Week InReview
Friday | Sep 6, 2019
Michael Burry explains why index funds are like subprime CDOs

The hero of “ The Big Short ” has plenty to say about everything from central banks fueling distortions in credit markets to opportunities in small-cap value stocks and the “ bubble ” in passive investing. “Like most bubbles, the longer it goes on, the worse the crash will be,” he said. That means a lot, coming from someone who made his fortune and fame betting against CDOs before the crisis.  One of his most provocative views: "The recent flood of money into index funds has parallels with the pre-2008 bubble in collateralized debt obligations, the complex securities that almost destroyed the global financial system."

in case you missed it...
The Treasury Department on Thursday unveiled its long-awaited plan to end US control of Fannie Mae and Freddie Mac, laying out a series of administrative and legislative steps to address the biggest piece of unfinished business from the 2008 financial crisis. Their blueprint outlines ideas for legislative and administrative steps, but leaves unclear how soon proposed steps can be completed. (Bloomberg | Sep 5)

The Cboe Volatility Index might be sending a false signal of a low level of implied volatility following a turbulent August in the market. The VIX could be underpricing the volatility risk by nearly 40%, according to an analysis by Macro Risk Advisors. (Bloomberg Markets | Sep 4)

A decade ago, they almost brought down the global financial system. Now they rule it. They earned 62% of global investment-banking fees last year, up from 53% in 2011, according to Coalition, an industry data provider. Last year, US banks took home $7 of every $10 in merger fees, $6 of every $10 in stock commissions, and $6 of every $10 paid to hold and move corporate cash. (The Wall Street Journal | Sep 4)

Investors already preoccupied with the trade battle between the US and China and the prospect of a recession have another frustration: thinning liquidity. The end of summer tends to be a slower period on Wall Street because of vacations and a sparse slate of economic data and earnings, but traders and analysts said the past month was marked by even lower-than-normal liquidity  –  a measure  of how easy it is to buy or sell different investments. (The Wall Street Journal | Sep 3)

Long-term bonds have been on a tear, with yields tumbling enough to heighten fears about a possible recession. Part of the recent fall in bond yields  –  which drives bond prices higher  –  has been caused by banks, insurers and other investors essentially buying on autopilot, because that's what their risk models and investment-hedging strategies tell them to do. (The Wall Street Journal | Sep 2)
FSOC meets on Libor, nonbank designations
(Sep 4) —  The Financial Stability Oversight Council met Wednesday and discussed potential amendments to its interpretive guidance on nonbank financial company designations, according to the Treasury Department. FSOC also:

  • Heard a presentation on nonbank mortgage origination and servicing and “potential related risks”

  • Received an update from staff at Treasury, the Federal Reserve, and the Commodity Futures Trading Commission on the transition from Libor to alternative reference rates, including the Secured Overnight Financing Rate (SOFR)

  • Council members “emphasized the importance of further attention by market participants and regulators to address any risks to the financial system that may arise related to Libor”

  • Voted to approve its fiscal year 2020 budget
the cyber cafe
How to minimize shadow IT
More than 9 in 10 organizations are dealing with "shadow IT" as unauthorized applications and functions take root without the IT department's approval, often creating significant cybersecurity weaknesses, finds the 2019 Oracle/KPMG Cloud Report. Although shadow IT isn't likely to be eliminated, IT leaders can help minimize it by collaborating with executives outside the department, providing self-service tools and using shadow IT discovery tools, Lisa Morgan writes.

US unleashes military to fight fake news, disinformation
Fake news and social media posts are such a threat to US security that the  Defense Department is launching a project to repel “large-scale, automated disinformation attacks.” The  Defense Advanced Research Projects Agency  wants custom software that can unearth fakes hidden among more than 500,000 stories, photos, video and audio clips.

Report details iPhone security flaws
Significant security flaws in iOS allowed hackers to gain access to iPhone users' location information, photos, private messages and more, says a report from Google's Project Zero. Although Apple is not commenting, Google says the flaws were fixed in February, but notes hackers "may nevertheless be able to maintain persistent access to various accounts and services by using the stolen authentication tokens from the keychain, even after they lose access to the device."
-—  CNBC
binge reading disorder
Ever had the post-vacation blues? Here’s how to avoid them.
The worst part of a vacation is usually when it ends. Catching up at work and home can be a jarring switch from carefree lounging on the beach. Here’s how to contend with the worst parts of returning to daily life without losing that vacation glow.

One obscure reason for August's big bond rally: negative convexity
Analysts trying to make sense of the steep slide in bond yields around the world in August are pointing fingers at many things, including slowing global growth and a prolonged trade war. Some are also attributing the push lower in yields to a less easily explained phenomenon: hedging against negative convexity in the mortgage market.

Even billionaires aren't rich enough to buy NFL teams nowadays
Suffering a dearth of bidders amid skyrocketing franchise values, the National Football League is mulling ownership rule changes designed to attract buyers outside of the richest of the rich.