunity). But only one does.

This outcome may be surprising because all the agents started off with identical wealth and were treated symmetrically (implying equal abilities and opportunities). But even in this stylized economy it boils down to the tyranny of math. "The very first coin flip transfers money from one agent to another, setting up an imbalance between the two. And once we have some variance in wealth, however minute, succeeding transactions will systematically move a “trickle” of wealth upward from poorer agents to richer ones, amplifying inequality until the system reaches a state of oligarchy." In another words the natural condition is trickle up economics! Now imagine our economy as it is with huge disparities between economic agents, individuals, households, companies, etc.  

To test how this framework would predict reality Boghasian and colleagues incorporate starting wealth disparity and introduce parameters such as taxes (χ) and privilege (ζ). The concept of privilege is represented by biasing coin flips in favor of wealthier individuals.   

They find that whenever the influence of wealth-attained advantage exceeds that of redistribution (taxes), you get more inequality and vice versa. Remarkably, extending the Yard Sale model by just those two-parameter (χ and ζ) the researchers were able match empirical data on U.S. and European wealth distribution between 1989 and 2016 to within 2 percent!!!

The implications are huge. If the natural tendency of wealth is to flow from the poor to the rich in a free-market economy, then public policies geared towards "trickle down" economics are futile, even under the best of intentions. But is higher income taxes the answer? Perhaps not, because taxes focus on income rather than wealth. To solve for that progressive politicians, like Warren, have proposed a wealth tax on the rich. Is that radical or new? Mosaic Law exhorts the Israelites to tithe (Deuteronomy 14:20) and the Quran obligates Muslims to pay zakat. So, no. But in fairness wealth tax, unless voluntary, is difficult to administer and enforce and complicated. So a myriad of public policies, taxes, regulation, affordable-education, etc. will likely be necessary to reverse the inequality trend.       

Do Stocks Outperform Treasury Bills?

No! Emphatically, vehemently, unmistakably no! Prof Hendrik Bessembinder's fascinating and exhaustive analysis cogently demonstrates the difficulty futility of trying to pick stocks. The full paper is here. 

Bessembinder evaluated the lifetime returns of every U.S. common stock traded on the New York and American stock exchanges and the Nasdaq since 1926; which tallies to 26,168 firms. And the key findings were (drum roll...):

1. Between 1926 and 2017 U.S. stocks increased shareholder wealth by $35 trillion (yay!). But just 86 stocks accounted for $16 trillion in wealth creation, half of the stock market total (whoa!!).

2. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.

3. ~58% of stocks actually decreased shareholder wealth.

The chart below highlights the key findings and the stocks that generated the most wealth over the last 90 years (click to enlarge). Not surprisingly, Tech firms generated the most wealth, though Energy, Telecom and Healthcare generated wealth disproportionate to the number of firms in the industries. The Champions: Apple, ExxonMobil and Microsoft. 

The results highlight the "skewness" of stocks. Returns from long-term stock investing are positively skewed, i.e., very large returns from a few stocks pull up the average. Most stocks actually have negative returns.  

The takeaway: “The results help to explain why active strategies, which tend to be poorly diversified, most often underperform.”- Bessembinder. So passive strategies (index funds or ETFs) are your best bet. To paraphrase Jack Bogle, the pioneer of index investing, don't go try to find the needle in the haystack, just buy the haystack. 

Note: An updated list through 2019 has the following companies (lifetime wealth produced, year publicly listed):

1. Apple             ($1,600 billion, 1981) 
2. Microsoft       ($1,400 billion, 1986)
3. ExxonMobil   ($990 billion, 1926)
4. Amazon          ($865 billion, 1997)
5. Alphabet         (720 billion, 2004) 

Timing the Market, Not Time in the Market?

Hmm, our last post advised against market timing. But wait, what if there was a way to successfully time the market, and an easy way at that? Well interestingly, err...amazingly, data shows that over the 25 years between 1993 and 2018, nearly all of the stock markets gained have happened at the same time each day: overnight. And the phenomenon was even more pronounced in 2020.

Yup, if sold at the open and bought at the close each trading day you would have been up 600%. Look, if you bought the S&P 500 at the end of 1992 and held on, by the end of 2018 you were up 857% (with dividends). So yeah, better to just invest and forget about it. But if that's too boring then this might be your best bet: buy at the market at the open and sell at the close.

Why does this work, even if market participants know about it? Well maybe for a couple of reasons:

1. Retail investors panic (of course!) and often flood the market at the open.

2. Buy backs by corporations (of course!) always at the end of the day.

3. Just for good measure, there's also the conspiracy theory that the Plunge Protection Team buys in the more thinly traded afternoon sessions to prop up stocks.

Time in the Market, Not Timing the Market?

Market timing can be deceptively difficult. Analysis from BoA Research quantifies how much so. Looking at data going back to 1930, BoA calculates that if investors missed the S&P 500′s 10 best days in each decade, total returns would be significantly lower than the return for investors who stayed in the market throughout. (Click chart to enlarge)

So, if an investor held on through the ups and downs of the market from 1930-2020, their return would have been 17,715%. On the other hand, if the same investor missed the S&P 500′s 10 best days each decade, their total gain would be just 28%!! Much of investing is about avoiding large losses, so that compounding can work it's magic on a growing base. If you were to 'simply' side-step the 10 worst days in every decade over the last 70 years, your gains would be an gargantuan 3,793,787%!!! Basically, $1 would grow to ~$400,000 as the S&P 500's best days turbocharged your returns. But the market’s best days typically follow the largest drops, so your timing has to be almost surgical.

We know that's nearly impossible, so the best path is to hold steady and dollar-cost average. And time in the market has historically ensured a positive return, as this analysis from Morgan Housel shows:

Based on the last 150 years of stock market data, a 10-year investment horizon gives investors an almost 90% chance of coming out ahead...with a 20-year horizon it's almost a certainty investors will have a positive return. So stay invested.

Hero: Dr. Kati Kario Pioneered Corona Vaccine Technology

The corona virus has so far claimed nearly 3 million lives worldwide, including some 575,000 in the U.S. But thanks to the development of vaccines in record time we may finally be turning the corner. The NYT has a great story on one of the heroes of that effort. Toiling in obscurity for decades Dr. Kario's work on mRNA has revolutionized vaccine development.

As the Times writes, Dr. Kario has focused her entire career on messenger RNA, "convinced that mRNA [which carries DNA instructions to cells' protein-making machinery] could be be used to instruct cells to make their own medicines, including vaccines." Her ideas about mRNA were unorthodox and largely dismissed in the academic world. For years Dr. Kario struggled to get funding for her research and moved from lab to lab. Eventually, two firms, Moderna and BioNTech took notice of her work and were using the science to work on the flu vaccine and Zika virus before the coronavirus came along. 

For over 200 years, vaccines were produced using attenuated viruses. The R&D process was slow and complicated. With Dr. Kario's work the actual microbe is no longer required; mRNA carries specific instructions to make the snippets of virus protein necessary to stimulate the appropriate immune response. Here's how it works:

The process is faster and easier to control, significantly accelerating the R&D process for new vaccines.  

After years of being on the fringes of genetic science, Dr. Kario is finally getting the recognition she deserves. She and her research colleague, Dr. Weissman, were vaccinated on Dec. 18 at the University of Pennsylvania..."A senior administrator told the doctors and nurses rolling up their sleeves for shots that the scientists whose research made the vaccine possible were present, and they all clapped. Dr. Kariko wept."

They are Heroes...

Let's Talk About ERP

Stocks are risky assets. Cash in your savings account is not. The equity risk premium or ERP tells us the additional return over the risk-free rate (3 month T-bills or "cash") that investors expect for putting money in the stock market. The ERP is always changing. The biggest determinant is bond yields. About 80% of the variation in ERP is due to changes in bond yields. 

This cool chart from (where else?) the Visual Capitalist with data from NYU's Damodaran shows the implied ERP for almost every country (click to enlarge) and how it is calculated. The U.S. with its AAA credit rating had a 5.2% equity risk premium (as of July 2020). Countries with higher perceived risks will require higher returns. So, for example, according to Damodaran's calculations investors would require twice the returns to invest in Bangladeshi stocks than in U.S. stocks, all else equal. Canada, Germany, Sweden and Singapore are perceived to have similar levels of equity risks to the U.S. Sudan, Venezuela and Yemen are places perceived to the have highest equity risks with a ERP of 27.1% each.  

A fall in ERP generally signals growing investor appetite for stocks over bonds and is bullish for stocks. A rise in ERP signals the opposite. Damodaran's most recent calculations (thru Feb 2021) show the U.S. ERP at 4.26% down from 5.2% in the chart above, but in the last seven months U.S. stocks have also rallied over 22%. ERP can also be a good relative valuation tool...if the spread in ERP between two countries widens or compresses relative to history it can indicate one market may be under or over valued relative to the other. Of course, there is likely very good reasons for the higher required premium...as they say there's no such thing as a free lunch. 

Best March Madness Game (Ever?): Gonzaga v UCLA

It's been a topsy-turvy NCAA championship, with lots of upsets and excitement...but nothing as good as last night's 2nd semi-final game. Top seed Gonzaga eked out a breathless, thrilling OT win over a determined UCLA. Certainly, one of the, if not the, best NCAA tournament games ever.

Will the final be half as good? Well see...

Risk and Reward: A Cautionary Tale?

The big news in the financial markets this past week was the blowup of Bill Hwang's Archegos Capital, a $10 billion family office, that sent shockwaves across Wall Street. At least two investment banks, Nomura and Credit Suisse, and possibly several others who lent to Archegos, suffered multibillion dollar losses. Bill Hwang, until last week, was quietly one of the 50 richest people in America. 

Bloomberg has a probing profile on Hwang titled "God and Man Collide in Bill Hwang's Dueling Lives..." While article focuses on the seeming contradictions of a pious man taking on massive risks, what I found most interesting was the breathtaking speed with which he accumulated that wealth. After his hedge fund career ended ingloriously in 2012, he opened his family office in 2013 with an estimated $200 million. Within a decade his fortune had swelled over 100 times to around $20 billion according to bankers (at least on paper), him making one of the richest persons ever on Wall Street! Even more remarkable, much of that wealth was accrued in the last 24 months!! That has to be a record, if not the record. How? Leverage, of course. Massive, massive amounts of leverage.

Archegos' strategy was simple enough: concentrated, directional bets on fast growing technology and media stocks, boosted by leverage. No hedging. (Of course!) And Hwang seemingly was very good at finding things that grew. Obviously it helped that Growth has been the dominant risk premium of the last decade (thanks Federal Reserve!) and outperformed crazily during the pandemic (click chart to enlarge).

Now just add leverage! Lots and lots of leverage. And Archegos did it through equity return swaps. A perfect way to take huge risks without anyone knowing, even your lenders. The chart below from the WSJ shows how total return swaps work. For a fee, you get your favorite investment bank(s) (i.e., prime broker(s)) to buy your desired basket of stocks for you. The bank owns these stocks, not you. As part of the swap, the bank will pass on the gains (including dividends) from this basket of stocks to you should the value of the basket rise, and you will cover any losses if the value falls. To make sure you are able to cover potential losses you need to put up collateral, usually 15% of the value of the basket. If the value of the basket falls, you will get a margin call to put up additional collateral so that you always have that 15% cushion, else the bank will seize your assets and sell them to manage their exposure. So, for putting up $15 you get exposure to $100 worth of stocks. 

  

The fees are nice, so all the banks want to do swaps. And Archegos didn't mind paying up for service, so Hwang was a particularly attractive client for prime brokers. In any case, the banks assumed the assets were liquid, so if things did go south they could sell them quickly and quietly without causing their price to drop. Well, you know what they say about assume? (...it makes an ass out of you an me) 

The problem was Archegos was doing swaps at roughly 6:1 leverage for the same basket of stocks with basically every prime broker on the Street. But none of them knew that. Because there is no requirement for Archegos disclose that to them (or the SEC, despite the massive notional sums). So, Hwang probably put up $500 million with each prime broker to gain exposure to $3 billion of his favorite stocks: Viacom, Discovery, GSX, Baidu, Tencent Music, Fubo and Farfetch, etc. And he did that with 10 banks? So that resulted in exposure possibly as high as $30 billion to a handful of stocks!

As a result the value of these stocks skyrocketed. Viacom stock rose 150% in over two months. Proving no good deed goes unpunished, Viacom announced on March 23rd that it was raising $3 billion in capital through stock issuances...because why not take advantage of this sudden, massive rise in the value of your company? (Or something like that). That sent the price of Viacom tumbling, precipitating margin calls. There was also this pesky rotation out of Growth into Value that was also taking place which put pressure on Archegos' other positions as well. The thing about leverage is that how ever fast it may push you up, it can always pull you down faster...

Naturally, things got out of hand quickly. When Archegos held a conference call on March 25 with all its bankers to let them know there was problem, a big problem, it was off to the races...GS, of course, was the first out of the gate, doing a huge block trade on Friday morning. Within a day Viacom's stock had fell 55% -- a $55 billion company! Of course it wasn't just VIAC, all the other Archegos stocks plummeted similarly in the face of Wall Street's fire sale.

It's unclear at this point what Hwang's end game was, force a squeeze on these heavily shorted stocks that would boost their returns even more (something Hwang painfully knows about) or just, you know, Diamond Hands. All told by April 1st, Bill Hwang is estimated to have lost at least $8 billion of personal wealth in less than a week. He is still likely very wealthy, just not Forbes 400 wealthy. Of course, it was the very same leverage that got him into trouble that made him over $10 billion in the first place. So, from another perspective, if the cost of making $2 billion is to lose $8 billion...well that's still a great trade. Just not for Archegos' bankers.