August 17, 2024 Weekly Recap & Good Reads

Last week in Random Walk+Good Reads, all in one email

Publishing Note: Random Walk will be on vacation next week.

👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun. 

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Last week in Random Walk . . .

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👇Here’s what Random Walk published last week 👇

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Analysis & Ideas

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Macro & Markets

Reallocating capital in a liquidity crisis. NY Fed researchers make the case for centrally administered liquidity injections during bank runs. See also How do recent financial conditions compare to previous tightening cycles. Chicago Fed researchers make the argument that credit conditions have tightened more than what the hiking cycle would predict. Haven’t dug into it, but I’m skeptical.

This is how Treasury really funds trillions of dollars of US debt. Interesting discussion of Treasury’s preference for shorter-term issuance. The discussion was prompted by a paper from Miran and Roubini that argues Treasury’s duration tactics function as “stealth QE” by favoring the short end of the curve (and thereby keeping rates at the long end of the curve relatively low). Idk have the expertise to have a useful opinion, but it seems intuitive that if Treasury could lock-in lower yields for the longer term, then it would . . . that Treasury continues to borrow short, suggests that borrowing long would come at a price it would be unwilling to pay.

Minsky Moments. A tiny primer on one of Random Walk’s favorite concepts.

5 Big Takeaways from Earnings Season. Heard it here first? Idk. When consensus converges on Random Walk, it means I need to take a different tact.

Fin Services

Rise of Crypto’s Shadow Bankers. Crypto banking got chased from the traditional banking system, and has predictably reemerged in the non-traditional banking system.

PE/VC

Stonepeak raises $3.15B debut fund for midsized infrastructure bets. Capital flows to the subsidies, and the air-pocket gets wider.

Hedge Funds are capitalizing on rampant creditor-on-creditor violence. More on the rush to exploit the “covenant-lite” deal terms of the free money era. Firms need rescue money, and investors are raising war chests to provide it . . . where the upside is leap-frogging the existing lenders through clever exploits of the deal docs. When times are good, sales triumphs over risk. When times get bad, risk says “I told you so.”

Goldman is giving insurance clients access to one of its hottest businesses: asset-backed lending. More on insurer’s rapacious demand for private credit yield (and private credit’s rapacious demand for insurance capital). See also Janus Henderson to buy Victory Park in private credit push. Why? Because Victory Park is an expert in asset-backed lending, which is “just as safe, but higher yielding” than traditional government bonds and investment grade credit.

The rich can’t sell their art, so their borrowing against it. Another asset price that’s indefinitely resilient, even though there’s no market to realize that price. So what’s to be done? Lend against it, obviously.

PE firms desperate for cash turn to a familiar trick. The struggle for liquidity is real, but while investors won’t buy PE companies, they will lend to them. PE funds lever up their portfolios with junk-rated debt, and use the cash to issue returns to investors. The loans will be repaid, y’know, when “things get back to normal.” It’s just like art. But see US junk loan funds suffer biggest outflows in years. Investors suddenly getting skittish around lending to middling companies.

Carta’s State of Private Markets. Lots of charts on the current VC funding landscape. I may dig into this more when I’m back.

Tech

Autonomous taxi boats. Idk if this has legs, but it’s an actual Jetsons-like futuristic advance, and for that, it deserves credit.

Culture clash at Netflix. The ad bros say “this is a relationship business, and it’s about brand, but we also need lots of tools and widgets to make it sell.” The product/tech bros say “idk, facebook and reddit make lots of money selling ads to cheap tchotchke makers, so do it that way.”

“Fractional” real estate platform, Landa, appears to be going under. If fractionalizing ownership is going to add value, it needs to start with a theory of bundling and transaction costs, that otherwise keep liquidity from the asset. Otherwise, you’re just taking a dollar and chopping it into 15 dimes, and that doesn’t work for long.

Energy

Booming demand for electricity stalls efforts to retire coal and gas. The best-laid plans of mice and men . . .

AI

Jobhunters flood recruiters with AI-generated CVs. More on the AI spam wars. If effort was part of the filter, then chatbots simply break the signal. Inevitably, there will be chatbots to respond to all the chatbots. It wouldn’t surprise me if “no chatbots” soon became a customer service value prop (at least until they get good enough).

Hedge Funds battle to turn AI from intern to analyst. More use cases along the lines of making tiresome things less tiresome.

We survived spreadsheet, and we’ll survive AI. Good reminder that while new technology can make certain jobs obsolete, it makes other jobs much more valuable.

Labor markets

Chipmakers face a labor crisis. Apropos of Reindustrialized Shrugged, it’s not so easy to conjure complex manufacturing out of thin air.

Real Estate & Migration

Welcome to y’all street, Texas’ burgeoning financial hub. Mostly fluff, but the underlying observation is that shift to the south and west becomes more enduring as those economies diversify and attract the full gamut of talent.

Massachusetts passes $5.2B housing bond bill to subsidize senior living. Lots of old folks need care and places to live, but not enough of them can afford what service providers are obligated to provide. As

Arnold Kling

says, ‘subsidize demand, and restrict supply.’ It’ll work this time, for sure.

Anatomy of labor demand pre- and post-covid. This probably deserves its own post, but the gist of it is that mid-metros are seeing a larger share of job posting, while big central metros are seeing less. Plus, healthcare is a comparably larger share of total, driven especially by demand in mid-metros (that have seen large net-population gains).

Consumer

Unwanted Burning Man tickets piling up. Cautious consumerism spares no one. (h/t Eddy Elfenbein)

Healthcare

The truth about hospital profitability. It’s a pretty wide dispersion, with a few places doing well, and lots of others struggling. The key is not getting stuck with the low-margin services (that need to be subsidized by the higher margin stuff), but naturally, all of the incentives are to shed the lower-margin stuff (or get big enough to carry both).

Small businesses make hard choices as insurance costs surge. A coda on the Second-order effects of inelastic demand. When people over there consume more healthcare, the cost is born by people over here, but it’s paid by their employers, who may then choose to fire them, in which case they will have no idea that they got fired because of someone else’s decision to consume healthcare without regard to its costs (because those are born by other people). A system designed to fail.

Google sees AI as the key to a healthcare revolution. Lots of big ideas, and who knows, maybe Google will breakthrough where all the other “revolutionize healthcare with tech” efforts have failed. Again though, for as long as the game is optimized for unsustainable results (i.e. everyone gets everything, and no one pays anything), then it’s hard to imagine how this pans out.

People & Culture

A housing theory of childless cat ladies. A good thread and collection of evidence and articles around the relationship between density and fertility rates. As with most things on the subject of both housing and natalism, the evidence is a mixed bag, and it’s unclear which direction causation points. These are hard, multivariate problems.

Why is NYC Shrinking? Related point, but the people leaving NYC tend to be young, wealthy and relatively childless . . . and the reason they are leaving appears to be job-related, and not because of affordability issues.

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