The Digest #124

Published on July 2, 2022

Independence Day

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

— Thomas Jefferson, July 4, 1776

Title Insurance Industry

Last week, I published two articles regarding the title insurance industry:

Title Insurance: Will the industry’s boom turn into a bust in a housing downturn?

Investors Title Company: A strong regional competitor with a fifty-year history


Risk Capital and Markets: A Temporary Retreat or Long Term Pull Back? by Aswath Damodaran, July 1, 2022. This article looks at the ebbs and flows of risk capital observed over several decades and then zooms in on the past two and a half years. “While it is easy to call the market movement in 2022 a correction and to argue that it is overdue, it is facile, and it fails to address the question of why it is happening now, and whether the correction is overdone or has more to go. In this post, I will argue that almost everything that we are observing in markets, across asset classes, can be explained by a pull back on risk capital, and that understanding the magnitude of the pull back, and putting in historical perspective, is key to gauging what is coming next.” (Musings on Markets)

Pension Funds Plunge Into Riskier Bets—Just as Markets Are Struggling by Dion Rabouin and Heather Gillers, June 26, 2022. The use of leverage in public pension funds has been increasing. Some funds use derivatives to gain leveraged exposure to underlying assets while others have issued bonds and invested the proceeds. The hope is that using leverage will amplify returns, but this strategy can also amplify losses. The first-ever post on The Rational Walk in February 2009 was a review of Roger Lowenstein’s While America Ageda book about America’s pension crisis. Thirteen years later, the situation seems to be getting even worse. (WSJ)

Wealth vs. Getting Wealthier by Morgan Housel, June 28, 2022. The premise of this article is that the process of becoming wealthier feels better than actually having wealth. During market declines, those who have investable assets often feel terrible because they are on a downward trajectory, not because their standard of living is in question. But I suspect that the 83% of Americans in a recent poll who described the economy as “poor or not so good” felt that way because of declining real wages and the recent destruction of the purchasing power of their savings. Malaise is affecting all segments of society in mid-2022 even if underlying reasons differ. (Collaborative Fund)

Fear of Crashing by Alex Morris, June 30, 2022. “The key question to answer in this bear market, and the ones that will undoubtedly follow it in the decades ahead, is whether you’re truly a long-term investor; can you accept the fact that stocks will periodically decline by 20%, 30%, or more? If you can, the answer is to structure your portfolio accordingly (to survive whatever tomorrow brings). And when those tough times inevitably arise, it’s worthwhile to remind yourself that the good times will come again. This too shall pass. … But if you simply cannot accept the vicissitudes of the stock market, I only see one effective solution: you should greatly limit your equity exposure, if you own any stocks at all.” (The Science of Hitting)

Money, One Hell of a Drug by Frederik Gieschen, July 2, 2022. This article is a comprehensive review of a book about the Sackler family, the former owners of Purdue Pharma. “At the heart of the story is a thorny issue: addiction is great for business but it can quickly negatively affect lives. Opioids are an extreme example but products like alcohol, tobacco, gambling, and social media (even coffee and sugar or junk food) exist with this tension. Painkillers’ vast profit potential proved irresistible to those able to maintain a state of denial about the consequences of their actions.” (Neckar’s Minds of the Market)

Status Over Money, Money Over Status by Rob Henderson, June 26, 2022. Most people who have worked in technology probably realize that a large amount of value is often created by a small number of superstar employees (although this isn’t restricted to technology). However, these employees rarely earn compensation commensurate with their contributions. The flip side is that employees who generate relatively less value can be paid more than the value they create. This article explores some of the reasons for this phenomenon, and much of it boils down to status preferences. “For many people, prestige is more valuable than income.” (Rob Henderson’s Newsletter)

Who Owns the Fed’s Massive Losses by Paul H. Kupiec and Alex J. Pollock, June 23, 2022. This is an interesting article delving into the Fed’s accounting. “Under this unique accounting policy, operating losses do not reduce the Federal Reserve’s reported capital and surplus. A positive reserve bank surplus account is ensured by increasing an imaginary ‘deferred asset’ account district reserve banks will book to offset an operating loss, no matter how large the loss. Among other things, this accounting ‘innovation’ ensures that the Fed can keep paying dividends on its stock. Similar creative ‘regulatory accounting’ has not been utilized since the 1980s when it was used to prop up failing savings institutions.” (The Hill)

When Should You Hire a Financial Advisor by Nick Maggiulli, June 28, 2022. This is an assessment of when it makes sense to seek guidance from a financial advisor. It is notable that the author is employed by a wealth management firm but acknowledges that hiring a financial advisor is not the right decision for everyone. One of the most important functions of an advisor is to talk to clients and keep them on the right track in times of market turmoil. “Having a trusted source that can help you separate the signal from the noise can be a financial lifesaver. This won’t always show up on the bottom line, but it can make your financial life a whole lot easier.” (Of Dollars and Data)

No Escape: Brief Reflections on Modern Nostalgia by Brady, June 30, 2022. I’ve always thought of nostalgia as basically harmless, but this article makes some good points about how nostalgia can become dysfunctional. “Nostalgia is a combination of the Greek “nostos” with the suffix “-algia”, respectively meaning “homecoming” and “pain”. From what I gather, the original meaning is essentially synonymous with “homesickness”. What was once a sort of straightforward idea about travelers and soldiers has become a weird modern form of escapism.  And I’ll presently argue that escapism, in our common understanding, is almost never good. I partake sometimes and so do you, being the frail creatures that we are. But, I think we ought to strive to avoid it.” (Think On These Things)

George Washington’s Farewell Address, February 21, 2022. Some parting thoughts from George Washington are worth considering on Independence Day. “What can we learn from George Washington’s writing? It seems to me that a great deal of his famous Farewell Address contains insights that continue to apply to the United States in the early twenty-first century.” (The Rational Walk)


Berkshire Hathaway: The Incomparable Compounder, June 29, 2022. 1 hour, 14 minutes. This is an excellent discussion between Patrick O’Shaughnessy and Chris Bloomstran regarding Berkshire Hathaway. They start with a discussion of the insurance business and float and proceed to cover many of the other major drivers of Berkshire’s success over the years. Chris Bloomstran knows Berkshire inside and out and this conversation is well worth your time. (Business Breakdowns)

How to Spot a Fraud When Everyone’s Against You, July 1, 2022. 49 minutes. “In this episode, we speak with the Financial Times’s Dan McCrum and Paul Murphy about their multi-year effort to expose fraud at Wirecard, a German payments giant that went spectacularly belly-up after billions of dollars were found to have gone missing. Dan, who’s just written a book about his experience called “Money Men,” explains how he first spotted problems at what was once described as “Europe’s greatest fintech,” and how hard it was to convince others of the truth. Rather than going after Wirecard itself, German authorities went after the journalists and short-sellers who were warning of the scheme.” (Odd Lots)

The Nature and Essence of Interest, June 30, 2022. 43 minutes. Jim Grant has a conversation with Edward Chancellor regarding his book, The Price of Timewhich will be published in AugustHere is part of the book’s description: “Over the first two decades of the twenty-first century, interest rates have sunk lower than ever before. Easy money after the global financial crisis in 2007/2008 has produced several ill effects, including the appearance of multiple asset price bubbles, a reduction in productivity growth, discouraging savings and exacerbating inequality, and forcing yield starved investors to take on excessive risk. The financial world now finds itself caught between a rock and a hard place, and Edward Chancellor is here to tell us why.” (Grant’s Current Yield Podcast)

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The Digest #124