fEmIb @jnrbyron - Twitter Profile

jnrbyron retweeted

17 days ago

The head of MIT's economics department accidentally destroyed the financial advisor industry in a ninety-minute lecture that derives, on one board, the exact formula every $500,000-a-year Wall Street analyst charges their firm to pretend they know. MIT charges $87,000 a year to sit in that classroom. He posted the entire lecture online for nothing. Millions have opened it. Almost no one paying an advisor 1 percent of their retirement account has watched it to the end. His name is Ricardo Caballero. He is the head of the MIT Department of Economics, one of the economists the Federal Reserve consulted through the 2008 crisis, and the researcher whose "safe asset shortage" theory explains why global interest rates sat near zero for a decade. The 90-minute clip in this video is Lecture 19 of his 2023 MIT course. Caballero is teaching a room of undergraduates the equation that decides whether your 401k grows or shrinks over the next thirty years. The formula on the slide behind him looks like a textbook fraction. It is the exact math that decides whether Apple is worth $3 trillion or $1 trillion, whether the 30-year Treasury pays 3 percent or 6 percent, and whether the house you were about to buy is fairly priced or fifty percent overpriced. Caballero walks through the entire mathematical foundation of pricing anything with future cash flows in one hour. Present discounted value. A dollar you will receive next year is worth less than a dollar today. How much less depends on one number: the interest rate. Move that rate by one point and the value of a thirty-year bond moves twenty percent. Almost nobody buying a bond fund knows this. Expected present value. Nobody actually knows what a company will pay in dividends in ten years. You use your best guess and discount it. Every earnings estimate on CNBC is one guess plugged into this formula and dressed up as analysis. Bond yields. The interest rate on a ten-year Treasury is not a policy choice. It is the number that makes the price of the bond equal to the present value of every future coupon. In 2022 that math wiped out $6 trillion of American retirement savings in a single year and almost no 401k holder ever heard the phrase. Stock prices by arbitrage. A stock must return the same as a bond plus a risk premium. Everything else is noise. Apple's $3 trillion market cap is one equation with three inputs: expected dividends, the risk-free rate, and the equity premium. That is the whole game. Real vs nominal. Every price you calculate can be measured in dollars or in inflation-adjusted dollars. Getting this wrong turns a 7 percent return into a 3 percent return. It is the reason a "5 percent CD" during 4 percent inflation is a 1 percent gift to the bank. Every hedge fund on Wall Street pays entry-level analysts $250,000 to memorize this equation. Every financial advisor in America charges you 1 percent of your retirement account per year to plug numbers into it while you are not looking. The head of MIT's economics department posted the whole lecture on OCW for the price of nothing. "The most important number in finance is the discount rate. Everything else in the market is a rounding error compared to it." That is a line Caballero returns to across the course. Almost no ordinary saver has ever asked what discount rate their advisor is quietly using on their portfolio. The lectures are free on MIT OpenCourseWare. The slides for Lecture 19 are online. Every equation Caballero writes fits on one page. The math is free. The willingness to spend ninety minutes on one lecture before choosing a mortgage rate, picking a bond fund, or paying a financial advisor for the next thirty years is a much rarer commodity than the confidence to walk in without it.