Typography

When I think of senseless waste, I think of the Battle of the Somme. Whole generations lost in order to move a trench line forward by a metre or two. Zoom forward in time to the modern finance industry which, for many decades, has been marshaling starry-eyed recruits in search of excess returns. I worry that all their effort has been wasted because, like the Somme's trenches, the integrity of prices can't be advanced any further once large amounts of effort are already being expended in beating the market. Fund managers who want to beat the market must find unique information in order to get a leg up on their competitors. But the supply of such information is limited so that at some point, prices include pretty much everything there is to know about a company. Any additional effort to hunt down information is wasteful from a society-wide perspective. The recent- ish phenomena of indexing gives us a feel for how far beyond the 'waste point' we've gone. Rather than tr...

Would it make sense for firms to try to slow down their equity structure? Equity markets are made of two classes of participants. The minority consists of long-term investors who, like Ulysses, have 'tied themselves to the mast' and would rather fix things when a company runs into problems than sell out. The majority is made of up rootless speculators and nihilistic indexers who cut and run the moment the necessity arises. Because their holding period is forever, the long-term investor class does all the hard work of monitoring a company and agitating for change. Keeping management honest is the only recourse they have to protecting their wealth. Speculators and indexers are free loaders, enjoying the same upside as investors without having to contribute to any of the costs of stewardship. How might long-term investors be compensated for the extra expenses they incur in tending the garden? One method would be for a firm's management to institute a slow/fast share structure ...

Remember when shadow banks regularly outcompeted stodgy banks because they could evade onerous regulatory requirements? Not any more. In negative rate land, regulatory requirements are a blessing for banks. Shadow banks want in, not out. In the old days, central banks imposed a tax on banks by requiring them to maintain reserves that paid zero percent interest. This tax was particularly burdensome during the inflationary 1970s when short term rates rose into the teens. The result was that banks had troubles passing on higher rates to savers, helping to drive the growth of the nascent U.S. money market mutual fund industry. Unlike banks, MMMFs didn't face reserve requirements and could therefore offer higher deposit rates to their customers. To help level the playing field between regulated banks and so-called shadow banks, a number of central banks (including the Bank of Canada) removed the tax by no longer setting a reserve requirement. While the Federal Reserve didn't go as f...

Have Swiss interest rates fallen so low that the public is finally bolting into cash? The Wall Street Journal and Zero Hedge  think so. They both point to big jump in 1000 franc notes outstanding as evidence that Switzerland has finally breached the effective lower bound to interest rates. Let's not get too hasty. Yes, the current run into paper francs may have something to do with Switzerland having hit its effective lower bound, the point at which paper francs provide a superior return to electronic francs. But Swiss francs also serve as a global safe haven asset. And this safe haven demand, operating entirely independent from effective lower bound demand, could be motivating people to amass 1000 franc notes in vaults. The effective lower bound problem is the idea that if a central bank drops rates low enough, a tipping point will be reached at which it becomes cheaper to hold 0% yielding banknotes and incur storage fees than to stay invested in negative yielding deposits. The...