At The Rotterdam

At The Rotterdam

Two old friends talk finance, money, and investing, every Friday. The Rotterdam was a popular downtown Toronto pub known for its extensive European beer selection. It was the perfect place for two rookies working for a large, US investment dealer to hang out after work on Fridays and discuss the capital markets. The discussion continues today on our podcast, with more perspective. We will tackle a new topic each week and try to keep the sessions shorter than thirty minutes. There seems to be an unprecedented amount of crisis news in current headlines. Our podcast explains why those who ignore history and react to noise typically have poor investment results. Always challenging but historically important, the stock, bond, currency, crypto and derivatives markets provide a unique look at human economic behavior. Jeff and Rasheed are not macro “talking heads” selling theory as fact. Rather than making short-term calls, we seek to simplify, clarify and discuss the financial markets from an honest theoretical and historical perspective. Importantly, our views come from our personal wide and deep experiences in the field. We hope that you enjoy the discussions. If you do please subscribe and recommend us to your friends. Please feel free to use the links to send comments or questions. read less

Episode 011: Is 60/40 Dead?
Jan 20 2023
Episode 011: Is 60/40 Dead?
The most generic rule in allocating one’s investments to the various possible asset classes is to be 60% stocks and 40% bonds. But 60/40 performed very badly last year, after more than a decade of having both bonds and stock rally on the back of low inflation and ever-declining interest rates. Now there is a debate about whether or not 60/40 is optimal for (at least some) investors. Goldman Sachs believes it is a good choice given that the future is always uncertain. Blackrock wants us to expand into more asset classes. Yet another opinion at Goldman Sachs sees the 60/40 success of the past as potentially gone for a very long time, perhaps even a lost decade. In episode 11 of At The Rotterdam, Jeff and Rasheed argue that thinking in terms of 60/40 obscures the most important question, which is what portfolio is most suitable for each investor. This separates the decision into two parts. What amount of money do I need in the future at various key dates. Or, if no specific needs, how much of my portfolio should be in reasonably safe assets so that I can sleep at night?For the riskier allocation, what risk premium am I trying to capture and how is the best way to do this? The equity risk premium (ERP) has dominated the past 150 years of investing in the US. But there are others: inflation, credit, liquidity and commodity. There might even be different risk premium in sub-classes (e.g. the smaller company premium in US equities).The events of 2022 reveal that the bond bucket in 60/40 is far from low risk: Bonds fell almost as much as equities last year. And they were down last year as well! So fixed income investing shouldn’t simply be a case of owning the bond market. Micro strategies are likely necessary. Institutions call one of these asset-liability matching. Another time we will dig into the best way to do this. For sure, however, a bond fund does not do this. 60/40 is good as a heuristic, reminding us to diversify, and so a good starting point for a discussion. But there are many more dimensions to an asset allocation decision, including one’s own specific needs.   Contact us at contact@attherotterdam.com Show Twitter: https://twitter.com/AtTheRotterdam Show Website: www.attherotterdam.com Rasheed’s Twitter: https://twitter.com/r_sale Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 010: Does Ex Fed Chair Ben Bernanke Deserve a Nobel Prize?
Jan 13 2023
Episode 010: Does Ex Fed Chair Ben Bernanke Deserve a Nobel Prize?
MONEY AND ECONOMICS. Recorded January 11, 2023. Released January 13, 2023. In awarding ex-Chair of the Federal Reserve Ben Bernanke  the 2022 Nobel Prize, a committee member observed that “Bernanke showed that banks played a central role in turning a relatively small recession into the Great Depression… [and] how badly it can go wrong if nothing is done about crises”. While the committee denied that Ben’s actions during the Global Financial Crisis  were a contributing factor, it was extremely fortuitous that it was one of the few specialists covering the monetary causes of the Great Depression who was in the driver’s seat at the Fed when deflation and depression loomed in 2008-9. In episode 10 of At The Rotterdam, Jeff and Rasheed discuss just how important Professor Bernanke’s research in the 1980s and actions in the 2000’s were. A solid knowledge of history backed the policies that halted the global economy’s fall into Depression.   Some useful links: Bernanke's speech to Milton Friedman Ben's winning 1983 paper The Nobel Prize committee on Ben Perry Mehrling on the Fed as Dealer of Last Resort Bagehot's Lombard Street The Economics Nobel is not a real Nobel Prize     Contact us at contact@attherotterdam.com Show Twitter: https://twitter.com/AtTheRotterdam Show Website: www.attherotterdam.com Rasheed’s Twitter: https://twitter.com/r_sale   Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 009. Bubbles
Jan 6 2023
Episode 009. Bubbles
INVESTING (EVERYONE). Recorded December 18, 2022. Released January 6, 2023.   For episode 9 of At The Rotterdam we talk a bit about financial bubbles, centering on one of the worst boom/bust tropes in financial history, the Dutch tulipmania of 1686-7. The tulip bubble is a terrible poster child for bubbles. For one thing, it didn’t really happen, no matter what Charles Mackay wrote in his famous 1841 book. To the extent that prices rose and fell, the event was too small to impact most of the citizenry, or other markets. The tulip bubble had no long-term technological benefits, unlike bubbles in internet stocks, railways, cars and bicycles, to name a few. Tulipmania had no regulatory response, unlike the South Sea Bubble of 1720 or the subprime boom and bust. In any event, it is almost impossible to tell when a bubble has started or even finished. The 1998-9 NASDAQ looked like a bubble in 2001. But a small blip in a long bull market today. So not only are bubbles not as evil as many a morality tale contends, they can be forces for good. And trying to avoid them risks missing capturing the risk premium if the market doesn’t crash. Not all booms go bust. Embrace bubbles.   Links: Contact us at contact@attherotterdam.com Show Twitter: https://twitter.com/AtTheRotterdam Show Website: www.attherotterdam.com Rasheed’s Twitter: https://twitter.com/r_sale   Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 008. SPACs: Where are the customers’ yachts?
Dec 23 2022
Episode 008. SPACs: Where are the customers’ yachts?
INVESTING (INTERMEDIATE). Recorded December 9, 2022. For episode 8 of At The Rotterdam we take a deep dive into one of the worst-performing structures of the last bull run. What do you need to know to avoid getting taken to the cleaners by Wall Street? There is an 80 year old book on the inner workings of Wall Street: Where are the customers’ yachts? It serves to remind us that there is far more money – or at least leverage – in providing financial advice than there is in receiving financial advice. Fees are of course everywhere. But it’s also the motivation. Grifters love financialization, for sure, but the investment business also motivates pretty much everyone to take the most fees and offset maximum risk to those least able to handle it. Special Purpose Acquisition Companies (SPACs) are just one such example of misaligned interests, uncompensated risk and egregious fees. Hugely popular in the final throes of the tech boom, SPACs are structured to put retail investors in the eventual combination – the “de-SPAC” – at a huge disadvantage on day 1. Certainly some de-SPACs work out, but this is in spite of the structure, not because of it.  SPAC apologists point out that IPOs are down as much as SPACs, and blame the investment climate. While this is partially true, the argument ignores the fact that IPOs rallied much more in the run up to the recent correction: While IPOs had 3.5x’d in the three years leading up to the market top, de-SPACs on average hardly budged. Since 2018 SPACs are down 60% while IPOs are up around the same amount. Some key readings: https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/ https://corpgov.law.harvard.edu/2021/04/23/recent-spac-shareholder-suits-in-new-york-state-courts-the-beginning-wave-of-spac-litigation/ https://www.warren.senate.gov/imo/media/doc/SPACS.pdf   Links: Contact us at contact@attherotterdam.com Show Twitter: https://twitter.com/AtTheRotterdam Show Website: www.attherotterdam.com Rasheed’s Twitter: https://twitter.com/r_sale   Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 007. About the Psychology of Money. How can we be better investors?
Dec 16 2022
Episode 007. About the Psychology of Money. How can we be better investors?
INVESTING (EVERYONE). Recorded December 15, 2022. Episode 7 of At The Rotterdam is our first book review.  Morgan Housel’s Psychology of Money is a masterpiece, packed with easy to understand anecdotes explaining why we struggle so much with money, wealth and our financial lives. But to us, the investing advice is beyond legendary. We recommend reading the book in its entirety. But here are the gems and how they fit with our understanding of investing on At The Rotterdam. Housel begins in Chapter 1 asking why people do crazy things with money. Any good behavioral finance book will give us more than enough “reasons”. Knowing why we are poor investors is the first step to becoming good investors. We’ll be going more into detail on each of the potentially fatal biases in later episodes. In Chapter 2 he deals with luck in investing. If there are a billion coin flips, there will be long runs of heads or tails. By complete chance. If there are a billion investors, some by complete chance will look like long-term winners. Yet have no skill at all. Once you realize markets are unpredictable, the rational investment process can begin. Chapter 4 covers compounding. The old adage “time in the market beats timing the market” is popular for a reason. US stocks have performed over the long run. And Buffet has performed better than most. But the sheer quantum or money he has is a result of achieving those investment returns over almost 80 years, starting when he was 14. Housel reveals that if Warren had started at 30 and retired at 60 he would be worth only $12 million, not the $100 billion he currently has. Compounding takes time to goose returns. Chapter 5 shows how important diversifying your investments is in order to preserve wealth. Chapters 11, 12 and 13 tell a similar story, but also add patience, planning for disasters and low leverage. While many people get rich on one asset, usually their business or even their employer’s, diversifying among many assets and types of assets is the best way to keep rich. The goal is to have an unbreakable portfolio for the money that you need for your future. That doesn’t mean that every investment has to be safe. In fact “barbelling” a portfolio with safe assets on one side and risky assets on another can sometimes be more efficient than all medium-risky assets. As Nassim Taleb says, “You can be risk loving yet completely averse to ruin.” We will have a lot to say about these issues in future episodes. Chapter 6 explains why barbelling might be better, introducing the value of the “power law” to investing: Generally a few great investments drive the returns of the market. You only need one Apple or one Facebook to have amazing returns from investing. Being diversified and using part of the barbell to purchase high risk companies helps maximize the probability you get one of those winners in your lifetime. No guarantees though. Chapter 15 is close to our hearts. Housel points out that holding stocks through a down market is not free. It costs mental anguish and real dollars (at least temporarily).  You need to pay this price to get the long term investment returns that have historically occurred (back to “time in the market”. Because most investors can’t stomach this pain, then try to “time the market”: trading in and out, generally underperforming the market by a large margin. See our Falling Knives and Drawdowns episodes.  That is also why “Macro Doom Porn” (episode 4) is so dangerous. Chapters 16 and 18 are about investing for your own goals, and not someone else’s. The stakes are high (our financial freedom) so we tend to want to take advice. From everyone with any semblance of a credential. Be aware, however, that advice givers often have ulterior motives. And that humans are terrible forecasters. Chapter 17 tells us not to be too pessimistic. Yes, a lot of bad things happen. But markets have had positive returns in the long run in spite of World Wars, epidemics, recessions, etc. Chapter 19 has tons of conclusions and advice, including:     Manage your money so you can sleep at night: diversify and leave room for error     The easiest way to be a better investor is to increase your time horizon. We hate that generally. It’s hard to be patient. Stay in the market.     Be OK with losses and things going wrong.     “Play your game” = Invest your way.     “Respect the mess”. Economics and finance are not sciences. Prediction is impossible.     To conserve wealth and grow it, understand tail risk (risk of catastrophic events), leverage, and the unpredictability of markets. People are lousy forecasters and in any event the market is unknowable.     Stay “a serious possibilist”.  Links: Contact us at contact@attherotterdam.com Show Twitter: https://twitter.com/AtTheRotterdam Show Website: www.attherotterdam.com Rasheed’s Twitter: https://twitter.com/r_sale Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 006. Stock Market Drawdowns: What You Need to Know
Dec 9 2022
Episode 006. Stock Market Drawdowns: What You Need to Know
INVESTING (EVERYONE)  Recorded December 8, 2022 Episode six of At The Rotterdam explains one of the many reasons why retail investors underperform the indexes.  While the US stock market has returned around 10% per annum on average for most of history, retail investors – according to one study - earned less than 2%, even less than inflation. Fees are partially to blame. But one of the less obvious yet likely culprits is impatience. Investors have been spoiled for most of the last 14 years, as the financial markets have generally been up only. Yet studies show that investors spend around three quarters of the time in a drawdown situation: Showing a portfolio loss from the previous highs.  Bear markets can be long and depressing. Yet 65% of the time investors are in a drawdown of 20% or more. Holding while the markets fall is costly, emotionally as well as financially. This is the cost of holding stocks for the long run. It’s always darkest before the dawn, and those who are not used to being underwater are more likely to sell at the bottom. But that has historically been a mistake. We go through the numbers and show that US stocks have killed it in the long term, even if most of the time inventors don’t feel it. Hanging in has been the right call, even when it hurts. Let’s just take the NASDAQ. It took 15 plus years to hit a new all-time high after the dot-com crash. But after it did, it went another 3.5x from there. Amazon bottomed down almost 95 percent. It took 10 years from its previous top to hit a new ATH. And then 18x’d from there.  Even the best winners in hindsight spent a great deal of time in a loss situation before the exponential gains arrived. Patience has historically been greatly rewarded. If you liked what you heard, subscribe and recommend us to others. And drop us a line. We'd love to hear from you. Links: Contact us at contact@attherotterdam.com Show Twitter: https://twitter.com/AtTheRotterdam Show Website: www.attherotterdam.com Rasheed’s Twitter: https://twitter.com/r_sale Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 005: Hyped up inflation? Lessons from interwar Germany
Dec 2 2022
Episode 005: Hyped up inflation? Lessons from interwar Germany
MONEY AND ECONOMICS Recorded December 2, 2022 For episode five of At The Rotterdam, Jeff and Rasheed recount how the weak Weimar Republic in Germany caused hyperinflation of the early 1920s, and why it is an extremely important event in history, but not for the reasons generally given.  The German hyperinflation that has been so often invoked as a warning against monetary overexpansion should in fact be a warning that paying too much attention to one rather unique incident in Western economic history risks not doing enough to bail out economies in crisis. As terrible as it was, the hyperinflation did not directly contribute much to the rise of the Nazis.  But it did have a tremendous negative effect on the global economy and polity of the 1930s and 40s: It specifically served to dissuade Germans and Americans from expanding the money supply at the start of the Great Depression. As the Austrian economist von Mises wrote,  A nation which has experienced inflation till its final breakdown will not submit to a second experiment of this type until the memory of the previous one has faded. No German government could succeed in the attempt to inflate the currency … as long as the men and women are still alive who have been the witnesses and victims of the 1923 inflation. The proper response, of reversing deflationary influences, was not considered because the last time money was freely available, hyperinflation resulted. Too little money too late was the major cause of the Great Depression and the economic and political turmoil in which the National Socialist rose to power in Germany in the 1930s.  Ben Bernanke knew this (he is one of the key scholars on the economics of the Great Depression) and did not hold back in the face of a potential second Great Depression in 2008. He said to monetarist Milton Friedman years earlier, I would like to say to Milton and Anna [Schwartz]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. Taking the wrong lesson from the German hyperinflation would have been deadly for our global economy.   Some references: As an antidote to When Money Dies (Kimber, 1975) and Jens Parsson’s Dying of Money (Wellspring Press, 1974), I highly recommend Tobias Straumann’s 1931: Debt, Crisis, and the Rise of Hitler (Oxford, 2019). Straumann’s link between austerity and Nazism is further detailed, and argued convincingly, in a fresh-off-the-press Galofre-Vila et al “Austerity and the rise of the Nazi party” (JEH, 2021). See also Haffert et al “Misremembering Weimar” (E&P, 2019). The prolific and popular economic historian Niall Ferguson has written on this exact topic in “Constraints and room for manoeuvre in the German inflation of the early 1920s” (EHR, 1996). Links: Contact us at contact@attherotterdam.com Show Twitter: https://twitter.com/AtTheRotterdam Show Website: www.attherotterdam.com Rasheed’s Twitter: https://twitter.com/r_sale   Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 003.  Lessons from 2000-1: Should We Buy Falling Knives?
Nov 17 2022
Episode 003. Lessons from 2000-1: Should We Buy Falling Knives?
INVESTING (EVERYONE) Recorded October 15, 2022   For our third episode of At The Rotterdam, Jeff and Rasheed go back in economic history again, but this time only to the turn of this century, to 2000-1. Here is a nice piece about that era: http://www.paulgraham.com/bubble.html   Then, like now, tech experienced a major correction that took years to recover from. But the recovery post 2001-2 lows was unprecedented.    The worst losses this year have been in zero revenue and zero profit technology companies, as well as crypto assets. Cathie Wood’s ARK Invest is down over 75% from ATHs as of this podcast. Electric vehicle companies such as Lordstown (RIDE) and Velodyne Lidar are down more than 90%. Streaming company ROKU is down around the same.    So where do we go now with tech? To be honest we have no idea. But we came up with eight lessons from the dot-com crash that may or may not be applicable to our listeners.   Stocks such as Amazon and Apple collapsed in 2000 but eventually not only rallied back to above their previous highs but have skyrocketed since. Apple fell 80% in 2000-1 but is currently up 11,300% from its 2000 ATH and 59,000% from its 2003 ATL. Any time was the right time to buy such stocks. The lesson here may be that what you buy is more important than when you buy.Some stocks never recovered after the crash (e.g. Pets.com). They were a bust at any price. Once again, market timing didn’t matter. Bad ideas generally can’t survive austerity. Corollary of lesson 1.Some ideas were good ideas but the companies didn’t have the runway to make it. Because bear markets generally last a while and funding can dry up for a long time, eventual winners need positive cash flow or strong balance sheets. Watch for cash burn especially. New firms with fresh funding can enter and take all of the spoils if competitors are weak. This is what Google did, post-2000.Even the best stocks took years to bounce back after the 2000 crash. It took Amazon almost 10 years to beat its old high. Other than the COVID crash and 1987, recent bear markets have lasted years. Patience has historically been a highly-valuable  virtue. The strong firms stood on the shoulders of their fallen brethren. Without Global Crossing putting fiber across the Atlantic and then going under, would we even have e-commerce? Bubbles change dynamics. They fund bad ideas and good ideas alike. There is time to see who will take advantage of the weaknesses and failures of others. Don’t hold the losers through the bear. There are lots of bear traps, rallies where everybody is filled with some hope before markets collapse again. There were multiple 10-20% rallies in 2000-2003 where it would make sense to dump the losers.The collapse did not invalidate the internet thesis. Far from it: It created the next generation of champions that could build on positive cash flow and/or strong balance sheets and business models. Is this true of newly-emergent tech like electric vehicles?2000-1 is an example where a few bgi winners dominated the best portfolios. The best way to have ensured you bought and held Apple, Amazon and Microsoft, to name three winners, was to be very diversified. Diversity has historically been finance’s free lunch. Rasheed holds a barbell of safe assets and emergent companies. One future Apple pays for a lot of mistakes.In hindsight, the dot-com crash of 2000 is a hardly-noticeable blip in the NASDAQ. WIll this be true of 2022-3?   Links: Show Twitter: https://twitter.com/AtTheRotterdam Rasheed’s Twitter: https://twitter.com/r_sale Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 002. A Financial timebomb? Systemic risk lurks in Canadian mortgages
Nov 17 2022
Episode 002. A Financial timebomb? Systemic risk lurks in Canadian mortgages
FINANCE AND POLICY Recorded October 25, 2022 Our second episode of At The Rotterdam sees Jeff and Rasheed discuss a market they follow closely. Both are homeowners in two of the world’s frothiest housing markets, and Rasheed ran a fund that invested in distressed mortgages from the US, UK and peripheral Europe. Could Canada really be in danger of a major financial system shock triggered by the real estate market? The answer is yes.  Even though the probability remains low, the threat is there.   Of course there is an opportunity to go back into financial history again. This time Rasheed recounts the US mortgage crisis of the 1930s and uses that to explain why Canada needs to clean up its act when it comes to the structure of its mortgage market. Just before the Great Depression, US mortgage markets looked a lot like Canada’s do right now, with most loans due in the 0-3 years and very little principal being paid down. In the 1930s, severe deflation across the board put pressure on housing prices. Those with mortgages coming due could not refinance as the new required down payment (LTVs were often 50%) while banks with credit troubles were reluctant to lend at any price. During the downturn, most US mortgages came due and at one point almost half the mortgage market was in default.  Policy makers then realized that longer term fixed rate mortgages would be safer, and that is what the US now has: 30 year fixed rates.  As long as the borrower can afford the monthly, they can stay in their home for a very long time. There is less chance of a wave of required refinancing in a bear market resulting in forced sales by homeowners who borrowed when prices were much higher. Canada’s reasons for having a market of mostly 5 year terms with 20-30 year amortization periods are structural, related to the Bank Act, how mortgages are financed, and the term of available mortgage insurance. These can all be changed through government policy to incentivize long-dated mortgages. Those mortgages are less likely to mature at a point where prices are below the borrower’s origination price, and a crisis is much less likely. Is it worth it?  We think so. Readings: A history of the Canadian mortgage market The US experience and response C.D. Howe and the IMF on the resilience of the Canadian mortgage market Links: Show Twitter: https://twitter.com/AtTheRotterdam Rasheed’s Twitter: https://twitter.com/r_sale Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.
Episode 001. FTX. Why we have financial regulation.
Nov 17 2022
Episode 001. FTX. Why we have financial regulation.
FINANCE (ADVANCED) Recorded November 15, 2022   Our inaugural episode of At The Rotterdam uses the recent events in crypto – FTX and Celsius failures – to explain why we (in the US) have the financial regulation we do.    It’s all due to history: From the Forgotten Depression of 1920-1, through the Crash of 1929, the bank and mortgage market failures of the early 1930s, and the broker defaults of the 1970s.   The US government, its agencies and the financial industries themselves regulated financial markets in order to restore investor trust and confidence.    In the 1920s, the Chicago exchanges and the Federal government cleaned up and legitimized commodity futures markets by requiring brokers to segregate funds and eliminate manipulation and conflicts of interest.    The regulation that established the SIPC in the 1970s ensured that retail client funds would be safe even if the broker defaulted. The SIPC helped repay all of Madoff’s small investors.   If FTX and Celsius were regulated like their traditional counterparts, at the very least the losses would likely have been mitigated and likely compensated, and the events might never have happened.   We shouldn’t need crises to remind us why we have consumer protection regulation in financial markets. History should be enough.   References: What do we know about FTX so far. What happened at Celsius. Coinbase’s policies. Rasheed’s book on the regulation of markets in the 1920s and 30s Reminiscences of a Stock Operator (1923) The history of the Securities Investor Protection Corporation (SIPC) Refco bankruptcy Links: Show Twitter: https://twitter.com/AtTheRotterdam Rasheed’s Twitter: https://twitter.com/r_sale Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.