What is SOFR? The new U.S. LIBOR alternative

The Federal Reserve Bank of New York (FRBNY) recently unveiled the publication of three reference rates: the Secured Overnight Financing Rate (SOFR), the Tri-Party General Collateral Rate (TGCR) and the Broad General Collateral Rate (BGCR). The production of the three reference rates signaled the start of the phased transition by the Fed away from the London Interbank Offered Rate (LIBOR) to a new paradigm. This dramatic shift is part of a multi-year effort by regulators to restore market confidence and transparency in the wake of the LIBOR rigging scandal that rocked the global markets.

 

SOFR was first recommended as the US dollar alternative to the LIBOR back in June 2017 by the Alternative Reference Rates Committee (ARRC) – a committee comprised of board of governors of the Federal Reserve (“the Fed”), the FRBNY, financial institutions, trade groups and other regulators. The election of SOFR is the culmination of work begun by the Fed and the US Treasury Office of Financial Research (OFR) in 2014, when the ARRC was convened to create a new set of alternative reference rates rooted in actual transactions.

 

TGCR, BGCR and SOFR reflect transactions in the Treasury repurchase market. TGCR is a measure of rates on overnight counterparty/tri-party general collateral repurchase agreement (repo) transactions secured by Treasury securities, while BGCR measures rates on overnight Treasury general collateral repo transactions. The BGCR includes all trades used in the TGCR, as well as general collateral financing (GCF) repo trades. Of the three reference rates, SOFR was deemed to be the best alternative to LIBOR.

 

SOFR’s daily volume (which the FBRNY estimated at $800 billion, for underlying transactions, in November 2017) and coverage across multiple repo market segments allow for flexibility for future market evolution. Read more »

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Mutual Fund and ETF Fees Fall to Record Lows

“Owning shares in a mutual fund or ETF has never been cheaper. According to Morningstar’s annual fund fee study, the asset-weighted fee for roughly 25,000 funds and ETFs averaged 0.518% in 2017, down from 0.562% in 2016The 8% drop was the  biggest year-over-year decline since 2000, when Morningstar began tracking the data, and represents more than $4 billion in savings for investors, according to Morningstar. Driving the decline were investor preference for low-cost funds — flows into the cheapest 20% of funds within different categories surged 60% — and fee reductions by active funds.

 

 

“The cheapest 20% of funds raked in nearly $1 trillion last year while the rest of the industry saw net outflows of approximately $250 billion,” said Patricia Oey, senior manager research analyst at Morningstar, in a statement. “The message investors are sending is crystal clear — cost counts.” Passive funds were the biggest beneficiaries of these flows, accounting for 70% of new inflows; lower cost actively managed funds accounted for the rest.

The average asset-weighted expense ratio for passive funds fell from 0.16% in 2016 to 0.15% in 2017, while the asset-weighted expense ratio for actively managed funds dropped from 0.75% to 0.72%, as investors moved funds out of costlier funds into cheaper ones. Read more »

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Global Debt at Record Level

Global debt rose to a record $237 trillion in the fourth quarter of 2017, more than $70 trillion higher than a decade earlier, according to an analysis by the Institute of International Finance. At the same time, the ratio of debt-to-gross domestic product fell for the fifth consecutive quarter as the world’s economic growth accelerated. The ratio is now around 317.8 percent of GDP, or 4 percentage points below the high in the third quarter of 2016, according to the IIF.

 

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“The Bet” (or how your money finds its way to Wall Street). The excerpt from Warren Buffet’s letter to shareholders in 2017

“In this section, you will encounter, early on, the story of an investment bet I made nine years ago and, next, some strong opinions I have about investing. As a starter, though, I want to briefly describe Long Bets, a unique establishment that played a role in the bet. Long Bets was seeded by Amazon’s Jeff Bezos and operates as a non-profit organization that administers just what you’d guess: long-term bets. To participate, “proposers” post a proposition at Longbets.org that will be proved right or wrong at a distant date. They then wait for a contrary-minded party to take the other side of the bet. When a “doubter” steps forward, each side names a charity that will be the beneficiary if its side wins; parks its wager with Long Bets; and posts a short essay defending its position on the Long Bets website. When the bet is concluded, Long Bets pays off the winning charity.

 

Here are examples of what you will find on Long Bets’ very interesting site: In 2002, entrepreneur Mitch Kapor asserted that “By 2029 no computer – or ‘machine intelligence’ – will have passed the Turing Test,” which deals with whether a computer can successfully impersonate a human being. Inventor Ray Kurzweil took the opposing view. Each backed up his opinion with $10,000. I don’t know who will win this bet, but I will confidently wager that no computer will ever replicate Charlie. That same year, Craig Mundie of Microsoft asserted that pilotless planes would routinely fly passengers by 2030, while Eric Schmidt of Google argued otherwise. The stakes were $1,000 each. To ease any heartburn Eric might be experiencing from his outsized exposure, I recently offered to take a piece of his action. He promptly laid off $500 with me. (I like his assumption that I’ll be around in 2030 to contribute my payment, should we lose.) Now, to my bet and its history.

 

In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

 

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?

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The Biggest Companies In The World In One Chart

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How big is the oil market? Bigger than all raw metal markets combined…

While the amount of uses in one barrel of oil is quite incredible, we still need a mind-boggling amount of the natural resource each year to sustain consumption.

Oil production per year: 34 billion barrels (incl. other liquids)
Oil market size at current prices: $1.7 trillion per year

To consider how big this actually is, we compare the annual market sizes of all major metals and minerals that are mined throughout the world:

  • Gold: $170 billion
  • Iron: $115 billion
  • Copper: $91 billion
  • Aluminum: $90 billion
  • Zinc: $34 billion
  • Manganese: $30 billion
  • Nickel: $21 billion
  • Silver: $20 billion
  • Other metals: $67 billion (Including platinum, palladium, titanium, tin, moly, uranium, and more)

The total amount works out to $660 billion –  just a tiny fraction of the size of the oil market.

 

Chart: The True Size of the Oil Market

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Global House Prices: An Interactive Guide Across The World

“Property is as safe as houses, at least until the roof falls in. Our latest tally of global housing markets shows that American house prices have recovered to a new nominal high, and in Spain and Ireland, prices are again rising at a decent clip. In the English-speaking Commonwealth countries of Britain, Canada, Australia and New Zealand, prices have risen largely unabated in recent years.

Since autumn 2014 $1.3trn of capital has flowed out of China. Some of that cash has found its way into residential property in some of the world’s most desirable cities. In America, Chinese investors bought some 29,000 homes in the 12 months to March 2016 with a total value of $27bn, according to the National Association of Realtors. Much of this money is focused on a handful of cities: Seattle, San Francisco, New York and Miami. Foreign money has helped propel skyrocketing prices in other places, too. In Vancouver, home values have risen by 47% in four years; in London they have risen by 54%; and in Auckland the rise has been a whopping 75%. The influence of foreign capital flows on housing markets is being scrutinised, particularly as affordability becomes ever more stretched.

 

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The Important Chart About Global Economy

According to the latest data on global GDP released by the World Bank this February, the U.S. still is the world’s biggest economy – by far. As shown by this Voronoi diagram, the United States (24.3%) generates almost a quarter of global GDP and is almost 10 percentage points ahead of China (14.8%), in second place, and more than 18 percentage points ahead of Japan (4.5%) on three.

 

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The Structure Of The US Budget In One Chart

Source: CBO, JPMorgan

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Opinion. The Future of Automotive and Related Industries

A Columbia University study suggested that with a fleet of just 9,000 autonomous cars, Uber could replace every taxi cab in New York City – passengers would wait an average of 36 seconds for a ride that costs about $0.50 per mile. Such convenience and low cost will make car ownership inconceivable, and autonomous, on-demand taxis – the ‘transportation cloud’ – will quickly become dominant form of transportation – displacing far more than just car ownership, it will take the majority of users away from public transportation as well. With their $41 billion valuation, replacing all 171,000 taxis in the United States is well within the realm of feasibility – at a cost of $25,000 per car, the rollout would cost a mere $4.3 billion.

 

- Car ownership has been rising with the growing global middleclass. There are 3.5 billion or so global middle and this could rise to 5.5 billion by 2030
- Self driving cars will start bending that curve or car and vehicle ownership and the growth of driving and driving related jobs
- Intel just announced they will spend $15.3 billion to buy Mobileye (a maker of self driving car components)
- Qualcomm spent $47 billion to buy NXP, the largest automotive chip supplier
- Google, Uber, Ford, Tesla, Nvidia and others are pushing hard to make self driving cars
- Regulation and laws

 

Peak Car – Rise and fall or car ownership

According to a forecast by PwC, a total of 107.4 million vehicles will be manufactured worldwide in 2020. Globally over 90 million motor vehicles were produced in 2015 and there were about 73 million passenger cars built.

Self driving cars will mean that far fewer drivers and cars and trucks will be needed to fulfill many of the motor vehicle related tasks.
- Commuting
- Delivery of goods
- Non-commuting passenger travel Read more »

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