Skip to main content
No. of Recommendations: 1
Many of you are far more financially
literate than me and may be able to answer a question.

A well known definition is,

“insanity is repeating the same mistakes and expecting different results.”

The strange politics in Argentina has resulted in
nine defaults, three this century, the most recent being last week.

I understand why international agencies like the IMF might loan them money...
after all, bureaucrats always think they know everything and have to do something to keep their jobs...
But why do any private moneys get used to purchase Argentina bonds?

Do the big banks just do a great sales/con job on various private parties to get a big sales commission, or are we that
ignorant about the financial history of this country? (If I know it, how hard can it be to
discover?) Or is there something else that I'm totally missing? The best thing for investors would be to force Argentina to only sell bonds called Toxic Waste, yield x%,guaranteed to default before due date.

rrjjgg
Print the post Back To Top
No. of Recommendations: 3
I think it's fair to assume that essentially no individual investors have purchased Argentine bonds.
They're all in the hands of various institutions, for various institutional reasons.

* They have a mandate to buy them, e.g. Argentine banks
* They have a mandate to buy them, e.g., they're in some bond index
* A trader thinks the price will rise in time for his (usually not her) year end bonus
* Some fund manager stuffs portfolios with them, since they meet some sort of dumb checklist on meaningless metrics like convexity
* There is a hunt for yield, and some dumber managers think that the extra return is free money rather than a clue about additional risk.
* Managers with perverse incentives making decisions on behalf of the actual investors, like those on commission. See the scene in Big Short at the banquet in Las Vegas.

Basically, I figure it's "the institutional imperative".

The amazing thing is that Argentina issued a 100 year bond in 2017.
I guess it was expected to default at least a half dozen times before maturity, and most of them after the fund manager is dead.
And people bought it.
Or rather, money managers bought it.

As an aside, what is the interest rate on a fixed-rate 30 year mortgage in the US right now?
Would you lend your money for that time frame with no inflation protection? Of course not. Neither would a bank lend their own assets with that kind of risk.
My hunch is that those are sure signs that something unsustainable is probably going on.
Till then, the government mortgage is free money for the middle class.

Jim
Print the post Back To Top
No. of Recommendations: 1
I often wonder how much of the money is illegal money laundering. Obviously those people don't want to lose money but if it is a way to "cleanse" the money maybe they do.

I won't go into details but there was a place near where I lived years ago where it just didn't seem possible for it to make money. Huge crowds on Friday/Sat nights but largely empty the rest of the time (and it could seat 800 for dinner!) and the real estate (rent) was $$$.

Ended up it was being used by illegal money/tax evasion and some people were arrested. I think that happens in more places than many of us more honest people realize.

What is that saying, fool me once shame on you, fool me twice shame on me?
Print the post Back To Top
No. of Recommendations: 1
* They have a mandate to buy them, e.g. Argentine banks
* They have a mandate to buy them, e.g., they're in some bond index
* A trader thinks the price will rise in time for his (usually not her) year end bonus
* Some fund manager stuffs portfolios with them, since they meet some sort of dumb checklist on meaningless metrics like convexity
* There is a hunt for yield, and some dumber managers think that the extra return is free money rather than a clue about additional risk.
* Managers with perverse incentives making decisions on behalf of the actual investors, like those on commission. See the scene in Big Short at the banquet in Las Vegas.

* New suckers are born every day.


As an aside, what is the interest rate on a fixed-rate 30 year mortgage in the US right now?
Would you lend your money for that time frame with no inflation protection?

At the moment we are quite clearly experiencing deflation.

Elan
Print the post Back To Top
No. of Recommendations: 1
I won't go into details but there was a place near where I lived years ago where it just didn't seem possible for it to make money. Huge crowds on Friday/Sat nights but largely empty the rest of the time (and it could seat 800 for dinner!) and the real estate (rent) was $$$.

Yeah, there was an Italian restaurant we used to go to in NW Chicago suburbs when we lived there. The prices were so low, they had to have been buying it for free to even break even. Veal parmesan was like $2.50. For the whole meal. I used to wonder how they could stay in business. Drinks were even dirt cheap, not like the typical restaurant prices.

The one day I realized, like you, that the restaurant owners were not there to make a profit on the food. It was to launder the money.
Print the post Back To Top
No. of Recommendations: 0
I won't go into details but there was a place near where I lived years ago where it just didn't seem possible for it to make money. Huge crowds on Friday/Sat nights but largely empty the rest of the time (and it could seat 800 for dinner!) and the real estate (rent) was $$$.

There was a really wonderful restaurant about an hour's drive from where I live. It had three large dining rooms. They had custom made carpets on the floors. In one room, they looked like a slate walkway. In another, they looked like bricks. In the third, like custom hardwood floor. It probably costs big bux to have carpets made like that.

The menu was high class and the prices were fairly high class. The last thing I remember was that everything was just great, but only two tables were occupied: ours, and at the other occupied table were about six men that we decided were Mafia. They were probably just businessmen. But that is what my friend and I imagined.

I see no possible way for a restaurant like that, just outside a large Ivy League university town, to make any money, or even pay the rent on a place like that with so few customers on a weekend evening.
Print the post Back To Top
No. of Recommendations: 7
As an aside, what is the interest rate on a fixed-rate 30 year mortgage in the US right now?
Would you lend your money for that time frame with no inflation protection? Of course not. Neither would a bank lend their own assets with that kind of risk.


My brother who lives in California called me yesterday saying he'd found a no-points no-costs 30-year fixed mortgage with 2.5% interest rate. He called USAA who said the best they could do was 4%. The 2.5% guy (in Atlanta) said his company was selling $500M/month worth of mortgages, and he was getting his money from investors who were willing to loan at that rate. Better than 10-year treasuries, right?

So I got the contact information for my brother's guy, but on a whim I called the mortgage broker I'd used eight years ago (for my Virginia house), who works for a large mortgage company. He is a good guy, retired military officer. He said he could definitely get 2.375%, and most likely 2.25%...again no points, no costs, 30-year fixed.

Tails
(filling out my refi application tonight)
Print the post Back To Top
No. of Recommendations: 0
He said he could definitely get 2.375%, and most likely 2.25%...again no points, no costs, 30-year fixed.

So why don't those rate show up on Bankrate, etc.? I'm seeing rates like 3.5% for Atlanta, 30-yr fixed. And can you send me your guys number?

John
Print the post Back To Top
No. of Recommendations: 3
Would you lend your money for that time frame with no inflation protection?
At the moment we are quite clearly experiencing deflation.


No argument there.
I figure that if they could get to work, and it weren't illegal, you could hire as many people as you like for $3-5 an hour right now.

But 30 years is a long time.
I wouldn't want to take on the inflation risk of years 10-30 in return for pretty much no return.
The median homeowner is not exactly a perfect credit risk counterparty, either.

Jim
Print the post Back To Top
No. of Recommendations: 0
What I am hearing is don't lend money to anyone?
Print the post Back To Top
No. of Recommendations: 0
o I got the contact information for my brother's guy, but on a whim I called the mortgage broker I'd used eight years ago (for my Virginia house), who works for a large mortgage company. He is a good guy, retired military officer. He said he could definitely get 2.375%, and most likely 2.25%...again no points, no costs, 30-year fixed.

Contact phone # or information????

I couldn't see anything close to this at my usual online mortgage places.
Print the post Back To Top
No. of Recommendations: 1

My hunch is that those are sure signs that something unsustainable is probably going on.


Seems to be sustainable in Japan.

The leading interest rate for the Flat 35 loan was 1.29% in May 2019, which is over double the rate some megabanks are giving their preferred customers for full-term variable rate mortgage loans (the lowest of which is 0.525%).

https://resources.realestate.co.jp/buy/getting-a-variable-ra...

I believe, as always, that Japan is the roadmap for the future. As regards disinflation/deflation, zero interest rates and large permanent government deficits required to keep the economy growing (weakly), Japan is merely ahead of the rest of the developed world by about 2 decades.
The only divergence seems to be in stock market performance. I would really like to know why Japan’s stock market is underperforming.
Print the post Back To Top
No. of Recommendations: 6
I would really like to know why Japan’s stock market is underperforming.

My conclusion: because the performance has been terrible.
Not the price performance, the business performance.

Price to book is not a perfect metric for valuing a broad index, but it's OK as a stake in the ground.
The P/B of the Topix (first section) is the same now as it was in July 2001, being 1.15. That was 17.83 years ago.
So, we can have a notion that valuation levels are comparable, and returns are measuring business progress rather than changes in valuation multiples.

The index has risen 1.79%/year since then. As multiples are about the same, the value of the index has probably risen roughly that much.
Add dividends, which are generally around 2%, to get the total return.
This is a pretty terrible return, so the Japanese market doesn't get a very high valuation multiple.
You can find better metrics of market valuation like CAPE, but they will general lead to the same conclusion.

In short, most Japanese companies have poor business economics.
The incremental returns on incrementally allocated capital are generally poor, for the simple reason that it's not generally a goal of management for that to be a high number.

Jim
Print the post Back To Top
No. of Recommendations: 0

In short, most Japanese companies have poor business economics.


That shouldn’t matter in the long term, though, should it?
A minority of companies with good business economics should manage to outcompete everyone else aside over the course of a few decades.
Unless the economy in Japan is really nepotistic/statist or something and not at all competitive/capitalistic.
Print the post Back To Top
No. of Recommendations: 6
That shouldn’t matter in the long term, though, should it?
A minority of companies with good business economics should manage to outcompete everyone else aside over the course of a few decades.
Unless the economy in Japan is really nepotistic/statist or something and not at all competitive/capitalistic.


The "outcompete" theory would work in any one industry better than it would for the economy as a whole.
Also, outcompeting a competitor means winning more business by providing more value for money to clients.
You can do that while making no profit at all. In fact, that makes it a bit easier: you can sell at cost.
Sometimes even less than that.
With support from friendly associated firms, banks, and government intervention a Japanese firm can sometimes lose money for decades.

But your second explanation certainly has a little bit of plausibility as well.
Making money for shareholders is not a significant goal of the management of the typical Japanese listed company.
You would think that it might be a useful secondary goal, as it could increase the prestige of the firm (something which IS very important to managers)
But corporate prestige comes primarily from gross revenue, revenue growth rate, and technical achievements.
Traditionally, concerns of profitability are limited to the top level executives. Senior product managers making decisions wouldn't usually concern themselves with it.
That's one reason you get a lot of amazing products that don't make any money.

These generalities have big exceptions, and of course corporate culture has presumably changed a bit over the decades.
But the sad truth is that it's quite possible to own shares in a well run well respected Japanese firm and never see any benefit from the profits, if any.
It was so bad for a while that the stock exchange created a new index based in large part on ROE,
thinking it would nudge managers into working for the benefit of shareholders, but it has so far flopped.
ROE is an input to the index selection, but company size is a bigger input, so it seems all the big firms simply kept doing the same old thing.

Jim
Print the post Back To Top
No. of Recommendations: 1
That shouldn’t matter in the long term, though, should it?
A minority of companies with good business economics should manage to outcompete everyone else aside over the course of a few decades.
Unless the economy in Japan is really nepotistic/statist or something and not at all competitive/capitalistic.


With a gradually shrinking population and a corresponding shift in demographics, there's not much economic growth to be had. I wouldn't expect the aggregate worth of publicly traded companies to outrun economic growth in the long run. Sure, there will be companies that will out compete others, but in the aggregate it's close to a zero sum game.

Elan
Print the post Back To Top
No. of Recommendations: 0
With a gradually shrinking population and a corresponding shift in demographics, there’s not much economic growth to be had. I wouldn’t expect the aggregate worth of publicly traded companies to outrun economic growth in the long run.

The working age population in China and the EU has been declining for a while (not nearly as fast as Japan’s (-1.35%)).
US working age population growth has slowed to a crawl.

What does that tell us about the future of the stock market?
Print the post Back To Top
No. of Recommendations: 1
And I believe that in the US the number actually working full time has shrunk even faster than the working age population . I expect to see a further decline in the number working later in the year as some (after a prolonged layoff )discover that not working has lots of charms. It certainly does for me , it's called retirement. The worry is lack of funds but people can adjust downward as long as true needs are met.

But these trends are very long term, I can't tell what will happen tomorrow much less in 20 or 30 years.
Print the post Back To Top
No. of Recommendations: 5
Speaking of madness in financial markets, I note that the S&P 500 now has a positive total return since the end of January.
(a couple of weeks before the all time high)

Crisis? What crisis?
Whee!

Jim
Print the post Back To Top
No. of Recommendations: 0
Forgive me if I am incorrect in my assumption Jim, but I detected a slight hint of sarcasm in your post.
Print the post Back To Top
No. of Recommendations: 1
Forgive me if I am incorrect in my assumption Jim, but I detected a slight hint of sarcasm in your post.

Well, I think the word "madness" gave it away : )

To be clear, I don't see many current market valuations making much sense.
Some seem too low, a lot seem too high.

But I guess divergence like that is the sign of a healthy market, in a way.
Even if their optimistic opinions are suspect, at least somebody is looking at individual issues instead of just index charts.

Jim
Print the post Back To Top
No. of Recommendations: 2
Earth to Market: "Get back"
Market: "Oh, Okay"

Elan
Print the post Back To Top