Author: Scott Buchanan

High Yield Investing, 2: Types of Funds; Loan Funds; Preferred Stocks

Scott Buchanan3 Comments

Types of Funds: Exchange-Traded, Open End, and Closed End

Some investors like to pick individual stocks, while others would rather own funds that own many stocks.  For bonds, investors usually own funds of bonds rather than taking possession of individual bonds.

A straightforward type of fund is the exchange-traded fund (ETF). This holds a basket of securities such as stocks or bonds, and its price is constantly updated to reflect the price of the underlying securities. You can trade an ETF throughout trading hours, just like a stock. If you simply hold it, there will be no taxable capital gains events. Many ETFs passively track some index (e.g. the S&P 500 index of large company stocks) and have low management fees.

An open end mutual fund also trades close to the value of the baskets of securities it holds, but not as tightly as with an ETF. You can place an order to buy or sell an open end fund throughout the day, but it will only actually trade at the end of the day, when the share price of the fund is updated to the most recent value of the net asset value. A quirk of open end funds is that buying and selling by other customers can generate capital gains for the fund, which get distributed to all shareholders. Thus, even if you are simply holding fund shares without selling any, you may still get credited with, and taxed on, capital gains. Also, if a lot of shareholders sell their shares at the bottom of a big dip in prices, the fund must sell the underlying securities at a low price to redeem those shares. This hurts the overall value of the fund, even for customers who held on to their shares through the panic.

Some open end mutual funds offer skilled active management which may meet your needs better than an index fund. For instance, the actively-managed Vanguard VWEHX fund seems to give a better risk/reward balance than the indexed junk bond funds.

Closed-end funds (CEFs) are more complicated. A closed-end fund has typically has a fixed number of shares outstanding. When you sell your shares, the fund does not sell securities to redeem the shares. Rather, you sell to someone else in the market who is willing to buy them from you. Thus, the fund is protected from having to sell stocks or bonds at low prices. The fund’s share price is determined by what other people are currently willing to pay for it, not by the value of its holdings. Shares typically trade at some discount or premium to the net asset value (NAV). The astute investor can take advantage of temporary fluctuations in share prices, in order to buy the underlying assets at a discount and then sell them at a premium. CEFs are typically actively managed, and employ a wider range of investment strategies than open-end funds or ETFs do. CEFs can raise extra money for buying interest-yielding securities by borrowing money. This leverage enhances returns when market conditions are favorable, but can also enhance losses.

Bank Loan Funds

One type of debt security is a loan. Banks can make loans to businesses, with various conditions (“covenants”) associated with the loans. Banks can then sell these loans out into the general investment market.

Most commercial loans are floating-rate, so the interest received by the loan holder will increase if the general short-term commercial interest rate increases. Thus, the loan holder is largely protected against inflation. Loans typically rank higher than bonds in order of payment in case the company goes bankrupt, and some loans are secured by liens on particular company-owned assets like vehicles or oil wells. For these reasons, in the event of bankruptcy, the recovery on loans is higher (around 70%) than for bonds (average around 40%).

Various funds are available which hold baskets of these bank loans, also called senior loans or leveraged loans. One of the largest loan funds is the PowerShares Senior Loan ETF (BKLN), which currently yields about 4.5%. Most of its loans are rated BB and B, i.e. just below investment grade.   There are also closed end funds which hold bank loans, which yield nearly twice as much as the plain vanilla BKLN ETF, by virtue of employing leverage, selling at a discount to the actual asset value of the fund, and expertly selecting higher yielding loans.  For instance,  the Invesco Senior Income Trust (VVR), which I hold,  currently yields 8% , which is enough to keep up with inflation.      

High-Dividend Common Stocks

Most “stocks” you read about are so-called  common stocks. Most company common stocks are valued for their potential to grow in share price or to steadily keep increasing the size of their dividend. The average dividend yield for the S&P 500 stocks is about 1.6%, which is lower than the current yield of the (risk-free) 2-year Treasury bond.

There are some regular (C-corporation) stocks which are not expected to grow much, but which pay relatively high, stable dividends. These include some telecommunication companies like AT&T (T; 6.5%) and Verizon (VZ; 5.9%), electric utilities like Southern (SO; 3.5%) and Duke (DUK; 3.7%), and petroleum companies like ExxonMobil (XOM; 3.6%). Investors might want to buy and hold some of these individual stocks, since these are among the highest yielding, high quality stocks. Broader funds which focus on large high-quality, high-yielding stocks tend to have lower average yields than the stocks mentioned above. For instance the Vanguard High Dividend Yield Index Fund (VHYAX) currently yields only about 3.2 % .  

Preferred Stocks

Companies, including many banks, issue preferred stocks, which behave more like bonds. They  often yield more than either bonds or common stock. Like bonds, most preferreds have a fixed yield; some convert from fixed to floating rate after a certain number of years. Unlike bonds, most preferreds have no fixed redemption date. Fixed-rate preferreds are vulnerable to a large loss in value if interest rates rise, since the shareholder is stuck essentially forever with the original, low rate. On the other hand, if interest rates drop, a company typically can, after a few years, redeem (“call”) the preferred for its face value (typically $25) and then issue a new, lower-yielding preferred stock.

Preferred shares sit above common stock but below bonds in the capital structure. Companies have the option of suspending payment of the dividends on preferred stock if financial trouble strikes. However, a company is typically not permitted to pay dividends on the common stock if it does not pay all the dividends on the preferred stock.

The largest preferred ETF is iShares US Preferred Stock (PFF). It yields about 5.8%, but holds mainly fixed-rate shares. The PowerShares Variable Rate Preferred ETF (VRP; 5.9%  yield) holds variable or floating rate shares, which helps insulate investors from the effects of interest rate raises. The First Trust Intermediate Duration Preferred & Income Fund (FPF) is a closed end fund with more than half its holdings as floating rate. Due to use of leverage and selling at a discount, the fund yield is a juicy 7.9%.

My favorite class of high yield investments is business development companies, discussed here.

Happy investing…

High Yield Investments, 1: Some Benefits of High Yield Stocks and Funds

Scott Buchanan2 Comments

A Case for High-Yield Investments

The data I have seen indicates that if you don’t need to draw down your investment for twenty years or more, you may do well to put it all in stock funds and just leave it alone. For reasons discussed here  the average investor will likely do better to buy an index fund like the S&P 500 rather than trying to pick individual stocks. The long term average return (including reinvested dividends) in the U.S. stock market has been about 10 %  before adjusting for the effects of inflation. (All my remarks here pertain to U.S. investments; hopefully some aspects may be applicable to other countries).

However, particularly as you age, financial advisors typically counsel investors to allocate some portion of their portfolio to more-stable fixed-income securities that generate cash to spend and keep you from having to sell stocks during a market downturn. Historically, long-term investment grade bonds have been used to provide steady cash, and to serve as an asset which often went up if stock went down. Thus, a 60/40 stock/bond portfolio was considered prudent. That model has been less useful in recent years, since bond yields have been so low, and since long-term bonds sometimes fall along with stocks, e.g. if long-term interest rates rise.

Another driver now for allocating some savings into non-stock investments is that after the large run-up in stocks last few years, which has far exceeded gains in actual earnings, the market may well muddle along flatter in the coming decade. In regular stock investing, you are banking primarily on stock price appreciation – you are counting on someone else paying you (much) more for your shares some years hence than you paid for them. But what if the “greater fools” don’t materialize to buy your shares?

Also, the inflation genie has been let out of the bottle, and it may be tough to get inflation back under say 4%; investment grade bonds are yielding appreciably less than inflation these days, so you are losing money to buy regular bonds.

Finally, if your stock is cranking out say 8% cash dividends, and you are holding it for those dividends rather than for price appreciation, when the market crashes (and this particular stock goes down in price, along with everything), you can be blithe and unruffled. In fact, you can be mildly pleased if the price goes down since, if you are reinvesting the dividends, you can now buy more shares at the lower price. Trust me, this psychological benefit is important.

Some High Yielding Alternative Investments

In this blog over the coming weeks/months we will identify several classes of securities which generate stock-like returns (around 7-10 % returns, if the dividends are continually reinvested) via dividend distributions rather than through share price appreciation. These securities often have short-term volatility similar to stocks, so they should be treated in the portfolio as partly as stock-substitutes rather than as substitutes for stable high-quality bonds. However, the better classes of high yield investments maintain their share prices over a long (e.g. 5-year) period, similar to bonds, but with much higher yields.

We will discuss High-yield (“junk”) bonds , senior bank loans, preferred stocks, Real Estate Investment Trusts (REITs), Business Development Companies, Master Limited Partnerships,   and selling options (put/calls) on stocks.  

I’ll close today with three examples of these high yield securities, which I have happily held for many years. They yield 8-9%, and their share prices have held relatively steady over the past five years:

Cohen&Steers Total Return Realty Fund (RFI). Current yield: 8.0 %

Ares Capital   (ARCC)   Current yield:  8.1%

Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV). Current yield: 8.8%                    

(Charts from Seeking Alpha)

Some Countries Use Too Much Fertilizer, and Some Use Too Little

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In a world where China and India continue to build huge, CO2-belching coal power plants, and a world where global supply chains can no longer be taken for granted, you might think that a small, crowded country like the Netherlands would prioritize home-grown food production over concerns about greenhouse gas emissions from a relatively small volume of cow manure. But this is Europe, the land of eco-utopianism, and so you would be wrong.

Cow poop does emit nitrous oxide (a greenhouse gas) and ammonia (which can potentially pollute local water if uncontained). In a burst of green virtue,  the Netherlands has, “unveiled a world-leading target to halve emissions of the gasses, as well as other nitrogen compounds that come from fertilizers, by 2030, to tackle their environmental and climate impacts.” This target is expected to result in a 30% reduction in livestock numbers and the closure of many farms. Dutch farmers are not amused, and have vented their ire by dumping hay bales on highways and smearing manure outside the home of the agricultural minister. Protests over green policies hobbling local farmers have spread to Germany and Canada.

All this raised in my mind the question, could we really get along with using much less nitrogen-based fertilizers? I found a great article by Hannah Ritchie on OurWorldinData.org, “Can we reduce fertilizer use without sacrificing food production?”, which provides lush tables and graphs on the subject.

First, it’s estimated that artificial nitrogen fertilizers (where hydrogen, mainly derived from natural gas, is reacted with atmospheric nitrogen at high pressure over catalysts to make ammonia and derivatives) allow the world’s population to be about twice as high is it would be otherwise. Put another way, take away nitrogen fertilizers, and half of us die. So any campaign to massively scale back on fertilizer usage would result in mass starvation. You first…

That said, Ritchie’s article pointed out that some countries such as China seem to be (inefficiently) using much more fertilizer than they need to get similar results, some countries (e.g. America) seem to be about in balance, and some areas (e.g. sub-Saharan Africa) would benefit from using more fertilizer. So globally we could probably use a bit less fertilizer if the profligate countries used (a lot) less, while the deprived countries used a little more.

I’ll conclude with two charts from Ritchie’s article. The first chart shows, for instance, that Brazil uses twice as much fertilizer per hectare or per acre as the U.S, and China uses three times as much, while Ghana uses about a tenth as much.

The second chart shows estimated nitrogen use efficiency (NUE). An NUE of 40%, for instance, shows that 40% of the nitrogen in the fertilizer is converted to nitrogen in the form of crops, while the other 60% of the nitrogen becomes pollutants. In China and India, only about a third of the applied nitrogen is fully utilized, compared to two thirds in places like the U.S. and France. ( Some countries have a very high NUE – greater than 100%. This means they are undersupplying nitrogen, but continue to try to grow more and more crops. Instead of utilizing readily available nutrients, crops have to take nitrogen from the soil. Over time this depletes soils of their nutrients which will be bad for crop production in the long-run).

Aging Populations = Inevitable Slow GDP Growth?

Scott Buchanan3 Comments

Last month Eric Basmajian published “Why Demographics Matter More Than Anything (For The Long Term)” on the financial site Seeking Alpha. He predicts that that the developed world plus China face a future of low economic growth (regardless of policy machinations) due simply to demographics. His key points:

Demographics are the most important factor for long-term analysis.

The young and old age cohorts negatively impact economic growth.

The prime-age population (25-64) drives the bulk of economic activity.

The world’s major economies are suffering from lower population growth and an older population.

Over the long run, the world’s major economies will have worse economic growth, which will negatively impact pro-cyclical asset prices (like stocks).

I will paste in some of his supporting charts. First, the labor force is more or less proportional to the 25-64 age cohort (U.S. data shown) :

…and GDP growth trends with labor force growth:

Also, on the consumption side, that is highest with the 25-54 age group:

And so,

Younger people are a drag on economic growth and older people are a drag on economic growth… The prime-age population is the segment that drives economic activity, so if the share of population that is 25-54 is shrinking, which it is, then you’re going to have more people that are a negative force than a positive force:

Once the working-age population growth flips negative, an economy is doomed…. Working age population growth in Japan flipped negative in the 1990s, and they moved to negative interest rates, QE, and they have never been able to stop. The economy is too weak.

After 2009, the working-age population in Europe flipped negative, and they moved to negative rates and QE, and they haven’t been able to stop. Even now, as the US is raising rates, Europe is struggling to catch up and has already abandoned most of its tightening plans.

In 2015, China’s working-age population flipped negative, and they’ve had problems ever since. They devalued their currency in 2015 and tried one more time to inflate a property bubble, but it didn’t work, and now they’re having to manage the deflation of an asset bubble that the population cannot support.

The US is in better shape than everyone else, but we’re not looking at robust growth levels in this prime-age population.

In conclusion, “ The real growth rate in most developed nations is collapsing because of those two factors, worsening demographics, and increased debt burdens.    In the US, as a result of the demographic trends I just outlined plus a rising debt burden, real GDP per capita can barely sustain 1% increases over the long run compared to 2.5% in the 60s, 70s, and 80s.”

That is pretty much where Basmajian leaves it. No actionable advice (besides subscribing to his financial newsletter). What isn’t addressed is whether productivity (production per worker) can somehow be accelerated. Also, one of his charts (which I did not copy here) showed a big trend down in 25-64 age fraction in the US population in the 1950’s-1960’s (as hangover from the Depression?), and yet these were decades of strong GDP growth. So these demographic trends are not the whole story, but his analysis is sobering.

On the Spreading of Monkeypox

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New York City has become the second major U.S. city after San  Francisco to declare a state of emergency due to the rise of monkeypox cases: “New York City is currently the epicenter of the outbreak, and we estimate that approximately 150,000 New Yorkers may currently be at risk for monkeypox exposure.”

With the country and the world still feeling the economic/social/personal effects of one pandemic, is there another one on the way? I don’t know, having no special training in epidemiology, but have tried to peruse some reliable sources to find out what I could, and share this information for your examination. I will paste in a general page from a UC Davis article, then conclude with a CDC snip on transmission details.

It seems that monkeypox typically takes pretty close physical contact (especially with skin, body fluids, or e.g. towels/clothing)  to spread, with having multiple romantic partners being a high risk factor. This is the opposite of COVID transmission, where just being in the same room puts you at high risk. However, as with COVID, someone can be contagious in the early stages before they show obvious symptoms. Based on all this, my guess is that monkeypox will not spread in the general population very much, but it will spread significantly in some groups and locales. But that is just my guess.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

From UC Davis “Monkeypox: What you need to know about this rare virus”:

What are the signs and symptoms of monkeypox? At what point is it infectious?

Monkeypox starts with fever, then general body aches, malaise, and muscle aches. with the first symptoms are similar to influenza. Those usually precede the development of a rash. You have probably seen photos of the rash. It’s really hard to miss. It starts as macules, which are flat lesions. Then it forms a firm nodule. From there, it becomes a blister, then a pustule (a blister containing pus) and then it scabs over.

According to the Centers for Disease Control and Prevention (CDC), the incubation period (The time from infection to symptoms) for monkeypox is usually 7 to 14 days, but it can range from 5 to 21 days.

People may be contagious at the early signs of fever and stay infectious through the rash until the skin scabs and heals over.

How is it transmitted?

Monkeypox is transmitted through close person-to-person contact with lesions, body fluids and respiratory droplets, and through contaminated materials such as clothing or bedding.  [[ see more on transmission below]]

Can you die from monkeypox? 

Most people with monkeypox will recover on their own. But 5% of people with monkeypox die. It appears that the current strain causes less severe disease. The mortality rate is about 1% with the current strain….

What are the treatments for monkeypox? Is there a vaccine for monkeypox?

The smallpox vaccine has some cross protection against monkeypox. The vaccine is being made available through public health for people who have had contact with confirmed or suspected cases of monkeypox. If the vaccine is given within four days of exposure, it protects about 85% of the time. Even if the vaccine is given up to two weeks after exposure, it may modify the disease, making it less severe. 

In addition, there are some antivirals and immunoglobulins that are available to treat monkeypox.

Is there a way to test for monkeypox?

If a health care provider suspects that a patient has been exposed to monkeypox, they can get a sample of a lesion and send it to the state for testing. If it turns out positive, the result will be confirmed at the CDC.

~~~~~~~~~~~~~~~~~~~~~~~~~

From CDC “How It Spreads”:

Monkeypox spreads in a few ways.

  • Monkeypox can spread to anyone through close, personal, often skin-to-skin contact, including:
    • Direct contact with monkeypox rash, scabs, or body fluids from a person with monkeypox.
    • Touching objects, fabrics (clothing, bedding, or towels), and surfaces that have been used by someone with monkeypox.
    • Contact with respiratory secretions.
  • This direct contact can happen during intimate contact, including:
    • Oral, anal, and vaginal sex or touching the genitals  or anus of a person with monkeypox.
    • Hugging, massage, and kissing.
    • Prolonged face-to-face contact.
    • Touching fabrics and objects during sex that were used by a person with monkeypox and that have not been disinfected, such as bedding, towels, fetish gear, and sex toys.
  • A pregnant person can spread the virus to their fetus through the placenta.

A person with monkeypox can spread it to others from the time symptoms start until the rash has fully healed and a fresh layer of skin has formed. The illness typically lasts 2-4 weeks.

Is the Bottom Quartile Already in Recession?

Scott Buchanan2 Comments

I heard on a radio interview that spending by the bottom quartile is way down in 2022, while it is holding up merrily for the upper two quartiles. My mind jumped to the thesis:

“Hmm, the bottom quartile probably (proportionately) felt the benefit of the three COVID stimulus packages more, plus they would have benefited more, proportionately, from the enhanced 2020-2021 unemployment benefits, which (I gathered from anecdotal observations) often paid them more for staying home than they used to receive for working. But…by 2022, all that extra money may be running out.”

I spent some time poking around the internet, trying to find some pre-made figures or tables to support or disprove this thesis. What I found tended to support it, but this is not rigorous data-mining. So, for what it is worth, here are some  charts.

First, about the spending in 2022. This chart indicates that discretionary service spending by the bottom 40% income cohort is indeed down sharply in  2022, and now sits a little lower than a  year ago, while the upper 20% cohort is spending actually more than a year ago.  Spending by the middle 40% trended up in 2H 2021, then back down in 1H 2022, to end about even over the past 12 months:

Discretionary service consumption by income cohort. (I don’t what the units are for the y-axis, but presumably they show the trends). Source: Earnest Research, as of June 30, 2022, as reproduced by Blackrock.

And what about 2020-2021? The next two charts indicate (a) that consumer spending was HIGHER in 2021 that it was pre-COVID for the bottom income quartile, even though (b) their employment in 2021 remained some 20% LOWER than pre-COVID. Looks to me like a lot of spending of stimmie checks was going on in 2021, but (see above) that money has run out in 2022.

Some reader here may have access to a more consistent data set, so I am happy to see this thesis tested further.

Consumer Spending by Income Quartile (Showing higher spending by bottom quartile following stimulus checks and enhanced unemployment payments in 2020-2021)  Source: The Economic Impacts of COVID-19: Evidence from a New Public Database Built Using Private Sector Data, Stepner et al. (2022).

Employment Changes by Wage Quartile ( Showing employment for the bottom quartile in most of 2021 was some 20% lower that pre-COVID)  Source: The Economic Impacts of COVID-19: Evidence from a New Public Database Built Using Private Sector Data, Stepner et al. (2022)   

A Logarithmic Map of the Entire Universe, from Earth to Edge

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Pablo Budassi has created a logarithmic map of the entire known universe, that shows the distances and relative sizes of objects above the earth’s surface. I think you will find it a worthwhile use of your 30 seconds of attention to click on the link below, scroll to the bottom to start down at the earth’s surface (the image quality at the link is much better than I can convey in these snips here):

And  then scroll your way up and up, through planets and stars to galaxies (not every star and every galaxy is shown, of course) and galaxy clusters:

And out through galaxy superclusters, to the very edge of the observable universe:

The scale of distances and sizes keeps getting larger and larger by factors of ten (i.e.,  logarithmically) as you go up. Here is the link: https://www.visualcapitalist.com/cp/map-of-the-entire-known-universe/

I am awed by the sheer sizes of things compared to familiar earth-scale objects. We know that our observable universe has not existed forever; presumably whatever caused this vast universe is incomprehensibly vaster. [1]

I am also impressed that humans are able to figure all this out; it is not obvious to the naked eye. An enormous amount of collective brainpower over the years  has gone into making instruments (including space-based telescopes) to collect data at many electromagnetic frequencies and to figure out what it all means.

Bonus: In case you haven’t seen them already, here is a link to compelling infrared images from the newly-deployed $10 billion Webb space telescope (your tax dollars at work):

https://www.cnet.com/science/space/features/webb-space-telescope-mechanics-how-nasa-unlocked-astronomys-next-great-era/

[1] I don’t want to distract from the sheer visual enjoyment of this graphic with a controversial discussion of what is responsible for bringing our universe into existence. All I will say here is that it did not come from “nothing”, as a certain dishonest physicist is fond of claiming. See the “Thinking About the Existence and Attributes of God” section of Christian Apologetics Insights from David Geisler, Ray Ciervo, and Prem Isaac [2020 NCCA, 9], including footnotes 1 and 2, for a brief discussion of these issues, and implications for a nonmaterial sustainer of physical reality.

The Great Crypto Market Meltdown of 2022

Scott Buchanan2 Comments

Ah, the delicious crypto bubble of 2021. Major cryptocurrencies like Bitcoin and Ethereum more than tripled in value. Every week, some new coin would get minted, letting early adopters 10X their money in a month.  Decentralized finance (DeFi) based on blockchain technology was The Next Big Thing. Move over, stodgy old Bank of America.

That was then, this is now. The chart below of Bitcoin price serves as a proxy for the fortunes of the whole sector:

Source   [the year 2021 is marked in highlighter].

This has the smell of a bubble bursting. First, why did crypto soar in 2021? I think COVID gets some credit for that. Most adults in the developed world sat home for many months in 2020-2021, and in countries like the U.S. were handed thousands of dollars of stimulus money,  in addition to giant unemployment checks. Much of that money went to buying “stuff” on Amazon, but much of it went into financial assets like stocks and crypto. Something like  half of men in the United States between the ages of 18 and 49 dabbled in crypto. As you saw your friends making money effortlessly, classic tulip bulb FOMO set it.

All bubbles end eventually. Crypto has imploded from a $ 3 trillion market to a $ 1 trillion dollar market in just a few months. That is two trillion (with a “t”) gone.  If Bitcoin were the only significant factor in the crypto universe,  the latest bust would be a fairly trivial matter. Since Bitcoin goes up and Bitcoin goes down, that is nothing new. But part of the hype of 2021 was all the breathless commentary on how DeFi would sweep the world and Change Everything. No more centralized banking controlled by old men in suits – – power to the people! And in fact, a whole industry of lending and borrowing in the crypto world has sprung up. That is where some more consequential problems have shown up.

Warren Buffet is known for the saying, “When the tide goes out, you find out who is swimming naked.” The rapid fall in crypto valuations has set off a cascade of failures in DeFi.  A key event was the implosion of the Luna/Terra (un!)stablecoin, in April-May 2022, which we wrote about here. A more widespread problem has been the unwinding of the crypto lending/borrowing system. Various firms loaned out the coin holdings of their customers to parties that wanted to trade (speculate) with them, and who were willing to pay something like 4-9% interest for get ahold of these coins. The parties doing the lending thought they were keeping themselves safe by requiring excess collateral for these loans.

 Oversimplified example: I will lend you $100 (real dollars) if you deposit $140 of Dogecoin with me. If Dogecoin falls in value to close to $100, I would require more collateral from you within say ten days, or else I would sell your Dogecoin into the market and get my $100 back (and you eat the $40 loss). The big problem comes if Dogecoin falls so fast that by the contracted grace period ends, its value is down to $80. Now I as well as you realize losses, and widespread panic ensues. Now, if I have been lending out your Dogecoin to yet more parties who (it turns out) can’t pay me back in full, I am doubly hosed. And now the solid customers start withdrawing their funds/coins from these firms, and we have an old-fashioned bank run. It doesn’t help that Celsius Network froze customers’ accounts last month, so they could not withdraw the coins they had deposited. That sort of thing really gets clients nervous.

And so a number of significant DeFi firms are going bust, and calls get louder for more government regulation, which is largely antithetical to the whole DeFi enterprise. I will paste below a summary of this carnage, and then in the interests of full disclosure, tell how it has affected me personally:

The crypto and the DeFi industry boomed over the past few years but the recent crypto crash has plundered the fortunes of several crypto companies. The following crypto companies have recently encountered financial difficulties:

Vauld

Business Today broke the news on Monday that Vauld, the Singapore-based crypto lending and investment firm operating in India announced that it has halted withdrawals and deposits for its more than 8,00,000 clients. Vauld’s CEO Darshan Bathija said in a blog post that unstable market circumstances had created “financial challenges” for the company. The CEO also announced that investors had withdrawn over $197 million in the past few months.

Terraform Labs

Terraform Labs was the company that had triggered the recent crypto crash. They created the algorithmic stablecoin TerraUSD which de-pegged from the US Dollar and led to the crash of Terra Luna another token of the ecosystem causing massive panic and sell off in the crypto markets.

Terra co-founder Do Kwon announced a “recovery plan” in May that included infusion of additional funding and the rebuilding of TerraUSD so that it is backed by reserves rather than depending on an algorithm to maintain its 1:1 dollar peg.

Voyager Digital

On July 6, the American crypto lender disclosed that it had filed for bankruptcy. In its Chapter 11 bankruptcy petition, Voyager stated that it had over 1,00,000 creditors, assets between $1 billion and $10 billion in value, and liabilities in the same range.

Three Arrows Capital (3AC)

The Singapore-based cryptocurrency hedge firm went bankrupt on June 29, just two days after receiving a notice of default on a crypto loan from lender Voyager Digital for failing to make payments on an approximately $650 million crypto loan. The company filed a petition for protection from its creditors under Chapter 15 of the United States’ bankruptcy code on July 1. This section of the code permits overseas debtors to safeguard their U.S.-based assets.

Celsius Network

Celsius Network also suspended withdrawals and transfers last month due to “extreme” market conditions. They also hired consultants in preparation for a future bankruptcy filing. The American-Israeli business reportedly disclosed on July 4 that a quarter of its workers had been let go.

Babel Finance

The Hong Kong-based cryptocurrency lender stated on June 17 that it had temporarily halted crypto-asset withdrawals as it scrambled to reimburse consumers. According to the company, “Babel Finance is suffering unprecedented liquidity issues due to the current market situation,” emphasising the severe volatility of the market for cryptocurrencies.

CoinFLEX

In a blog post published on Thursday, CoinFLEX’s CEO Mark Lamb announced that the company would temporarily halt withdrawals due to “extreme market conditions” and uncertainty about a certain counterparty. The company is facing serious financial troubles and there seems to be no way out.

My Confessions

Briefly — I bought into Bitcoin and Ethereum in the form of the funds GBTC and ETHE towards the end of 2020. As crypto started to unwind this year, I sold out of ETHE to de-risk, coming out a little ahead there. I decided to hang in with the Bitcoin fund, riding it up, and now down, down, down. I am so far in the red on this one that I am just going to hold it indefinitely, hoping for some recovery someday.

I bought into Voyager (see above, it has recently crashed and burned) and sold half after it doubled, and the rest at about breakeven price, so came out ahead there. Another, similar firm, Galaxy Digital, I bought has also plummeted to near zero. I got out of that, but waited too long and lost about 30% there.

Readers with exquisite memories might recall that I wrote an article some months back here on EWED touting the DeFi model as a great way to earn interest to keep up with inflation: “Earning Steady 9% Interest in My New Crypto Account.”  I chose BlockFi rather than Celsius Network to put my funds in for this, since Celsius (an offshore enterprise) seemed a little shady, whereas BlockFi made a point of being audited and compliant with U.S. regulations. Good choice, in light of Celsius’ recent freeze on customer withdrawals.

Now, even solid firms like BlockFi are hurting. Customers spooked by all the other crypto drama are withdrawing assets “just to be on the safe side.”  BlockFi is seeking cash infusions from white knight Sam Bankman-Fried to stay afloat. The 30-year old crypto billionaire looks to be able to acquire the firm for pennies on the dollar, wiping out the initial (private) investors in BlockFi.  I am one of these BlockFi customers withdrawing funds (half of my deposit there) – – just to be on the safe side.

Three Tips for More Effective Learning, from Andrew Watson

Scott BuchananLeave a comment

I just ran across a short article [1] summarizing a talk with some techniques on learning more efficiently, which seemed worth sharing here. It may be something for professors to pass along to their students.

The speaker was Andrew Watson, who is an expert on learning and the brain, and currently a teacher at the Loomis Chaffee School in Connecticut. He noted three key ways that students (and adults) can work with the ways the brain learns information. The last two points are good but well known, while the first point was not something I have seen emphasized much:

( 1 ) Retrieve information while studying:

To study better, students should focus on the idea of retrieval rather than review. Trying to recall information before looking back at it produces more remembering than simply reading it through again. He suggested creating flash cards and using visual hints and clues as effect retrieval techniques.

( 2 ) Change the environment to avoid distractions:

The environment in which someone studies also affects how well they retain information because the human brain works best when it focuses on one activity at a time.

(My comment: That is absolutely true for me, I can’t stand any distraction when I am studying or writing, but I know people who claim they study more effectively with a TV show or music going in the background…I wonder what academic studies show about that.)

( 3 ) Bolster your health:

The brain, like the rest of the body, benefits from a healthy lifestyle, including eating well and exercising regularly. Ample sleep helps the brain to process and solidify information absorbed during the day. If homework is everything that helps a person learn and if sleep help you learn, then sleep is a part of homework.

[1] “Brain Hacks for Brainiacs” in the Loomis Chaffee Magazine, Spring 2022, page 13.

Shifts in Labor Participation: The Great Resignation Becomes the Great Reshuffling

Scott Buchanan1 Comment

More than 47 million workers quit their jobs in 2021, in what has become known as The Great Resignation. However, many of these workers are getting re-hired elsewhere. Hiring rates have outpaced quit rates since November, 2020.

The U.S. Chamber of Commerce has published some statistics on this reshuffling of the labor force, which I will reproduce here.  As shown in the chart below, quit rates in leisure and hospitality  (which require in-person attendance and pay lower salaries) were enormous. However, the recent hiring rates have been even higher in this area, so the shortage of labor there is only moderate.

When taking a look at the labor shortage across different industries, the transportation, health care and social assistance, and the accommodation and food sectors have had the highest numbers of job openings.

But yet, despite the high number of job openings, transportation and the health care and social assistance sectors have maintained relatively low quit rates. The food sector, on the other hand, struggles to retain workers and has experienced consistently high quit rates.

I am not sure I understand exactly what the following chart represents, but it was deemed important:

I think the % of yellow is the ratio of unemployed persons with experience in the field (i.e., who could readily participate) to the total job openings in that field. E.g., “…if every unemployed person with experience in the durable goods manufacturing industry were employed, the industry would only fill 65% of the vacant jobs.” These are interesting data, although I’d be even more interested in seeing  numbers on unfilled job openings as fraction of total (filled and unfilled) job openings to give a better idea on how much each industry is hurting for labor. Anyway, here is some of the commentary from the article:

It is interesting to look at labor force participation across different industries. Some have a shortage of labor, while others have a surplus of workers. For example, durable goods manufacturing, wholesale and retail trade, and education and health services have a labor shortage—these industries have more unfilled job openings than unemployed workers with experience in their respective industry. Even if every unemployed person with experience in the durable goods manufacturing industry were employed, the industry would only fill 65% of the vacant jobs.

Conversely, in the transportation, construction, and mining industries, there is a labor surplus. There are more unemployed workers with experience in their respective industry than there are open jobs.

The manufacturing industry faced a major setback after losing roughly 1.4 million jobs at the onset of the pandemic. Since then, the industry has struggled to hire entry level and skilled workers alike.

And finally:

Some industries have been less impacted by labor shortages but are grappling with how to deal with the rise of remote work. For example, the rise of remote work might explain why there has been less “reshuffling” in business and professional services.