FX volatility Feb 2015

Currency Wars Monetary Easing

A Merrill Lynch analyst has constructed a “GDP-weighted range-based currency volatility index” to show that the current level of volatility in currencies is “the highest for non-crisis periods in twenty years.”  He also argues that “a weak currency might provide a short-term boost to the countries engaging in currency devaluation.  However, if everyone is playing the same game, all we will end up with is more and higher FX volatility.  This in turn will likely exact a toll on global trade and capital flows.”  Also, “since interest rates (short-term as well as long-term rates) are currently so close to zero, the exchange rate has become the main transmission channel of monetary easing…but the benefits that exist independent to the exchange rate are shrinking alongside rates.”  Quite.  Cue the PBoC: “China’s central bank cut the required reserve ratio for its banks (alt) as it stepped up efforts to counter the impact of capital outflows and encourage banks to boost lending amid fresh data showing a weakening economy…The required reserve ratio, known as the RRR, specifies the portion of a commercial bank’s deposits that must be held on reserve at China’s central bank, where it is unavailable for loans and other investments.”  Most analysts, however, seem to think that the RRR cut reflects new concerns about yuan liquidity, and not necessarily an attempt at currency devaluation: “Once upon a time China’s trade surpluses were so large and the capital inflows so strong that [these] inflows provided more than enough base money to fuel any amount of credit expansion that China authorities desired.  In fact, there were excess inflows that China had to sterilize.  Now the trade surpluses have diminished and the speculative inflows have cooled…If RRR were not cut, there would be an effective tightening of liquidity conditions.”  


Jobless Claims Steady Despite Energy Layoffs

Fewer Americans than forecast filed jobless claims last week, hovering around levels that are typically associated with an improving job market.”  This is great news considering all the energy sector layoffs last month: “U.S.-based employers shed 53,041 jobs last month…with 40% of those directly related to oil prices.  It was the highest monthly job cut tally since February 2013 and an 18% increase from the same month a year ago.”  “All eyes are on Friday, when a Labor Department report is projected to show the [US] added more than 200,000 jobs in January for a 12th consecutive month, and unemployment held at 5.6 percent, a more than six-year low.”


How Do Ya Like Dem Wages?

The Labor Department says “unit labor costs, a key gauge of inflation and profit pressures that measures the price of labor for any given unit of output, increased at a 2.7 percent rate in the fourth quarter after falling at a 2.3 percent rate in the third quarter.  For all of 2014, unit labor costs rose 1.5 percent compared to a gain of 0.2 percent in 2013.”


The Problem With “Make My Day” Is That It Can Go Both Ways

Greeks have got themselves in a bit of a dilemma.  On the one hand, they don’t really wanna leave the European Union.  But also, they don’t really wanna leave their money in a Greek bank.  Also, “game theory has a couple of weaknesses.  First, it tends to work best in situations like mobile phone spectrum auctions where you can be reasonably sure that all the other players are playing game theory too.  And second, it will only give you the correct steer if you have made the right assumptions about the other guy’s objective function.”  Here’s the problem: everyone’s objective function is probably something like “don’t destroy the European Union,” but Syriza is holding a grenade (debt default), and the ECB is holding a bazooka (Greek banking collapse)….decisions…


EU: European Commission Raises Forecasts For Eurozone Growth: From 1.1 To 1.3% In 2015


USA: Prudential’s Stock Price Is About To Get Real Efficient

Oil Fund Is Gonna Take The High Road On Fossil Fuels (Alt)


kfc double downDoubling Down On Junk

“Since 2008, the repo market has been shrinking as banks have shifted to longer-term financing in response to new regulatory capital rules and other post-crisis pressures.  What remains of the $4.2tn market is increasingly being taken up by non-bank entities (alt) such as real estate investment trusts, mutual funds and hedge funds…repo financing is also playing a new role in the marketing of collateralised loan obligations, or CLOs, which are bonds backed by loans to companies…by lending against the CLOs, banks can make money from assets they would not be able to own under incoming new rules.”  Says one banker, “Since we can’t hold the assets on balance sheet, it is a good way to get exposure.”  Meanwhile, “a proposed exchange-traded fund will make it much easier for anyone to double down on junk-rated loans.  The AdvisorShares Pacific Asset Enhanced Floating Rate ETF will use derivatives to boost gains on high-yield loans, allowing retirees and pensioners to magnify bets on debt that promises higher yields.”  Meanwhile, “home-equity lines of credit (alt), or Helocs, and home-equity loans jumped 8% in the first quarter from a year earlier…The $13 billion extended was the most for the start of a year since 2009…While that is still far below the peak of $113 billion during the third quarter of 2006, this year’s gains are the latest evidence that the tight credit conditions that have defined mortgage lending in recent years are starting to loosen.”

Natural Gas Is Going Global

“Projects under way mean that by 2018 over a third more LNG (liquid natural gas) capacity will come onstream — the equivalent of China’s current consumption of LNG and piped gas combined…LNG’s share of the world’s gas supply is likely to rise from around 15-20% now to as much as 30% if all the projects being planned come to fruition…The beginning of a genuinely global market in LNG is a transformation similar to what happened with oil.”  Meanwhile, the Federal Energy Regulatory Commission is taking baby steps towards allowing LNG exports (alt).  Also, new research by the Department of Energy “concludes that both Europe and Asia would probably cut total greenhouse gas emissions by switching from coal to LNG (alt), although that relies on the US keeping down the rate at which gas escapes from wells and pipes.”  Also, the Energy Information Administration thinks that LNG could “play an increasing role in powering freight locomotives in coming years…America’s seven major U.S. freight railroads spent $11 billion in 2012 for more than 3.6 billion gallons of diesel fuel in 2012.  For these railroads, fuel accounts for nearly one quarter of operating expenses.”  Last year, the average price for a gallon of diesel was $3.97, and “the equivalent amount of energy in natural gas cost 48 cents at industrial prices.”

Chasing Returns Bonds

“As interest rates continue to decline, mutual fund and ETF investors continue to buy bond funds in the typical fashion of flows following returns.  Hence, over the last four weeks as 10-year Treasury yields declined 20bps, inflows into fixed income funds totaled $19bn.  Stocks, on the other hand, saw $7bn in outflows over the same period, suggesting some reverse rotation out of stocks and into bonds.”  Also, “investors have poured $3.1 billion into municipal-bond mutual funds this year (alt)…the gains mark a shift after investors pulled $39.9 billion from the funds in the last 31 weeks of 2013.”  Meanwhile, here’s an interesting theory about unwinding QE and interest rates: “people tend to believe that QE suppresses rates by creating a bid where there otherwise wouldn’t be one…this isn’t a rational thing to think at all.  In reality, QE is and always has been about diminishing liquidity risk in the system.  Take the tap away, and you open the door to rollover risk, defaults and so-on — all of which increases risk aversion, which puts a bid on longer dated Treasuries.”

China: Cutting Reserve Requirements For More Banks

“Whether banks qualify for a lower reserve ratio will depend on whether their loans to smaller-sized firms and the farming sector account for a certain proportion of their total lending…other pro-growth measures announced on Friday included an instruction to banks to speed up lending, and a promise from the central bank to disburse more loans to commercial banks through a scheme known as ‘re-lending’…a way for China to increase money supply in the system and lift economic growth.”  Meanwhile, is China pulling a Mario Draghi?

Global: Complacency Everywhere

USA: To Make A Killing On Wall Street, Start Meditating

Um…then again?

Space: Take A Dragon To The Moon!

Peanut Butter Jelly TimeIt’s Peanut Butter Nervous Time!

Global bond rates dropped to their lowest levels of the year Wednesday, as central bankers signaled their determination to jolt the world’s largest economies out of their malaise…The yield on the 10-year U.S. Treasury dropped to as low as 2.523%, its lowest level in more than six months…In the U.S., despite rock-bottom interest rates, housing activity remains relatively depressed, companies have yet to pick up hiring and inflation has remained worryingly low.”  Bonds have done pretty well so far this year, surprising basically everybody, as investors seek “safe places to put cash as they fret about the flagging U.S. economy.”  That makes this seem even worse: Pimco “recorded net outflows of ($30.0 billion) between January and March 2014.”  Meanwhile, the market has David Tepper shakin’ in his boots (alt): “on Wednesday he struck a cautious note, worried about slow U.S. growth and the risk of a global economy that will worsen unless the European Central Bank takes aggressive action (which actually looks somewhat likely)…’The market is kind of dangerous right now.’…’I think it’s nervous time.’”  Journalists don’t seem to agree with Mr. Tepper: “Oh, sure there’s the selloff in biotech and tech stocks, and there’s the geopolitical threats of an unraveling in Ukraine.  But in general, those things just aren’t getting much of a pulse out of the market…the market is boring.”  Meanwhile, “U.S. homebuilder sentiment slipped unexpectedly in May to its lowest in a year with a darkening view of the current sales environment for single-family homes outweighing a modest pickup in expectations for activity in the next six months…builders have consistently raised concerns about stiff credit conditions for buyers and tight supply of building lots and labor.  In May, they said financial insecurity among potential buyers was a culprit.”  Meanwhile, Trulia takes a closer look at the housing market and finds that among the most expensive cities, “the housing stock is growing slowly, even though these are the places where it would be most profitable to build.  That’s because these cities tend to have geographical constraints that prevent further sprawl, and have adopted zoning codes that make it difficult to add more housing by building density.”  This is pretty much what’s happening in London as well: “tight planning rules and a shortage of land mean that relatively little new housing is being built, even as a booming economy and spectacular population growth create lots of demand for it…As a result, in London, though prices are 25% above the 2008 peak, construction is still about 20% below it…That suggests that unless there is more construction, prices in London and the south east will continue to climb, at least as long as interest rates stay low, the population keeps growing and there isn’t another financial crisis.”  Also, here’s one important difference between the auto and housing markets: “Both of these markets have had some favourable underlying demand-side pressures building in the last few years…Yet access to car loans has been relatively less constrained than access to single-family mortgages.”  Meanwhile, the property bubble in China is really confusing, but here’s what you should know: 1) “Overall credit has grown from about 120 percent to 190 percent of GDP in just the past five years,” 2) “Local incomes can’t support rents or down payments for [sleek inner-city digs].  Instead, wealthy Chinese are buying up multiple properties as investments, while simultaneously investing in the shadow banks that finance this property-building to begin with,” 3) As the property bust starts to settle in, the government is gonna let the system crumble a little, 4) But they won’t let it completely collapse,  5) Even if real estate investment drops significantly in China, global GDP will only take a minor hit (says the IMF),  and 6) But there are two groups that will likely feel a bigger impact: countries exporting raw materials to China, and Europe, where a devalued yuan could lead to deflation (although you could make the same argument for United States I think?).  All of this is especially confusing for Bank of America: “A spokesman for Bank of America said that the don’t-worry view is from the bank’s macroeconomic team while the do-worry view is from the corporate-strategy team.  ‘These two have been known to take different views,’ the spokesman said.  ‘It’s our effort to give a 360- (degree) view.’”

Mario Draghi Better Get His Game Face On

“A crucial new piece of information now makes it virtually certain that the ECB will act in June.  The case for waiting…was that a burgeoning recovery would gradually start to counter disinflationary forces by eroding excess capacity…But today’s report from Eurostat shows that growth in the first quarter of 2014 was sluggish…Output across the 18-country zone rose by only 0.2%, much lower than the 0.4% expected by the markets which was roughly the central projection made by the ECB in its previous forecasts.”  Here’s 5 things you should know about economic growth in the Eurozone: 1) The recovery is fragmented; unequal, 2) Low inflation, even outright deflation, isn’t the end of the world, 3) Growth in the UK and the Eastern fringe (Hungary and Poland) looks pretty good, 4) The ECB basically has no excuse not to pull on its monetary levers, and 5) What levers?  The ECB seems somewhat interested in doing some QE type stuff, but they basically don’t have a market for bonds backed by the credit of a singular Eurozone entity.  This is why most people expect the ECB (alt) to 1) boost lending to small and medium sized businesses (SMEs) in the Eurozone by charging banks to keep money at the ECB, combined with another long-term refinancing operation (LTRO) which would basically be a bunch of cheap money for Eurozone banks to lend out and create SME-loans-backed securities, and 2) purchase these SME-backed securities à la Quantitative Easing.  

Global: BlackRock Signals Bond Trading Shake-Up (Alt)

As the bond market dries up thanks to financial regulation (e.g. higher capital requirements and no proprietary trading), BlackRock is swooping in for the kill:  “The alliance with Tradeweb’s trading network of dealers means that users of BlackRock’s Aladdin risk management system will be able to access a broad number of interest rate markets, including US Treasury bonds, European, Japanese and Australian government bonds, US mortgage and agency debt along with interest rate swaps.”

KutcherJobsHead-Scratching Data Provoke Head-Scratching Reactions

“America’s recent economic data have not exactly been the easiest to interpret.”  Just to refresh your memory (wine tasting this weekend?): 0.1% GDP growth and 288,000 new jobs in the same week.  The Economist doesn’t seem to take the 0.1% number too seriously (weather weather weather), and argues that The Taper is further complicating the issue: “at faster rates of employment growth the Fed begins to worry about inflation pressures (or is perceived to worry about such pressures).  The expected pace of policy tightening and inflation expectations adjust accordingly, and the economy appears to slow back to a ‘safe’ rate of labour-market recovery.”  Furthermore, they argue that wage growth is a more critical indicator than headline unemployment and jobs growth, and “the question then becomes how willing the Fed is to tolerate wage growth that is rising toward ‘normal’ levels (of about 4%, compared with the 2% growth of the past few years).”  Meanwhile, the market reaction to the big jobs report last Friday involved a lot of head scratching: “It seems like the bond market is telling you one thing and the stock market is telling you something else, so which do you believe?”…”It’s almost a schizophrenic reaction from the markets here.”  While the strong economic data did produce some predictable behavior (growth-sensitive stocks rose), bonds and gold also rallied.  Utilities stocks fell ~2%, however, which are sometimes traded as a proxy to bonds.  Merrill Lynch is attributing “some of the muted reaction in rates to a tepid stock market reaction and short positioning in rates.  Other factors such as lower supply dynamics in agencies and the reserve growth in China may be helping longer term yields.  Unfortunately, we have no concrete evidence of the factors driving the bid.”  The tepid stock market reaction seems to suggest that it will take more than good job creation to boost stocks much higher: “It will take some catalyst, a genuine acceleration in economic activity or a sign that corporate America can expand profit margins from already record-high levels.”

World’s Biggest Economy Is A Hoax Work In Progress

“Smaller Chinese banks have ramped up their shadow lending activity (alt), adding to the financial risks that threaten to trip up the world’s second-biggest economy (first-biggest?).”  The Financial Times reports 10 unlisted banks whose “exposure to shadow credit assets soared last year.  For the 10 banks, which operate in large cities from Shijiazhuang in the north to Fuzhou in the south, investments in trust plans and holdings of other non-standard credit products climbed to 23.3 per cent of their total assets last year, up from 14.3 per cent in 2012…For Bank of Zhengzhou, almost two-thirds of its non-standard credit went to local governments, property developers, construction companies and miners — all of which struggle to obtain normal loans because regulators have classified them as risky borrowers.”  Meanwhile, “six months into China’s grand economic makeover, Beijing is playing it safe, choosing gradual progress on many fronts over game-changing, riskier reforms such as removing all controls over bank interest rates.”  The gradual progress so far has included “simplified business registration,” “removal of distortions in pricing of resources such as gas, and services like rail transport and healthcare,” “special economic zones,” etc.  Further reforms are expected, however, and include “stripping big state firms of an implicit government guarantee,” “reforms to China’s residence registration system and land property rights,” “revamp of how revenues, spending and responsibilities are split between Beijing and local governments,” etc.  Meanwhile, Nomura says that “China’s great real-estate bust has begun” thanks to “a combination of a huge oversupply of housing and a shortage of developer financing…producing a housing market downturn that could drive China’s GDP to less than 6% this year.”  Here’s something to cheer us up: “A narrower gap between China-HK trade balances suggests that the amount of hot money entering the mainland via over-invoicing exports has been efficiently cracked down during the past few months.”  Meanwhile, local governments in the Pearl River Delta (“the manufacturing workshop of the world — in south China”), “are allowing manufacturers to pay lower pension contributions than required (alt) as they worry about companies leaving, particularly as factories face double-digit wage rises each year.”  Here’s the dilemma: “while they want to keep factories, they also want to avoid the kind of strikes that raise concerns in the eyes of potential investors.”  

EU: Deflation Risks In Euro Zone Very Low” Says European Commission

USA: Organic Is Going From Hippie To Mainstream

apprenticeships in America

Skills Gaps

The nice thing about a “skills gap” is that it takes the blame for unemployment/low participation rate off of companies and on to the laborers themselves.  There, that’s my liberal plug, now this: apprenticeships are on the decline in America (alt) (the number of apprenticeship programs “fell 40% in the U.S. between 2003 and 2013”) despite their attractive ability to match the training workers receive to the skills employers want.  “Perhaps the biggest obstacle is that two-thirds of apprenticeship programs in the U.S. are in the construction industry, furthering a blue-collar image that stifles interest among young people and the employers who could create jobs for them.”  Employers say they are skeptical of apprenticeships, however, because of their association with unions, as well as the “fear that employees will leave for better-paying jobs almost as soon as they’ve learned their required skills.”  Obama is making America’s job training program reform a high priority (has announced over $500 million in new grants to develop apprenticeship style programs).  Interesting to note: when it comes to measuring our skills gap deficiencies, Germany is basically the golden standard (e.g. the United States, Great Britain, Canadaetc.).  Meanwhile, here’s how companies can be more “productive, profitable, and provide good jobs with good wages”: 1) “hire people both for their technical skills and their motivation to work together for the mission and goals of the enterprise,” 2) “adopt business strategies that stress quality, innovation…as drivers of profitability as opposed to competing solely on being the lowest-cost,” 3) “implement employment and labor practices that combine investments in training and development,” and 4) “respecting workers’ decisions to be represented by unions if they choose to do so.”

Defensive Strategies Gaining Momentum, Particularly In Small Caps

“In recent weeks, investors have pulled back from the riskier corners of the stock market, and small-company stocks are typically more vulnerable to wide price swings than are large company shares…the result has been two sharp selloffs of small-company stocks this year (alt), yet investors worry that valuations remain lofty and the stocks remain vulnerable to more declines…The Russell 2000 is at trading [sic] around 19 times the expected earnings of its components for the next year…At the start of 2013, the earnings multiple on the Russell was 15.1.”  Meanwhile, “large speculators such as hedge funds are betting $2.8 billion this month that the Russell 2000 Index will fall.  That’s the most since 2012 and the highest versus average levels since 2004…While small-cap shares are usually the first to benefit when economic growth picks up, the selloff reflects a loss of faith by professional investors in the five-year equity rally…’It suggests a market that has become defensive…we somehow have lost momentum in the small-cap space.’…Russell 2000 companies have on average 4.2 percent of their stock on loan…the average short-interest position on S&P 500 shares is 2.1 percent.”  Meanwhile, Goldman Sachs says “while some high-flying stocks have rebounded, investors shouldn’t expect them to return to their previous heights…’Typically quality and momentum have positive correlation.  However, today it is slightly negative, suggesting momentum has been fueled by stocks with ‘lower-quality’ characteristics.’”

Debating China: “Impending Day Of Reckoning” vs. Cautious Optimism?

The Financial Times says “a financial crisis in China has become inevitable,” and postponement of the day of reckoning will only make things worse.  The things that make them most nervous about China’s economy are: 1) the Chinese money supply (M2) “has tripled in the past six years, an expansion four times as large as that of the US over the same period,” 2) the working-age population appears to be declining, 3) “output is being produced, sometimes even in the absence of any demand,” 4) China’s closed capital account will fuel a “huge and persistent balance of payments surplus,” 5) Beijing may decide to walk to the talk when it comes to easing up on “perpetual policy stimulus” and implicit bailout guarantees.  The Peterson Institute for International Economics says that “even with a 50 percent drop in housing prices, Chinese banks could continue to operate relatively normally” with an average non-performing loan (NPL) ratio of 6.6 percent.  Things get complicated, however, when you consider the “whole slew of industries that provide inputs to real estate development,” many of which are highly leveraged and don’t have very far to go to be in default.  Furthermore, because “mortgages are used as collateral for more than 40 percent of bank loans,” a drop in home prices would reduce banks’ collateral for lending.”  Also, more than 40 percent of Chinese households’  net worth is in the equity value of their home (in the US it is closer to 30 percent).  PIEE concludes that “China isn’t in danger of a US-style wave of foreclosures, but the financial sector is certainly not insulated from a real-estate-induced economic slowdown.”  Further complicating the issue is that “official housing data are often of such poor quality that even informed observers can’t be too sure of themselves.”  Also, China’s sheer magnitude (160 cities with population > 1 million; The United States has 9) makes this type of data collection especially hard.

USA: Bank Of America Suspends Buyback, Dividend Increase After Miscalculation

USA: Soured Mortgages Attract Institutional Dollars

Apple vs Android use in New YorkIt’s The Age Of Aquarius Renewables Asset Management!

“Investment banking giant Citigroup has hailed the start of the ‘age of renewables’ in the United States, the world’s biggest electricity market…the big decision-makers within the U.S. power industry are focused on securing low-cost power, fuel diversity and stable cash flows, and this is drawing them to the increasingly attractive economics of solar and wind.”  Citi predicts the LCOE (levelized cost of energy) for solar and wind will trump the rising LCOE of natural gas, coal (basically already priced out of the market) and nuclear.  Also, like nuclear power, biomass and hydro plants have a much higher cost of capital than solar or wind, and that financing cost (interest rates) is likely to increase soon.  Meanwhile, the Bank of England wonders if the “age of asset management” is upon us: “the good news is that asset management is going to be huge — spectacularly, monumentally more huge than it is now.”  Indeed, by 2050, the Bank of England forecasts total assets under management of insurance companies, pension funds, mutual funds and other funds to exceed $400 trillion (currently ~ $87 trillion).  Furthermore, the asset management industry poses a unique “too big to fail” type challenge: “concentration is actually higher in asset management than banking, when it comes to the top ten share of assets…solvency of the asset managers isn’t really the problem (thanks to third party ownership of the assets) but pro-cyclic behavior, herding and short termism may be.”

New Vision For The Future: Humans Thwacking Glowing Lumps Of Metal

“There is reason to be skeptical of the assumption that machines will leave humanity without jobs.  After all, history has seen many waves of innovation and automation, and yet as recently as 2000, the rate of unemployment was a mere 4 percent.  There are unlimited human wants, so there is always more work to be done…Nonetheless, technologically related unemployment…may prove a tougher problem this time around.”  Meanwhile, “inside Toyota Motor Corp.’s oldest plant, there’s a corner where humans have taken over from robots in thwacking glowing lumps of metal into crankshafts…’When I was a novice, experienced masters used to be called gods, and they could make anything.’  These gods, or Kami-sama in japanese, are making a comeback…Humans are taking the place of machines in plants across Japan so workers can develop new skills and figure out ways to improve production lines and the car-building process.”  Meanwhile, GM could probably use some Kami-sama on their ignition switch team, or maybe some Kami-sama in their dealership therapy team?  Finally, here are some possible reasons for the long-term decline in the participation rate for prime-working age men.

AAPL: Here’s Why Developers Keep Favoring Apple Over Android

Question: if Android “has about an 80 percent market share in some areas of the world [then] why aren’t designers paying it more attention?”  Answer: “Android users don’t pay for apps, they don’t have data plans, you can’t monetize them easily, and designers are all iPhone users and don’t really understand Android users.”  Furthermore, an “Android user is worth one-quarter of an iOS user,” at least for video game sales, however sales of physical goods suggests a similar conclusion.  Meanwhile, Apple is still sitting on a massive $159 billion cash pile.  With very few acquisitions in the last couple of years, and none over a billion dollars, some people are wondering: “Where are the robots, the driverless cars, the virtual reality goggles?”  Tim Cook, CEO, says “buying something for the purposes of just being big” isn’t part of the strategy, but it is kind of fun to consider all the possibilities $159 billion can afford (e.g. space travel, iTesla etc.).

USA: Small Caps Serve Up Big Warning

“Russell 2000’s underperforming the S&P 500 has been a general theme lately.  So far this year, it’s down 0.7 percent while the S&P 500 is up 1 percent.  In the last six months, the Russell 2000 is up 7 but the S&P 500 gained 10.5 percent during the period.”  Meanwhile, “high flying tech [stocks are] crashing back to earth.”  Companies like Twitter, LinkedIn, SolarCity and Facebook are all down ~30% so far this year, while “established names with strong dividend yields” have been performing well (i.e. Microsoft, Oracle and Cisco).

EM: Nigeria: The New Belgium

Calculating Nigeria’s GDP was rebased this weekend “to include previously uncounted industries including telecoms, information technology, music and film production,” in an effort “to measure one of the world’s biggest informal markets.”  The result: $510bn.  “$190 billion more than South Africa…on a par with that of Poland and Belgium, and ahead of Argentina, Austria and Iran.”

HFT: Dark Markets May Be More Harmful Than High-Frequency Trading

“The rise of ‘off-exchange trading’ is terrible for the broader market because it reduces price transparency a lot, critics of the system say.  The problem is these venues price their transactions off of the published prices on the exchanges — and if those prices lack integrity then ‘dark pool’ pricing will itself be skewed.  Around 40 percent of all U.S. stock trades, including almost all orders from ‘mom and pop’ investors, now happen ‘off exchange,’ up from around 16 percent six years ago.”  For more, here are a bunch of different takes on high frequency trading.

China: Both A Lender And A Borrower Be, China Property Edition

“Chinese property companies are buying stakes in banks and raising fears that the country’s already stretched developers are trying to cosy up to their lenders…Some of the developers are heavily indebted, sparking questions about the motivation for these deals, and specifically whether the property companies are hoping to use their links to the banks to obtain preferential financing.”

UPS: Why UPS Trucks Don’t Turn Left


Top four fined banksSurprise: “Too Big To Fail” Is Advantageous For Those “Too Big To Fail”

The Federal Reserve Bank of New York has published new research suggesting “the largest US banks have benefited from a significant funding advantage (alt) over their smaller peers;” systemically important banks (“too big to fail”) “enjoyed an extra $60m-$80m of cost savings per average new bond sale (or about 31 bps total) over their smaller competitors until 2009.”  Furthermore, “Fed researchers cautioned that regulators would have to consider trade-offs when breaking up systemically-large banks.  [For example,] capping banks’ size at 4 per cent of GDP would raise the industry’s expenses by as much as $4bn per quarter…Instead, the Fed researchers suggested that requiring big banks to issue longer-term and ‘bail-inable’ debt that can be converted into equity in times of stress, might be preferable to dismantling large lenders.”  Meanwhile, “Wall Street banks and their foreign rivals have paid out $100bn in US legal settlements (alt) since the financial crisis, according to Financial Times research, with more than half of the penalties extracted in the past year.”  Furthermore, near-future litigation costs for big banks are expected to be ~ $151bn, according to the Federal Reserve.

China Could Use More Safety Nets

“Hundreds of depositors have raced to pull their cash (alt) from a small rural bank in eastern China, forcing local officials to take emergency measures to calm the panic after the bank run began to spread…it has been a localised event, contained to one farming county where lightly regulated credit cooperatives and loan guarantee companies failed this year after mismanaging funds…At its doors, the bank broadcast a recorded message on repeat: ‘Savers’ deposits are protected by law.  There is no situation in which we cannot meet cash withdrawal demands.’”  Which isn’t totally true.  Until, at least, the Chinese government establishes the safety net of deposit insurance.  Speaking of safety nets, China will need more if it wants to rebalance the economy successfully: “China’s government is keen to promote consumer spending as a new force in the economy.  The only problem: Chinese households hate to consume.  Instead, they squirrel away their money for a rainy day — not surprisingly, since pension provision is patchy and, in the absence of a decent insurance system, medical costs weigh heavily on the sick.”  Meanwhile, here’s an update on the development of China’s shale-gas industry: “so far fewer than 100 shale-gas wells have been drilled in China, compared with around 40,000 wells in the U.S…’Relative to United States’ shale-gas plays, the [reserves] of the Sichuan and Tarim basins are potentially enormous and, if successful, could rival the Marcellus in terms of absolute scale.’”

EU: Germany’s Bundesbank Gives Its Blessing To QE In Europe

“The European Central Bank could buy loans and other assets from banks to help support the euro zone economy, Germany’s Bundesbank said, marking a radical softening of its stance on the contested policy.”  The President of the German Bundesbank is only one of several Euro policy makers who appear to be relaxing their opposition towards unconventional monetary policy.  This is probably due to three things: 1) people seem to question whether it has much of an impact at all, 2) “more economists are fretting about the risks of getting stuck in a deflationary trap,” and 3) German confidence in their economy is waning.

USA: Many Of Oculus’ Early Backers Not Part Of Facebook Riches

“The big winners of Facebook’s $2 billion deal to buy Oculus VR, a virtual reality headset maker, include a roster of elite venture capitalists who invested in the company early on.  But many who supported Oculus in its early days will walk away empty-handed.  Those would be its backers on Kickstarter, the fund-raising platform that Oculus used to raise $2.4 million in September 2012…Their goal was not to receive equity but rather to see the product come to market.  The smallest backers got merely a ‘thank you.’”  Barry Ritholtz is rather unkind to the sheep scammed by Kickstarter and, by extension, the JOBS Act.

BC: IRS Says Bitcoin Should Be Considered Property, Not Currency

“The I.R.S.’s decision would treat Bitcoin as property subject to capital gains taxes.  Long-term capital gains taxes are capped at 20 percent, a more favorable rate than the top rate of 39.6 percent on federal income taxes.  Individual traders in the currency markets — the British pound, for example — are expected to treat gains or losses as regular income for tax purposes.”

robot at workTaking Orders From Tradebot: The Pros And Cons

“Eric Schneiderman, New York’s attorney-general, in a speech on Tuesday called for (alt) ‘tougher regulations and market reforms’ of high-frequency trading (HFT) firms.  He highlighted contracts that allow high-frequency trading firms to place computer servers inside trading venues and gain access to extra bandwidth to speed their access to information, such as prices and volume.”  Meanwhile, the CFTC is jumping on (alt) the “Anti-HFT Bandwagon”: “The Commodity Futures Trading Commission is investigating deals between large high-speed firms and the two futures-exchange operators, CME Group and IntercontinentalExchange Group (ICE)…the probe is focused on complicated, often opaque incentive programs that give high-volume trading firms financial benefits such as discounts on fees the exchanges charge to execute trades.”  Perfect quote: “[Tradebot Chairman Dave Cummings] said he sees nothing inappropriate about Tradebot speaking regularly with exchanges and requesting order-type features it believes would be useful.  ‘Tradebot is treated the same as any other customer,’ he said.”  Meanwhile, individual investors should probably leave the technical analysis to Tradebot: “individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, [take more risk etc.]…we estimate that for our data, technical analysis costs investors on average approximately 50 basis points per month in raw returns from poor portfolio selections, and 20 basis points from additional transaction costs.”  All in all, high frequency trading by humans costs them about “8.5 per cent a year for normal traders, and about 20 per cent a year for high rollers.”  Also, consider this: Vanguard has some super convenient research on measuring the true value of wealth-management/financial advisors: they say you’re worth about 3bps to clients as long as you stick to their “Alpha strategy modules.”  So all in all, financial advisors practicing asset allocation, rebalancing and “don’t panic” coaching (i.e. sticking to the plan through the scary times) add over 10% in returns for their clients.  Well done.  Speaking of which, here’s some more evidence that bonds are the best “hedge” you can get with a portfolio weighted towards equities (i.e. asset allocation is a good idea).  Meanwhile, a new study “suggests that people can be prodded into doing something they don’t want to do, by a robot.”  During their experiments, “most apparently believed that the robot was issuing requests autonomously (it wasn’t, a human being was behind a glass wall controlling things) and responded accordingly.  They also found that some of the volunteers even tried bartering, either with themselves or the robot, by requesting another task or by suggesting out loud that perhaps the robot was malfunctioning.”

USA: Janet Yellen’s Moment

“Not only can Yellen alter the guidance on interest rates with which the FOMC has been steering global financial markets.  Beyond that she could do something far more profound and exciting: transform an entire generation’s way of thinking about economics, market forces and the role of government in achieving and maintaining prosperity.”  For some reason, people seem to be teasing the idea that Janet Yellen could introduce some fairly radical new monetary thresholds/forward guidance; especially when it comes to overshooting their original 2% inflation target.  The show starts at 11:30 AM PST.

China: Central Bank Holds Bailout Talks With Property Developer

“China’s central bank and one of its largest state lenders are holding emergency talks over whether to bail out a defaulting real estate developer.”  “Failure of a small property developer is not unusual in China or even in Zhejiang Province, where [Zhejiang Xingrun Real Estate] is based.”  Furthermore, “Xingrun’s problems appear to stem mostly from mismanagement and alleged illegal activity.”  Interestingly enough, the PBOC is denying involvement in bailout talks.  Meanwhile, a survey from the American Chamber of Commerce in China finds that U.S. companies are concerned “over intellectual property, the safety of proprietary data and government-sponsored campaigns against foreign firms operating in [China].”

SEA: Seattle Becomes First City To Cap Uber, Lyft Vehicles

Seattle’s millennials are going all “damn the man!” over this; it seems fairly significant, however, in the context of Seattle’s growing reputation as a major West Coast tech hub á la Silicon Valley.  Meanwhile, Silicon Valley counties Santa Clara, San Mateo and San Francisco top the list of highest wages in America in Q3 2013.  Also, apparently Yolo, CA is a real place (#7 on “Percent increase in average weekly wage”).

YHOO: Is Yahoo’s Business Worth Less Than Nothing?

Here’s an interesting piece on how the market doesn’t seem to have a “correct” grasp on Yahoo!’s market value given its massive stakes in Alibaba and Yahoo Japan: “Alibaba and Yahoo Japan could both be overvalued, thereby understating the true value of Yahoo’s core business…Or it’s possible that Yahoo’s shares are too cheap…Or maybe the markets have it right and Yahoo’s business is hopeless.”

Gross: Morningstar’s Current View On Pimco (alt)

“Given our current view, we have lowered PIMCO’s overall Stewardship Grade to C from B, with an A grade being the highest possible and F the lowest.”

USA: One-Third Of Americans Only Have $1,000 Saved For Retirement

USA: Current-Account Gap Narrows To Level Last Seen In 1999

USA: Politics And The Rise Of “Dark Money”

Foreign holdings of US Treasuries March 2014Bubble Bubble: Bonds Edition

Gillian Tett over at Financial Times says we might be in a bubble, but its probably not the bubble you were expecting: “In recent years an astonishing amount of money has quietly flooded into fixed income funds…And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse — creating destabilising shocks for regulators and investors alike.”  Furthermore, last year’s “taper tantrum” proved that bond markets can be just as skittish as their equity counterparts, “and since it is now the bond funds, not banks, that hold the lion’s share of corporate bonds, if another taper tantrum does take hold that could be very destabilising.”  Meanwhile, “over $8 billion of new municipal debt came to market [last] week — and that’s not even counting the $3.5 billion of bonds sold by Puerto Rico…it made for the most active week of new muni issuance so far this year.”  Foreign holdings of U.S. Treasuries, however, saw a record decline and has some people believing that “Russia is shifting its Treasury bond holdings out of the Fed and into offshore accounts.  That way, Russia would be able to buy or sell its portfolio if the U.S. and its European allies impose economic sanctions amid growing geopolitical tensions in Ukraine.”  So yeah, things are getting kinda spooky for bond investors.  Then again, some believe there is simply a rising bubble in bond-bubble chatter.


“The People’s Bank of China announced Saturday that it would double the allowable trading range for the yuan against the dollar to 2% from a midpoint rate it sets every day…Many investors have always viewed the yuan, also called the renminbi, as a safe bet — a one-way appreciation game.  But the Chinese government is now trying to show that its currency markets are just as susceptible to outside factors. Doing so may boost outside confidence in the yuan and help promote offshore hubs for the currency.”  United States Treasury Secretary Jack Lew could be heard muttering “game on.”  Meanwhile, shares of China’s four largest banks have sold off $70 billion in valuation on market concerns over a slowing economy and a credit meltdown.  “The slowdown is making it harder for Chinese borrowers to repay their debts…Some lenders are increasingly financing insolvent companies to help them pay off maturing debt in a bid to avoid outright defaults…The practice, known as evergreening, reduces banks’ ability to lend to profitable businesses.”  Furthermore, “investors in Chinese banks are concerned ‘the ongoing interest-rate liberalization will squeeze their profits…Over the short or medium-term horizon, pessimism over the industry is still there and share prices could become even cheaper.’”  Meanwhile, Alibaba (China’s eBay-Amazon-Google all wrapped into one) has chosen the United States for its IPO later this year and is expected to be among the largest ever.

Seeking Justice: IFRS And The DOJ Would Rather Not

A Seeking Alpha contributor has exposed an insider trading/investing tabloid scandal involving IR firm “Dream Team” and at least two companies, Galena Biopharma and CytRx Corp: “Below I will provide detailed documentation (emails and attachments) that indicate management from both Galena and CytRx were intimately involved in reviewing and editing the paid articles on their own stock at precisely the time they were looking to sell / issue shares.”  Meanwhile, “the International Financial Reporting Standards (IFRS) Foundation’s role in governing global accounting rules is under threat after European politicians said they were questioning whether the authority was ‘best suited’ to the position.  The London-based authority, responsible for setting standards in 100 countries, has been severely criticised by MEPs for poor governance structures, a lack of transparency and its ‘close links to the accounting industry.’”  Also, the Justice Department “is simply unequipped — or unwilling — to combat complex financial frauds.”

Global: US And EU Impose Sanctions As Crimea Asks To Join Russia

As expected, Crimea voted to join Russia (by an extremely wide margin: >95%), so now the United States and the European Union are imposing travel bans and asset freezes on 32 people.  Eurasia Group calls the sanctions “a sideshow” and “puts the odds of a Russian military invasion [of Ukraine] at 40%.”

EU: It’s All About The Bin Ladens, Baby

MA370: Finally, A Plausible Scenario Of What Happened To Flight 370 (maybe)

USA: Factories Flex Muscle After Winter Chill; Largest Output Gain In Six Months

USA: One Third Of Uninsured Won’t Sign Up For Obamacare

Keqiang OKThe Dual Dragon Is Taking A Deep, Slow Breath; Prefers Quality Over Quantity

Chinese Prime Minister Li Keqiang sent a “warning shot” (alt) this week to companies steeped in debt and risk-hungry investors when he said that “China was likely to see a series of defaults as the government accelerates financial deregulation.”  Meanwhile, “a raft of data out Thursday added to the evidence that China’s economy is losing speed early in 2014.”  Here’s what some economists are saying: “We expect Beijing to ramp up spending on infrastructure and social welfare projects…” “Benign inflation leaves Beijing plenty of policy flexibility to cushion the growth slowdown,” “Many of China’s domestic growth drivers remain in place, notably consumption, urbanization and services; and global demand growth is on an improving trend, which will help China’s economy this year.”  Two directors from the Fung Global Institute argue that “any strategy for mitigating the threat of a sharp slowdown [in China’s economy] must account for the dual nature of China’s economy.  On the one hand, Chinese cities are becoming increasingly modern and globally engaged…On the other hand, half of China’s population remains rural, delivering a large share of income from agricultural activities…This duality has positive implications for China’s economic prospects…China has an even larger and more diversified economic base than many realize — implying a degree of growth momentum that would be difficult to lose.”  Furthermore, China must address another dual dragon: its “two-tiered credit system”.  If China can merge the higher tier (easy-credit fuel for shadow banking) with the lower tier (set by the Central bank), “this will inevitably trigger some defaults and erode the quality of banks’ loan portfolios, [but] the end result — a more balanced and healthy economy — will be more than worth it.”  Also, China’s “bond-market” needs some work: “The bulk of Chinese government debt is held by state-owned banks, which are under great pressure to keep it until maturity…the government uses banks as ATMs to bankroll stimulus efforts without having to worry about risk, volatility or capital flight.  And for their obedience, banks are assured a stable return.”  “This artificially constructed bond market hides a large degree of risk borne by the banks and, ultimately, the state…As long as inflation remains under control, the banks will be happy to hold government bonds to maturity.  But if inflation spins out of control…”

Still Feels Like A Recession

“This week, an NBC News/Wall Street Journal poll of American adults found that 57 percent still think the economy is in recession.  It’s not hard to see why.  People don’t take this as a technical economic research question; they take it to mean, ‘Is the economy good?’”  Furthermore, “Two trends are responsible [for this perception of economic recession].  The labor market is still slack (debatable), meaning millions who would like to work can’t, and those who do work have limited ability to demand higher wages (i.e. it takes the most powerful man in the world, and even then…).”  Meanwhile, “10 percent of U.S. renters say they would like to buy a home in the next year, according to a new report from Zillow, which surveyed renters in the nation’s 20 largest housing markets.  If all the renters who said they wanted to buy a home in the next year actually did, that would represent more than 4.2 million first-time home buyer sales, about twice the number of first-timers in 2013.”

Active Managers: Put Me In, Coach!

Here’s an interesting piece from Bloomberg on behavioral finance and the rise of “coaching” on Wall Street: “Coaches in the financial world are borrowing techniques from as far afield as sports, Eastern philosophy and neuroscience to improve their clients’ returns.  In addition, a new crop of software companies has sprung up to provide reams of statistics that the companies say can help investors and their coaches uncover hidden strengths and weaknesses.”  And guess what?  They aren’t cheap: “coaches don’t like talking about what their services cost, although they say clients should expect to pay from $400 to $1,000 an hour.  Some coaches, like [Denise Shull], charge a retainer as well as ask for a bonus amounting to a slice of the client’s profit.”  Meanwhile, Barry Ritholtz discusses the recent reporting of a “rash of suicides within the financial community” and concludes that “this morbid fascination of suicides…may be nothing more than random fluctuations in data.”  Also, the “French 35 hour workweek” might be a myth.

USA: Have You Been To The Mall Lately?

“During the past several months, more retailers have reported declines in customer visits, while fewer have boasted gains.  Despite this headwind, some retailers — or retail categories — have been able to successfully motivate consumers to visit their stores.”  These retail categories include: 1) Healthy lifestyle (e.g. Whole Foods, GNC), 2) Housing-related (e.g. Home Depot), 3) Warehouse clubs (e.g. Costco), 4) Fast casual restaurants (e.g. Chipotle), 5) Dollar stores and 6) “Fast-fashion” retailers (e.g. H&M).

SF: Is San Francisco New York?

“In many ways, San Francisco is the nation’s new success theater.  It’s the city where dreamers go to prove themselves — the place where just being able to afford a normal life serves as an indicator of pluck and ability.”