crochet unicornPeople And Their Toys Tools Technology

“Data collected by the marketing company Lifehack tells us that the average social media user ‘reads’ — or perhaps just clicks on — 285 pieces of content daily, an estimated 54,000 words.  If it is true, then we are reading a novel slightly longer than The Great Gatsby every day…It’s possible that streamlined scrolling of browsers and e-books, as opposed to reading on paper, can lead to what psychologists call ‘the misinformation effect.’”  “The Internet has caused society to experience a transition from a scarcity of signals to a surfeit of signals.  More information means more good information but also more bad information…We are in a world where there is vastly more to know, yet our cognitive capacities remain what they were in the Stone Age.”  “Digital natives — students who grew up with laptops in classrooms — at American University are beginning to show a preference for reading books in print…’I like holding it.  It’s not going off.  It’s not making sounds.’”  Meanwhile, “the online craft bazaar Etsy made its debut on the Nasdaq stock market Thursday, signaling the birth of an unusual public corporation — and not just because its employees carry around compost on bicycles, or because its regulatory filings are peppered with phrases like, ‘We keep it real, always.’  Etsy is one of a growing number of companies, called B Corps, that pledge to adhere to social and environmental accountability guidelines.”  Etsy is “the second for-profit company to go public out of more than 1,000 companies that have that certification…’We have a right to ask more of our corporations, and they should not exist simply to generate profit.’”  Meanwhile, Virtu Financial is a company known for “a culture that encourages its math-minded employees to continuously hone trading algorithms” and it also went public.  “Virtu’s IPO will be the first for a pure high-frequency trading firm and symbolizes how lean, technology-focused companies can have an outsize impact on global trading…’We focus on one thing and one thing only: making the tightest bid and offer on more than 11,000 financial instruments around the world.’”  Meanwhile, “the more unfamiliar someone is with the wild Black Swan-generating randomness, the more he or she believes in the optimal working of evolution…Evolution is a series of flukes, some good, many bad.  But, in the short term, it is not obvious which traits are really good for you…The idea that we are here, that this is the best of all possible worlds, and that evolution did a great job seems rather bogus.”  Meanwhile, “prospecting with a fintech tool is not nearly as fun as the old days, but it is a helluva lot smarter and more efficient.”

 

Unicorns

“There’s a new term cropping up in startup pitch meetings: ‘One-on-one.’  It means the company is seeking to raise $100 million at a valuation of $1 billion.”  Meanwhile, “Snoop Dogg has invested in a start-up called Eaze, an ‘Uber for weed’…Ashton Kutcher is putting money into Spring, a mobile commerce app that is ‘Tinder for fashion’.  The Winklevoss twins, whose claim to have” it goes on.

 

USA: Wages For About 80% Of Americans Peaked In 1972

 

China: Futures Tumble On Regulation To Decrease Borrowing, Increase Short Selling

 

Oil: Bloomberg Is Calling It

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Cautious Conversations

John Williams: “I think the data show that U.S. inflation can be easily modeled in the following way: It runs about 2 percent, and then there is some fluctuation from commodity/import prices and the amount of slack in the labor market…to me it’s not that much of a puzzle that underlying inflation is running about half a percentage point below our 2 percent goal.”  Furthermore, “I don’t think [low inflation abroad] speaks in any way to whether the U.S. can hit its 2 percent goal.  We know from history that we are able to control our own inflation rate through monetary policy despite other countries having rates that are higher or lower than ours is.”  Ben Bernanke: “I don’t see anything magical about targeting two percent inflation.  My advocacy of inflation targets as an academic and Fed governor was based much more on transparency and communication advantages of the approach and not as much on the specific choice of target.”  In regards to the future of monetary policy, Ben likes a big balance sheet: “monetary control might be more, rather than less, effective if the Fed [managed interest rates] by its settings of the interest rate paid on excess reserves and the overnight reverse repo rate.”  Also, a large balance sheet “facilitates the creation of an elastically supplied, safe, short-term asset for the private sector, in a world in which such assets seem to be in short supply.”  John seems to agree: “This is a typical Fed belts-and-suspenders approach.  We’re not exactly sure how interest rates will behave and so we want to make sure that we have the full set of tools and programs…it’s a lot of contingency planning.”

 

Millennials Trust Each Other And Basically No One Else

“Nearly one in three Americans who are now having to pay down their student debt…are at least a month behind on their payments,” says the St Louis Fed.  “Delinquencies on student debt are far higher than those for other forms of consumer credit, including credit cards, mortgages and auto loans…Delinquencies are no longer rising.  But they’re not going down, either.”  Meanwhile, PricewaterhouseCoopers sees a trend in the renting “sharing” economy: “We’re witnessing the rise of companies predicated on trust among strangers at the same time as general trust in society is actually falling…Why are hundreds of thousands of people letting strangers rent their bedrooms or drive their cars if society is growing more cynical?”  The answer: while trust in individuals and institutions is deteriorating, faith in the crowd is growing.  “In other words, I don’t trust you, Random Guy Giving Me A Ride Home, but I do trust the 4.9-star average rating of all the people who’ve been in your car before.”  Meanwhile, “if you think Chris Christie’s Social Security plan is bold, you should see Team 109’s.

 

ECB: Draghi Isn’t Worried About Scarcity Of QE Eligible Bonds

 

USA: As Long As He Keeps Blogging More Power To Him

 

ICYMI: Bonds Beware As Money Catches Fire In The US And Europe

That whole velocity of money thing isn’t really playing out the way some thought…here’s another go at it.

help me obi wan kenobi leia

Help Me Emerging Markets; You’re My Only Hope

The weakness in retail sales from December through February didn’t jibe with the strength in employment and consumer confidence.  Another surprise was that the windfall from falling gasoline prices didn’t show up in better spending in other retail categories.  Then March employment data turned weak, and the month’s 1.0% gain in retail sales excluding gasoline (to a new record high) wasn’t much of a spring rebound following the 0.8% decline from December through February.  Even worse, on an inflation-adjusted basis, core retail sales (excluding autos, gasoline, and building materials) fell 1.3% saar during Q1.”  “Saving, not shopping, is the hallmark of this expansion…Recent consumer data suggest households remain very focused on building a financial cushion to guard against the next crisis.  To do that, they are being very cautious about their purchases…For global producers who have long depended on the American consumer…the frugality means a re-think about strategy.  Emerging middle classes in developing economies may be the best hope for consumer-related manufacturers.”  Meanwhile, a Bloomberg poll of money managers reveals some high optimism for Nigeria, Vietnam, Argentina and Saudi Arabia.  “According to the United Nations, Nigeria has the potential to become the third most populous country in the world by 2050 and also boasts the highest percentage of people under the age of 15 today…growth could eventually rival China’s.”  Meanwhile, the IMF would like you to know about the “super taper tantrum”: “higher US interest rates could expose particular vulnerabilities in emerging markets where companies have issued large amounts of debt in dollars, the IMF said, adding that between 2007 and 2014 debt had grown faster than GDP in all major emerging markets.”  Meanwhile, Research Affiliates concur with Janet Yellen’s “gradual and lower than you expect” forecast for interest rates: “Looking toward retirement and still needing to repair their balance sheets in the aftermath of the housing recession, Main Street Americans are reluctant to borrow at any price.  To reach significantly higher real interest rates, we need not only more optimistic GDP forecasts but rectified balance sheets and greater willingness to spend rather than save and invest…The demand just isn’t there.  After seven years of trying to bring the punchbowl back to the party, the Fed may be realizing that this time nobody seems interested in drinking off the hangover.  Don’t expect the party to ramp up anytime soon.”  Meanwhile, the party got turnt up in Europe this morning!

 

Fear Leads To Anger

“According to Bank of America Merrill Lynch’s monthly Fund Manager Survey, 13% of global investors believe equity bubbles are the biggest risks facing stocks.  That number is up from just 2% in February.  Among the panel surveyed, 25% believe global stocks are overvalued and 68% think the U.S. is the most expensive region.”  Meanwhile, “your appetite for risk will likely ebb and flow with the markets even if your ability to take risk based on your financial situation hasn’t changed much.”  Also, “the more confident investors are in a risk model’s saving power the more useless they become…The best a risk model can do for the investor is point out where potential areas of risk exist, not how that risk will manifest and play out.”

 

Global: The Question Is No Longer If, But When The World Will Transition To Cleaner Energy

 

Fed: The Mythic Quest For Early Warnings


Tech:
We Made 8 Trillion Transistors Every Second Last Year

kermit rainbow connection

The Lovers, The Dreamers And Me

Analysts at Citibank and The Economist are coming to Chinese equities’ defense: “The Shanghai index, which includes China’s biggest companies from banks to oil majors, is trading at a forward PE of about 15, in line with its ten-year average.  From this perspective, the rally looks more like a ‘mean-reversion trade’ than something wildly unsustainable.”  “When investors tell us that China is a bubble and expensive all we need to do is highlight…a market which is very certainly an investor favourite, India.  This market is even more expensive relative to all the other markets, and it isn’t as if investor after investor we meet tells us, ‘oh boy that Indian market is hotter than your average Vindaloo.’”  (Side note: valuations suggest that investors are expecting the highest EPS growth rates in India (6.5%), Poland (6.4%), South Africa (6.3%), Indonesia (6.2%) and the Philippines (6%))  “The most striking feature of the Chinese rally in recent weeks has been its crossing of borders…A programme to connect the mainland and Hong Kong stock markets has provided a corridor for channeling excess liquidity out of China.  With A-shares still trading at a 20% premium to H-shares, Chen Li, a strategist at UBS bank, predicts the convergence will continue.”  Meanwhile, “there has been speculation in certain quarters of the markets that a ‘Singapore-China’ stock connect may be in the pipeline.

 

But Wasn’t Distortion Always The Point Of Extraordinary Monetary Policy?

“The European Central Bank has barely started its €1 trillion-plus asset purchase program and already there are mutterings about how it might need to be wound down early.  There are signs of a solid pick-up in the eurozone economy,” as well as “rising bank lending as firms turn more bullish on their growth prospects.”  Yet “on the other side of the equation there are clear market distortions.”  For example: “all over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates…some banks have faced the paradox of paying interest to those who have borrowed money from them…In Spain, Bakinter has been forced to deduct some clients’ mortgage principal payments because an interest-rate benchmark tied to Switzerland’s currency has dipped into negative territory.”  Meanwhile, Eurostat says the savings rate is moving back up, which may “send minor alarm bells ringing for those who fear that households may respond to falling consumer prices by postponing discretionary prices.”  Then again, Ben Bernanke says higher wages in Germany are good news for everyone: “In a world that is short of aggregate demand, Germany’s trade surplus redirects spending away from other countries, reducing output and incomes abroad.  Higher wages in Germany should promote spending by German households on both domestic goods and imports, reducing the imbalance.”

 

Oil

“One of the most important questions for economists about the past year’s collapse in oil prices is whether it was driven by supply or demand.”  The IMF says “it started out as a bad-news demand story, but turned into the good-news supply story.”  Meanwhile, “China is on an oil-buying spree again.” (alt)

 

USA: Home Services Is One Of The “Few Pots Of Gold Left”

 

USA: Aswath Damodaran Ain’t Buyin The Small Cap Premium

ski patrol

Shreddin’ The Gnar

What the Fed has begun to worry about is financial stability…the longer rates stay very low, the greater the risk they become built into the current financial architecture…It is useful to think of the Fed’s mindset here as being like that of the avalanche patrol at a ski resort.  You detonate your tools in order to see if there are any avalanches out there to be triggered.  You don’t know if there are any out there, but you know the longer you wait, the larger the risks grow in probability and magnitude…the policy rate can be used to signal, to keep us on our toes, and to help clear the slopes now so as to lower the risk of triggering a larger and potentially destabilizing avalanche later.”  Meanwhile, John Williams is soooooo stoked bro : “As we go through time, that probability of saying ‘well, the shocks are going to push us back,’ seems to be [decreasing]…More importantly, we are really thinking about a path, we are talking about moving interest rates from zero to a normal level over several years.”  “To get that message across Williams has begun giving away T-shirts, printed at his own expense, showing an arrow busting upwards out of a computer and declaring: ‘Monetary policy — it’s data dependent.’”  Meanwhile, the powder abroad is DEEP dude: “investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going…Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency…’There’ll be huge demand for the dollar that is much more than what’s consistent with growth or interest-rate differentials’…in addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand…’Central banks are re-accumulating their dollar reserves and low, or negative, bond yields in the euro zone will probably speed up that trend.’”  Also, whether you are on snowboard Team Summers or skis Team Bernanke, the gnar is the same: “There’s too much money and not a lot to do with it.  And that’s why we’re seeing investors make some interesting, seemingly non-economic decisions with their piles of cash.”  Speaking of piles of cash, “General Electric’s deal to sell off real estate and get out of most of the finance business contains a little sweetener for the U.S. government, in the form of up to $4 billion worth of taxes on repatriated earnings…Right now, U.S.-based multinationals are not taxed by the U.S. government on what they earn overseas — until they bring that money back to the U.S….and there’s at least $690 billion in overseas cash…Companies can use it to make acquisitions abroad, or do what’s called ‘synthetic repatriation,’ which means borrowing against the overseas cash and giving it to shareholders in the form of buybacks and dividends.”  “Shareholders in the biggest US companies stand to receive a record $1tn in cash this year, as blue chips’ concerns over the global economic outlook have diverted cash away from investment and is driving a boom in buybacks and dividends.

 

USA: Financial Stability And Captive Reinsurance

 

China: Equity Rally Creates New Corporate Giants

Meanwhile, the “impossible” trade is working.

potato

Global Prices And Political Boundaries

The “dollar-related drop in import prices is one of the things weighing on U.S. consumer prices, and one of the reasons inflation is running well below the Fed’s 2% target.”  This has led some to believe that the Fed will wait to see a turnaround in the dollar or, perhaps, stable import prices before raising rates.  “That won’t happen right away.  This is because purchases overseas are often contracted in dollars months ahead of time, so much of the dollar’s rally this year has yet to register in import prices.  The dollar’s effect on the prices consumers pay takes longer to show up, as much as a year….So even if recent signs that the dollar is leveling off hold, the pressure that its recent strength is exerting on prices will still very much be in evidence at the start of the summer.”  Meanwhile, “U.S. import prices fell in March as rising petroleum costs were offset by declining prices for other goods…Import prices dropped 0.3 percent last month after a downwardly revised 0.2 percent gain in February.”  Also, “China’s consumer price index maintained a sluggish year-on-year pace of 1.4 per cent in March, the same rate as in February, according to the government’s official figures…The producer price index, often regarded as a leading indicator for consumer prices, has been mired in deflation thanks to sliding domestic demand and chronic overcapacity…Producer prices deflated for a 37th consecutive month in March, falling 4.6 per cent, versus a 4.8 per cent fall in February…’The current bout of goods deflation in China and South Korea is the longest in postwar East Asia outside of Japan in the 1990s.”  Meanwhile, the Treasury Department says “South Korean authorities appear to have intervened in December and January to keep their currency from appreciating…South Korea’s trade surplus with the U.S. totaled $14 billion in the second half of 2014, larger than the $9.6 billion surplus from the same period a year ago.”

 

Great Hope News For All Economies

“When it comes to stocks, America is the big loser this year.  The S&P 500 is up just 1.6 percent through Thursday’s close, making it the worst among major market indexes for 2015…In Europe, the U.K.’s FTSE 100 is up 6 percent, France’s CAC 40 has climbed 22 percent, Germany’s DAX is up 24 percent and Russia’s RTS is up 27 percent.”  James Mackintosh says “these are weird indices which mix companies from across borders traded in different currencies…four of the five biggest contributors to the Stoxx 600’s rise this year have been from outside the eurozone, in Switzerland or Denmark.  Another two of the top 10 contributors are British, Glaxo and BP.  All have been helped by the plunging euro, as they are not traded in euros.”  Meanwhile, “Hong Kong is set to overtake Japan as the world’s third-largest stock market…Japan is poised to drop to No. 4 even as the nation’s shares almost double under Prime Minister Shinzo Abe…’the Japanese market is actually rising on hopes that monetary easing will help us escape deflation.  And if Chinese stocks are rallying on expectations the government will prop up the economy, that’s great news for all economies.’”

 

Hot Potatoes

Goldman Sachs says “passive ETFs aren’t being used passively by buy-and-hold investors.”  “One lingering knock against ETFs is that — in spite of their potential benefits of low cost, tax efficiency and diversification — their widespread use is turning ordinary long-term investors [into] fast-trading, global-macro focused buy-and-sell junkies.”  Furthermore, “the prevalence of ETFs seems to be influencing price moves…Correlations between stocks and sectors [have] been increasing since the 2008 financial crisis.”  Meanwhile, annualized turnover on the New York Stock Exchange “is down to 63% from a high of 110% in 2010;” however, “including trades on all marketplaces, the annual turnover rate in U.S. stocks is running at 307%…And that figure doesn’t include [ETFs], which get flung around like hot potatoes.  According to John Bogle, founder of the Vanguard Group, the 20 largest ETFs were traded last year at an average turnover rate of 1,244%.”

 

WM: 8-10% Average Return Is A Decent Goal That You Won’t Ever Actually See

 

What: Scott Stringer Thinks Scott Stringer May Have Misled Some Folks

Kentucky commonwealth stadium

Dear Fellow Shareholders,

Jamie Dimon’s latest letter to shareholders has an interesting section on “how the table is set” for the next financial crisis (“Where do you want me?” asks future rogue criminal).  First, some good news: “We will enter the next crisis with a banking system that is stronger than it has ever been.”  Harder! Better! Faster! Stron–“There is a greatly reduced supply of Treasuries to go around — in effect, there may be a shortage of all forms of good collateral…It is unlikely that we would want to accept new deposits the next time around because they would be considered non-operating deposits (short term in nature) and would require valuable capital under [new regulations]…Non-bank competitors are increasingly beginning to do basic lending in consumer, small business and middle market…it is my belief that in a crisis environment, non-bank lenders will not continue rolling over loans or extending new credit except at exorbitant prices that take advantage of the crisis situation.”  K.  Speaking of nonbanks, “many big banks have retreated from the repo market following the adoption of costly new regulations…This opens up a potential new revenue opportunity for nonbank brokers and others who aren’t subject to the same regulations.”  And the good taxpayers of Kentucky aren’t (directly) subject to the same regulations: “Stephen Jones, who oversees about $4 billion of state money at the Commonwealth of Kentucky, said he completed his first direct repo trade in January, without using a large, bank-owned broker-dealer.  The state is lending $123 million this month to a REIT called Invesco Mortgage Capital Inc., up from $50 million earlier.”

 

Basically Nobody Knows The Difference Between A Bubble And A Bull Unless We’re Talking China

“The question of whether or not we are in a tech bubble has been raised regularly for years now…it’s easy to look at numbers, whether that be valuations, revenue multiples, or simple counting stats, but any analysis is incomplete without understanding markets.  In 1999 most consumer markets were simply not ready, whether it be for lack of broadband, logistics build-out, etc…Today, by contrast, many of the most valuable unicorns are consumer-focused companies like Uber or Airbnb.  Moreover, these companies are competing not with other tech companies but rather with entirely new (to tech) industries like transportation or hospitality.”  “Optimism in the face of growing uncertainty is hard to sustain.  That seems to be the crux of the problem facing the market.  The current situation — very optimistic implied earnings growth and deteriorating economic uncertainty — is a temporary condition…If the market’s pricing of earnings growth drops to the long-term realized growth mean of 7%, the S&P 500 would drop 11% to 1850.”  Meanwhile, Dan McCrum has dropped the mic on China.

 

USA: FAA Appears To Be Giving The OK On Drones For Insurance Companies

 

USA: “Could A Computer Do My Job?” Is A Decent Question To Be Asking Yourself

 

Oil: Is Volatile

Nothing Changes Until Everything Changes

The percentage of U.S. women in their 30s and 40s who are childless is rising, new data from the U.S. Census Bureau show…47.6% of U.S. women aged 15 to 44 were without children last year, up from 46.5% in 2012…The number of women aged 40 to 44 who had only one child roughly doubled between 1976 and 2014…These trends have helped push America’s fertility rate to record lows, though it should be noted that U.S. fertility still ranks relatively high compared with Europe and Japan.”  Meanwhile, the IMF says the financial crisis has done lasting, significant damage to global growth: “lower potential growth in advanced economies has been driven in roughly equal measure by slower capital accumulation and labor growth — due primarily to adverse demographics…demographic factors are likely to act as a brake on growth in many advanced and emerging market economies, as populations age and workers retire.”  However, “there is still room for optimism — the future trajectory of potential output is not set in stone.”  Meanwhile, global investment in renewable energy “rebounded in 2014 to a near all-time high of $270 billion.”  And thanks to the rapidly decreasing costs of solar and battery technology, “renewable energy capacity added in 2014 was easily an all-time high…Renewables went from 8.5 percent to 9.1 percent of global electricity generation just in 2014…The takeoff of solar-plus-batteries has only begun to ramp up the exponential curve, and market shares are still small.  But it has begun, and it doesn’t look like we’re going back.”  Meanwhile, a team of engineers at Caltech have “developed a very tiny, very powerful 3D imager that can easily fit in a mobile device…the imager may soon allow consumers to snap a photo of just about anything, and then, with a good enough 3D printer, use it to create a real-life replica ‘accurate to within microns of the original object.’”

 

100 Year 4.5% Euro-Denominated Mexican Sovereign Debt

Europe’s plunging borrowing costs marked two new milestones on Wednesday, with Switzerland becoming the first country ever to issue 10-year debt that gives investors a yield under 0%, and Mexico lining up a rare deal to borrow euros that it will repay a century from now…Mexico’s deal, which is set to wrap up later Wednesday, is expected to give investors a yield of about 4.5%.”  Meanwhile, “about 65 percent of the record 60 billion euros of investment-grade bonds sold in March came from overseas companies…and a lot of those sellers are based in the U.S….Debt is so cheap in Europe that U.S. companies are saving money even if they buy currency hedges that have gotten expensive as the dollar’s soared versus the euro…even if the Fed does hike interest rates this year, it may not matter too much to U.S. corporate borrowers.  They’ve found, courtesy of Draghi, a new source of financing that is plenty cheap.”

 

Snapping Up Bargains

A huge jump in equities purchases by Chinese investors (alt) has produced record trading volumes in Hong Kong, a signal that the prolonged stock rally on the mainland is finally spilling into global markets…On Wednesday, southbound turnover — purchases and sales — through the Stock Connect leapt to HK$21bn ($2.7bn), more than three times the previous daily record set on April 2…Wednesday’s moves took the average premium of domestic listing, known as A shares, over Hong Kong-listed H shares down from 35 per cent to 28 per cent…’We think retail investors from across the border will soon be snapping up bargains on the Hong Kong stock market.  With the A share market still rising in spite of weak economic data and poor corporate earnings in China, we believe Hong Kong H shares are becoming an increasingly attractive alternative.’”  Meanwhile, Chinese tech stocks are now trading at “an average 220 times reported profits…higher than those in the U.S. at the height of the dot-com bubble.”

 

Oil: Shell To Buy BG Group For About $70 Billion (Alt)

“The deal, if approved by shareholders and regulators, would make Shell the world’s largest producer of liquefied natural gas…would enable the two European energy giants to eliminate overlapping costs to help offset the impact of weaker prices.”  Meanwhile, here’s the U.S. oil story in seven charts.

 

EU: Should You Invest In A Currency-Hedged International-Equity ETF?

 

Fed: Bernanke Says Central Banks Shouldn’t Set Policy To Mitigate Financial Stability Risk

 

EU: Greek Banks Are Linking Arms

 

What: JPMorgan Is Blowing The Whistle On Its Future Criminals Employees

google-glass

Geography: Categorical Convenience And Tourist Capital

The geographical reach of listed companies is a more important driver of index returns than ever before, according to research by the EDHEC-Risk Institute…Between 2003 and 2013, the report found that the S&P 500’s exposure to regions outside the Americas grew from 19% to 27%.  For the STOXX Europe 600, exposure to non-European regions grew from 36% to 45%…The total market cap of companies exposed to foreign markets rose dramatically in the 10 years to the end of June 2013.  In the S&P 500, this figure grew from $2.9 trillion to $5.6 trillion…’It would be a shame if asset allocators compromised their asset allocation policy, which is often based on macro-economic scenarios that use regional dimensions, through poor evaluation of the geographic reality of their portfolio or benchmark.’”  Meanwhile, Mohamed El-Erian thinks “the concept of an ‘emerging markets asset class’ may no longer be a sufficiently useful and accurate catch-all classification for investors.”  Furthermore, “macro decisions to allocate or withdraw capital from EM — particularly through index and index-like vehicles — tend to be significant drivers of return, volatility and correlation behaviors, which too often leads to valuations that are decoupled from individual fundamentals…this phenomenon is amplified as the market influence of a relatively small base of dedicated investors is subject to the vagaries of less well-informed ‘crossover’ funds (that is ‘tourist’ capital)…Today, this means recognizing that EM is in a technical phase of unsettling volatility.”  Meanwhile, Ben Bernanke thinks EM vendors may want to stock up on pretzel and bratwurst: “An important source of the global saving glut I identified before the financial crisis was the excess savings of emerging market economies (especially Asia) and of oil producers.  The good news is that, for reasons ranging from China’s efforts to reduce its dependence on exports to the decline in global oil prices, the current account surpluses of this group of countries, though still large, look to be on a downward trend.  Offsetting this decline, however, has been a significant increase in the collective current account balance of the euro zone.  In particular, Germany, with population and GDP each less than a quarter that of the United States, has become the world’s largest net exporter of both goods and financial capital.”

 

What You Google Is All There Is

“As the Internet has become a nearly ubiquitous resource for acquiring knowledge about the world, questions have arisen about its potential effects on cognition.  Here we show that searching the Internet for explanatory knowledge creates an illusion whereby people mistake access to information for their own personal understanding of the information…Searching for information online leads to an increase in self-assessed knowledge as people mistakenly think they have more knowledge ‘in the head.’”  Meanwhile, “jumping to conclusions on the basis of limited evidence is so important to an understanding of intuitive thinking, and comes up so often in this book, that I will use a cumbersome abbreviation for it: WYSIATI, which stands for what you see is all there is…WYSIATI facilitates the achievement of coherence and of the cognitive ease that causes us to accept a statement as true.  It explains why we can think fast, and how we are able to make sense of partial information in a complex world.  Much of the time, the coherent story we put together is close enough to reality to support reasonable action.  However, [WYSIATI helps] explain a long and diverse list of biases of judgment and choice.”

 

USA: April Employment Report Will Be Key To Fed

 

EU: Spain Joins Negative Yield Club

 

WM: “Constraints Imposed By Tax-Efficient Asset Management Do Not Have Significant Performance Consequences”

porky pig

A Th-Th-Th-That’s All, Folks!

Mohamed El-Erian’s portfolio is mostly concentrated in cash right now: “Central banks look at growth, employment, at wages.  They are too low.  They don’t have the instruments they need, but they feel obliged to do something…They hope that they will trigger what’s called the wealth effect…There is a massive gap right now between asset prices and fundamentals.”  “Why is this the most mistrusted bull market in recorded history?  Because no one thinks it’s real.  Everyone believes that it’s a by-product of outrageously extraordinary monetary policy actions rather than the result of fundamental economic growth and productivity — and what the Fed giveth, the Fed can taketh away.”  Meanwhile, “there are two common delusions about the Fed: [1] They know something we don’t [2] They are stupid.” Meanwhile, “there seems to be a conflict between low liquidity in markets requiring more and more predictability and the Fed wanting to have more flexibility…If economic conditions demand that [the Fed] raise rates this year it will simply have to contend with the existing, broken model.”  Meanwhile, “the easy part of the dollar rally is definitely behind us” (alt) …”On Friday, the dollar took its biggest tumble in almost two weeks following slower-than-expected U.S. job growth for March.  The Labor Department reported nonfarm payrolls grew by 126,000.  Economists…had forecast an increase of 248,000…the expected likelihood of a Fed rate increase in September dropped to 28% from 33%, according to the fed-funds futures market.”  Meanwhile, Josh Brown says “the preconditions for active management outperformance are present!”  He argues that the current outperformance of small caps over large, as well as international stocks over domestic, provide plenty of “alpha” potential.  Furthermore, “dispersion has shot up — dispersion representing the degree of standard deviation between stocks from one another.”  Also, “cash is also not as big of a drag this year as it was last year.”  “The question is, will these conditions remain present long enough for the active funds to post a (sorely needed) banner year for the industry?  It would make things a lot more interesting and could cause quite a stir here in the Index Utopia.”  Meanwhile, The Tide In Europe Is Turning Towards Active Management.  Also, Would Benjamin Graham Have Hated Index Funds?

 

USA: What Happens If My Algorithm Is Wrong?”

 

USA: [Insert Noun Here] Asian Infrastructure Bank Has Convinced Larry Summers Of One Thing!