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Is China’s Economy Finally Starting To Recover? Here Is What The Real Data Shows

Is China’s Economy Finally Starting To Recover? Here Is What The Real Data Shows

Over the weekend, China-watchers – or at least the ones who don’t really watch China all that closely and instead rely on others’ “hot takes” – were shocked to learn that in February both the Chinese manufacturing and non-manufacturing PMIs had crashed far below consensus expectations, tumbling to record low levels, surpassing even the economic contraction observed at the peak of the global financial crisis.

Meanwhile, anyone who was following out periodic updates of China’s “alternative”, high-frequency indicators demonstrating the real state of the economy was hardly surprised, because as we showed over the past few weeks, after China’s catastrophic post-Lunar New Year collapse the economy has yet to stage a material rebound as profiled previously:

And yet, judging by the market’s torrid surge on Monday, it appears that – as so often happens – traders took China’s latest numbers in stride, and specifically as an indication of Beijing “kitchen sinking” the collapse in February, with a V-shaped recovery sure to follow.

Or maybe not, because while not only has China’s economy not picked up even modestly, but it is only a matter of time before Beijing, which has forced people to go to work against their will, succumbs to a second wave of coronavirus infections, one which will result in an even worse economic slump than the current one, which incidentally has yet to show any actual recovery!

So what do the latest high-frequency economic indicators show? It may come as a surprise to some that not only has China’s economy barely posted any improvement since our last update on this topic a week ago, but it has in fact lost ground in some metrics. Courtesy of Goldman, here is the latest “alternative” data:

First, daily coal consumption has barely rebounded from the recent lows, and is in fact where it was when the Lunar Near Year started, and tracking almost 30% Y/Y:

In line with the reduced daily coal consumption, railway-loaded coal volumes are also tracking substantially below the average level of the past three years, and what’s worse, the 2020 series appears to have slowed down in recent days.

An even more ominous indicator is China’s traffic congection index – a proxy of overall trade and commerce – which has barely budged since its new year lows and remains far below the same period in previous years.

With commerce frozen and amid fears that the government is lying about the true extent of the coronavirus spread, it will hardly come as a surprise that passenger traffic has failed to stage even a modest rebound from its new year lows, and is about a quarter of where it was one year.

One of Wall Street’s favorite real-time indicators, traffic congestion in major Chinese cities, has seen a modest rebound in recent days, however even it remains just barely above its level at the start of the lunar new year, and is below half where it has been in recent years.

It’s not just passenger traffic that is moribund: the load factor on domestic flights remains a fraction of where it has been in recent years.

Even the one area where there was been a modest rebound in recent days, daily property sale, remains in dire territory, or about 68% down compare to last year.

Looking at end markets for commodities used in construction, the operating rate of rebar  slumped further on both weak demand and high inventories. Likewise, the operating rate of HRC and galvanized steel, mainly used in the manufacturing sector, is now at just 50% of capacity and shows no signs of recovery.

And, as Goldman points out, while the bank has found increased orders from cable and wires fabricators while, operating rate of copper rod producers remained as low as 50% for big companies and 30% for medium-sized producers. What’s more, some small producers have not restarted yet at all, according to a Goldman survey with onshore contacts.

There is a silver lining to China’s ongoing economic paralysis: anyone who ventures into one of the country’s thousands of cinemas will have the building all to themselves.

The failure of China’s economy to reboot comes even as authorities have ordered owners of closed factories – whose employees are scared to return to work – to boost electricity usage to pretend that the economy is back to normal, and to fool those people who look at the charts above, into getting the impression that China’s economy is humming again. We described this bizarre example of central planning on Saturday, and here is Rabobank’s Michael Every commenting on this very phenomenon on Monday morning:

Saturday’s China PMI data were frankly shocking. Manufacturing was at 35.7 and services at 28.9: these are not recessionary levels, but outright depressionary. The private Caixin PMI was also awful at 40.3, again saying a deep downturn is biting. Of course, the real issue is if we get a V-shaped recovery in output – or in virus infections. Optimists, and Chinese stocks this morning, are cheering the former – and Chinese stocks are always freely traded and never, ever manipulated by the authorities, as well all know. Realists, and NASA satellite imagery of no pollution over China, lean towards the latter: as does one anecdotal, unsubstantiated report trending over the weekend that China has been ordering factories to leave the lights on to make them look busier from space and to boost electricity output in case pesky foreigners start trying to use that as a GDP proxy.

Finally, for all those expecting that Beijing will unleash another massive stimulus to kick-start the economy which remains paralyzed at a time when most analysts said activity would be back to normal by the first week of March, we give the last word to Nomura’s China economist Ting Lu, who not only correctly predicted the plunge in PMIs, but also said that “the likelihood of another round of massive stimulus appears low as policy space remains limited.””

“We believe markets might underestimate the scale of the current growth slump. Due to a slower-than-expected rate of business resumption, we have cut our year-on-year Q1 real GDP growth forecast to 3.0% and expect Beijing to ramp up policy easing measures in coming months. That said, the likelihood of another round of massive stimulus appears low as policy space remains limited.”

In short, for China – which was the world’s growth dynamo during the global financial crisis and helped the world rebound from the 2009 global depression while raking up tens of trillions in debt – the end of the economic road may finally be here.


Tyler Durden

Mon, 03/02/2020 – 20:40

via ZeroHedge News https://ift.tt/2PHSWbV Tyler Durden

Why Ranked-Choice Voting Might Make Little Difference In Heavily Contested Primaries

One advantage of using primaries to select nominees for President is that when the selection process takes place over time, it is easier for similarly-minded voters to coordinate on nominees. Today is a good illustration, as the departures of Pete Buttigieg and Amy Klobuchar from the race for the Democratic nomination facilitate the coordination of moderate Democrats, presumably to the benefit of Joe Biden. Whatever one’s politics, it may seem perverse that the more candidates who cluster around a particular set of issue positions, the greater the advantage for candidates outside the cluster. And it may also seem perverse that candidates sometimes must drop out to best address the ideological interests of their supporters.

Social choice theorists have identified alternative approaches to resolving elections in a single round that in theory avoid imposing a disadvantage on clustered candidates. These mechanisms require voters to rank either all candidates or some of their favorites in preference order. The mechanism that seems to receive the most attention these days is ranked-choice voting. This algorithm, sometimes referred to as instant runoff voting, eliminates candidates one by one based on who has the fewest first-place votes; when a voter’s first-place candidate is eliminated, the second-place candidate assumes the top spot.

Ranked-choice voting, however, does not have a desirable property, known as the Condorcet criterion. An algorithm meets this criterion if it guarantees that it will always select a candidate who beats all other candidates in pair-wise comparisons, should such a candidate exist. For example, suppose 45% of voters have the preference ordering (1) Left (2) Center (3) Right, 40% have the preference ordering (1) Right (2) Center (3) Left, and 15% have Center as their first choice. Then, a majority of voters prefer Center to Left, and a majority prefer Center to Right, so a Condorcet method would choose Center. But ranked-choice voting would eliminate Center, ultimately selecting Left instead.

Defenders of ranked-choice voting suggest that this is highly unlikely in practice. For example, an analysis of 138 elections in the Bay Area using ranked-choice voting found that each election of the 138 had a Condorcet winner and that the ranked-choice mechanism in fact selected this winner. This may seem surprising, given the simplicity of the example above in which a Condorcet winner exists but ranked-choice voting does not select it. Another surprising result is that only 7 of the 138 elections chose a candidate trailing in the first round, indicating that ranked-choice voting rarely produces a result different from that of a system that simply chooses the candidate with the most first-place votes.

One possible explanation for these phenomena is that voters ranking their preferred candidates are not doing so in a vacuum, but instead are placing some weight on other voters’ preferences. Political scientists have long noted the possibility of bandwagon effects, and it is plausible that a voter might want to vote for the election winner, or at least for a candidate who is the obvious alternative to the winner. Voters might do this even with a voting system in which they rank all their choices. A related possibility is that a voter does not want to “waste” a vote and seeks to act strategically, even though ranked-choice voting and Condorcet methods greatly limit (without eliminating) the possibility of strategic behavior. A voter who deep down prefers Elizabeth Warren, for example, might mistakenly believe that placing her near the top of the ballot will limit the voter’s ability to make a choice between Bernie Sanders and Biden. We can think of this as a bandwagon effect too, though the motivation is quite different.

If voters change their heart-of-hearts rankings to favor candidates who are more popular among other voters, adoption of ranked-choice voting might make little difference. Consider, for example, a ranked-choice poll from about a week ago of Democratic primary voters. Given the rankings of voters, Sanders was the Condorcet winner and also would have won a ranked-choice vote, though with only a narrow head-to-head edge over Biden. This is in part because 27% of Sanders voters had Biden as a second choice and 38% of Biden voters had Sanders as a second choice. These results may seem surprising given the conventional wisdom that Sanders and Biden are in separate lanes, but makes perfect sense if there are some voters who will tend to place the candidates who have the best chance of winning at the top of their ranked-choice ballot.

To what extend do bandwagon effects undermine Condorcet methods? As a quick back-of-the-envelope approach, I ran a simple simulation many times (C# source code here). The gist is that I assumed that there are 10 candidates, each of whom has two attribute values randomly distributed from 0 to 1. Each voter also has a preferred value for each attribute and ranks candidates based on the sum of the absolute difference from the voter’s preference to each candidate’s attribute value. However, half of voters are susceptible to a bandwagon effect, in which they give some benefit to the two candidates who have the highest number of first-place votes overall. I then varied the size of this bandwagon effect.

This simulation allows us to distinguish latent Condorcet winners from apparent Condorcet winners. A latent Condorcet winner is a candidate who beats all other candidates in pair-wise comparisons when there are no bandwagon effects. An apparent Condorcet winner is a candidate who beats all other candidates in pair-wise comparisons when bandwagon effects exist. Arguably, we would like an election method to tend to choose latent Condorcet winners, even though voters’ revealed rankings factor in bandwagon effects.

This simulation can help us answer whether bandwagon effects explain why apparent Condorcet winners seem to exist so often and why ranked-choice voting picks these so often. The figure immediately below shows how often the simulation produced latent and apparent Condorcet winners. With no bandwagon effects, Condorcet winners exist around 90% of the time; the other 10% of the time, some form of the Condorcet paradox emerges. But as bandwagon effects increase, the proportion of the time that a Condorcet winner emerges rises to 100%. Unfortunately, these are apparent Condorcet winners, reflecting how the voters vote but not necessarily the assumed latent preferences. This helps explain the result above that a Condorcet winner almost always appears to exist.

Similarly, the next figure demonstrates that the probability that ranked-choice voting chooses the apparent winner increases with bandwagon effects. Of cases in which an apparent Condorcet winner exists, ranked-choice voting succeeds at identifying that winner only 80% of the time in our simulations without bandwagon effects, but 100% of the time when the bandwagon effects are large. Again, this helps explain the result that ranked-choice voting seems to choose Condorcet winners, despite the absence of theoretical guarantees that it will do so.

Changing from ranked-choice voting to a Condorcet method will not much improve the voting system’s chance of selecting the latent Condorcet winner. The next chart illustrates the probability that a voting method selects the latent Condorcet winner. Condorcet methods are better than ranked-choice voting in the absence of bandwagon effects, but both are equally bad given bandwagon effects.

This suggests that when implementing some form of preference balloting in elections with many candidates, the most important challenge is to persuade voters that they should reveal their true preferences and shouldn’t worry about wasting their votes. Perhaps this information might be easier to convey with ranked-choice voting than with more complex Condorcet methods, because the dynamics of ranked-choice voting are more intuitively understood. If so, ranked-choice voting might be preferable to Condorcet methods, despite the latter’s stronger theoretical properties. On the other hand, the superficial very strong apparent performance of ranked-choice voting may reveal that it is not easy to convince voters to express their true preferences. If that’s so, seemingly more primitive voting systems, such as our own Presidential primary system, could be preferable.

This analysis doesn’t tell us much about whether some type of Condorcet method might make a difference in a general election with a very small number of candidates. It seems plausible that adopting such a method might allow for the emergence of a centrist third party in the United States. Ranked-choice voting would be unlikely to make a difference, since the centrist candidate would have the fewest votes. But it seems plausible that a centrist candidate might be able to convince many voters to place her second on the ballot, and a Condorcet method could then choose this candidate as the winner. Precisely for this reason, ranked-choice voting, which makes little difference, may be much more politically feasible than a Condorcet alternative.

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Forced Labor? – China Pushes 1000s Of Uyghur Muslims To Work In Factories

Forced Labor? – China Pushes 1000s Of Uyghur Muslims To Work In Factories

The Australian Strategic Policy Institute (ASPI) published a new report that says at least 27 factories in nine Chinese provinces are using forced labor of at least 80,000 Muslim Uyghur minority from the western Xinjiang autonomous region. 

“Under conditions that strongly suggest forced labour, Uyghurs are working in factories that are in the supply chains of at least 83 well-known global brands in the technology, clothing and automotive sectors, including Apple, BMW, Gap, Huawei, Nike, Samsung, Sony, and Volkswagen,” ASPI’s report said.

After several years of intense international criticism of China’s Uyghur re-education camps of more than one million people, many of these folks have graduated and been funneled into government-directed factories around the country. 

The report said, “It is extremely difficult for Uyghurs to refuse or escape these work assignments, which are enmeshed with the apparatus of detention and political indoctrination both inside and outside of Xinjiang. In addition to constant surveillance, the threat of arbitrary detention hangs over minority citizens who refuse their government-sponsored work assignments.” 

It added that “local governments and private brokers are paid a price per head” by the Xinjiang provincial government to “organise the labour assignments,” which ASPI says a new phase of government “repression” of Uyghurs is underway in forced labor factories making products for Western consumers. 

The Shandong-based Taekwang factory is one of many factories Uyghurs have been forced into labor. Taekwang is owned by South Korean chemical and textile conglomerate (chaebol), is one of the largest manufacturers of shoes for Nike, turning out upwards of eight million pairs per year. 

ASPI said hundreds of Uyghurs workers did not choose to work at the factory; they were assigned by the government. 

“The Chinese government is now exporting the punitive culture and ethos of Xinjiang’s ‘re-education camps’ to factories across China,” said Vicky Xiuzhong Xu, the report’s lead author.

It was seen in some cases that Uyghurs were transferred from re-education camps directly to factories. 

 “For the Chinese state, the goal is to ‘sinicise’ the Uyghurs; for local governments, private brokers and factories, they get a sum of money per head in these labour transfers,” Xu added.

And while the appeal of cheap slave labor is enticing for Western companies, the Chinese government promotes Uyghurs integration in factories as their strong efforts at ‘multicultralism’…

 “By ‘encouraging’ ethnic minorities in Xinjiang to ‘interact and develop themselves,'” Wang Yang, an official in charge of Xinjiang labor policies, recently said. “China has immensely promoted interaction and integration among different ethnicities.”

As China attempts to restart its manufacturing base, specifically in the Hubei region, where shortages of workers remain because of the virus outbreak, it’s only a matter of time before the government sends in Uyghurs to pick up the broken pieces. 


Tyler Durden

Mon, 03/02/2020 – 20:20

via ZeroHedge News https://ift.tt/2VFShvE Tyler Durden

Why Ranked-Choice Voting Might Make Little Difference In Heavily Contested Primaries

One advantage of using primaries to select nominees for President is that when the selection process takes place over time, it is easier for similarly-minded voters to coordinate on nominees. Today is a good illustration, as the departures of Pete Buttigieg and Amy Klobuchar from the race for the Democratic nomination facilitate the coordination of moderate Democrats, presumably to the benefit of Joe Biden. Whatever one’s politics, it may seem perverse that the more candidates who cluster around a particular set of issue positions, the greater the advantage for candidates outside the cluster. And it may also seem perverse that candidates sometimes must drop out to best address the ideological interests of their supporters.

Social choice theorists have identified alternative approaches to resolving elections in a single round that in theory avoid imposing a disadvantage on clustered candidates. These mechanisms require voters to rank either all candidates or some of their favorites in preference order. The mechanism that seems to receive the most attention these days is ranked-choice voting. This algorithm, sometimes referred to as instant runoff voting, eliminates candidates one by one based on who has the fewest first-place votes; when a voter’s first-place candidate is eliminated, the second-place candidate assumes the top spot.

Ranked-choice voting, however, does not have a desirable property, known as the Condorcet criterion. An algorithm meets this criterion if it guarantees that it will always select a candidate who beats all other candidates in pair-wise comparisons, should such a candidate exist. For example, suppose 45% of voters have the preference ordering (1) Left (2) Center (3) Right, 40% have the preference ordering (1) Right (2) Center (3) Left, and 15% have Center as their first choice. Then, a majority of voters prefer Center to Left, and a majority prefer Center to Right, so a Condorcet method would choose Center. But ranked-choice voting would eliminate Center, ultimately selecting Left instead.

Defenders of ranked-choice voting suggest that this is highly unlikely in practice. For example, an analysis of 138 elections in the Bay Area using ranked-choice voting found that each election of the 138 had a Condorcet winner and that the ranked-choice mechanism in fact selected this winner. This may seem surprising, given the simplicity of the example above in which a Condorcet winner exists but ranked-choice voting does not select it. Another surprising result is that only 7 of the 138 elections chose a candidate trailing in the first round, indicating that ranked-choice voting rarely produces a result different from that of a system that simply chooses the candidate with the most first-place votes.

One possible explanation for these phenomena is that voters ranking their preferred candidates are not doing so in a vacuum, but instead are placing some weight on other voters’ preferences. Political scientists have long noted the possibility of bandwagon effects, and it is plausible that a voter might want to vote for the election winner, or at least for a candidate who is the obvious alternative to the winner. Voters might do this even with a voting system in which they rank all their choices. A related possibility is that a voter does not want to “waste” a vote and seeks to act strategically, even though ranked-choice voting and Condorcet methods greatly limit (without eliminating) the possibility of strategic behavior. A voter who deep down prefers Elizabeth Warren, for example, might mistakenly believe that placing her near the top of the ballot will limit the voter’s ability to make a choice between Bernie Sanders and Biden. We can think of this as a bandwagon effect too, though the motivation is quite different.

If voters change their heart-of-hearts rankings to favor candidates who are more popular among other voters, adoption of ranked-choice voting might make little difference. Consider, for example, a ranked-choice poll from about a week ago of Democratic primary voters. Given the rankings of voters, Sanders was the Condorcet winner and also would have won a ranked-choice vote, though with only a narrow head-to-head edge over Biden. This is in part because 27% of Sanders voters had Biden as a second choice and 38% of Biden voters had Sanders as a second choice. These results may seem surprising given the conventional wisdom that Sanders and Biden are in separate lanes, but makes perfect sense if there are some voters who will tend to place the candidates who have the best chance of winning at the top of their ranked-choice ballot.

To what extend do bandwagon effects undermine Condorcet methods? As a quick back-of-the-envelope approach, I ran a simple simulation many times (C# source code here). The gist is that I assumed that there are 10 candidates, each of whom has two attribute values randomly distributed from 0 to 1. Each voter also has a preferred value for each attribute and ranks candidates based on the sum of the absolute difference from the voter’s preference to each candidate’s attribute value. However, half of voters are susceptible to a bandwagon effect, in which they give some benefit to the two candidates who have the highest number of first-place votes overall. I then varied the size of this bandwagon effect.

This simulation allows us to distinguish latent Condorcet winners from apparent Condorcet winners. A latent Condorcet winner is a candidate who beats all other candidates in pair-wise comparisons when there are no bandwagon effects. An apparent Condorcet winner is a candidate who beats all other candidates in pair-wise comparisons when bandwagon effects exist. Arguably, we would like an election method to tend to choose latent Condorcet winners, even though voters’ revealed rankings factor in bandwagon effects.

This simulation can help us answer whether bandwagon effects explain why apparent Condorcet winners seem to exist so often and why ranked-choice voting picks these so often. The figure immediately below shows how often the simulation produced latent and apparent Condorcet winners. With no bandwagon effects, Condorcet winners exist around 90% of the time; the other 10% of the time, some form of the Condorcet paradox emerges. But as bandwagon effects increase, the proportion of the time that a Condorcet winner emerges rises to 100%. Unfortunately, these are apparent Condorcet winners, reflecting how the voters vote but not necessarily the assumed latent preferences. This helps explain the result above that a Condorcet winner almost always appears to exist.

Similarly, the next figure demonstrates that the probability that ranked-choice voting chooses the apparent winner increases with bandwagon effects. Of cases in which an apparent Condorcet winner exists, ranked-choice voting succeeds at identifying that winner only 80% of the time in our simulations without bandwagon effects, but 100% of the time when the bandwagon effects are large. Again, this helps explain the result that ranked-choice voting seems to choose Condorcet winners, despite the absence of theoretical guarantees that it will do so.

Changing from ranked-choice voting to a Condorcet method will not much improve the voting system’s chance of selecting the latent Condorcet winner. The next chart illustrates the probability that a voting method selects the latent Condorcet winner. Condorcet methods are better than ranked-choice voting in the absence of bandwagon effects, but both are equally bad given bandwagon effects.

This suggests that when implementing some form of preference balloting in elections with many candidates, the most important challenge is to persuade voters that they should reveal their true preferences and shouldn’t worry about wasting their votes. Perhaps this information might be easier to convey with ranked-choice voting than with more complex Condorcet methods, because the dynamics of ranked-choice voting are more intuitively understood. If so, ranked-choice voting might be preferable to Condorcet methods, despite the latter’s stronger theoretical properties. On the other hand, the superficial very strong apparent performance of ranked-choice voting may reveal that it is not easy to convince voters to express their true preferences. If that’s so, seemingly more primitive voting systems, such as our own Presidential primary system, could be preferable.

This analysis doesn’t tell us much about whether some type of Condorcet method might make a difference in a general election with a very small number of candidates. It seems plausible that adopting such a method might allow for the emergence of a centrist third party in the United States. Ranked-choice voting would be unlikely to make a difference, since the centrist candidate would have the fewest votes. But it seems plausible that a centrist candidate might be able to convince many voters to place her second on the ballot, and a Condorcet method could then choose this candidate as the winner. Precisely for this reason, ranked-choice voting, which makes little difference, may be much more politically feasible than a Condorcet alternative.

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Beto O’Rourke Becomes Third Former Democratic Rival To Endorse Biden As ‘Super Tuesday’ Looms

Beto O’Rourke Becomes Third Former Democratic Rival To Endorse Biden As ‘Super Tuesday’ Looms

Beto O’Rourke will be the third former Democratic presidential contender to endorse Vice President Joe Biden Monday night during a rally in Dalls, the New York Times reports.

Former Representative Beto O’Rourke of Texas, who became a progressive star in his spirited race against Senator Ted Cruz before mounting a less-successful presidential campaign, will endorse Joseph R. Biden Jr. and appear with him in Dallas Monday night, according to two Democratic officials familiar with his plans.

Mr. O’Rourke, who dropped out of the primary last fall, has returned to his native El Paso and largely stayed out of the campaign.

But one night before the Texas primary, he will line up with his fellow former candidates, Pete Buttigieg and Amy Klobuchar, in their effort to coalesce behind Mr. Biden and slow the momentum of Bernie Sanders.

The shock-and-awe message is clear: Despite his innumberable stumbles and the fact that his campaign was on life-support just days ago (though he still has tens of millions in his campaign war chest), the DNC has anointed Joe Biden the winner of the primary.

At this point, the only non-Bernie frontrunner who hasn’t dropped out is Elizabeth Warren, who was probably busy Monday night celebrating the demise of Chris Matthews’ career, just the latest ‘scalp’ on Warren’s wall.

On Twitter, Warren was busy sharing one of the several stories published Monday bashing the rich over imaginary resource hoarding that isn’t even happening.

Still, Robyn Kanner’s 72 hours aren’t yet up.

Here’s Buttigieg endorsing Biden live. We expect to see Beto and Amy shortly.

Though Bloomberg is stubbornly hanging on (for now), unless something incredibly shocking happens tomorrow, it’s pretty much down to Biden vs. Bernie. Although, as Trump argued earlier, it’s not really a race – it’s a coup.


Tyler Durden

Mon, 03/02/2020 – 20:04

via ZeroHedge News https://ift.tt/39kRVP4 Tyler Durden

Friday’s Dip Buying By Hedge Funds Was The Most Extreme In The Past Decade: Why This Is Worrying Morgan Stanley

Friday’s Dip Buying By Hedge Funds Was The Most Extreme In The Past Decade: Why This Is Worrying Morgan Stanley

Amid the broader market carnage which culminated with the fastest 10% S&P correction from an all time high, last week also we observed the biggest one-day point drop in the Dow Jones ever (this in turn was followed by the biggest one-day Dow point surge ever on Monday). But more notably, following several days of freefall, on Friday equity long/short hedge funds finally stepped up, and whether it ends up being the “best trade”, the “worst trade”, or something in between, Morgan Stanley’s prime brokerage writes that “the buying of US equities among Equity L/S funds on Friday was the biggest we’ve seen in the past decade.” And while Monday’s ramp certainly eased some concerns about another year of woeful hedge fund performance, Morgan Stanley cautions that depending on what happens to stocks from here, it “raises the risks that we could see a rotation and alpha drawdown, should these flows look to reverse in the future.”

As we first observed two weeks ago, the record high leverage, crowding, and factor risks among the hedge fund community have raised the risk for future violent hedge fund rotations.

And while we have not yet seen these risks realized in the sharp sell-off over the past weeks, the recent behavior and mixed performance among HFs has made Morgan Stanley more concerned that we could be getting closer to a sharp rotation. In particular, three of the things the bank is watching have changed recently and are driving its greater concern:

  • HFs have been actively adding to gross leverage, particularly by adding longs in the largest amounts of the past decade last Thurs and Fri. This is concerning because in 3 of the 4 similar past episodes since 2014, large long selling has followed afterwards and has coincided with negative HF alpha (see Figure 1 below)
  • L/S funds bought large amounts of Momentum last week (and sold Value), once again crushing Marko Kolanovic’s argument that a rotation out of momentum/low-vol and into value stocks is imminent.
  • Performance (while good relative to the markets) has declined in absolute terms into negative territory and crowded stock performance has been mixed

So was Friday’s record dip buying a sign that hedge funds have finally gotten their mojo back and are again able to time market inflection points? According to Morgan Stanley that is hardly the case, and instead last week’s flush into risk assets merely underscores the top three rotation risks, which are as follows:

Rotation Risk Consideration #1: Largest Long Buying of Past Decade

Throughout the sharp sell-off last week, HF activity showed almost no signs of active de-grossing. In fact, the opposite was largely the case as L/S funds bought longs throughout last week and Quant funds generally added to both sides of their  books to keep their leverage from falling as fast as it would simply due to the falling markets. Put simply, there were no real signs of capitulation among Hedge funds.

While this behavior of buying dips and adding to gross exposure is fairly common during market pullbacks, the magnitude of the long buying among L/S funds spiked to unprecedented levels on Friday. For context, the long buying on Thursday was in line with the prior high from 2010-2019 and Friday’s buying was ~75% higher than that. Similarly, large long buying has often come near short term market troughs, aside from what happened in late 2018 (i.e. HFs generally exhibited good timing from a broad market perspective). Looking at the peak long buying within the green ovals in Figure 1, they peaked on the following dates:

  • Feb 6, 2014
  • Aug 27, 2015
  • Feb 9, 2018
  • Oct 17, 2018

However, this behavior raises the rotation risk that Morgan Stanley’s Prime Brokerage has been getting more concerned about for a while. Essentially, the concern is that HFs have tended to sell longs afterwards (often as markets rebounded) and this selling coincided with negative alpha from L/S funds.

Notably, the one time there wasn’t a subsequent alpha drawdown in the next few months was early 2018. But as one can see from the next chart below, the long buying then was a reversal from long selling into the Jan ’18 peak, rather than an acceleration of long buying as we’ve seen recently. The chart below tracks the trend in the cumulative long activity over time to help show when longs have been built up or reduced. To be clear, HFs were covering shorts aggressively from 4Q17 to early ’18 so nets were going higher, but L/S funds weren’t arguably pressing their longs into the market high.

In addition, this chart shows that, while the long buying in Jan 2016 and Aug 2019 were not quite as extreme over a short period of time (as highlighted in the green rectangles in Figure 1), the long risk had been building for months leading up to  the drawdowns in 1Q16 and Sep-Oct 2019.

Rotation Risk Consideration #2: Increased Momentum Buying (and Value Selling)

It’s not just that L/S funds were adding risk by buying the dip last week, what’s also notable is what they were buying. From a sector/industry perspective, they were mostly buying areas they’re already quite long: Software, IT Services (payments), Aero & Defense, Semis, Internet Retail, Hotels Restaurants & Leisure, and Entertainment.

From a factor standpoint, this manifested itself in one of the largest weeks of buying of Momentum in many years. It was the largest since last Sep (during the brief rebound after the sharp drawdown) and last Aug. In addition, it was the largest selling of Value in years. From a net exposure standpoint, L/S fund Momentum exposure is around the 50th %-tile since 2010 (and similar to where it stood prior to the selloff last Sep) while Value is around the 10th %-tile since 2010.

Rotation Risk Consideration #3: Performance Declines

For many HFs that are net long the market, there were few places to hide last week. Thus, it’s not surprising that funds lost about 4-5% gross last week as markets were down about 10%. This shifts returns into negative territory on a YTD basis. Needless to say, dipping into negative territory on a YTD basis early in the year is very different from doing so late in the year and leads to different investing behavior. Thus, being down about 2% hasn’t apparently triggered large de-grossing, especially as equity markets are now down 8-9% on the year.

For those looking for a performance trigger, Morgan Stanley suggests that one reference point might be early 2016. As the S&P sold off 9% from Dec 31 to Jan 20, L/S funds were down about 4-5%. However, the tipping point was that as the S&P rallied towards the end of Jan to be down only 5%, L/S were still down about 3.5-4% (i.e. there was little upside capture on the rebound). When markets started to sell-off again in early Feb and funds went back to being down closer to 5% on the year, they aggressively switched to de-grossing.

So while performance has held up so far, the concern is that a breakdown in returns could cause risk appetite to decline and de-grossing to increase. Two things to note on this front are:

  1. The crowded longs in the US have held in relatively well lately, but the 2 best days last week were last Thurs & Fri, which coincided with outsized long buying among HFs
  2. The crowded shorts have not been working well, which may suggest less cushion if the longs start underperforming

In conclusion, Morgan Stanley reminds us that a few weeks ago that the Combined Risk Metric of leverage-crowding-factors was back at highs, BUT that we had not yet seen aggressive HF behavior at that point and the rotations usually came a couple months after the metric hit highs. As such, “with the changes in behavior last week and more time passing, the risks of a rotation appear to be greater now and if capitulation (i.e. de-grossing) does play out among HFs, this would likely be fairly painful.”


Tyler Durden

Mon, 03/02/2020 – 20:00

via ZeroHedge News https://ift.tt/32LIWUE Tyler Durden

Matthews Out At MSNBC After Sexism, Bigotry, Racism, & Senior Moments

Matthews Out At MSNBC After Sexism, Bigotry, Racism, & Senior Moments

Oh, the perfect irony that after almost four years of abusing Donald Trump (during his campaign and presidency) for endless character flaws, it will be President Trump that outlasts the MSDNC anchor.

At the beginning of tonight’s show – ‘Hardball’ – Chris Matthews abruptly announced his retirement after a tumultuous month that included calls for his firing.

“I’m retiring. This is the last ‘Hardball’ on MSNBC, and obviously this isn’t for lack of interest in politics,” the 74-year-old said in addressing the audience in scripted remarks.

“As you can tell, I’ve loved every minute of my 20 years as host of Hardball. Every morning I read the papers and gung-ho to get to work. Not many people have had this privilege.”

“Retired” is one way of calling it…

Matthews was notably absent from the network’s live coverage of the South Carolina primary on Saturday, one day after being accused of sexual harassment by GQ columnist Laura Bassett (lambasting Matthews for comments made to a variety of women during his MSNBC career).

“I was afraid to name him at the time for fear of retaliation from the network; I’m not anymore. It was Chris Matthews. In 2016, right before I had to go on his show and talk about sexual-assault allegations against Donald Trump, Matthews looked over at me in the makeup chair next to him and said, ‘Why haven’t I fallen in love with you yet?’

So he is a sexist?

“Another time, he stood between me and the mirror and complimented the red dress I was wearing for the segment. ‘You going out tonight?’ he asked,” Bassett wrote, adding that Matthews told the makeup artists at the time, “Make sure you wipe this off her face after the show. We don’t make her up so some guy at a bar can look at her like this.”

And a bigot?

Then things got super awkward during coverage of President Donald Trump’s rally in South Carolina on Friday evening when Matthews thought Republican South Carolina Senator Tim Scott was Jaime Harrison, a Democrat running against the other senator from that state, Lindsey Graham.

The exchange between Matthews and Harrison occurred after the two had already spoken several minutes prior. Later, when Matthews saw Scott standing next to Graham, he mistook the junior South Carolina senator for Graham’s black Democratic opponent.

“Jaime, I see you standing next to the guy you’re gonna beat right there, maybe, maybe maybe, Lindsey Graham,” Matthews quipped.

“That’s Tim Scott, Tim Scott,” a female voice said off-camera.

“Jaime?” Matthews said.

“Who is that?” said the obviously confused MSNBC anchor after another correction.

“That’s Tim Scott,” Harrison said, smiling.

And is having senior moments?

Confusing two Americans because they have the same skin color?

Or is he racist?

Perhaps he should have ‘removed from office’ sooner?

In fact after his statement of retirement, Matthews attempted to address some of the recent controversies and allegations around him, trying to offer an apology.

“After my conversation with NBC, I decided tonight will be my last ‘Hardball.’ I’ll tell you why. The younger generations are ready to take the reigns. We see them in Politics, the media, they have proven in the workplace. They grew up with better standards, fair standards.”

“Compliments on a woman’s appearance some men, including me, might have once incorrectly thought were okay were never okay. Certainly not today. For making such comments in the past, I’m sorry.”

Have a great retirement Chris. Watching Trump win in November.


Tyler Durden

Mon, 03/02/2020 – 19:40

via ZeroHedge News https://ift.tt/2IfTPVb Tyler Durden

The Nobility Of Tulsi Gabbard

The Nobility Of Tulsi Gabbard

Authored by W.J.Astore via BracingViews.com,

In the South Carolina primary won on Saturday by Joe Biden, Tulsi Gabbard earned only 1.3% of the vote.  Her poor showing was due in part to her outcast status among the Democratic establishment joined by mainstream media outlets like MSNBC and CNN. 

Speaking of CNN, I caught a few minutes of coverage over the weekend during which its commentators confessed they couldn’t understand why Tulsi was still running. One person (Anderson Cooper, the weasel) suggested she was angling for a job with Fox News. 

Of course, Tulsi’s principled opposition to regime-change wars and other disastrous U.S. foreign policy decisions went unmentioned.  When her name is mentioned by the corporate-owned media, it’s usually in the context of the candidate most likely to succeed – in Russia.

By running in the election, Tulsi Gabbard continues to make an invaluable contribution:

She highlights the power of the military-industrial-Congressional-media complex and its rejection of any candidate willing to challenge it. 

Gabbard’s status as a major in the Hawaii Army National Guard, her service in Congress on the House Armed Services Committee, her military deployments to Iraq: all of this is downplayed or dismissed.  Meanwhile, Mayor Pete’s brief stint in Afghanistan is celebrated as the height of military service.  What’s the difference between them?  Mayor Pete plays ball with big donors and parrots talking points of the Complex – Tulsi doesn’t.

In a recent op-ed for The Hill, Tulsi yet again does America a service by calling out red baiting in America’s elections.  Here’s how her op-ed begins:

Reckless claims by anonymous intelligence officials that Russia is “helping” Sen. Bernie Sanders (I-Vt.) are deeply irresponsible. So was former New York City Mayor Michael Bloomberg’s calculated decision Tuesday to repeat this unsubstantiated accusation on the debate stage in South Carolina. Enough is enough. I am calling on all presidential candidates to stop playing these dangerous political games and immediately condemn any interference in our elections by out-of-control intelligence agencies.

A “news article” published last week in The Washington Post, which set off yet another manufactured media firestorm, alleges that the goal of Russia is to trick people into criticizing establishment Democrats. This is a laughably obvious ploy to stifle legitimate criticism and cast aspersions on Americans who are rightly skeptical of the powerful forces exerting control over the primary election process. We are told the aim of Russia is to “sow division,” but the aim of corporate media and self-serving politicians pushing this narrative is clearly to sow division of their own — by generating baseless suspicion against the Sanders campaign.

Tulsi is right here – and she’s right when she says that:

The American people have the right to know this information in order to put Russia’s alleged “interference” into proper perspective. It is a mystery why the Intelligence Community would want to hide these details from us. Instead it is relying on highly dubious and vague insinuations filtered through its preferred media outlets, which seem designed to create a panic rather than actually inform the public about a genuine threat.

All this does is undermine voters’ trust in our elections, which is what we are constantly told is the goal of Russia.

She also accurately notes how the “corporate media will do everything they can to turn the general election into a contest of who is going to be ‘tougher’ on Russia. This tactic is necessary to propagandize the American people into shelling over their hard-earned tax dollars to the Pentagon to fund the highly lucrative nuclear arms race that the military-industrial complex craves.”

Tulsi Gabbard may not be in the democratic race much longer, but that’s not because she lacks guts.  Indeed, her willingness to buck the system – and her commitment to making the world a less militaristic place – make her a notable candidate.  She’s been a noble voice crying in a corrupt and self-serving wilderness.


Tyler Durden

Mon, 03/02/2020 – 19:20

via ZeroHedge News https://ift.tt/2Ti3bWP Tyler Durden

Bill Fleckenstein: Coronavirus Will Cause A “Confidence Crisis” In The Fed

Bill Fleckenstein: Coronavirus Will Cause A “Confidence Crisis” In The Fed

Money manager and metals specialist Bill Fleckenstein appeared on the Quoth the Raven Podcast on Sunday to give his thoughts about gold, the market’s reaction to coronavirus and the Fed’s coming “confidence crisis”.

Gold

First, talking about last week’s move in gold, Fleckenstein says he doesn’t attribute the move to margin calls, as many had speculated. He instead says that gold likely just fell victim to “hot money”, which he noted often happens when gold spot rallies hard and the miners don’t follow – exactly what happened last week.

Bill said:

“Gold has gone up, but the mining stocks really didn’t participate. That concerned me because when the mining stock sputter and gold keeps going, then gold gets hit,” he says.

He continued:

“When gold was spiking on the coronavirus news, it didn’t quite act right in conjunction with other things, and I was a little nervous. Then, of course, it got destroyed on Friday. I suspect there was a lot of trend following money in gold. A lot of hot money. Hot money because it’s going up.“

The Market’s Volatility

The rally late last week was because people thought the “Fed was going to save them”. Fleckenstein says he doesn’t believe it to be the case that the Fed is going to give the market a rate cut anytime soon. He thinks the market will have to crash further before central banks intervene.

He also doesn’t think we’ve seen real panic in the equity markets yet. 

“When I look at the personalities of some of the absolute crap, like Tesla, they’re still valued like a total joke. I don’t think we saw a hell of a lot of panic,” he says.

“This was not about illiquidity”.

The Fed’s Coming Crisis

Bill continued: “The Central Banks are going to get panicked. They’re panic prone because they’re so stupid,” he says.

He also thinks the market is eventually going to wise-up to what the Fed is doing: 

“This is the moment in time we have been waiting for. Those of us who think these central bank policies are no good. We’re at the moment in time where they could lose credibility to a certain degree,” he says of the Federal Reserve.

“Slowly but surely people could realize it’s not working.”

He continued: “The Fed probably won’t cut today and the market’s going to keep getting tatered until the Fed does. But the real opportunity on the short side will be the big rally after when the Fed cuts. That rally ought to fail. If that failed rally occurs and they start down again, they will accelerate a lot, and you will have broken the psychology of the ‘The Fed can rescue us’.”

“Then you can have much more of the crash. That’s kind of the road map that I see,” he says.

You can listen to the entire podcast here:

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Tyler Durden

Mon, 03/02/2020 – 19:00

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Why Crypto Bulls May Not Want It To Be A Safe-Haven Asset

Why Crypto Bulls May Not Want It To Be A Safe-Haven Asset

Authored by Omid Malekan via Medium.com,

All eyes were glued to the quote screens this past week to see how crypto would react to the virus-inspired selloffs in other markets. Many were hoping that Bitcoin would finally show off its bonafides as a “safe haven” or flight to quality asset — something I myself have wondered about in the past.

But crypto mostly tanked alongside everything else.

There are two ways market watchers are interpreting this.

  1. Some observers now (disappointedly) think that crypto is just another risk-on asset, to be sold during a crisis.

  2. Others still think it’s a safe haven, and point to the fact that gold fell this past week as well (there is some precedence of precious metals falling during the peak of a crisis, then rebounding strongly. Make of that what you will).

My hunch is that it’s neither. Crypto is mostly doing its own thing. Too few big players own any of it, or even consider owning it, for it to be caught up in the usual “risk-on, risk-off” calculations. Asking the average Wall Streeter what happened to Bitcoin while the Nasdaq was tanking is sort of like asking them what happened to the Mexican Peso. Most traders probably weren’t even thinking about it. More importantly, I wonder whether crypto investors should want their preferred investment to be a flight to quality asset. I certainly don’t.

My belief is based on volatility:

To be a safe haven, an asset needs to be less volatile than the thing investors are fleeing. This is as much a mathematical truth as it is common sense. The reason why you’d rather own treasuries or gold during a market crash is because — regardless of the market mood — they usually don’t move as much as Tesla. You can see what I mean in the following chart of the implied volatility of stocks, treasuries and gold.

Although their relative vols tend to be correlated, one is almost always much higher than the other two. Bond volatility actually spiked to a multiyear high last week, but it was still less than a quarter of stock volatility.

Crypto volatility doesn’t even register on this chart because it’s an order of magnitude higher. That alone disqualifies it for proper “safe haven” status. Case in point, the price of Bitcoin rallied by over 50% in the two months prior to this week, with alts rallying even more. Nobody wants something that can double that quickly as their store of value. Things that go up quickly can come down just as fast.

So in order for crypto to become a true safe haven, its volatility would have come down drastically. This is not something hodlers should want. A less volatile asset is one that by definition has less potential upside. To put it in industry slang, less vol equals much later moon.

Gold, which is historically a reliable tore of value, has had an impressive rally over the past five years, climbing by 44%. If Bitcoin were to follow the same trajectory, it would barely break above $12,000 in the year 2025 — still 40% below its previous high. How terribly disappointing that would be for most investors

So as far as crypto’s safe-haven status is concerned, be careful what you wish for. There are still many risks and unknowns to owning these things, so investors should expect disproportionate upside as their reward. This is even truer given crypto’s backwards volatility profile. Unlike stocks, bonds, gold and almost everything else – cryptocoins are more volatile during bull markets than bear ones. The current five year high realized 30 day vol in Bitcoin was recorded right around the time of the late 2017 peak. The low came 11 months later as she was making her 2018 lows.

https://www.bitpremier.com/volatility-index

This begs the question: if not risk on vs risk off, what drives crypto prices?

It’s still too hard to know for sure, but my guess is that the performance of relative market infrastructure matters more than relative asset prices. There are now two competing models for a financial system:

  1. the legacy one, which emphasizes centralized control by large commercial entities whipped around by their central banking overlords,

  2. and the newer one, which emphasizes decentralized protocols driven by a global community.

My admittedly non-mathematical correlation analysis shows changing perceptions about how value is best moved around are the biggest drivers of crypto valuations.

  • When the old way fails its users, as was the case during the great financial crisis that launched Bitcoin, the Cypriot bail-in that lead to the 2013 highs or more recent Chinese capital controls, crypto goes up.

  • When the new way shows its own problems, like the Ethereum DAO crisis of 2016, or the contentious Bitcoin Cash split that marked the 2018 lows, crypto goes down.

Ironically, the biggest gains have happened when the stalwarts of the old guard bless the new way, like when the CME announced Bitcoin futures in 2017 or Facebook launched Libra in 2019.

If this analysis holds true, then the question crypto longs should be asking is not how stocks or bonds will do as the Coronavirus situation unfolds, but rather how the legacy financial infrastructure holds up during this period, and just as importantly, the ensuing response.

My prediction is not so good. The current attitude towards easy money from the world’s central banks reminds me of what Homer Simpson once said about alcohol: it’s the cause, and cure, of all of life’s problems. All of the instabilities that have built up from a decade of easy money — like an insane debt load in China or the destruction of commercial banking in Europe — are about to be pushed to a new extreme. It might take a few years to play out, but it won’t end well, increasing the appeal of an alternative

There’s also the possible catalyst of a central bank digital currency using some kind of blockchain infrastructure, an event made more likely by a scary contagious disease. If you believe in the price impact of blessings by the old guard, then it doesn’t get any better than a tokenized CBDC, a friendly blink from the Eye of Sauron himself.


Tyler Durden

Mon, 03/02/2020 – 18:40

via ZeroHedge News https://ift.tt/2TrSXC0 Tyler Durden