Tuesday, December 12, 2023

A Horrible Story That Just Gets Worse

Bloomberg wrote what I interpret as a scathing condemnation of JP Morgan's handling of a customer account. The client was in his 70's when the story starts in 2015 and he had "at least $50 million." Over the next few years there was a combo of the client becoming cognitively impaired and the bank had him in very "sophisticated" and complex investments with a boat load of leverage and very concentrated allocation to master limited partnerships (MLPs).  

If portrayed correctly in the article, there is no way they were looking out for the client's interests. They were making a lot of money off this guy and they were very focused on covering their butts. Part of the story is that the couple in question had enough money to be considered accredited investors but they were not sophisticated. In addition to a huge and leveraged position in MLPs that blew up, they sold him a swap that converted his dollar debt into a euro debt obligation and then the euro went up which made it worse. 

If $50 million was the figure, that's a little fuzzy but we'll go with it, he was 78 and his wife was ten years younger when they first went with JP Morgan. If they'd found him a cash account paying zero interest back in 2015, they could started taking $1.5 million/yr and lasted until 2038. Figure though they could have found him something paying a percent or so it might have lasted a little longer. A little more practically, they could have easily put something together that was 75-80% in fixed income with maybe a little equity exposure, maybe...and some cash. They still could have ripped him off on the management fee while still making sure he didn't go bust. 

There was an implication that the customer had something of an ego that needing placating. I don't know of course but if so, they could have put $500,000, that's only 1%, into an expensive Bitcoin product. Bitcoin was going for $250 in the middle of 2015. $500,000 back then would have grown into $6 million if they panic sold into the 2018 low.

The story as told, epitomizes all the bad things you hear about brokerage firms and financial advisors. For anyone reading this, for God's sake, keep it simple and avoid the type of leverage that involves borrowing money from the brokerage firm. The sold a swap to the guy? I had no idea it was ok to sell a swap, I don't mean wrapped into a mutual fund or ETF but an actual swap, to an individual investor no matter how big they are.

And because we're talking about leverage, the Financial Times had a quick write up on the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF). The FT referred to it as the "cocaine bear ETF" which had me laughing out loud even though I haven't seen the movie.  

I was curious though, what does 3X look like when leveraged down to hold more cash.


In theory, these are the same exposure but Portfolio 2 frees up a lot of cash to cover sequence of return risk. Over the period studied, they're not that far apart and the Portfolio 2 seemed to do pretty well until late 2021.


This graph shows that in many individual years, the dispersion between the two very wide. Could Portfolio 2 dig out of the 32% whole it has dug for itself since the start of 2022? I'm not sure how that models out but since October 19th, TMF is up 37% so maybe it can. 

In case it isn't obvious, I am not interested actually implementing a portfolio with any weighting to TMF, let alone 26%, but it is interesting to model out to see how it works. Aside from having no idea what the daily reset will do to tracking TLT in the future, oh and the fact I don't want to own long dated debt, down 34% in one year, like it was in 2022, is a tough way to make a living.

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