Archive for the ‘Uncategorized’ Category

State of the Markets

Posted: February 7, 2018 in Uncategorized

A day of reprieve today.

Serious damage has been done and, aside today, a period of consolidation will be needed.

Moreover it is an harbinger of things to come.

In the last year Wall Street introduced (a bit like 2006) a lot of new and strange product.

Gamma trades (bet on low volatility), all sort of ETF (robotic trading, factor, ultrashort, leveraged and so on), algorithmic trading, volatility selling).

Always in bull market they find a way to make more money and the regulator just watch.

This products significantly will produce more swings and we will need to get used to it.

And yes…soon or later something will go really wrong. Well at least the Fed now knows it.

 

 

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My November newsletter was aptly name the Rise of the Machines.

And last Wednesday was Early Warning.

In essence I wrote the new algorithmic  trading and ETF will wreak havoc once they decide to attack.

And they decided provoking immense and rapid losses.

From JP Morgan quant desk (today, not over 3 months ago)

<<JPMorgan’s quant strategist Kolanovic said spike in market volatility will probably trigger some $100B of outflows from US stocks by funds following so-called systemic approaches. Said selling from trend-following strategies contributed to Monday afternoon’s selloff on Wall Street and unwinding of positions betting on continued low volatility — known as index-option gamma hedging, short-volatility trades and volatility-targeting strategies — were also behind the outflows. However, noted recent selloff will likely draw fundamental investors and even trigger pension fund rebalances. ” In a separate article, Bloomberg discussed how momentum-chasing quants were actually ready for the sell-off with Commodity Trend Advisers’ (CTAs) reducing their equity exposure from a three-year peak on 24-Jan while raising their commodity exposure to a six-year high.>>

Moreover I must add that it is clear that ETF (exchange Traded Fund) are selling under robotic advice parameter.

For my clients only, I also explained how to fight the machines. Very similar to the movie, indeed – the future of stock market war is here.

Australia at best is just flat and 2018 could get worse.

After the massacre of every sector starting with manufacturing, we remain only with tourism (very expensive), education and immigration to save the country.

Commodities are completely dependent on China. China saved Australia as they had the all important election Congress – but this year they will really need to reduce leverage in the system. We have a bit of protection from the fact that our iron ore is less polluting than the Chinese one – but do not expect growth there.

Housing indicators are turning south and building activity has slowed down.

Spending is down with zero wage growth and rising costs.

Infrastructure spending is underway – but meant to soften the blow – not enough to avoid it.

In general the earning growth in the ASX200 is subdued (driven by banks), but there are positive patches and in general valuation re expensive, dragged up by the US valuations.

Confronted with this PM Turnbull starts thinking about the defeat in 2019.

His response has been a…..”Trump lite” reform.

-promising a tax cut reduction (oh my…..a Trump-tax lite reform).

-Pushing the defense industry (let’s call it as it is weapon-selling) industry to be one of the largest exporters by 2020. It could have been health or education or superannuation.

And before you accuse just PM Turnbull of incompetence, let’s remind ourselvesthat the high energy bills comes to some errors due to Rudd-Gillard Government.

But also before that the Australian politics have been riddled of policy mistakes (electricity prices already skyrocketed +72% between 2003 and 3013 – font Australian Bureau of Statistics).

What is the issue? Apart the incompetency of our government, it is our election cycle.

Three years election cycles make that no-long term policies can be created and implemented.

You can see with PM Turnbull – it is turning to the next election so it does not care anymore about the scaremongering Budget Debt (which is not – well much better than almost every other country) and think about…tax cuts!!

 

Markets

The US Treasuries 10 year T-Bond are over 2.71% and the market is shaking.

It is a difficult argument to explain, but it is very much critical to understand it.

When the US Treasuries are sold, their yield increase. By the institutional market this is considered the no-risk yield (as the US should go in default if not paid).

As the mega pension fund have to allocate money to the Government bond or stock market they will always allocate the money where the yield is better (to rely on yield to pay pension is much smarter than rely on gains).

As long as the yield on T bond is under 2.5%pa it is clear that is better to allocate to the share market.

Between 2.5% to 3% it is still convenient to allocate to the market, but is more of a grey zone – specially over 2.8%pa.

Over 3% it is definitely better to take the money out of the share market and into the bond market.

As we are talking about trillion of dollars, the effect is quite nasty.

Geopolitics.

There is also a geopolitical side? Who is selling so much T bond to spike the yield?

There is no public information about this, but a guess

  • Apple and company in order to pay the tax bill for the repatriation (that would be temporary as once paid, the money will go to buy Treasuries, once the tax is paid in April?
  • The Chinese as a warning shot against further US trade sanction?
  • The European disengaging by the Trump led US after Davos meetings?

Probably all three and something else.

 

Italy election: O Bella Ciao

Posted: January 24, 2018 in Uncategorized

Italy will have its elections on the 4th March.

For the people in the know Italian election were always been the most interesting and dangerous.

Italy went backwards economically since joined the EURO and even got abandoned by the rest of Europe with the huge influx of immigration. Italians even feel that the “one million migrants” invited by Germany as a ruse – Germany got the top pick of migrants – leaving the bad apple to the rest of Europe.

Italian are destitute and angry. And Italy cannot be left failing like Greece as its banking system and debt market (3rd largest in the world) are too big to let fail.

Even strategically is important. It always had an independent streak – always has been closest to Russia and very friendly with China. Even in the middle east has good relation with Iran and was trying to stop the US attacking Libya.

While there are starting signs of recovery it is too late and most of the recovery is exogenous (more because France, Spain, Germany goes well than anything to do with Italy).

At the moment the current governing party (PD – Left) looks like finished.

The more likely outcome is a right wing  alliance Forza Italia (yes, Berlusconi again!) Lega Nord – so a against migrant, pro business, less State.

The pollies are now giving the majority to M5Star (high deficit, universal income, abolishment of the European Fiscal Compact) , but I do not think it could form a coalition.

The parties seems now to avoid taking of an Italexit. But this does not mean there will be trouble.

It looks more like the Italian party decided to work as a fifth column (a minority group that is against the majority) by sabotaging Europe (or better aid the German vision of Europe) by breaching the Germany imposed Deficit limit, supporting France, avoiding the fiscal compact rules, siding with Russia and other mean.

Hence the post is called O Bella Ciao. A very famous Italian song from the 2 World War Partisan. It say Oh beautiful woman bye, I woke up with the invader (German troops) in the town and I leave to the country to fight and die for freedom and Italy.

The outcome of this election will most probably not be market breaking (unless M5 Star win), but they will seed problems that will come up with vengeance in the next recession.

 

Syria: A Turkish invasion

Posted: January 22, 2018 in Uncategorized

Turkey followed on its words and invaded Syria, Afrin to create a buffer zone.

Apart the possibility of errors this situation begs some dig in.

It all started with the US idea of forming a 30,000 Kurdish force as a buffer to prevent Islamic State return (in reality it was done to carve a US – allied part of Syria).

Now we find a NATO-US ally attacking the YPG Kurds – US ally. This could have never have happened (a NATO ally member attacking a  US ally) if President Obama did not respect the famous red line on Syrian gas attack.

It has  forever weakened the US standing (well unless the US changes idea).

Afrin will fall (Turkey has the second largest NATO army), but things get complicated if then the Turks will try and seize Manbij. All the American strategy kind of pivot on Manjib and practically a fall of Manjib will be a fall of the US influence in Syria.

The US probably will not intervene unless shot upon and Syria will be lost.

Definitely the Turks made an agreement with the Russians (Russians owns the sky with missile defenses and it would be impossible for Turkey to attack without their consensus).

The Russians will not be super -happy, but it is better Turkey than the US and they had to pay back the US as President Trump authorized the sale of lethal weapons to Ukraine. They probably also helped carve some deal with Assad (Turkey is not really interested in invading Syria – they just do not want a US armed Kurdish force at their doorstep).

I picked up and interesting and unknown fact in my news feed.

 

In the next 4 years there will be AUD60bn of interest only loan to be refinanced.

Due to the more stringent rules for the bank capital most oif them will have to be transformed into capital and interest – increasing the cost for the real estate investor and decreasing the tax deduction.

Moreover, there is an estimated 20% of “liar loans” (where people declared financial positions different from the reality and the banks closed their eyes).

This fact will add a new downward pressure on real estate and on consumer spending (higher loan repayment- less money to spend).

A little policy mishap could really spell the end of the Australian real estate fantasy (that houses are the only secure investment).