Sunday Spectacle CCXXIX

Central Bank Money Printing

Central banks generally increase assets by printing money and buying them, so the charts below are indicative of their money printing. Historically, increase in central bank balance sheet (i.e. increase in money printing and supply of money) has led to inflation in goods and services (this is offset by deflation or wealth destruction and a bunch of other factors). Recently most of the money printing has been used to buy financial assets--for instance, the JCB is a big owner of Japanese stocks--so it is not clear to me if the situation will be similar to the inflationary busts we have seen in the past. Beyond inflation, too much central bank asset purchases also distorts the market and crowds out the private sector--not a good thing from a capitalist point of view (private sector makes better capital allocation decisions than the government).

It's interesting how the main 3 developed country central banks have behaved over the last decade.

source: "Central Bank Cash Flood Swells Bond Danger" by Lisa Abramowicz,, June 2 2017

Not visible in the chart below but looking at the interactive chart in the Bloomberg article, we see...

(figures are rounded to nearest 0.1 trillion)

  • In June 2007, ECB assets were $1.6 trillion, JCB was $0.8 trillion and FedRes was $0.9 trillion.

  • As of March 2012, ECB had ramped up its assets to $4.0 trillion, while FedRes was at $2.9 trillion and JCB was $1.7 trillion.

  • By September 2014, FedRes assets had gone up significantly to $4.5 trillion, while ECB was $2.6 trillion and JCB was $2.5 trillion.

  • Interestingly, jumping to the present (May 2017), FedRes has not increased its asset base which is still around $4.5 trillion, while ECB has gone up to $4.7 trillion and JCB to $4.5 trillion.

The things that stand out to me are:
  • FedRes balance sheet was clean and had low "economic leverage" before the financial crisis. Relative to the size of the economy, FedRes has less assets than in Europe or Japan (do note that I'm being very simplistic here and there are many other things and operations undertaken by central banks which are unique to that region and won't be properly captured in these asset figures). Some people find the FedRes balance sheet alarming (because they look at how it was a decade or two ago) but it actually is the better one of the three above. If I'm not mistaken, the US Federal Reserve has also not intervened directly in the stock market and purchased stocks en masse like the JCB or Swiss Central Bank (not shown above)--this is a good thing for US corporations and the US economy (the less central bank involvement, the better IMO).
  • Once the FedRes hit around $4.5 trillion in 2014, it has stayed the same. In contrast, JCB has significantly ramped up its assets.
  • The ECB seems to tweak its assets more so than others. For instance, its assets were $4 trillion in 2012 but then dropped to $2.6T in 2014 and is now back up to $4.7T in 2017. I'm not sure if this is due to economic events (such as Greek crisis a few years ago) or for some political reason or something else. I also haven't looked to see if the changes are due to currency fluctuations (for example, Euro has declined against the US$ recently).
  • JCB assets seem really high compared to the size of the economy. Japan has always been a mystery and it's not really clear how it is going to play out.

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Sunday Spectacle CCXXVIII

Decline in American C Corporations
the Rise of Pass-through Entities

Catherine Mulbrandon from always does good work on economics and business graphics and this is another great one on American corporations and tax collections. It clearly shows something that is not widely understood by the public at large. Namely, the number of American C corporations--these are the ones that pay corporate taxes*--have declined significantly in the last few decades. The number of pass-through entities--these are ones that don't pay corporate taxes but instead the owner is taxed directly*--has risen. The biggest impact from all this is the reduction in corporate double-taxation (which benefits owners of such companies) and the decline in taxes being collected from corporations (which hurts government/society**).

* I'm being very simplistic here and there is more complexity to the notion of how corporate taxes are paid
** This is only true if you believe government is not too big and tax revenues should not decline

source: "Number of corporations has dropped since the 1980s,"Visualizing Economics May 19 2017. Created by Catherine Mulbrandon at

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Tuesday, May 23, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sold: Syngenta (SYT) -- Tender Offer Accepted

The Syngenta (SYT) buyout successfully closed about a week ago and ChemChina cashed out all shareholders that tendered the shares near the end of last week. If you haven't tendered your shares, you should do so immediately in the next round where they are accepting the shares; who knows how the untendered shares will be treated once the offer ends and you don't want to be in that situation (this is a Swiss company and is an ADR so squeeze-out rules may not be what a typical American or Canadian investor encounters).

Overall, I'm very satisfied with this deal. The returns weren't that great--about 10% from the initial October 2016 position and about 3.6% from the April 2017 position--and the deal got delayed by about a quarter for regulatory reasons but it was a low-risk position and turned out as I was anticipating. This is the kind of risk arbitrage position I would like to take on.

You learn a lot from deals like these. You don't get to see it reading this blog but I was starting to question myself because the spread was so large for so long. For such a publicly visible deal, it is easy to doubt yourself when the spread stays somewhat wide. The question, 'what does the smart money know that you don't' runs through your head a lot. In fact, I still can't figure out why the spread remained at about 3% even after the European regulators, who were the main gatekeepers, approved the deal. That's when I decided to significantly increase my stake (it almost seemed like a risk-free arbitrage at that point). I would have put more money into this deal at that point but it was a bit risky in terms of currency fluctuations (I only have a small portion in US$ and I don't hedge so even though 3% seemed almost risk-free, it could be wiped out by currency changes). Also, it would be in a taxable account so the benefit is diminished.

You also learn something about position sizing in deals like this. I was always thinking about increasing the stake but was a bit too scared. Then after the regulator approved, my confidence increased and I put as much money as I can into this (keeping in mind what I mentioned above: currency risk and tax impact). My portfolio isn't large like some of you but I had around 56% of my portfolio in Syngenta by the end.

I can never be sure but I think the spread remained large because this deal is too big for risk arbitrageurs. Professional risk arbitrageurs tend to have 20+ deals at the same time and don't take big positions unlike amateurs like me (a key reason for this is that you want risk arbitrage to be uncorrelated to the market and not so dependent on company specific risk). This is a massive deal and arbitrageurs likely didn't have enough capital to commit. Furthermore, there were some big blow-ups, including John Paulson's risk arbitrage funds, in 2016 due to big merger failures (particularly several big deals being blocked by regulators in the healthcare sector). I think this limited the capital availability and probably made them limit their exposure to individual deals.

Price sold: US$92.95
Total Return: 6.4% (annualized (estimate): 11% -- not meaningful)

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Sunday Spectacle CCXXVII

Real Estate Contribution to Canadian Provincial GDP

(source: "In Home Capital’s Mortgage Mess, Blame the ‘Unlucky’ Brokers" by Katia Dmitrieva, Bloomberg, May 23 2017)

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Sunday Spectacle CCXXVI

Rise of Indexes vs Stocks

Not sure what is counted as stocks in this graphic by Bloomberg but it's amazing that indexes outnumber stocks. That's beyond crazy. The number one function of stock markets, according to some theorists, is price discovery and wonder how much of that is lost due to the rise of indexes.

Wonder how these indexes are going to behave during a market correction or a crash.

source: "There Are Now More Indexes Than Stocks," Bloomberg, May 12 2017


Sunday Spectacle CCXXV

American Business Creation/Termination

I'm shocked to see such a low number of businesses (overall net) being created in the last decade. I don't know if the data is bad or something is being missed. This is probably good for existing companies but bad for society (since it implies less dynamic and less innovative economy).

(source: 1Q 2017 GMO Quarterly Letter, GMO. URL direct link; URL main website)

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