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Michael Nau

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  • The Conservative Bias Of Economic Models [View article]
    This is probably true of American economists, especially in the last 30 years. But I'd argue that academic fashions are a result of broader social forces, and it seems like the pendulum is swinging back to the left. Left-leaning models do a better job at explaining debt deflation that right-leaning models. Also, there is a growing consensus that inequality matters, and nobody but the far left cared about that before 2008.
    Feb 5 08:23 AM | 3 Likes Like |Link to Comment
  • How To Retire At 30! [View article]
    I don't get the point of retiring early. Why not just get a job you love and adjust your standard of living accordingly? Even if you can pull off retiring at 30 or 40 or whatever, why spend a decade or more of your best years before that doing something you hate?

    By the way, it sounds like this MMM guy does have two jobs: blog writing and being a landlord. Maybe he loves those jobs, but they are jobs if he relies on them for income.
    Jan 29 05:54 PM | 12 Likes Like |Link to Comment
  • American Capital Agency's Upcoming Q4 2013 Book Value Projection [View article]
    Thanks for the article!
    Jan 29 10:23 AM | 3 Likes Like |Link to Comment
  • Oxfam Report Suggests The NWO Is Almost Upon Us [View article]
    I guess I disagree in the sense that I think credit is critical for the economy. Policies that seek to destroy credit markets are likely to have also sorts on negative unintended consequences IMO. I think it is simpler to regulate credit by limiting its use in financial speculation and requiring stronger underwriting standards.

    As for taxes not solving the problem, consider this example: in the 1950s and 1960s, high tax rates funded higher education for a whole generation. Student loans were almost nonexistent. Nowadays, we've decided (wrongly I believe) that higher education should be substantially funded by debt. The tax vs. debt tradeoff is clear. Because when it comes down to it, high household debts are a result of education and housing policy. Mortgages and student loans are by far the largest types of household debt.
    Jan 28 12:12 PM | 1 Like Like |Link to Comment
  • Oxfam Report Suggests The NWO Is Almost Upon Us [View article]
    Joseph, I applaud the anti-elite sentiment behind the article, but I think some of the conclusions and implications are worrying. Prior political movements combined conspiracy-laden anti-internationalism and anti-finance economic populism that focuses on "the productive class" and "the little guy". We fought against them in WWII. I'm not joking- read the platforms of the Nazi and Fascist parties before the got into power.

    I'd argue that the solutions are more simple: political mobilization in favor of a regulated, redistributionist form of capitalism. Tax the rich, break up the big banks, re-regulate finance, strengthen the social safety net. It worked in the U.S. and Europe after WWII and could work again.
    Jan 28 11:32 AM | 1 Like Like |Link to Comment
  • How The Focus Of Dividends Impacts Returns [View article]
    Larry, interesting article, as always.

    One question about interpreting these sorts of studies: to what extent should we be skeptical of any study because past performance is no guarantee of future results? Clearly, they are not useless, but they also do not have the same epistemological status as chemistry experiments. It seems like your approach is to go with the research and downplay investor judgement because that judgement is so often flawed. What's the right balance?
    Jan 27 06:26 PM | Likes Like |Link to Comment
  • Systemic Risk Stems From Asset-Liability Mismatches [View article]
    Wait, you are saying that AIG poses no systemic risk? Given the 2008 crisis, I'd say the burden of proof is on you to support that claim.

    It doesn't matter if the derivatives side of the business is "separate" from the insurance side so long as counterparties have recourse to the parent company or other subsidiaries. And that is exactly how AIG got into the business in the first place, by using its AAA rating to support the obscure FP division.

    Here's what I'd propose: either spinning off the derivatives business or require that the counterparties have no recourse to the parent company.
    Jan 23 08:18 AM | 1 Like Like |Link to Comment
  • Credit Acceptance Corp.: A Low Risk Sub-Prime Auto Financing Company With 12% Upside [View article]
    I like CACC in the long run, but its no longer cheap. The high margins in the recent past will erode over time as discounts disappear and the whole sector continues to heat up. At that point, CACC will have to sacrifice either growth or credit quality. Fortunately, management is disciplined so it will probably sacrifice growth. But as a result, the company should not command a growth multiple.

    I'm waiting until the competitive cycle turns down and there is a washout of the high growth, low quality players such as CPSS.
    Jan 22 11:41 AM | Likes Like |Link to Comment
  • The Super Investors Of Graham And Doddsville [View article]
    I agree that American equity markets probably come closest to being perfectly efficient.

    Here's my story of the victims in distressed debt markets: holders of such debt that are constrained by leverage or regulation. During liquidity crunches, banks will sell risk assets, even if over-collateralized, to raise cash, and insurance companies are required by regulators to maintain credit quality in their portfolios. Investors using marking are forced to sell when they are unable to meet margin calls. Money managers at other institutions have explicit rules against holding the debt of bankrupt companies or don't want to take on the career risk.

    So I'm not sure that this is zero-sum. After all, most distressed credit instruments were not distressed when first issued. How should we define the boundaries of "the market"? If it is the entirety of the credit market encompassing all credit instruments, maybe you have a point. But buyers of distressed debt are a very specialized group. Maybe investors in this elite group are more-or-less equal (who knows?). But it seems to me that the class itself may be a way for participants to gain at the expense of those unwilling or unable to participate. Oaktree's very very successful investments in TARP-related programs are a case in point.
    Jan 15 06:39 PM | Likes Like |Link to Comment
  • The Super Investors Of Graham And Doddsville [View article]
    Larry, I always enjoy reading your articles, its good to have an index advocate ruffling everyone's feathers here on SA. And I mostly agree, the majority of my holdings are in index funds.

    But what about this: asset classes that are hard to index/have the strongest cases for market inefficiency. I'm especially thinking about distressed debt. Oaktree and Third Avenue have solid records in this space. Their strategies and risk profiles vary from fund to fund, and to my untrained eye they seem to have added value. I know elsewhere you tell people to dump high-yield for a combo of TIPS and small cap value, but these aren't simple high-yield corporate debt index funds like JNK.

    How would you go about designing a test of risk-adjusted outperformance in distressed debt markets? Or do you stick by your TIPS & small value approach?
    Jan 15 05:52 PM | Likes Like |Link to Comment
  • Perception Is Not Reality For Jamie Dimon And JPMorgan [View article]
    They may be good at making money, but criminality in the organization is systemic. Fraud, lying to pubic officials, and otherwise breaking the law is commonplace.

    This is not to say that they will ever be meaningfully reined in. But I'd hesitate to say that such an ethically challenged company has good leadership.
    Jan 15 10:12 AM | 1 Like Like |Link to Comment
  • Regulators back down over Volcker CDO provision [View news story]
    The worst part is that the underlying economic reality hasn't changed, the securities in question really are worth less than par. Its all about accounting earnings.
    Jan 15 06:37 AM | Likes Like |Link to Comment
  • Lessons From 2013: Part IV [View article]
    "Of course it would be worth less and that would be reflected in the PRICE."

    Larry, I didn't want to bring out the big guns, but the price is not always right: tech bubble, subprime CDOs. EMH folks have a tough time indeed explaining the financial crisis and actually abandon their theory when they point to "excessive risk-taking" or "regulatory lapses". If the market is always right, financial crises and asset bubbles wouldn't exist.
    Jan 13 08:02 AM | Likes Like |Link to Comment
  • Lessons From 2013: Part IV [View article]
    "That's just simple math"

    Larry, here's part of the issue with your approach: you are overconfident in the scientific status of current finance research. Finance is not math, physics, or even biology. Its a social science and is therefore a lot messier than most mainstream finance scholars would care to admit.

    The Miller-Modigliani "theorem" tries to copy the methodology of geometry to say something universal about the nature of cash flows. The problem is that its conclusion that dividends policy and capital structure are irrelevant is ridiculous. What if JP Morgan is financed with a debt to equity ratio of 1,000:1? I'd say it is worth less than if it is conservatively financed, because it would likely go bankrupt and the equity become worthless. This is partly why the financial crisis happened- too much faith in market prices and market actors, not enough common sense.
    Jan 10 10:32 AM | 1 Like Like |Link to Comment
  • Lessons From 2013: Part IV [View article]
    The issue with most studies of asset classes, investing styles, etc. is that they are constructed with a total return bias. The framing is something like: "imagine you spent $1000 on asset class X in year Y and never added to or reduced your position. What would the annualized returns look like up until the present?"

    Such studies can be very informative but also potentially misleading, because actual portfolio returns are path-dependent in terms of the timing of additions and withdrawals. What I'd like to see is a long-term comparison of DGI stocks and non-dividend payers or whatever under different accumulation regimes: 5% annual contributions to portfolio from prior year balance, zero contributions (current default), 3% annual distributions, 4% distributions, 10% distributions, etc. The results may be illuminating- different sorts of assets may work better depending on financial goals/situations.

    The ultimate total return investor that holds forever, never adds or withdraws, is a useful abstraction to make comparisons easier for academic research, but probably does not exist in the real world.
    Jan 9 06:42 PM | 3 Likes Like |Link to Comment