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A little over a month ahead of 13F season, BofA has analyzed hedge fund long and short portfolios to come up with a snapshot representation of the most popular and most hated positions, as well as a broad distribution of holdings by sectors. Here is a snapshot of the findings.

Hedge funds’ gross positioning is most aggressive in Discretionary, which is the fourth-biggest sector in the S&P 500 index, accounting for less than half of Tech’s weight, but hedge funds have taken the second-biggest gross long and short exposure in the sector after Tech. In particular, their short exposure in Discretionary is the same size as their short exposure within Tech.

Next, net exposure: BofA calculates the net exposure of hedge funds (HFs) by subtracting estimated short positions from their reported long positions. Based on the net exposure, hedge funds are most overweight Materials (1.89x), Discretionary (1.47x) and Health Care (1.28x), while maintaining a net short exposure to Telecom

What is surprising here is that contrary to widespread “knowledge”, hedge funds are not massively net long tech. So what explains the tremendous outperformance of tech stocks in recent months? Simple: as BofA showed previously, much of the ascent in tech names in the first half is due to tech company stock repurchases, or as BofA said “net buying of Tech in the 1H was entirely buyback-driven.” It begs the question what will happen when buybacks stop (either due to the earnings blackout period or for another reason), or merely slowdown as corporate cash levels decline.

Tech “mystery” notwithstanding, here is the most important data breakdown: which are the S&P500 stocks with the highest and lowest net relative exposure (on the long side), and alternatively, which are the most, and least, shorted stocks.

The two tables below are screens of stocks with the most (Table 3) and the least (Table 4) short interest (as a % of float), where, the bank estimates that most (~85%) of short interest in stocks is from hedge funds.

According to the above data, traders who are betting on a continuation of the historic short squeeze that hit in mid June would be well advised to go long the most shorted names and hedge by shorting the least shorted names.

Next, BofA also has a screen of stocks which are most overweight by hedge funds based on their net relative weight in the stocks vs. its weight in the S&P 500 (Table 5), and 2) a screen of stocks which have the largest net short positioning by hedge funds relative to the stocks’ weight in the S&P 500 (Table 6). In other words, these are the stocks that hedge funds love most and least, but not enough to necessarily short them, even though the list of “Bottom 20” names roughly coincides with the 20 most shorted names.

Why does the above data matter and why is positioning relevant?

Simple: as we first explained back in 2013 in “For The Third Year In A Row, The “Most Shorted Names” Generate The Highest Return” and also in
“Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate “Alpha“, going long the most hated/shorted names, while shorting the most popular/beloved stocks has been a winning strategy virtually every year since the financial crisis, largely thanks to central banks turning the market upside down.

BofA confirms as much writing that “Over the last several years, buying the most underweight stocks by large cap active funds and selling the most overweight stocks by large cap active funds has consistently generated alpha” and while the performance of this strategy in 2017 was sketchy, the trade more than redeemed itself in June when the most shorted names enjoyed a historic outperformance relative to the broader market.

Finally, BofA makes a notable caveat highlighting that positioning risks are particularly acute during quarter-end rebalancing: the 10 most neglected stocks have outperformed the 10 most crowded stocks by an annualized spread of 90ppt on average during the first 15 days of each quarter since 2012.

In retrospect, if only David Einhorn had followed this simple strategy over the past 5 years, he would probably be the single best performing hedge fund in the world right now, instead of watching his legacy disappear with one redemption request after another.

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Authored by Adem Tumerkan via Palisade-Research.com,

One of the most important macro-situations that’s developing right now is the looming U.S. dollar shortage.

I don’t mean in the sense that banks don’t have enough dollars to lend out – I’m talking about the foreign sovereign markets.

Here are some of the things that’s causing liquidity to dry up…

1. Soaring U.S. deficits – the United States’ need for constant funding is requiring huge amounts of capital

2. A strengthening U.S. Dollar – which is weakening the rest of the worlds currencies

3. Rising U.S. short-term rates and LIBOR rates – courtesy of the Federal Reserve’s tightening 

4. The Fed’s quantitative tightening program – unwinding their balance sheet by selling bonds

These four things are making global markets extremely fragile. . .

I’ve written about this dollar shortage before – but things are getting much worse. 

As a recap of why this all matters – when the U.S. buys goods from abroad, they are taking in goods and sending out dollars. Otherwise said, they are selling dollars out of the country in return for goods.

Those countries that sold to America now have dollars in return. But since countries don’t have a mattress to store their money under – they must find liquid and ‘safe’ places to put it.

With the dollar as the world’s reserve currency – and U.S. treasury market being the most liquid – countries usually take the dollars and funnel them back into the U.S. via buying bonds.

Since the U.S. is a net-debtor – inflows of new money is constantly required to pay out outstanding bills. So there’s always fresh debt that foreigners can buy.

And if you haven’t checked lately, the national debt is over $21 trillion – and growing faster. The latest Congressional Budget Office (CBO) report stated that at the current rate – U.S. debt-to-GDP will be over 100% by 2028 (if not sooner).

So how does this tie into a dollar shortage?

Let me break it down…

The always-rapidly-growing U.S. deficit requires constant funding from foreigners. But with the Federal Reserve raising rates and unwinding their balance sheet through Quantitative Tightening (QT) – meaning they’re sucking money out of the banking system.

These two situations are creating the shortage abroad. The U.S. Treasury’s soaking up more dollars at a time when the Fed is sucking capital out of the economy. 

Not too mention the strengthening dollar and higher short-term yields are making it more difficult for foreigners to borrow in dollars. Especially at a time when Emerging Market’s are imploding. 

And as we know – while the dollar gets more expensive – other currencies are getting weaker.

Here’s some of the largest Asian economies and how much their currencies have weakened against the dollar. . .

Unfortunately – foreign Central Banks have only limited options of what they can do to protect their currencies. . .

One – they can raise rates to defend their local currency. The idea is that if they offer higher interest rates, investors will park money in the country.

But raising rates will slow their growth down and hurt the nations debtors. And with Trump’s trade policies causing concerns for export heavy economies – mainly the Emerging Markets – making borrowers pay more interest isn’t a good thing.

Two – they can sell their dollar reserves instead. The Central Bank can sell their reserves at a discount on the Foreign Exchange market. And buy their local currency in return – pushing the USD down against their own currency.

The problem with this option is that it’s very costly and risky. . .

All the years of surpluses it took for them to build up those dollar reserves can disappear in a blink of an eye. And what do they get in return for all that cost? Temporary stability of their currency until they run out of dollars to sell. This is what happened in the 1998 ‘Asian Contagion’ crisis that decimated Asian economies.

And it appears things are already approaching ‘critical mass’ as foreign Central Banks grow concerned with the Fed’s tightening. Here are a couple of examples. . .

The Vietnamese Central Bank recently announced that they’re willing to intervene in the foreign exchange market to protect the stability of their local currency – the Vietnamese Dong (VND) – which just hit a record low.

This means they’re using ‘Option Two’ – selling their dollar reserves (pushing the USD Forex down) and buying the Dong on the open market (pushing the VND up). 

This will ‘stabilize’ their currency’s value – that is, until they run out of dollars. . .

Another example – the Reserve Bank of India (RBI) governor – Urjit Patel – penned a piece in the Financial Times urging the Fed to slow down their tightening to prevent further chaos in the emerging markets. 

Indonesia’s new central bank chief shared the RBI’s feelings – calling on the Fed to be “more mindful of the global repercussions of policy tightening.”

With the U.S. Treasury requiring significant funding from abroad. And the Fed raising rates while pulling dollars out of the economy via Quantitative Tightening – this is the foundation of a dollar shortage.

The soaring U.S. dollar, Emerging Market chaos, and depreciating Asian currencies are all effects from this.

That means global economies and stock markets will grow far more fragile – until the Fed inevitably reverses their tightening to re-liquidize global markets. 

As usual – expect things to get worse before they get better. 

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The Kroger Co. could soon unleash a fleet of autonomous grocery delivery vehicles across the United States if its on-road, fully autonomous pilot program is successful.

Kroger, the largest American supermarket chain announced a new partnership with California-based Nuro Thursday to test driverless home deliveries. The pilot program could begin as early as the fourth quarter in an unnamed region.

“Unmanned delivery will be a game-changer for local commerce, and together with Kroger, we’re thrilled to test this new delivery experience to bring grocery customers new levels of convenience and value,” said Dave Ferguson, Co-Founder, Nuro.

“Our safe, reliable, and affordable service, combined with Kroger’s ubiquitous brand, is a powerful first step in our mission to accelerate the benefits of robotics for everyday life.”

While supermarkets and grocery stores are rushing into home deliveries — unlocking a tranche of more gig-economy jobs for heavily indebted millennials, Kroger and Nuro could soon rain on the parade as their new partnership uses fully autonomous vehicles to overcome the expensive challenge of “last mile delivery” — the last step in getting items to a shopper’s home.

Through this partnership, shoppers can place same-day delivery orders, sort of like Amazon, through Kroger’s existing ClickList online ordering platform.

Nuro’s sole purpose is to eliminate the human capital cost from the equation of the “last mile delivery,” which tends to be expensive. In other words, all those newly minted millennials trying to survive below the living wage, well, your time as a package delivery driver could be soon expiring.

The company applies robotics, artificial intelligence, and computer vision technology mounted on a golf-cart-like vehicle designed to transport goods — quickly, safely, and affordably. The fully-electric, unmanned four-wheeled vehicle has separated locking compartments for items. Shoppers will access these compartments via a smartphone app that will produce a code to unlock the compartments.

The oddly shaped vehicle, packed with cameras and sensors mounted on the roof, weighs roughly 1,500 pounds. Similar to a golf-cart, the battery pack and electric motors are mounted beneath the floor, which accounts for most of the weight. The company says the compartments are rated to carry a combined cargo weight of up to 243 pounds.

“We are incredibly excited about the potential of our innovative partnership with Nuro to bring the future of grocery delivery to customers today,” says Yael Cosset, Kroger’s chief digital officer.

 

“As part of Restock Kroger, we have already started to redefine the grocery customer experience and expand the coverage area for our anything, anytime and anywhere offering. Partnering with Nuro, a leading technology company, will create customer value by providing Americans access to fast and convenient delivery at a fair price.”

In the last year, Kroger made a series of powerful moves to further its exposure to online and delivery services, as its digital sales for the past quarter exploded by 66 percent.

“We cannot just rely on physical stores to reach all of our customers for delivery and and pick-up,” said Yael Cosset, Kroger’s chief digital officer, in an interview with CNBC.

With approximately 2,800 stores in 35 states, autonomous delivery vehicles for Kroger could become a serious disruptor to the thousands of millennials who have resorted to gig-economy delivery jobs.

Why should you care? Well, the partnership between Kroger and Nuro is a significant warning sign that the immediate impact of automation on society will have the potential to dramatically reshape the U.S. in the 2020s and beyond.

*  *  *

As Karen Harris, Managing Director of Bain & Company’s Macro Trends Group would say, the imminent collision of automation “could trigger economic disruption far greater than we have experienced over the past 60 years.”

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Authored by Thorstein Polleit via The Mises Institute,

You get a lot of attention if you shout out things like “The stock market is about to collapse”, or “The US dollar crash is just around the corner”, or “The housing market slump is about to unfold”. But from the viewpoint of sound economics, making these kinds of predictions is quite impossible.

Putting probabilities to certain outcomes – such as “I assign a probability of 30 per cent that the stock market collapses in 2018” – might be fashionable among forecasters, but it certainly does not do the trick or make things any better.

Some Can

To be sure: One cannot, and should not, dismiss the idea that there might be people out there who have the ability to forecast events happening in the future correctly on a sustained basis. For instance, a successful entrepreneur belongs to this very group. He or she comes up with products people want to buy going forward, and they sell these products at prices which exceed production costs. They are also in a position to forecast changes in consumer demand and adjust their output accordingly.

Also, there are successful stock market investors, who stand out with many years of outperformance compared to their competitors. To be consistently better than the market, they must see and know something others do not see or know, and take action accordingly. For instance, they must detect undervalued stocks, and reap a decent profit when the market pushes stock prices towards their intrinsic value. They successfully invest at the right time in the “right” shares, which deliver outperformance over time.

Successful entrepreneurs and investors must have what it takes – the vision, courage, business acumen, or whatever it might be – to get the future right. That does not mean that they will not make forecast errors. But for some reason, their forecast errors turn out to be less devastating than those of the majority of the people. One thing is certain, though: Successful entrepreneurs and investors do not base their forecasts on the idea that economics would put you in a position to make correct predictions. Why is this so?

Most Cannot

Economics is not a science that provides you with the means for forecasting the future. As Ludwig von Mises puts it: “This is not to say that future human actions are utterly unpredictable. They can, in a certain way, be anticipated to some extent. But the methods applied in such anticipations, and their scope, are logically and epistemologically entirely different from those applied in anticipating natural events, and from their scope.” Mises’ statement might require some further explanation.

Rightly understood, economics is the science of human action, or, to be more precise, economics is about the logic of human action. Its “Archimedean Point” is the irrefutably true statement that “humans act”. The latter cannot be denied without causing a logical contradiction. If you argue “humans cannot act”, you act, and you would thus contradict your own statement. From the self-evidently true statement “humans act” we can deduce, or unfold, further true statements.

To give some examples: Human action, which is always the action of an individual, is purposeful; action requires means to attain goals; means are scarce; human action presupposes the category of means and ends, that is causality; time is an indispensable means for action; human action implies time preference and thus the originary interest rate (and both are positive, they cannot be zero, let alone be negative); the law of marginal utility is also logically implied in the statement “humans act”.

These (and other) statements are logically implied in the proposition that “humans act”. Any economic theory that contradicts the implications of the concept of human action must raise serious doubts as to its truth value. For instance, an economic theory in which human action does not take time, or in which human action is not constrained by definite time preference and a positive originary interest rate, can be dismissed as being logically false (as unrealistic, as unworldly madness).

The Role of Ideas

The irrefutably true knowledge that humans act implies that ideas (or theories) make humans act. And ideas are the ultimate given in the explanation of human action; they cannot be traced further back to other explanatory factors. This we cannot deny. Denying it would assume the existence of external (physiological, biological, chemical) factors which systematically explain human actions. However, science has so far failed to come up with a definite relation between external factors and human action.

In fact, there is a logical reason why such a relation cannot be discovered: Man undeniably has learning ability, meaning he can learn. Arguing “Man cannot learn” presupposes that man can learn; otherwise one wouldn’t say anything to someone else; assuming the contrary would amount to a performative contradiction. And arguing that “Man can learn not to learn” runs into an outright logical contradiction. As we cannot reject the notion that humans have learning ability, we can understand why we cannot know the future of our actions.

For if we assume that we know today how humans will act in the future, we would say that we have not only sufficient knowledge about natural phenomena but also know humans’ future choices, preferences and value scales in the future. The latter, however, would imply the denial of learning ability: Knowing today how humans act in the future would contradict the logically true statement that humans have learning ability – for we would know today all things happening in the future – but this is a logical contradiction and thus false.

Forecasting Impossible

It is now easy to also understand why there cannot be any constant relation between external factors and human action – in the sense that if the factor X occurs, humans will take certain action, and the result will always be Y. From experience, we know that different people, in response to given stimuli, often act differently at different points in time. But experience does not prove anything. Luckily, we do not have to take recourse to experience to know that there are no quantitative regularities in human action.

The reason why there are no such behavior constants is a logical one: If the external factor X causes certain action (in the sense of “if X, then Y”, or “if X goes up by 10 per cent, then Y will decline by 5 per cent”), we would be in a position to forecast today human action in the future (in quantitative terms) – and again, we would thereby contradict the logical conclusion that humans have learning ability: If we know today how we will act in the future, we have to assume that we cannot, and do not, learn along the way.

Now we have come full circle. Economics – if and when rightfully understood as the logic of human action – does not, and cannot, provide you with insights predicting future human action. Any attempt to use economics for making predictions runs counter to logic and is thus bound to fail. This by no means suggests that economics is a trivial undertaking. On the contrary! What economics can do is outline (with absolute certainty) the qualitative results of human action taking place under certain conditions and circumstances.

For instance, economics tells you with apodictic certainty that if people engage in voluntary exchange, all parties will benefit; or if the central bank increases the quantity of money, the purchasing power of the money unit declines (compared with a scenario in which the quantity of money had remained unchanged); or that a rise in the quantity of money in the economy will never be “neutral” as far as peoples’ income and wealth positions are concerned, it will always benefit some at the expense of others.

Entrepreneurial Competence

The vast majority of economists these days is, however, heavily engaged in the business of forecasting. They try to forecast where, say, interest rates, stock prices, exchange rates will stand in 3, 6, 12 months, or even farther out. And there is demand for such forecasts: A great number of investors is eager to listen what these forecasting economists have to say about the future, and quite a few investors take the economists’ forecasts seriously, namely as input for their investment decisions.

From what we have outlined earlier, however, we can know for sure that “mainstream” economists will fail in the effort to forecast the future and that a significant number of investors will get disappointed: Economics as a science cannot predict how humans will act, it cannot quantitatively forecast how economic magnitudes will develop. Such predictions are, and for logical reasons, beyond the reach of economics. One should not be misled about this fact by elaborated mathematical models and highly sophisticated econometric techniques.

The truth is that any economist who thinks that the science of economics is about forecasting is disoriented. His or her advice will not help you make wise investment decisions. So what should you do if you are concerned about a looming stock market crash? The answer is pretty straightforward. If you think you cannot be better than rest of the pack, invest in a broadly defined stock market index (or certificate) and stick to it. Because if you cannot outperform, there is simply no point in engaging in any crash forecasting.

Alternatively, you could turn to consistently successful entrepreneurs and investors for seeking advice. Perhaps they would tell you not to waste any time on forecasting a stock market crash – for no one knows how people will react in the future. Successful business-people and investors might come up with a rather different recommendation: namely, put your money in great businesses, purchased at a decent price, and stick to it, whatever may come. Over time, you will be doing better than those thinking they could forecast the crash.

Be that as it may, economics teaches us about the laws of human action, but it does not provide insights about how people will behave in the future, how human beings will quantitatively respond to certain factors. Economics is not a forecasting science, it is a reconstructing science: It allows us to understand, from the starting point of the irrefutably true statement that humans act, the qualitative consequences if humans act under certain conditions which, however, are often uncertain from the present point of view.

Murray N. Rothbard credits this solid, logically grounded and, as far as practical matters are concerned, most crucial insight to Ludwig von Mises: “It is above all Ludwig von Mises who recognizes the freedom, of mind and choice, at the irreducible heart of the human condition, and who realizes therefore that the scientific urge to determinism and complete predictability is a search for the impossible—and is therefore profoundly unscientific.”

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