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A few days ago, legendary investor Howard Marks penned another one of his widely read Oaktree Capital memos.

This memo was all about the fallout from Silicon Valley Bank’s collapse. Marks didn’t rehash the developments but focused instead on their significance.

‘My sense is that the significance of the failure of SVB (and Signature Bank) is less that it portends additional bank failures and more that it may amplify preexisting wariness among investors and lenders, leading to further credit tightening and additional pain across a range of industries and sectors,‘ wrote Marks.

While he mainly attributed the bank’s collapse to factors peculiar to it, Marks did identify important elements SVB shared with other banks:

• ‘Asset/liability mismatch – Financial mismatches are dangerous, and banks are built on them. Deposits are banks’ primary source of funds, and while some have longer terms, most can be withdrawn on any day, without prior notice. On the other hand, making loans represents banks’ main use of funds, and most loans have lives ranging from one year (commercial loans) up to 10-30 years (mortgages). So, while most depositors can demand their money back at any time, (a) no banks keep enough cash on hand to pay back all their depositors, (b) their main assets don’t pay down in a short timeframe, and (c) if they need cash, it can take them a long time to sell loans – especially if they want a price close to par. Maintaining solvency requires bank managements to be aware of the riskiness of the assets they acquire, among other things. But liquidity is a more transient quality. By definition, no bank can have enough liquidity to meet its needs if enough depositors ask for their money all at once. Managing these issues is a serious task, since it’s a bank’s job to borrow short (from its depositors) and lend long.

  ‘This mismatch, like most other mismatches, is encouraged by the upward slope of the typical yield curve. If you want to borrow, you’ll find the lowest interest rates at the “short end” of the curve. Thus, you minimize your costs by borrowing for a day or a month . . . but you expose yourself to the risk of rising interest expense, since you haven’t fixed your rate for long. Similarly, if you want to lend (or invest in bonds), you maximize your interest income by lending long . . . but that subjects you to the risk of capital losses if interest rates rise. If you follow the yield curve’s dictates, you’ll always borrow short and lend long, exposing you to the possibility of an SVB-type mismatch.

• ‘High leverage – Banks operate with skinny returns on assets. They pay depositors (or the Fed) a low rate of interest to borrow the funds they need to operate, and they lend or invest those funds at slightly higher rates, earning a modest spread. But they literally make it up on volume. They employ heavy leverage, meaning they can do a lot of business based on little equity capital, thereby translating a low return on assets into a high return on equity. However, having a high ratio of total assets to equity capital means a modest decline in asset prices can wipe out a bank’s equity, rendering it insolvent. There’s no source of meltdown – in any sector – as potentially toxic as the combination of high leverage and an asset/liability mismatch. Banks have them both.
• ‘Reliance on trust – Since depositors put money in banks in pursuit of safety and liquidity and, in exchange, accept a low return, faith in banks’ ability to meet withdrawals is obviously paramount. Depositors ostensibly can get liquidity, safekeeping, and low interest from any bank – that is, one bank’s offering is essentially undifferentiated from those of others. Thus, most depositors are perfectly willing to change banks if given the slightest reason, and there’s no offsetting reason for them to leave their money on deposit if a bank’s safety is questioned.’

All up, Marks is finding today’s volatility fruitful. Bargains aren’t plentiful in times of euphoria:

‘When investors think things are flawless, optimism rides high and good buys can be hard to find. But when psychology swings in the direction of hopelessness, it becomes reasonable to believe that bargain hunters and providers of capital will be holding the better cards and will have opportunities for better returns. We consider the meltdown of SVB an early step in that direction.’

‘Why ChatGPT will never beat the stockmarket’

This was the title of a quick opinion piece from the AFR yesterday. I’’ll spare you the need to read it yourself, as the conclusion is exactly as the title suggests.

The author, Tom Richardson, believes AI simply isn’t able to deal with the complexities of modern markets. And to his credit, he is right. ChatGPT will even tell you that itself.

Just look at the response it gave my colleague Ryan Dinse:

But that is simply its limitation right now…

Trying to claim that AI will never be able to beat the market, well that’s a far different matter. In fact, I even decided to ask ChatGPT what it thought about this for the fun of it. Here is what it told me:

According to the bot itself, AI is already deeply linked to investing efforts. So, who are we to believe?

Well, fortunately, I can tell you that I’d certainly be siding with ChatGPT on this one. Because while it isn’t quite up to the task of picking stocks (it is just a chatbot after all), other software is…

You see, when it comes to AI stock picking, we’re actually pretty familiar with the idea.

One of my colleagues, Callum Newman, actually decided to implement an AI system into his stock-picking strategy.

Fortunately, he had some help from software developers to bring the concept to life, but it’s his financial experience and investing knowledge that is at the core of the system.

In fact, he’s been using it as part of his Small-Cap Systems publication for a while now. It’s the secret ingredient to his trading strategy. Because as the past 12 months have demonstrated, in these choppy markets, Cal’s AI has been the difference maker.

Just listen to Cal explain it to you himself:

The point is, like it or not, AI investing is already here…

Whether people want to argue about its rates of success or failure is perhaps the more poignant topic. It’s obvious that most AI critics are happy to dismiss the technology simply because it isn’t 100% perfect.

No piece of AI software can pick a stock with a guaranteed profit.

But neither can a human being.

So what’s the difference between the two?

The advantage that AI will have over all of us in market matters is because it can learn far more and far faster than we can. Sure, it will likely be a long time before AI has the same amount of intuition or curiosity that our minds do, but that isn’t enough to give us the edge. The raw data-crunching power and constant learning is simply going to lead to an exponential rate of development that will supersede our abilities.

And that’s exactly what Cal’s system is tapping into.

It is designed with the same learning principles that will inevitably see AI overtake people at picking stocks…

https://www.moneymorning.com.au/20230420/dont-just-invest-in-ai-invest-with-ai.html

[Kiryll here. Will AI overtake people at picking stocks? Ryan makes a great point that AI’s exponential learning curve makes the claim plausible. But some aren’t buying it, chief among them AFR columnist Tom Richardson, who thinks the idea AI tools like ChatGPT can beat the stock market is ‘ridiculous’].

Unless you believe in pixies, you're not going to believe #ChatGPT or other AI can beat the stockmarket, despite some ridiculous claims to the contrary, here's why https://t.co/tJgM3tNu0D

— Tom Richardson. (@tommyr345) April 19, 2023

Lithium producer Allkem (ASX:AKE) received an average price for lithium carbonate from third party sales of US$53,175/tonne in the March quarter, in line with the December quarter.

However, the weighted average price from third party sales of lithium carbonate in the upcoming June quarter is expected to be US$42,000/tonne.

That is in line with the recent slump in spot prices for the white metal.

The Reserve Bank governor Philip Lowe is now speaking following the review into the central bank he leads.

You can listen live here.

And you can read his prepared remarks here.

In his prepared remarks, Lowe commented on the big proposed change to creating a separate board whose sole focus is monetary policy:

‘The recommended changes could also strengthen the monetary policy process, by having a board whose sole focus is monetary policy. I very much welcome the conclusion that this board should include people with diverse perspectives and knowledge and who have experience in decision-making under uncertainty. It is also pleasing to see that the Panel recommended that the Treasury Secretary remain on the Board.

‘The establishment of these two boards will require changes to the Reserve Bank Act, which is a matter for the Australian Government and Parliament. You would have already heard that the Treasurer intends to proceed with these changes. We will work constructively with the Government and Parliament with the aim of ensuring that any changes to legislation are effective in achieving their objectives.’

Oh, the usefulness of the search function.

The 300-page review into the Reserve Bank is a wide critique of the central bank that pundits will be dissecting for weeks.

One topic of discussion was groupthink, mentioned 11 times in the report.

Specifically, the review thought there is a risk of groupthink within the RBA that must be hedged with better incorporation of diverse views.

The review heard from stakeholders calling the RBA a ‘closed shop’ with ‘little interaction with the broader economics community’. One such stakeholder summed it up by noting:

‘As an observer, it would appear to me that the RBA has an insular culture that is not particularly open to ideas from outsiders and is prone to groupthink.’

Only 53% of current RBA employees agreed with the phrase ‘the RBA takes into account the views of a broad range of external stakeholders’. The responses were even worse for staff in the Economic Research Department, with only 10% agreeing.

Struggling BNPL veteran Zip (ASX:ZIP) released a 3Q23 results update this morning, saying improved margins leave it on track for ‘cash EBTDA profitability during 1H FY24’.

Cash transaction margin for its core business (ANZ and America) rose to 2.8% in the quarter, up from 2.5% in 3Q22. Zip did not include the periphery businesses in the calculations as it seeks to divest them.

The divestment is expected to bring in $20 million in net cash inflows during H2 FY23.

As for its vaunted top-line growth, Zip reported modest gains in a sign of changed strategy.

Revenue rose 15% YoY to $182.1 million, while transaction volume rose 9% YoY to $2.2 billion. Active customers fell 1% YoY to 7.2 million.

Again, there is some confusion over how Zip reports its customer totals.

In 3Q22, Zip reported that customer numbers were 11.4 million, whereas the 1% YoY drop reported today implies the number was about 7.3 million.

Source: Zip

#BNPL $ZIP says it remains on track for 'cash EBTDA profitability during 1H FY24'. #ASX $ZIP.AX pic.twitter.com/3uP1SpjJON

— Fat Tail Daily (@FatTailDaily) April 19, 2023

UK inflation remained above 10% in March. A Bank of England rate hike is basically a cinch now.

Consumer price inflation rose 10.1% in the year to March, down slightly from February’s 10.4%. Boffins expected a 9.8% rise — a big miss.

While petrol and diesel prices fell, prices for food and leisure spiked. Food prices rose 19.1% in the year to March!

Core inflation — which excludes the oft-volatile food and energy categories — was recalcitrant, remaining unchanged at 6.2%.

NAB’s assessment was blunt:

“UK April CPI yesterday was a shocker, headline CPI only falling from 10.3% to 10.1% against 9.8% expected and the core measure unchanged at 6.2% against expectations for a fall to 6.0%.”

UK Chancellor Jeremy Hunt said inflation above 10% ‘is not a good place to be, ultimately it is dangerous if you leave it there’.

Source: Financial Times