Wrap

Markets were pretty dead: SPX, 10Y yield, DXY, even gold were pretty flat. Oil was up 1.5%, as were some energy stocks. The only excitement was $AMC going up 95%, through manipulation by the Reddit WSB crowd. European stocks were up.

There was not much news: everyone is waiting for the payrolls report, due Friday.

Insurance

The principal agency problem is a big one. Economics works best when principals transact directly: when the farmer sells his produce to the housewife. Of course, the modern economy is increasingly characterized by long chains of intermediaries, not least when it comes to insurable risks. Akerlof (husband of Janet Yellen) got a Nobel Prize for writing about the market for lemons, i.e. cars which sellers know have faults, where those faults are undetectable by buyers. This asymmetry of information leads to a failure of the market to clear at a price which maximizes utility. It seems to me that all purchases of insurance are of this sort: if I insure my house against fire, or earthquake, the underwriter is enormously better informed about the real risks that I am running than I am. Moreover, even if I could estimate the risk accurately, and knew the cost (e.g. of rebuilding) I would probably willingly overpay for insurance, “just to be on the safe side.” I think this problem is behind the out-of-control level of prices for medical care in the USA. I don’t think it was a surprise that both Ben Graham and Warren Buffett decided to base their investing around an insurance underwriter (GEICO).

The great thing about being an underwriter is that if you are big enough, the government will bail you out even if you misprice risk and would otherwise be bankrupted by claims (exhibit A: AIG in 2009).