Herd Trading, Policy Pivots, & Terrible Market Liquidity Are A Bad Combination

Via Guy Haselmann of Scotiabank,

A comment I posted on a Bloomberg Chat this morning says it all, “herd trading, policy pivots, and terrible market liquidity are a bad combination.”

This week, markets have been driven by position squaring and P&L management.   There have been extraordinary price movements in various commodities and currencies due to extreme weather, the decline in the Chinese Renminbi, capital flight, Fed taper, and geo-politics.  Such P&L volatility is causing decisions to be made in other, seemingly uncorrelated markets, due to the need to manage P&L risk.

These movements are of elevated concern because the investment climate of recent years has created a herd mentality.  Now that global stimulus is being withdrawn, those trades are under attack and a mini-contagion is unfolding (see my March 24th Commentary note)

Adding to recent concerns of increased volatility are the price declines, and loss of momentum, in many high-flying stocks, such as Twitter, Pandora, Tesla, Netflix, Solar City, Priceline, Facebook, Gilead, and Biogen, to name just a few.

Given how this is unfolding, it is worth revisiting a few points I made in my “2014 and Beyond” outlook paper (from January 3rd).

“…..investors and speculators receive ever-lower returns for ever-higher levels of risks. Over time, the ability of an investor to assess an asset’s fundamental value becomes ever-increasingly impaired.   It should be a warning sign to portfolio managers’ fiduciary responsibility to maximize return per unit of risk.


“In 2014, investors have asymmetric risk distributions that are skewed to the downside.  Risk-seeking investors are playing a high-stakes ‘game of chicken’ because the door to exit will be narrow. When risk needs to be pared, market liquidity will be challenging due to fewer market- makers, and potentially fewer new marginal buyers.”


Investor behavior is partially being driven by fear of missing the upside:  they feel pressure to ‘not earn zero’, to beat inflation and benchmarks, or to simply outperform their peers.  This herd mentality is a powerful, yet dangerous force.  It should be a warning of the markets’ downside potential when markets are confronted with the next “risk-off” catalyst.


Regulations and uncertain rules of trading have thoroughly compromised market liquidity. It is the ‘Greater Fool Theory’ for investors believe they will be able to monetize profits in aggregate.” 


The FOMC wants markets to believe that they can navigate a soft landing through micro-managing the unwind process.  However, investors and traders care more about the “final destination than the journey”, to quote from Mohamed El-Erian, so there will become a time when the Fed tips investors from yield-seeking toward getting ‘ahead of the curve’.  This point will occur during the process of the Fed lowering the accommodation needle.


The apt analogy is a playground see-saw where investors (and Fed) have a seat firmly on the ground and risk assets dangling in the air.  The Fed has started the process of tossing 10 pounds (billions of Treasuries) onto the seat in the air.  Every six weeks after each meeting, another 10 pounds will be tossed on the ‘high-side’. At some point, a few heavy investors will decide to jump-off the seat that they have been sharing with the Fed, causing the high-seat (risk assets) to come crashing down from its high perch. The Fed would like to balance the see-saw, but history suggests the chances are infinitesimal.”

The trades that have worked well during the Fed’s ‘pedal to the metal’ accommodation policies are now showing signs of strain as QE is being unwound.  As the calendar advances closer toward QE’s end, market volatility will edge higher and positions will adapt accordingly.  Investors will soon learn whether the QE policy (specifically designed to lift asset prices) was actually a pressure cooker that ultimately had to blow once the QE spigot was turned off.  Is this trade beginning now or could it pause until later in the fall?

Financial asset prices and positions will have to adjust and recalibrate to levels that properly reflect the asset’s fundamental value.   More importantly, expected returns will have to begin to more accurately reflect the true level of the risk of the asset. After all, the implicit Fed put that has placed a floor under the market, and powered it forward, is gradually being removed. 


I expect portfolio re-balancing to put a floor (this time) in Treasuries over the next several months.  This is one of several reasons, I remain a bond bull.  If you are not in yet, I would at least wait until after PCE (8:30 am), but I would not wait too long.

“A lot of people are afraid of heights.  Not me, I’m afraid of widths.” –Steven Wright


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The Fallacy of Homeownership – Why Do People Believe The Myth?

Submitted by liberta blog,

In our previous article we explained why buying a house is often a very silly financial decision, especially for people who are young, or those that have a low net worth.

In this article we're going to explain why we think people are so infatuated with the idea of buying and owning a house, even though, if you look a the facts, it goes against many of the investment principles they believe in and hold dear.

But first, I need to address one of the myths about buying residential property…

Myth #1: Buying a house is a way to beat inflation

The theory is:

It is worth borrowing a huge amount of money to purchase a house because, not only will your property appreciate in value over time, your loan amount will also decrease in value in record time, partly because you are paying off a bit of your loan every month and partly because inflation eats away at the value of the amount you still owe!

And it is true – borrowing R1,000,000 to buy a house may seem like a scary amount right now, but a few years later, R1,000,000 will be considered a small amount of money.

If you would like to see just how effectively inflation destroys the value of money over time, plug a few numbers into the inflation calculator and see for yourself.

I have to admit: this theory makes for a very convincing argument.

But it is not.

The elephant in the room

The hole in the buying-a-house-is-a-way-to-beat-inflation-theory is the fact that the interest rates commercial banks charge their customers have always been higher than the inflation rate.

If you take out a loan, you pay more in interest to the bank, than you gain through the devaluation of the amount outstanding on your loan due to the effects of inflation.

The only real winner in this equation is the bank who was kind enough to grant you a loan to buy your property.

And when I say winner, I really mean it, because not only is the bank earning an above inflation return on the money they lend to you, they also create the money they lend to you, right there on the spot, out of thin air.

If I had to behave like a bank and you were a customer to whom I was granting a home loan, it would be pretty much the same as if I had a printing press in my basement, where I would quickly print up R1,000,000 in counterfeit currency to lend to you, make you sign a contract with dire consequences to yourself should you ever miss a loan payment and then, to make sure I get the best deal possible, charge you an above inflation interest rate on the counterfeit money I lend to you.

If you or I behave like this, it is called a scam and, of course, it is illegal.

When banks behave like this, it is called fractional reserve lending and, whether you like it or not, it is perfectly legal.

The wonders of fractional reserve banking

I know what you’re thinking.

But this is no conspiracy.

The fact that commercial banks create money when they grant loans is not a secret.

Not at all.

In fact, commercial banks create over 90% of all the money that circulates in our economy. It is just the way the system works.

If anything is suspicious, it is the fact that everybody uses money, but almost no-one understands where the money they use comes from.

How to make money from a Residential Property Boom

Once you understand the way the system works, you’ll understand that one of the best ways to make money out of a residential property boom is not to invest in residential property, but to invest in commercial banks that grant loans to people who buy residential properties.

During a residential property boom, banks are creating massive amounts of money out of thin air and lending it out, with interest, to many many customers who are lining up to buy the rapidly appreciating residential property.

If you own a part of the banking action, you can make a lot of money while the boom lasts.

There is only one problem with this approach: like all good parties, it eventually comes to an end and, the next day, you wake up with a massive hangover.

Booms usually lead to bubbles, and bubbles eventually pop. When bubbles burst , the very same banks who were raking in record profits just a few months prior to the bubble bursting are all suddenly bankrupt. A good example is the 2008/2009 housing bubble collapse.

But have no fear.

There is an even better way to make money out of a residential property boom, with just about zero risk:

At the start of a housing boom, find a job with a commercial bank and negotiate your salary in such a way that your bonus is linked to the profits the bank makes on residential property loans.

Trust me. It’s a slam-dunk.

So, who is spreading the propaganda?

This is pure speculation, but since bankers are the main beneficiaries of the fractional reserve banking system, I won’t be at all surprised if they are also the main players responsible for spreading propaganda about the home ownership myth I have attempted to debunk with these articles.

And if you’re a banker, who better to get on your side than the government?

Much has been written about the way politics work (especially in America), how lobbying costs money and how big business is the main contributor to political campaigns, so I’m not going to add my own thoughts here.

What I will say is this: if these concepts are new to you, perhaps it’s worth re-reading this article one more time. Perhaps click on some of the links and watch the youtube videos to make sure you understand everything.

Then, if you just want to feel patriotic and inspired, take a look at the video below. I’m sure you’ll love it. It nearly drove me to tears. Heart wrenching stuff.

Over to you

When, after many years of being an investor, I finally figured out how the monetary and banking systems work, it massively changed my perspective on investing.

Since the money we use is something that affects everybody on a daily basis, I find it astounding that so very few people understand where money comes from. I encourage you to do your own research. Reach your own conclusions.


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Finally, a Border Solution That Satisfies Everybody

Border fenceArizona lawmakers may not have
a reputation as rocket scientists (smart Arizonans know better than
to waste time and effort in government), but this time they’ve come
up with a stroke of genius: a solution to the battle over border
control that should satisfy all parties. Who could object to a
virtual virtual fence? No, I didn’t stutter.

Faced with a lack of enthusiasm for the expense involved in a
measure to install a chain of high-tech towers intended to monitor
border crossings,
Sen. Bob Worsley
(R-Mesa) settled for mandating the fence, but
providing no resources for its actual construction.

According to Howard Fischer of
Capitol Media Services

PHOENIX — A Senate panel voted Tuesday to set up a “virtual
fence’ along the U.S.-Mexico border — but provided absolutely no
cash to do that.

The 8-1 vote came after Sen. Bob Worsley, R-Mesa, realized he
could get no traction for his original proposal to spend $30
million to build a network of 300 towers, each equipped with
cameras and radar. So the scaled-back version, HB 2461, simply
authorizes the virtual fence — and delayed until next year the
question of whether Arizona taxpayers will actually pick up the

That’s right. Senators voted for tough border surveillance of
the sort to please immigration warriors, but with the low price of
nothing sure to charm fiscal hawks. Open border advocates will, of
course, be happy about the lack of actual fencing provided by the
virtual virtual fencing measure.

If only lawmakers elsewhere would adopt this sort of
can-pretend-to-do attitude, the rest of us would have so much less
to worry about when legislatures met. We could either applaud their
firm intent, or their merciful lack of follow-through, depending on
our inclinations.

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UK Housing Boom Could Turn To Bust … Again

Today’s AM fix was USD 1,295.00, EUR 942.09 and GBP 779.14 per ounce.

Yesterday’s AM fix was USD 1,314.50, EUR 952.74 and GBP 794.98 per ounce.

Gold bullion dropped to its lowest level in six weeks in London as better than expected durable goods hinted to a recovery in the U.S. and increased the case for the U.S. Fed to keep reducing stimulus and start to raise interest rates. Fed Chair Yellen commented after this month’s policy meeting that the bond buying program may end this fall and the first increase in the benchmark rate may follow six months after later.



U.S. President Barack Obama reiterated yesterday that the U.S. and its European allies stand united against Russian attempts to redraw Ukraine’s boundaries. Russia is the biggest supplier of palladium followed by South Africa, where workers have been on strike since Jan. 23rd.


Lord Adair Turner – (Bloomberg News Image)

Britain’s former chairman of the  Financial Services Authority (FSA), Lord Adair Turner, spoke at Cass Business school yesterday and warned that the UK could be repeating the 2008 financial crisis by fueling the property market. He commented that mortgage and commercial property lending in global economies had played a “central role” in nearly all financial crises and post-crisis recessions.

Lord Turner told the Telegraph, “We’ve got to increase the supply of housing because otherwise we are just piling up very strong incentives to buy housing, very strong incentives to borrow money to buy housing but against a fixed supply”.

“If you do that the only thing that can give is the price.”

Lord Turner warns about the debt to income ratio. “Even the Office for Budget Responsibility has said the only way we’re going to get growth back in the next five years is for the ratio to return to 170% again. If in five years time debt has gone back up to 170%, and if interest rates have returned to 3%, 4% or 5%, then a lot of people are going to be struggling.”

Lord Turner elaborated that targeted reforms to limit credit fuelled growth were needed to prevent a repeat of the 2008 financial crisis. “The policies followed before the financial crisis failed to prevent it,” he said.

“In its wake major financial reforms have been introduced. These include higher capital and liquidity standards, more effective bank resolution procedures: measures to address risks in derivatives trading: and structural reforms such as ring fencing… While these reforms are valuable, they will be insufficient to ensure a more stable financial system and economy over the long term.

“We need to recognise and contain the potential for instability which [reliance on in real estate lending] unleashes,” added Lord Turner.

“Policies relating to the supply of new real estate, and to its taxation will likely prove as important to to financial and macroeconomic stability as reforms specifically focused on the financial system itself.  “[Credit cannot be] constrained through the use of the interest rate lever alone.”

With interest rates at post war lows and unlikely to go much lower the risks of further systemic events developing within our global financial centres, is again rising. It would seem that the measures taken in oversight and reporting, albeit a massive improvement on previous regulatory mishaps, are again proving porous.

The rampant politicisation of interest rate policy and monetary tools are again creating new asset bubbles, most notably in the property and equity markets which may in the end pose even greater risk than the financial dislocations of 2008.

When money is debased on an industrial scale by monetary authorities the results can soon turn catastrophic. It is essential that prudent investment strategies take these risks into account and that investors allocate a modest percentage of their portfolios to hard assets such as gold and silver.

For more information on the best ways to invest in and own gold please download a copy of our Guide to Investing In Gold


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Picturing Our Dystopian World – Where Less Is More

The economic growth expectations for the world in 2014 just plunged to fresh lows at a mere 2.78% – that is 15% “less” growth than was expected a year ago. The world’s equity markets are up 25% “more” than at the start of 2013. Thus, our dysfunctional dystopian world where ‘less’ economic growth is ‘more’ wealth-creating. Long live the central bank utopia…


MSCI World (green) vs 2014 World GDP expectations (red)


Chart: Bloomberg

h/t @Not_Jim_Cramer


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Rand Paul Sets Up Nationwide Network for 2016, Law Firm Say Christie Wasn’t Involved in Bridge Scandal, IMF To Give Ukraine $14-18 Billion: P.M. Links

  • Rand Paul’s campaign organization has assembled

    200 people across all 50 states
    , making him the first potential
    presidential candidate for 2016 to establish a nationwide network
    in preparation for the election.
  • A law firm that Gov. Chris Christie (R-NJ) hired to investigate
    New Jersey bridge closure scandal concluded that the governor was

    not involved
  • The International Monetary Fund announced that it intends to
    give Ukraine
    $14–18 billion
    . Part of that package will come from the
  • The IRS says it will
    take years
    to respond to all of Congress’s requests regarding
    the targeting of Tea Party groups.
  • Citigroup shares fell 5 percent after the bank failed a Federal
    stress test
    , an indicator of Citigroup’s (in)ability to
    withstand serious economic downturn.
  • If you live in New York City and don’t like juggling your
    groceries, you better start hoarding plastic grocery bags. The city
    council just introduced a bill that would impose a
    10-cent fee
    on each bag.

Follow Reason and Reason 24/7 on
Twitter, and like us on Facebook. You
can also get the top stories mailed to
up here

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Jesse Walker on Flight 370 Conspiracy Theories

Did you really expect all the
speculation about the lost Flight 370 to stop just because the
authorities think they know what happened? Alternative theories are
still bound to flourish, Jesse Walker writes. Indeed, if you look
at the reasons why such ideas emerge, you’ll see that this is the
kind of mystery that’s most likely to inspire suspicious

View this article.

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Late-Day VIX-Selling Panic Rescues S&P From Red Close Year-To-Date

The major US equity indices all pushed into negative YTD territory today in yet another pump-dump-and-small-ramp deja vu day. Early strength gave way quicker today as Biotechs bounced off an early dump (but closed back below their 100DMA for 2nd day – first time in 18 months), momo names were crushed (down 10-14% post-FOMC), Citi was banged over 5% (on extremely heavy volume post CCAR), and the NASDAQ tested down (and bounced off) its 100DMA. Treasuries were mixed once again with bear-flattening the dominant theme. The USD ended the day unch on the week with EUR weakness offset by CAD and GBP strength. AUDJPY was in chgarge of stocks most of the day-session. Copper and oil improved as gold and silver slipped more (though bounced at the close). Late-day JPY pump, VIX dump rescued the S&P back to +0.03% return for 2014.


All major US equity indices back to unchanged or worse in 2014… the S&P 500 closed +0.03% YTD (Nasdaq, Russell and Dow all red year-to-date)


Whocouldanode that financial stocks were getting ahead of themselves?


As Citi was crushed…


But today saw Biotechs bounce off an early flush ending small green…


And high-beta Momos once again…


Since The FOMC, Nasdaq and Small caps have been hammered…


even as the broad indices bounced on a magical AUDJPY carpet ride as 330RAMP CAPITAL arrived…(note USDJPY was in charge in the pre-open but algos flipped soon after the US open when they could not garner any momo from USD).


As VIX-selling lifted the S&P into the green for 2014…


FX markets were very volatile but not if you look at the USD Index…


As Treasuries continues to bear-flatten…


Especially the long-end…


Charts: Bloomberg

Bonus Chart: Candy Crushederer…



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Economist Tyler Cowen’s Attacker Identified as John Pendleton

The man who attacked economist
and George Mason University professor Tyler
Cowen with pepper spray
 yesterday has been identified as
John Pendleton. Economic Policy Journal points
 that Pendleton has previously commented on
Cowen’s blog, Marginal Revolution, accusing Cowen of hacking his
computer and sexually harrassing him for several months. 

a comment posted
March 17, 2014, Pendleton wrote: 

What better place to do prison research than inside a

If the police and FBI won’t arrest you for hacking my
computer and sexually harassing me over the past several months, I
will do it myself—in the next couple weeks before school starts
again. Either way, one of us is going to prison 

I will entertain settlement offers at the email address


Jonathan E Pendleton 

Yesterday afternoon, Pendleton made good on these threats,
busting into Cowen’s classroom as Cowen was teaching a class (on
vigilante justice, ironically enough). According to Arlington
County Police spokesman Dustin Sternbeck, Pendleton entered the
classroom, stood up on a desk, and announced that he was placing
Cowen under “citizen’s arrest.” Pendleton then attempted to
handcuff Cowen and, when Cowen resisted, sprayed him in the face
with pepper spray.

A student tried to intervene and Pendleton struck him with a
stun gun, according to Sternbeck. Cowen fled the room, with
Pendleton chasing and eventually catching up to him in the hallway
and trying once again to place him in handcuffs. 

Police eventually apprehended Pendleton, who was taken to the
Arlington County Police Department. He has been charged with
“assault by caustic substance” and abduction, and is being held in
a detention facility. 

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Fact Or Fiction: G-7 Unable To Get Deposit Back On “G-8 Summer Getaway” T-Shirts

THE HAGUE – Shortly after suspending Russia’s membership in the exclusive coalition of industrialized nations, the United States and the six other wealthy nations that compose the newly renamed Group of Seven reportedly found themselves unable to get their deposit back on a set of “2014 G8 Summer Getaway” T-shirts they had ordered for the body’s scheduled summit in June.


We placed an order for a box of medium- and large-sized crewneck tees back in February, but when we called to cancel this morning, the guy at the printing shop said the deposit is final and they don’t do any refunds,” said UK Prime Minister David Cameron, who explained that the forum of major global economies lost $80 on the order, which included matching yellow shirts featuring a stylized G8 logo and a pair of palm trees as well as a dozen custom-stitched “Scorchin’ In Sochi” hats.

Of course, Putin never gave us his $10 share, so we’re all going to have to cover that too. We’ll make sure everyone pays upfront when we order our new shirts, though we haven’t decided yet whether we want them to say ‘Brussels Bash ’14’ or ‘G7: Summer of Heaven.’ Plus, [Italian Prime Minister] Matteo [Renzi] is still really lobbying for us to pay extra and get tie-dyed ones.”

Cameron added that the world leaders were also left scrambling to revise their schedule of events for the upcoming meeting as the group’s downsizing had left German Chancellor Angela Merkel without a partner to participate in their annual three-legged race.


Source: The Onion


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