Category: zerohedge

Submitted by Nicholas Colas of Datatrek Research

US used car/truck prices are still increasing at an amazing rate. The current semiconductor shortage at automotive assembly plants and very light dealer inventories, especially in pickup trucks, is driving marginal demand here. All this is a good reminder of just how awkwardly automotive design and assembly fits into the modern global tech ecosystem. EVs/AVs can change that relationship, but it will take time.

Here’s a chart to kick off the conversation.

It is the Manheim Used Vehicle Value Index through mid-March 2021. This shows US used car/truck values are up a staggering 24 percent from March 2020 and up 3 percent in just the last 2 weeks to a new all-time high. The data here comes from real-world auction transactions between dealers for late-model used cars, so it’s solid.

What’s going on? Two things.

First, US new vehicle dealer inventory is lean just now. Unlike Europeans, who customarily order their cars and wait for delivery, American vehicle buyers purchase from dealer inventory and drive off the lot literally days after they think to themselves “I need a new car/truck”. Dealers know this, so they keep as large an inventory they can afford. Most auto companies do not report dealer inventory anymore, but Ford does. As of March 1st, their dealer system was running 58 days supply. At this time of year, that number should be closer to 65 – 70 days.

Bottom line: new car dealers are aggressively buying late model used cars and trucks so they have something to show potential buyers and capitalize on the potential demand driven by stimulus/tax refund checks as well as the traditional spring buying season.

Second, Manheim’s own analysis shows used vehicle demand is especially strong in one segment: pickup trucks. Looking at the dealer inventory data, that makes sense. Ford was at 53 days supply as of March 1st for the F-Series and Toyota was at 35 days supply. Again, these should be more like 70 days going into spring selling season.

The link to “Disruption” is the shortage of computer chips that’s been much in the news. The issue here is cars and trucks now use a lot of semiconductors for everything from engine management to in car entertainment and navigation. When the pandemic hit last year the auto OEMs cut back orders, rightly fearing a decline in vehicle demand. Chip producers flipped their factories to making product for the tech industry, which was seeing excellent demand.

But light vehicle demand remained robust last year and into 2021, so OEMs have had to go hat in hand to the chipmakers. The problem is that 1) sales to car companies aren’t especially profitable and 2) changing production at a semiconductor factory takes time. You can imagine how these conversations went. The net of it is that automakers are cutting back production while they wait for chip shipments.

We’ll start to wrap this up with an observation from our days covering the auto industry: designing, producing and supplying anything for a passenger car or truck is unlike any other industry you can imagine. First, it takes at least 3 years (an eon in tech-land) to design a vehicle, and these designs are frozen a year or longer before the vehicle is available for sale. Second, OEMs are cheap because the industry is so competitive. Third, anything they put in a vehicle has to have a very low fail rate, which means they will favor older proven technology over newer products. Lastly, governments around the world regulate cars and trucks across a wide spectrum of attributes ranging from safety to fuel economy.

All this is important because there’s so much investor and tech industry enthusiasm about automotive as a growth area. Fair enough – between government mandates for electric vehicles and a lot of capital flowing to autonomous vehicle hardware and software something interesting will develop. But we’re not designing the next cool smartphone handset with a 5 year (at most) useful life. EVs/AVs will have to be as robust and safe as what’s on the market now to succeed. And the auto industry will have to integrate into the world’s tech hardware manufacturing infrastructure better – much better – than it currently is.

We’ll get there, to be sure. But it won’t be a fast move. Nothing in automotive ever is, unless it’s a fully loaded 2-year-old used pickup moving down the auction line next week.

In what’s clearly a well-timed and glaring “message” not only aimed at Taiwan but especially at its Western backers amid this week’s continuing sanctions tit-for-tat with Beijing, Taiwan’s military is reporting on Friday the “largest ever” incursion by China’s air force. 

While in the past months the PLA aerial patrols have grown bigger and more frequent – sometimes coming every week and often involving eight or a dozen or possibly even fifteen combined Chinese fighters and bombers – Friday’s incursion involved a record-setting twenty PLA military aircraft. This is by far the largest ever recorded, since Taipei began publicly releasing data on the incursions.

“Twenty Chinese military aircraft entered Taiwan’s air defense identification zone on Friday, in the largest incursion yet reported by the island’s defence ministry and marking a dramatic escalation of tension across the Taiwan Strait,” Reuters reports.

Such a large force is being described as “unusual” by Taiwan’s Defense Ministry. It confirmed the location of the aircraft and published select images in an official statement.

Crucially the incursion in the democratic island’s southwest defense zone included four nuclear-capable H-6K bombers being escorted by smaller fighter jets. 

20 PLA aircraft (Y-8 ASW*2, KJ-500 AEW&C, H-6K*4, J-16*10, J-10*2 and Y-8 RECCE) entered #Taiwan’s southwest ADIZ on Mar. 26, 2021. Please check our official website for more information: https://t.co/KdPmWCid1Z pic.twitter.com/OFKTMsNXC3

— 國防部 Ministry of National Defense, R.O.C. 🇹🇼 (@MoNDefense) March 26, 2021

“The presence of so many Chinese combat aircraft on Friday’s mission – Taiwan said it was made up of four nuclear-capable H-6K bombers and 10 J-16 fighter jets, among others – was unusual and came as the island’s air force suspended all training missions after two fighter jet crashes this week,” Reuters continued.

Aside from this week’s sanctions escalation involving coordinated action of the US, UK, EU, and Canada on Monday over alleged ‘genocide’ and widespread human rights abuses in Xinjiang province, this latest bomber incursion comes a day after Taiwan’s defense chief admitted the island has initiated mass production of long-range missiles capable of striking mainland China.

Friday’s largest ever recorded incursion is without doubt the mainland’s “answer” to Taiwan’s boasting over its missile developments and ambitions.

While Biden said Thursday during his first presidential press conference that he “doesn’t want confrontation” with China he’s done little in terms of rolling pack ‘confrontational’ Trump policies – but quite the opposition – he’s arguably actually increased the pressure. 

This means there’s a great likelihood the Pentagon will send a destroyer through the contested Taiwan Strait once again in a bit of ‘counter-messaging’ as China ramps up its flights. And on up the escalation ladder we go…

Authored by Sven Henrich via NorthmanTrader.com,

What have we learned so far in 2021? Simple: The relentless liquidity machine remains in full control. In addition to renewed and larger fiscal stimulus central bankers, including the Fed, have made it abundantly clear they will keep printing no matter what the data shows, no matter how much inflation there is (“let it run hot”). The Fed itself continues on its $120B per month QE program while the ECB has accelerated their program.

And while there’s been some angst around tech in response to rising yields and hyperextended small caps just recently dropped 11% the larger S&P 500 keeps chugging along and any threats of a trend break continues to be averted so far and indeed being saved yet again this week:

In short: Any tag of the 50MA or quick dip below is being bought and the upward trend continues unabated:

As long as this remains the case new highs can be expected every month to follow as that is currently the trend. New highs in January, new highs in February, new highs in March, little dips in between and anew the program continues.

If you reduce markets to its simplest form and just assume that central bank printing and liquidity remains the overarching driver of everything and the Fed will, as it has stated, continue to print well into next year then perhaps the best analog to the current action is the ghost of 2013.

What was 2013 but anything other than a big Fed print operation? It was after all in December of 2012 when the Fed upped its QE3 program from $40B to $85B per month and markets did nothing but relentlessly drift higher with the occasional dip into the 50MA early in the year:

There were a couple of angst moments in 2013. One came on the heels of then Fed Chair Bernanke merely hinting at maybe tapering the QE3 program. Markets immediately dropped to the 100MA and Bernanke quickly dismissed the idea. One wonders why (facepalm). The other 2 corrective episodes came during the regular seasonal corrective periods in September and October. All 3 episodes ended at the 100MA and $SPX continued to make steady higher lows during each episode followed by higher highs and QE3 didn’t end until October 2014.

I’ve said since last year this all remains a matter of central bank control and reality is the current tape suggests central banks remain in full control despite the occasional hiccups in yields, the dollar and tech.

It is not until the above mentioned trend breaks that one can get a glimmering prospect of central banks losing control.

So if 2013 repeats where can this all head? Steady up of course with 50MA/100MA tags along the way.

Indeed the broader confluence of trend lines, presuming constant central bank control, suggests a peak into February 2023 just above 4,500 $SPX:

The message: Rips to new highs remain selling opportunities for 50MA/100MA reconnects, while these very same reconnects continue to offer buying opportunities unless the trend breaks. In that case of course all bets are off and the market could find itself rebalancing in a major way including filling a lot of, if not all, open gaps back to November:

The largest correction in 2013 was brought about by Bernanke’s tapering comments. I suspect Jerome Powell will not subject himself to the embarrassment of a taper tantrum. Why even pretend and see markets drop. After all Jerome Powell has already learned his lesson in 2018 when he tried to maintain an “autopilot” stance on reducing the Fed’s balance sheet and rate hikes only to cower and completely reverse himself as soon market bombs were dropping all around him in Q4 2018. And so the Fed then, which currently states it will only raise rates once full employment is reached, instead cut rates three times in 2019 when unemployment was at 50 year lows of 3.5%. No, it’s never about the economy, that’s just the pretext. It’s about markets.

That was the lesson of the ghost of 2013 and it is the same now. Everything else is noise to be ignored. That is unless the trend breaks for then a whole heap of new ghosts would come scaring the bejesus out of everyone.

Having repeatedly previewed the recent quant rebalance into energy stocks, which he used as a basis to push JPMorgan clients into what he now views is an oil/commodity supercycle, JPMorgan’s Marko Kolanovic has likely had to field quiet a few (angry) investor calls in recent days, with oil plunging last week and dragging down energy names with it before its modest rebound this week.

So has the recent wobble, which came at the worst possible time for JPM’s “quant rebalance into energy” call deflated some of the Croat quant’s confidence that commodities are only going up, up, up?

Not at all, and as he writes in his latest “Market and Volatility Commentary” note, despite repeatedly highlighting his long-term positive view on Oil and energy stocks and the view that a supercycle in energy commodities may be under way, “over the past week, the Oil market exhibited unusual volatility, particularly with selloffs last Thursday and yesterday.”

So what caused this selling just as JPM had predicted aggressive buying from rebalancing quants? Apparently it was other quants, or rather trend-followers dumping: as Kolanovic “explains”, a significant part of this selling came from systematic investors, namely CTAs.

Over the past years we have studied CTA trading strategies and the signals they employ. There are, broadly speaking, 3 factors that drive positioning of a CTA strategy:

1) asset specific momentum signals,

2) asset specific and overall portfolio volatility, and

3) asset specific stop-loss signals that can override momentum signals.

In the case of Oil, going into the last Thursday’s selloff, Kolanovic writes that momentum signals for commodities were positive, however on Thursday “only short-term momentum was breached (e.g., 20-day MA), which has relatively low weight compared with other lookbacks. In Tuesday’s selloff, another short-term signal was breached as well (e.g., 50-day MA). One should note that medium- and long-term signals (e.g., 4m, 6m, 12m, 200-day MA, etc.) are all still positive and would imply that CTAs should be still heavily long Oil. However, they are not.” Well, oops.

Never seeing a market signal he can’t goal seek to fit his narrative, Kolanovic then effectively says that quant selling is bullish, i.e., “these positions have been substantially reduced, which is in our view a positive for oil prices going forward.”

But why were CTAs selling if the signal going into Thursday were so positive, and with most of the other signals are still positive (i.e., over 80% of weighted average signals based on historical regressions)?

The reason, according to JPM quant, is the stop-loss signal that got triggered both on Thursday (and again yesterday). “Stop loss ensures that a potential turning point in asset price does not result in catastrophic losses” or as Kolanovic explains:

In our books on CTA strategies, we explained why stop losses are critical for momentum strategies, and how they don’t improve return profiles, but significantly reduce the kurtosis of returns – a critical parameter of any momentum strategy. Stop loss signals are usually set along the lines of a 1-day 5% drop, or 1-week 10% drop, or anything in between (e.g., 3-day 6% drop, etc.). A broad of range of these stoploss signals were breached for Oil last week, resulting in CTAs selling the bulk of their oil positions. In addition to stop loss, increased volatility reduced position on account of volatility targeting (philosophically very similar to stop-loss), and vol-targeting adjustments usually last 3-5 days.

What happens next?

Once the stop loss clears on a rolling basis – and that can happen any day now – CTAs will be still left with a largely positive signal for oil, and the Croat believes that “they will re-engage their long asset exposure”:

We believe that will result in an upward move in oil prices (all else equal). In addition to CTA selling, intraday price action indicates a large short gamma position on round numbers such as WTI at 60, 59, 58, which were breached multiple times up and down. Fast moves through option strikes helped trigger CTA selling. However, option gamma cuts both way, and will also result in a faster move up as these strikes are crossed.

Perhaps he is right… but there is one catalyst listed by Kolanovic which would be especially bullish for oil: if the Ever Given ship currently blocking the Suez Canal happens to break, blocking this critical waterway for an indefinite period of time and sending the price of oil exploding higher.

As Kolanovic puts it, “another interesting development of this week was the blocking of the Suez Canal. While we believe and hope the situation will get resolved shortly, there are some risks of the ship breaking.” In such a scenario which would be a wet dream for Saudi Arabia, “the canal would be blocked for an extended period of time, which could result in significant disruptions to global trade, skyrocketing shipping rates, further increase of energy commodities, and an uptick in global inflation.”

How does Kolanovic trade this? How else – by going long his favorite commodity sector: “This risk can be hedged by buying Oil and associated equities (e.g., energy, shipping, etc.).”

As an aside, and considering who would benefit the most from triple digit oil prices one wonders if MbS had something to do with a ship bigger than the Eiffel Tower getting stuck almost perpendicular…

… in one of the world’s most closely supervised waterways.

Authored by Simon Black via SovereignMan.com,

On October 6, 1789, a group of French peasants surrounded the country estate of King Louis XVI of France and demanded that he and his family relocate to Paris.

The people were sick and tired of the king living the luxurious palace lifestyle at their expense. And, fearing what might happen if he refused, Louis consented to their demand.

The French Revolution was already well underway at that point, sparked in large part by people’s disgust with their out-of-touch aristocracy.

France had been rendered bankrupt by the late 1700s; decades of costly foreign wars, coupled with endless extravagances by the nobility, had completely depleted the treasury.

The government’s solutions alternated between pretending their financial problems didn’t exist, to raising taxes at every possible turn.

The nobles hardly noticed. They lived lavashly while passing on the inflation and tax increases to the peasants.

French aristocrats were either completely clueless, or didn’t care one bit, that their policies were ruining people’s lives.

The Queen, Marie Antoinette, is rumored to have summed up this attitude when she said “Let them eat cake”, in response to hearing how countless peasants were starving.

Most likely that story is just urban legend. However there is plenty of historical evidence that she cared far more about her hair and royal gardens than any plight of the French people.

Her lavish spending was so famous, in fact, that the French used to refer to her as “Madam Déficit”.

And yet— the king, the queen, the nobles— they were the elites. They knew best, and they were in charge of making decisions for everyone else.

You know the rest of the story: the royal couple eventually paid for their conceit with their heads. But that didn’t solve France’s problems.

Soon a wave of radicals took over and formed a new elite (which became known as the Reign of Terror). And just like the old elite, they knew best, and they were in charge of making decisions for everyone else.

This new elite encouraged the population to rat each other out for petty crimes. They printed stupifying quantities of paper money and engineered hyperinflation across the country.

France’s revolutionary history is an incredible example of what happens when a tiny, out of touch group of elites manages to seize power and set the priorities for an entire nation.

We’re experiencing a version of this today in the West.

Prominent media personalities, politicians, tech companies, and self-absorbed social media celebrities, have appointed themselves our cultural nobility and seized the power to dictate just about everything, from how tax dollars are spent, to the words that we’re allowed to say, to how our children are to be educated.

It’s astonishing how quickly it happened, and how much has changed.

For example, it wasn’t that long ago that the entire purpose of the US military was to fight and win wars… and to be the most lethal fighting force in the history of the world.

But today our new elites have changed the priorities. So now instead of the latest weaponry and unit readiness, senior military leaders brag about maternity flight suits, or reducing physical fitness standards in order to be more inclusive.

Twenty years ago the military was about shock and awe. Today the priority has become diversity and inclusion.

Here’s another example: once upon a time, politicians at least paid lip service to fiscal responsibility.

In fact there were numerous government shutdowns and debt ceiling crises in the United States, i.e. political battles to prevent excessive spending, as recently as 2011, 2013, 2018, and 2019.

Today, the new elites have changed the priorities. They tell us that the debt doesn’t matter, and the government can spend as much as it wants.

And with every new massive spending bill, they’re emboldened to spend even more money. It’s been two weeks since the $1.9 trillion ‘Covid’ bill was passed, and they’re already planning a $3 trillion ‘infrastructure’ bill.

Basic fiscal responsibility is simply no longer a priority.

Then there’s education, which used to be about – you know – EDUCATION.

But now that the new elites have taken control, teachers have kids praying to Aztec gods of human sacrifice in order to expunge their whiteness.

Critical Race Theory abounds in schools to teach children they are either victims or oppressors. And the new elite tells us that grading students based on getting the right answer in math class is White supremacy.

Then there’s the media – a once-trusted source of news and information.

Today, under the new elites, the priority is no longer truth.

It’s about force-feeding the narrative they want you to believe, whether about Covid, race, politics, climate change, or anything else.

For example, when a deranged lunatic went on a rampage and killed eight people last week in Atlanta, six of whom were Asian, the media immediately reported that the shooting was due to White supremacy.

Yet the FBI said there was no evidence to suggest a racial motivation, and even the killer himself stated that he was motivated by his sex addiction.

But the media kept pounding the White Supremacy story anyhow.

Yahoo News immediately told its audience in a reprinted article entitled “Whiteness is a Pandemic” that

Whiteness is a public health crisis. It shortens life expectancies, it pollutes air, it constricts equilibrium, it devastates forests, it melts ice caps, it sparks (and funds) wars, it flattens dialects, it infests consciousnesses, and it kills people. . .

Naturally this is considered to be perfectly acceptable content, and not racist in any way.

In 18th century France, people were starving, but the elites who ruled them were so out of touch that the prevailing attitude was, let them eat cake!

Today there’s a new elite that makes all the rules. They’ve completely corrupted western civilization. They are fanatics who embrace Marxism, violence, racism, and censorship.

And like the French elites before them, they’re completely out of touch with how much they’re destroying the country and people’s lives. Let them eat woke!

*  *  *

On another note… We think gold could DOUBLE and silver could increase by up to 5 TIMES in the next few years. That’s why we published a new, 50-page long Ultimate Guide on Gold & Silver that you can download here.

Not long after Connecticut, California and a handful of other states announced plans to move up the start date for when all adults will be eligible to receive the COVID vaccine in the US, Rutgers, the largest public university in the state of New Jersey, became the first public school in the US to announce that students wouldn’t be allowed back to campus in the fall unless they had been fully vaccinated.

Administrators said President Joe Biden’s mandate for everyone to be eligible for a vaccine by May, made during the president’s first official press conference yesterday, should give students plenty of time to get their shots, UPI reports.

“We are committed to health and safety for all members of our community, and adding COVID-19 vaccination to our student immunization requirements will help provide a safer and more robust college experience for our students,” Rutgers President Jonathan Holloway said in a statement.

[…]

“Vaccination is key to stopping the current pandemic,” Brian Strom, chancellor of Rutgers Biomedical and Health Sciences, said.

Notably, the university added that students with religious or medical exemptions would be allowed to attend classes without the vaccine.

Of course, students who opt to continue taking classes online won’t be bound by the mandate. “An effective vaccination program is a continuation of Rutgers’ commitment to health and safety for all members of our community of more than 71,000 students, the cities we are in and the communities we serve throughout New Jersey,” Rutgers Chief Operating Officer Antonio Calcado added.

Some criticized the university’s decision to grant staff, from groundskeepers to professors, an exemption to the ruling, saying they won’t be required to be vaccinated in order to teach (although, since professors are generally older than students, they would in theory have had more time to get the jab). Still, they will be “strongly encouraged” to receive it.

For Rutgers students wondering when they might be eligible, the NYT has published a summary of recent announcements from US states that are accelerating the expansion of eligibility, in keeping with President Biden’s push to get 200MM doses into American arms by the end of his first 100 days.

Governors across the United States are speeding up eligibility for coronavirus vaccines as the number of new cases nationally plateaus, adding more urgency to vaccination efforts.

California will open up vaccine eligibility on April 1 to any resident who is 50 or older, and will expand that to residents 16 or older on April 15, state officials announced on Thursday, saying they could do so because of increasing supplies of vaccine from the federal government. And Gov. Ron DeSantis of Florida announced that any state resident who is 40 or older would be eligible starting on Monday, and that the minimum age would drop to 18 on April 5.

In Connecticut, which is among the most-vaccinated states in the country, Gov. Ned Lamont said Thursday that all residents 16 and above would be eligible beginning April 1. New Hampshire will make shots available to all residents 16 and older starting April 2, and North Carolina on April 7. In Rhode Island, Gov. Dan McKee said the state was on track to make vaccines available to all residents over 16 by April 19.

Gov. Andy Beshear of Kentucky said the state would open vaccinations to those 40 and older starting Monday, adding that a mask mandate would stay in place for at least another 30 days. And in Minnesota, Gov. Tim Walz is expected to announce on Friday that all residents over the age of 16 will be eligible starting March 30.

Meanwhile, New Jersey announced Friday that it would lower minimum age to 55 as of April 5, meaning it’s running behind some of its neighbors.

As we wait to see whether more schools will follow Rutgers’ lead, many Americans are wondering whether employers will impose similar requirements. Dr. Scott Gottlieb told CNBC in a Friday morning interview that he doesn’t expect employers. But while they might not explicitly mandate vaccination, Dr. Gottlieb believes they will find ways to incentivize employees to get it done.

“I think every college and university is going to require vaccination to return to campus or at least most of them,” says @ScottGottliebMD on the Rutgers announcement. “Universities have more discretion over what they require their students to do to be a part of that community.” pic.twitter.com/h6lYkWRdhT

— Squawk Box (@SquawkCNBC) March 26, 2021

Meanwhile, in the UK, citizens are pushing back against PM Boris Johnson’s proposal to make vaccination mandatory to visit the pub.

Authored by Lance Roberts via RealInvestmentAdvice.com,

I recently discussed why “Free, Isn’t Really Free” regarding the retail investor. While “free trades” have certainly reduced the transaction costs, the selling of data to the highest bidder has likely cost investors more than they saved. To wit:

“As is clear from the billions paid for order flow and the billions made from executing those orders, there is no such thing as ‘free trading.’ Thus, the claim of ‘commission free trading’ is often no more than a rhetorical ruse to attract new investors and distract from the billions of dollars in PFOF and other hidden costs that ultimately come out of retail investors’ pockets. It’s pretty clear that these intermediaries are often merely transferring the investors’ visible upfront commissions into invisible after-the-fact de facto commissions.”

However, there is another problem with “free trading” that will likely reduce your investing outcomes over time.

It’s A You Problem

Over the years, I’ve heard from several clients who have had trouble disciplining themselves from trading too frequently. That was in a low-cost world.

Now that trades are no-cost, it’s going to get a lot worse.

It’s difficult enough to match, much less beat, stock indexes without the drag of frequent trading. Frequent traders, from my experience, rarely do well in the stock market.

A Kiplinger article noted the same.

“In one study, Odean found that trading costs did indeed weigh on the performance of investors who traded more frequently. Such is a problem that no-commission accounts will render obsolete.

But no-commission trades won’t do anything about the results garnered from another study. Odean found that, ‘on average, the stocks these investors bought went on to underperform the stocks they sold.’

Speculative trading (trades that didn’t seem driven by, say, tax purposes or rebalancing concerns) was even worse. Across all trades, stocks that investors bought underperformed those they sold by three percentage points. However, that disparity widened to five percentage points when considering only speculative trades.

The zero-commission trade is bound to amplify the low-cost proposition of exchange-traded funds. By accelerating the huge migration of investor dollars away from actively managed mutual funds. Now, if investors simply stuck to buying broad-based index ETFs and holding them, that actually would be a good thing.

But what’s far more likely is that a big swath of these investors will trade more. They will try to pick ETFs and stocks that will beat the market over short time periods. After all, the trade is free – why not make it?”

Psychological Drag

So free trading may save you money on trading costs, but if it causes you to trade rashly,  your returns may suffer. For most investors, investment returns are a much bigger deal than trading costs. Therefore, being able to trade for free can be counter-productive if it tempts you to become a day trader and tank your investment performance.

Such was the conclusion of Daniel Wiener, editor of The Independent Adviser.

“Free trading doesn’t help investors. It only encourages bad behavior. As someone who’s been managing client assets for more than 25 years, we talk about ‘time in the market, not market timing’ because long-term investing works.”

The annual Dalbar Investor Survey shows the same. Equity investors consistently do worse than the index.

Such is due primarily to the psychological pitfalls that occur from “herding” to “confirmation bias.” 

“When discussing investor behavior it is helpful to first understand the specific thoughts and actions that lead to poor decision-making. Investor behavior is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time, which leads to underperformance.” – Dalbar

Another study by Barber, Lee, Liu, and Odean shows much the same:

“On average, individual investors lose money from trading. Barber and Odean (2000) document that the majority of losses incurred can be traced to trading costs. However, trading costs are not the whole story. On average, individual investors have perverse security selection abilities. They buy stocks that earn subpar returns and sell stocks that earn strong returns (Odean (1999)). In aggregate, the losses of individuals are material” – Barber, Lee, Liu, and Odean

Shrinking Holding Periods

Repeated studies show that long-term holding periods lead to better outcomes. Short-term trading, driven by overconfidence, generally leads to worse.

“The length of time that investors hold shares has been shrinking for decades but the trend accelerated this year. There are different ways of slicing it. However, Reuters calculations of NYSE exchange data show the average holding period for U.S. shares was 5-1/2 months in June. This was a decline from 8-1/2 months at end-2019.

The previous record low of six months was hit just after the 2008 crisis. In 1999, for example, 14 months was the average.” – Reuters

Why are holdings times shrinking?

“From 0% interest rates, pandemic-induced volatility to sports gamblers that are bored to death at home due to lack of sports betting. Then there are the millennials living in their parents’ basements with nothing else to do. Also, the day-traders by the millions playing the market using the Robinhood app. And the unemployed trying to multiply their $600+ weekly unemployment checks and also have fun doing it. Don’t forget those same people also throwing the $1,200 stimulus checks into the market to make some money to pay bills, etc. Not to mention algorithm-based machine trading by big institutions, locked-down realtors unable to flip houses finding their luck in the stock market, etc.” – David Hunkar via TFS

While the reasons for the continuing decline in holding periods are many, commission-free trading is exacerbating that trend by removing the “brake pedal” from the speeding car.

Whatever the cause, ultimately, investors’ inability to hold stocks for the long-term is damaging for the market and investors. Simply churning stocks all day long or even holding them for only a few months will not lead to a growing and robust equity market.

Right Solution For The Wrong Reason

One of the proposals by Democratic candidates, and hinted at by the current Biden Administration, is a “Financial Transaction Tax (FTT).”

An FTT is a proposal to place a “tax” on buying and selling a stock, bond, or other financial contracts like options and derivatives. Taxing stock trading is not new. America already has an FTT, albeit extremely small: currently set at roughly 2 cents per $1,000 traded. 

According to the Brookings Institute, there are many problems with an FTT, harming savers and investors, reducing economic growth, and failing to raise the promised revenue by driving activities to lower-taxed areas overseas.

An FTT is a wrong proposal to solve the Government’s persistent overspending problem. However, it could reapply a “brake pedal” to slow over-trading by individuals. It also could discourage hedge funds from more predatory practices. Such could improve holding periods and longer-term returns.

The Wall Street Journal reported that online brokerages see record spikes in new accounts and trading activity in recent months. The authors argue this trend is due in part to the industrywide move to zero-commission trading. Platforms like E*Trade and Robinhood exacerbate this trend by providing individual investors to trade with few restrictions.

“Many are young and first-time traders confronting the first economic downturn of their professional lives. Yet with free trading at their fingertips and massive online communities with which to discuss trading ideas, many figure they have little to lose.

Research shows that individual investors tend to underperform the broader market, in part because of frequent trading. That hasn’t stopped scores of traders from taking the plunge.” – WSJ

Slowing It Down

As discussed previously, the selling of customer data provides high-frequency trading firms the ability to front-run retail investors.

“If people can find trading patterns and use that to make money, then fair play to them, but they should not be able to do that by selling information that does not belong to them. If they do not sell the information to anyone else, that reduces the scope for front running.” – Financial Times

The removal of payment for order flow, and a return to a transaction fee, remains the most sensible option. But, an FTT could accomplish the same.

“Proponents and opponents alike agree that an FTT would reduce high-frequency trading, or HFT. The profit margins on these individual trades are typically small—for example, profit margins could be as little as a few cents in a heavily traded stock. An FTT would make these trades unprofitable and drastically reduce, or even eliminate, HFT activity.” – Tax Foundation

While an FTT may indeed impact retail investors, resulting in reduced trading volume, it may also help squash the predatory effects of hedge funds and HFT’s.

“Some HFT-oriented trading firms have allegedly engaged in heavily scrutinized (and in some cases illegal) practices, publicized in Michael Lewis’ 2014 book Flash Boys: A Wall Street Revolt. These practices include frontrunning (detecting a large buy/sell order and moving in front of it in anticipation of the resulting price movement) and slow-market arbitrage (simultaneously buying and selling securities on separate exchanges to exploit small, transient price discrepancies).”

The removal of payment for order flow, and a return to a transaction fee, remains the most sensible option. But even an FTT might be worth considering if it reduces professional firms’ ability to take advantage of retail traders.

Free And Fair

As a fiscal conservative, I’m not too fond of taxes of any sort. I am a firm believer in “free markets.”  However, for “free markets” to work effectively, they must also be “fair markets.”

Our current capital market system may be “free,” but it is not “fair” in many ways. Regulators should take steps to ban payment for order-flow, restrict high-frequency trading, and create markets that protect retail investors from predatory practices.

Such would mean that firms providing transaction services would have to go back to charging a commission for their services. But such would potentially have the knock-off effect of “slowing things down” and providing better investors’ outcomes.

However, the reality is that since Wall Street owns regulators, those money-making schemes already in place are likely to remain.

Therefore, while not a proponent, I can make the case an FTT would raise financial transaction costs, resulting in fewer of them. How this affects the overall economy depends on whether the reduced trading is beneficial. If it is, will the reduction will be significant enough to have an impact that goes beyond the investors and traders involved.

While the emergence of zero-commission trading is generally a win for investors, there’s one potential downside – the temptation to over-trade. In other words, it could be more tempting to move in and out of stock positions more frequently because it doesn’t cost anything to do it.

Don’t make this mistake. Although there are certainly some good reasons to sell stocks, the lack of trading commissions isn’t one of them.

But what we do need are “free” and “fair” capital markets.

Entirely as expected and just on the heels of its retaliatory punitive measures slapped on the European Union this week, China’s Foreign Ministry has announced new sanctions against the United Kingdom for its joining multiple countries led by the United States in imposing human rights related sanctions on Beijing officials, particularly related to abuse and persecution of Xinjiang’s Muslim Uighur population. This resulted in the UK promptly summoning China’s Charge d’Affaires in the hours after the announcement. 

The countermeasures target nine UK individuals and four entities, notably Britain’s chairman of the foreign affairs committee Tom Tugendhat alongside other “anti-China” MPs and scholars. They were identified as having “spread lies and rumors about China’s Xinjiang region,” according to state media. 

“As of today, the individuals concerned and their immediate family members are prohibited from entering the mainland, Hong Kong and Macao of China. Their property in China will be frozen, and Chinese citizens and institutions will be prohibited from doing business with them. China reserves the right to take further measures,” the foreign ministry stated on Friday (local time).

The sanctioned individuals were identified as follows:

Beijing sanctioned nine persons, among them Tom Tugendhat, Iain Duncan Smith, Neil O’Brien, David Alton, Tim Loughton, Nusrat Ghani, Helena Kennedy, Geoffrey Nice and Joanne Nicola Smith Finley. The four entities that were subjected to Beijing sanctions are the China Research Group, the Conservative Party Human Rights Commission, the Uyghur Tribunal and the Essex Court Chambers.

State-run Global Times slammed the behavior of the above-named as constituting “serious interference in China’s internal affairs and sovereignty” which has ultimately been “detrimental” to diplomacy.

The UK government had earlier described the necessity of its coordinated sanctions actions done with the EU, US, and Canada in a statement: “Acting together sends the clearest possible signal that the international community is united in its condemnation of China’s human rights violations in Xinjiang and the need for Beijing to end its discriminatory and oppressive practices in the region.”

China has announced its first ever sanctions against UK individuals, including 5 parliamentarians, for spreading ‘lies and disinformation’ #Uighurs https://t.co/7l5YXhO8xU

— WikiLeaks (@wikileaks) March 26, 2021

China’s immediate response was to earlier call the Xinjiang allegations, which center on China’s network of ‘reeducation’ camps and labor prisons, a mere “a pretext for interfering in China’s internal affairs and frustrate China’s development.”

“People of all ethnic groups in Xinjiang, including the Uyghurs, enjoy each and every constitutional and lawful right. The fact that Xinjiang residents of various ethnic groups enjoy stability, security, development and progress, makes it one of the most successful human rights stories,” Chinese Foreign Ministry spokeswoman Hua Chunying had claimed in an official statement.

China’s Global Times is now indicating that Canada is next on China’s retaliation target list, after multiple members of Canadian parliament have been extremely vocal in calling for greater punishment against Beijing, including the Boycotting of the 2022 Beijing Olympics. 

Something odd is going on.

During today’s US session we noticed an unusual number of large block trade headlines.

• Shopify – SHOP 762k @ $1,000

• FarFetch – FTCH 26mm @ $45

• Discovery – DISCA 16mm @ $45-50, DISCK 32mm @ $40-44

• Vipshop – VIPS 32mm @ $27.60

• Tencent – TME 50mm @ $17.60

• Baidu – BIDU 10mm @$185

That is around $7 billion of block trades executed in the open in the morning session alone.

After reaching out to one desk, as were told “someone is liquidating,” and another desk suggested the trades were a “result of forced deleveraging.”

Lots of speculation as to the seller.

Is it Cathie Wood? (we do not think so since very few of these positions are in her ARKK fund).

One other suggestion was that it might be Credit Suisse, liquidating positions to fund the bailouts for the angry Greensill-deal clients? (all six of the positions are among CS largest positions, but the size of the blocks dwarf CS positions so it’s not them).

So who is it?

Quid Pro Joe?

Yesterday, reporters repeatedly pestered President Joe Biden with questions about whether the Senate should kill the filibuster (one reporter asked why Biden and the Senate would allow a “relic of Jim Crow” to remain, to which Biden replied that “electoral politics is the art of the possible”). As progressives wonder whether more moderate Dems will join their “end the filibuster” cause, it looks like President Biden has found another way around the problem of securing enough boats to pass his agenda (while keeping progressive moonshots like the Green New Deal out of reach).

Bloomberg reports that Biden is planning to nominate the wife of West Virginia Sen. Joe Manchin, a conservative “Blue Dog” Democrat and a critical senatorial swing vote, to a “regional economic development position.”

President Joe Biden plans to nominate Gayle Conelly Manchin — an educator and the wife of Democratic Senator Joe Manchin, a key swing vote — to a regional economic development position after the lawmaker has emerged as a key swing vote in the chamber.

The White House said Friday that Gayle Manchin is Biden’s pick for federal co-chair of the Appalachian Regional Commission, an economic development partnership between the federal government and 13 states, including West Virginia, where the senator and his wife reside.

Manchin and his wife have been married for more than 50 years. Their daughter, Mylan CEO Heather Bresch, made headlines back in 2016 when her company jacked up the price of epipens.

As BBG reminds us, Manchin is “the foremost Democratic swing vote in the chamber.” Since the Senate is evenly split between the GOP and Democrats, VP Kamala Harris must be relied upon to cast the tiebreaking vote. But when Manchin votes with Republicans, he can single-handedly stymie the Democratic Agenda. This ability has earned him the ire of progressives. which is evenly split between the parties but is controlled by Democrats because Vice President Kamala Harris breaks ties. As a result, Manchin holds significant sway in Biden’s ability to pass legislation.

It’s pretty clear what Biden is doing here: while BBG points out that Gayle Manchin is technically qualified for a position like this – she “served previously on the State Board of Education, and chairs Reconnecting McDowell, an initiative in West Virginia run by the American Federation of Teachers. She also served as secretary for the West Virginia Office of Education and the Arts and holds two graduate degrees” – the timing factor is hard to ignore.

For the past few weeks, Manchin has been telling reporters he wants Democrats to push through Biden’s upcoming $3 trillion infrastructure/climate package through regular order instead of through reconciliation, a budget process that would allow a mammoth infrastructure package to pass with just 50 votes by circumventing the fillibuster. Maybe now, Manchin will keep quiet, and simply show up to vote when the time comes.

Manchin has already flexed his newfound power in Washington. He has already successfully scuppered one of Biden’s cabinet nominees, Neera Tandan, who was nominated for OMB chief.

Another example of corruption..they don’t even try to hide it anymore
RT @ScottJW: So, the odds Joe Manchin caves on the filibuster just went up. | Biden Names Wife of Pivotal Democratic Senator for Federal Post https://t.co/KwiUT6hWYI

— Cosmo (@Cozmosus) March 26, 2021

Is this how you bribe a senator?