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    • What are the early warning signs that an industry will not meet expectations?

      Sometimes investing feels like a game of Titanic: hold your sinking stock too long and you’ll go down with the ship. I did consulting work for a local wealth management firm many years ago, and in talking with one of the principals I was impressed with how much research they did from the 10-Ks and various other reports. A carefully written footnote might hint at a pending disruption from a key supplier, or a continuing rise in price of a core commodity. But with a capricious President on economic decisions, reading the tea leaves appears an even more complex endeavor.

      Tech got a severe body blow with the Trump administration’s decision yesterday to put a freeze on H-1B visas, three quarters of which are used by the Tech industry to bring in foreign talent to the US:

      “‘This is a full-frontal attack on American innovation and our nation’s ability to benefit from attracting talent from around the world,’ said Todd Schulte of, a pro-immigration advocacy group for big tech companies.

      “‘America’s continued success depends on companies having access to the best talent from around the world,’ Google said. The tech giant’s C.E.O., Sundar Pichai — who was born in India.”

      It’s anyone’s guess how long the freeze will last, or whether it will be quickly reversed and forgotten. Should CEOs start hiring fortune tellers?

      Further Reading



    • For those who look for early warning economic indicators, I think this news is significant. The Federal Reserve tries to use its levers to keep the US economy—and by extension the global economy—from worsening. For the first time since the Great Recession, the Fed is forcing the banks to keep more cash on hand by banning stock buybacks and limiting dividend payouts. One of their board members even feels that they aren’t going far enough:

      “Board governor Lael Brainard called on the Fed to block dividend payouts to shareholders during the third quarter, not just limit them.

      “‘I do not support giving the green light for large banks to deplete capital, which raises the risk they will need to tighten credit or rebuild capital during the recovery,’ wrote Brainard, who was appointed by President Barack Obama. ‘This policy fails to learn a key lesson of the financial crisis, and I cannot support it.’”

      You would think the $2 trillion in additional deposits since the pandemic began would ease the Fed’s concerns, however, perhaps the $2T in additional cash on hand should be viewed as a temporary situation.

      Further Reading

      H/t @afisher


    • Balance sheet leverage is one of my indicators.

      As the Global Financial Crisis was starting, I did a quick analysis of the Fannie Mae and Freddie Mac balance sheets and determined they were leveraged at 150-to-1 once you subtracted out their intangible assets. They had all manner of intangibles on their balance sheet, such as future tax abatements that may or may not occur.

      In any event, intangibles like goodwill, potential tax credits and the like are mostly an accounting fiction since you can't sell them. Know anyone who will buy some goodwill - the amount you paid above book value for an acquisition? I don't.

      Well at 150-to-1 you know that was eventually going to blow up, and since both were in my mother's estate, I quickly sold them. And they were taken over by the federal government about 9 months later.

      Subsequently, I remember listening to John Mack, CEO of Morgan Stanley during the Global Financial Crisis years, expounding on how proud he was that Morgan Stanley had reduced its leverage to 35-to-1. "Holy cow!" I thought. Normal depository banks have to retain about 8% capital or operate at 12-to-1 leverage and here was a major investment bank happy they were being conservative at 35-to-1.

      So if the Federal Reserve is telling banks to build their balance sheets, a fancy way of saying reduce your leverage, then you know they're not sanguine about the economy.