Navy Screws Up – Sends Reporter Details On Avoiding His FOIA Request

Following a Washington reporter’s request to the Navy to turn over documents related to the Navy Yard Shooting, a US Navy official mistakenly forwarded an internal email outlining instructions on exactly how to avoid his Freedom of Information request. As RT reports, hours after NBC’s Scott Macfarlane’s tweets on the matter went viral, the Navy “regretted the incident” and re-iterated its “commitment to transparency.”

 

Via RT,

Scott MacFarlane, a news reporter for NBC 4 in Washington, DC, had filed a FOIA request with the Navy in an attempt to compel authorities to turn over documents related to the Navy Yard shooting in September. MacFarlane was seeking memos written by higher-ups at Naval Sea Systems Command from September, October, and November 2013–messages sent by the same officials in the hours directly after the shooting occurred, and images of building 197 at the Navy Yard, where the gunman killed 12 people and injured three others.

 

The Navy’s FOIA office confirmed that it had received MacFarlane’s request, but instead of sending him the relevant documents, they inadvertently sent an internal email containing instructions on how to avoid the reporter’s request. MacFarlane tweeted a screenshot of the message – which included the name of Robin Patterson, the Navy’s FOIA public liaison – accompanied by the phrase “EPIC FAILURE.”

 

“I think the appropriate response is ‘cameras are prohibited from the premises, with the exception of ‘official photos’ of specific events and assemblies, or ceremonies, such as retirements,” the email read, in part. “This request is too broad to tie to the specific event. If you discover that there is a ‘photo library,’ I would recommend negotiating with the requester…”

 

 

FOIA workers advised each other to avoid turning over information by telling MacFarlane his request was too broad and would constitute a “fishing expedition,” and that he should “narrow the scope of his request.”

 

“Again, another ‘fishing expedition,’” the screenshot shows. “[J]ust because they are media doesn’t mean the memos shed light on specific government activities.”

 

Officials also singled out one of MacFarlane’s requests in particular, noting “this one is specific enough that we may be able to deny it. However, I want to talk with the FBI as they may have ‘all the emails during that time, in their possession.’”

 

Just hours after MacFarlane’s tweets went viral, the Navy’s Twitter feed published a series of messages addressing the military’s respect for the FOIA process.



    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/h0rEVAJa2Es/story01.htm Tyler Durden

Japan Plans To “Nationalize” 280 More “Ownership-Unknown” Islands

15 months after acquiring three disputed islands in the Senkakus, and amid growing tensions with the Chinese following tit-for-tat air-defense zones, Abe’s visit to the war-shrine, and public-opinion battles; Japan may have just cranked the rhetoric dial to 11. As Japan Times reports, the Japanese government will nationalize about 280 islands whose ownership is unknown out of the about 400 remote islands that serve as markers for determining Japan’s territorial waters.

Under the plan, announced Tuesday, the government will complete its search for the islands’ owners (which began in August) by June. This follows already tense warnings this evening from China that “Japan’s moving in a dangerous direction.”

It seems the Abe nationalism fears were not exaggerated.

 

Via Japan Times,

The government will nationalize about 280 islands whose ownership is unknown out of the about 400 remote islands that serve as markers for determining Japan’s territorial waters, the state minister for oceanic policy and territorial issues has announced.

 

Under the plan, announced Tuesday, the government will complete its search for the islands’ owners by June. Islands whose owners have not been tracked down by then will be registered on the national asset ledger.

 

The move aims to clarify the government’s intention to protect territories and territorial waters by designating remote islands as “important national territories,” and to reinforce the management of marine resources and national security.

 

The search for owners was started in August last year by the Headquarters for Ocean Policy, led by Prime Minister Shinzo Abe.

 

 

Registering [remote islands] as Japan’s national assets would send a message that we intend to strengthen management of them,” Ichita Yamamoto, the state minister for oceanic policy and territorial issues, said at a press conference. “The government must accurately grasp the state of these remote islands.”

 

 

About 500 islands serve as the base points for establishing Japan’s territorial waters and exclusive economic zone. However, information about some of the islands, including their owners, has yet to be confirmed.

This won’t end well… especially with the Koreans now openly decrying the monetary policies of the Japanese also…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/p8xCCuz65QY/story01.htm Tyler Durden

Japan Plans To "Nationalize" 280 More "Ownership-Unknown" Islands

15 months after acquiring three disputed islands in the Senkakus, and amid growing tensions with the Chinese following tit-for-tat air-defense zones, Abe’s visit to the war-shrine, and public-opinion battles; Japan may have just cranked the rhetoric dial to 11. As Japan Times reports, the Japanese government will nationalize about 280 islands whose ownership is unknown out of the about 400 remote islands that serve as markers for determining Japan’s territorial waters.

Under the plan, announced Tuesday, the government will complete its search for the islands’ owners (which began in August) by June. This follows already tense warnings this evening from China that “Japan’s moving in a dangerous direction.”

It seems the Abe nationalism fears were not exaggerated.

 

Via Japan Times,

The government will nationalize about 280 islands whose ownership is unknown out of the about 400 remote islands that serve as markers for determining Japan’s territorial waters, the state minister for oceanic policy and territorial issues has announced.

 

Under the plan, announced Tuesday, the government will complete its search for the islands’ owners by June. Islands whose owners have not been tracked down by then will be registered on the national asset ledger.

 

The move aims to clarify the government’s intention to protect territories and territorial waters by designating remote islands as “important national territories,” and to reinforce the management of marine resources and national security.

 

The search for owners was started in August last year by the Headquarters for Ocean Policy, led by Prime Minister Shinzo Abe.

 

 

Registering [remote islands] as Japan’s national assets would send a message that we intend to strengthen management of them,” Ichita Yamamoto, the state minister for oceanic policy and territorial issues, said at a press conference. “The government must accurately grasp the state of these remote islands.”

 

 

About 500 islands serve as the base points for establishing Japan’s territorial waters and exclusive economic zone. However, information about some of the islands, including their owners, has yet to be confirmed.

This won’t end well… especially with the Koreans now openly decrying the monetary policies of the Japanese also…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/p8xCCuz65QY/story01.htm Tyler Durden

Libya Warns: Oil Tankers At Closed Ports “Will Be Destroyed”

Armed groups, demanding autonomy for eastern Libya, have invited foreign companies to buy oil from ports they have seized in defiance of the central government in Tripoli. As Reuters reports, “If a ship docks in one of the closed ports,” warned Libya’s defense ministry, “then we will destroy it,” but the group, led by tribal leader and 2011 civil war hero Ibrahim Jathran, shrugged off Tripoli’s warning, stating “we welcome global oil companies … The oil security guards will guarantee the safety of tankers.” The development adds to an air of chaos as the weak Tripoli government struggles to rein in the armed groups that helped oust Muammar Gaddafi in 2011 but which kept their guns and are now demanding political power and a bigger share of the country’s oil wealth.

 

Via gCaptain (Reuters),

Armed groups demanding autonomy for eastern Libya have invited foreign companies to buy oil from ports they have seized in defiance of the central government in Tripoli.

 

In an announcement on Tuesday, they also pledged to protect tankers loading crude, after the Libyan defence ministry said it would destroy vessels using ports in the east, which are under control of the protesters linked to a self-proclaimed regional government.

 

 

On Monday, the Libyan navy said it fired warning shots at a tanker trying to load oil at the eastern port of Es-Sider, which was seized with two other terminals by the autonomy group in August. The three harbours accounted previously for 600,000 barrels a day.

 

But the group, led by tribal leader and 2011 civil war hero Ibrahim Jathran, shrugged off Tripoli’s warning by inviting foreign companies to buy eastern oil.

 

 

“We welcome global oil companies … The oil security guards will guarantee the safety of tankers,” said Abd-Rabbo al-Barassi, prime minister of Jathran’s self-declared government in the eastern Cyrenaica region.

 

Workers at the seized ports had returned to work, he said. A newly founded oil company called Libya Oil and Gas Corp would be dealing with potential buyers. A new army and coast guard, made up of Jathran’s battle-hardened fighters, would secure the ports.

 

 

Libya’s defence ministry had earlier warned potential buyers against any docking at the seized ports. “If a ship docks in one of the closed ports, and it does not leave the port again, then we will destroy it,” said Defence Ministry spokesman Said Abdul Razig al-Shbahi.

 

The risks of an escalation were clear over the weekend when the Libyan navy said it opened fire on a vessel trying to reach Es-Sider before the tanker, Baku, turned back to Malta.

 

 

The confrontation has raised worries that Libya, also struggling with Islamist militias and armed tribesmen, might break apart as Cyrenaica and the southern Fezzan region demand political autonomy.



    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/bbCaQcz67xg/story01.htm Tyler Durden

Libya Warns: Oil Tankers At Closed Ports "Will Be Destroyed"

Armed groups, demanding autonomy for eastern Libya, have invited foreign companies to buy oil from ports they have seized in defiance of the central government in Tripoli. As Reuters reports, “If a ship docks in one of the closed ports,” warned Libya’s defense ministry, “then we will destroy it,” but the group, led by tribal leader and 2011 civil war hero Ibrahim Jathran, shrugged off Tripoli’s warning, stating “we welcome global oil companies … The oil security guards will guarantee the safety of tankers.” The development adds to an air of chaos as the weak Tripoli government struggles to rein in the armed groups that helped oust Muammar Gaddafi in 2011 but which kept their guns and are now demanding political power and a bigger share of the country’s oil wealth.

 

Via gCaptain (Reuters),

Armed groups demanding autonomy for eastern Libya have invited foreign companies to buy oil from ports they have seized in defiance of the central government in Tripoli.

 

In an announcement on Tuesday, they also pledged to protect tankers loading crude, after the Libyan defence ministry said it would destroy vessels using ports in the east, which are under control of the protesters linked to a self-proclaimed regional government.

 

 

On Monday, the Libyan navy said it fired warning shots at a tanker trying to load oil at the eastern port of Es-Sider, which was seized with two other terminals by the autonomy group in August. The three harbours accounted previously for 600,000 barrels a day.

 

But the group, led by tribal leader and 2011 civil war hero Ibrahim Jathran, shrugged off Tripoli’s warning by inviting foreign companies to buy eastern oil.

 

 

“We welcome global oil companies … The oil security guards will guarantee the safety of tankers,” said Abd-Rabbo al-Barassi, prime minister of Jathran’s self-declared government in the eastern Cyrenaica region.

 

Workers at the seized ports had returned to work, he said. A newly founded oil company called Libya Oil and Gas Corp would be dealing with potential buyers. A new army and coast guard, made up of Jathran’s battle-hardened fighters, would secure the ports.

 

 

Libya’s defence ministry had earlier warned potential buyers against any docking at the seized ports. “If a ship docks in one of the closed ports, and it does not leave the port again, then we will destroy it,” said Defence Ministry spokesman Said Abdul Razig al-Shbahi.

 

The risks of an escalation were clear over the weekend when the Libyan navy said it opened fire on a vessel trying to reach Es-Sider before the tanker, Baku, turned back to Malta.

 

 

The confrontation has raised worries that Libya, also struggling with Islamist militias and armed tribesmen, might break apart as Cyrenaica and the southern Fezzan region demand political autonomy.



    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/bbCaQcz67xg/story01.htm Tyler Durden

23 Reasons To Be Bullish On Gold

Submitted by Laurynas Vegys via Casey Research,

It's been one of the worst years for gold in a generation. A flood of outflows from gold ETFs, endless tax increases on gold imports in India, and the mirage (albeit a convincing one in the eyes of many) of a supposedly improving economy in the US have all contributed to the constant hammering gold took in 2013.

Perhaps worse has been the onslaught of negative press our favorite metal has suffered. It's felt overwhelming at times and has pushed even some die-hard goldbugs to question their beliefs… not a bad thing, by the way.

To me, a lot of it felt like piling on, especially as the negative rhetoric ratcheted up. Last year's winner was probably Goldman Sachs, calling gold a "slam-dunk sale" for 2014 (this, of course, after it's already fallen by nearly a third over a period of more than two and a half years—how daring they are).

This is why it's important to balance the one-sided message typically heard in the mainstream media with other views. Here are some of those contrarian voices, all of which have put their money where their mouth is…

  • Marc Faber is quick to stand up to the gold bears. "We have a lot of bearish sentiment, [and] a lot of bearish commentaries about gold, but the fact is that some countries are actually accumulating gold, notably China. They will buy this year at a rate of something like 2,600 tons, which is more than the annual production of gold. So I think that prices are probably in the process of bottoming out here, and that we will see again higher prices in the future."
  • Brent Johnson, CEO of Santiago Capital, told CNBC viewers to "buy gold if they believe in math… Longer term, I think gold goes to $5,000 over a number of years. If they continue to print money at the current rate, I think it could be multiples of that. I see a slow steady rise punctuated with some sharp upward moves."
  • Jim Rogers, billionaire and cofounder of the Soros Quantum Fund, publicly stated in November that he has never sold any gold and can't imagine ever selling gold in his life because he sees it as an insurance policy. "With all this staggering amount of currency debasement, gold has got to be a good place to be down the road once we get through this correction."
  • George Soros seems to be getting back into the gold miners: he recently acquired a substantial stake in the large-cap Market Vectors Gold Miners ETF (GDX) and kept his calls on Barrick Gold (ABX).
  • Don Coxe, a highly respected global commodities strategist, says we can expect gold to rise with an improving economy, the opposite of what many in the mainstream expect. "You need gold for insurance, but this time the payoff will come when the economy improves. In the past when everything was falling all around you, commodity prices were soaring out of sight. We had three recessions in the 1970s and gold went from $35 an ounce to $850. But this time, gold is going to appreciate when we start getting 3% GDP growth."
  • Jeffrey Gundlach, bond guru and not historically known for being a big fan of gold, came out with a candid endorsement of the yellow metal: "Now, I kind of like gold. It's definitely very non-correlated to other assets you may have in your portfolio, and it does seem sort of cheap. I also like the GDX."
  • Steve Forbes, publishing magnate and chief executive officer of Forbes magazine, publicly predicted an impending return to the gold standard in a speech in Las Vegas. "A new gold standard is crucial. The disasters that the Federal Reserve and other central banks are inflicting on us with their funny-money policies are enormous and underappreciated."
  • Rob McEwen, CEO of McEwen Mining and founder of Goldcorp, reiterated his bullish call for gold to someday top $5,000. "We now have governments willing to seize their citizens' assets. We now have currency controls on the table, which we haven't seen since the late 1960s/early '70s. We have continued debasement of currencies. And the economies of the Western world remain stagnant despite enormous monetary stimulation. All these facts to me are bullish for gold and make me believe the price will bounce back relatively soon."
  • Doug Casey says that while gold is not the giveaway it was at $250 back in 2001, it is nonetheless a bargain at current prices. "I've been buying gold for years and I continue to buy it because it is the way you save. I'm very happy to be able to buy gold at this price. All the so-called quantitative easing—money printing—by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super-bubble in gold stocks."

And then there's the people who should know most about how sound the world's various types of paper money are: central banks. As a group, they have added tonnes of bullion to their reserves last year…

  • Turkey added 13 tonnes (417,959 troy ounces) of gold in November 2013. Overall, it has added 143.6 tonnes (4,616,847 troy ounces) so far this year, up 22.5% from a year ago, in part thanks to the adoption of a new policy to accept gold in its reserve requirements from commercial banks.
  • Russia bought 19.1 tonnes (614,079 troy ounces) in July and August alone. With the year-to-date addition of 57.37 tonnes—second only to Turkey—Russia's gold reserves now total 1,015 tonnes. It now holds the eighth-largest national stash in the world.
  • South Korea added a whopping 20 tonnes (643,014 troy ounces) of gold in February, and now carries 23.7% more gold on its balance sheet than at the end of 2012."Gold is a real safe asset that can help (us) respond to tail risks from global financial situations effectively and boosts the reliability of our foreign reserves holdings," said central bank officials.
  • Kazakhstan has been buying gold every month, at an average of 2.4 tonnes (77,161 troy ounces) through October. As a result, the country's reserves have seen a 21% increase to 139.5 tonnes from a year ago.
  • Azerbaijan has taken advantage of a slump in gold prices and has gone from having virtually no gold to 16 tonnes (514,411 ounces).
  • Sri Lanka and Ukraine added 5.5 (176,829 troy ounces) and 6.22 tonnes (199,977 troy ounces) respectively over the past year.
  • China, of course, is the 800-pound gorilla that mainstream analysts seem determined to ignore. Though nothing official has been announced by China's central bank, the chart below provides some perspective into the country's consumer buying habits.

China ended 2013 officially as the largest gold consumer in the world. Chinese sentiment towards gold is well echoed in a statement made by Liu Zhongbo of the Agricultural Bank of China: "Because gold has capabilities to absorb external economic shocks, growth of its use in the international monetary system will be imminent."

And those commercial banks that have been verbally slamming gold—it turns out many are not as negative as it might seem…

  • Goldman Sachs proved itself to be one of the biggest hypocrites: while advising clients to sell gold and buy Treasuries in Q2 2013, it bought a stunning (and record) 3.7 million shares of GLD. And when Venezuela decided to raise cash by pawning its gold, guess who jumped in to handle the transaction? Yes, they claim the price will fall this year, but with such a slippery track record, it's important to watch what they do and not what they say.
  • Société Générale Strategist Albert Edwards says gold will top $10,000 per ounce (with the S&P 500 Index tumbling to 450 and Treasuries yielding less than 1%).
  • JPMorgan Chase went on record in August recommending clients "position for a short-term bounce in gold." Gold's price resistance to Paulson & Co. cutting its gold exposure, along with growing physical gold demand in Asia, were cited among the main reasons.
  • ScotiaMocatta's Sunil Kashyap said that despite the selloff, there's still significant physical demand for gold, especially from India and China, which "supports prices."
  • Commerzbank calls for the gold price to enter a boom period this year. Based on investment demand from Asian countries—China and India in particular—the bank predicted the yellow metal will rise to $1,400 by the end of 2014.
  • Bank of America Merrill Lynch, in spite of lower price forecasts for gold this year, reiterated they remain "longer-term bulls."
  • Citibank's top technical analyst Tom Fitzpatrick stated gold could head to $3,500. "We believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward."

None of these parties thinks the gold bull market is over. What they care about is safety in this uncertain environment, as well as what they see as enormous potential upside.

In the end, the much ridiculed goldbugs will have had the last laugh.

We can speculate about when the next uptrend in gold will set in, but the action for today is to take advantage of price weakness. Learn about the best gold producers to invest in—now at bargain-basement prices. Try BIG GOLD for 3 months, risk-free, with 100% money-back guarantee. Click here to get started.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/H9SpARJA1yw/story01.htm Tyler Durden

When Risk Is Not In Parity: Bridgewater’s Massive “All Weather” Fund Ends 2013 Down 3.9%

Just over a year ago, in one simple graphic, we showed why Bridgewater, which currently manages around $150 billion, is the world’s biggest hedge fund. Quite simply, its flagship $80 billion Pure Alpha strategy had generated a 16% annualized return since inception in 1991, with a modest 11% standard deviation – returns that even Bernie Madoff would be proud of.

And, true to form, according to various media reports, Pure Alpha’s winning ways continued in 2013, when it generated a 5.25% return: certainly underperfoming the market but a respectable return nonetheless.

However, Pure Alpha’s smaller cousin, the $70 billion All Weather “beta” fund was a different matter in the past year. The fund, which touts itself as “the foundation of the “Risk Parity” movement“, showed that in a centrally-planned market, even the best asset managers are hardly equipped to deal with what has largely become an irrational market, and ended the year down -3.9%.

Ironically, we voiced our skepticism about All Weather last January long before the market’s Taper Tantrum and subsequent actual Taper, when we provided our opinion on (what was then and probably still is) the “world’s biggest and most successful “beta” hedge fund.” We said:

[W]hile we absolutely agree with Dalio that “there is a way of looking at things that overly complicates things in a desire to be overly precise and easily lose sight of the important basic ingredients that are making those things up” (they need those Econ PhDs for something), we certainly don’t agree with Bob Prince’s assessment that the entire world is merely a “machine” which can be understood, in terms of its cause-effect linkages.

 

While this may be true in simple two actor environments, and in theoretical, textbook markets, it is certainly not the case in a enviornment filled with irrational actors, who respond in times of crises – so vritually all market inflection points – with their feelings, instincts, phobias and gut reactions, than with anything resembling logic and reason. And especially not in times of “New Normal” central planning.

What happened next is well-known to most.

The NYT describes it succinctly: “A number of risk-parity funds like All Weather were caught off guard by a sudden rise in Treasury yields last summer. Treasury yields began to rise last May after speculation began that the Federal Reserve would soon scale back its monthly purchases of United States Treasury’s and mortgage-backed securities. The Fed began slowly scaling back its purchases, which are intended to stoke economic growth, last month. Last year also was a particularly rough one for TIPS and other inflation-protected securities. TIPS tend to perform poorly when Treasury yields rise and inflation is low. Last year, iShares TIPS, an exchange traded fund that tracks the inflation-protected securities market, fell about 9 percent.”

Long story short, the internal assumptions behind Risk Parity blew up spectacularly in a year in which yield soared, while equity markets dipped initially only to rebound furiously, without a concurrent spife in inflation expectations. Welcome to the New Normal.

To be sure, we narrated the implosion in Risk Parity in almost real time. Recall from When Will “Risk Parity” Blow Up Again:

In March we suggested that in a rising rate environment risk parity was susceptible to draw-down as yields gap higher. As it turned out this happened even sooner than we expected after the Federal Reserve’s June 19th FOMC statement. Despite the fact that the statement said nothing new, markets interpreted it as hawkish and Treasuries took a pounding. In the next two weeks ten year Treasuries lost over 4% in total return, creating an overall loss of 7.5% since the beginning of May. The situation was worsened by the fact that equities also fell briefly, but unlike Treasuries also rebounded quickly.

 

 

The consequence for some risk parity funds was a significant loss. For example the AQR Risk Parity Fund lost 13% from May 9th to June 24th and fared worse than shares, credit or Treasuries in response to the FOMC sell-off. The question is whether this will happen again, or was this event a one-off? We believe that this is a relatively mild foretaste of what is to come. Consider that this was a response to a hint that the Fed could start to taper its asset purchases which occurred while the Fed was moving its balance sheet far beyond historical limits at a rate of over $1 trillion per year. The responses to the actual onset of tapering and rate hikes are likely to be more severe. Our US economists believe tapering will begin in Q4 this year and end in Q2 next year but that rate hikes will be delayed.

But nobody was more critical of Risk Parity than GMO’s James Montier who in a December note equated the Risk Parity concept with “Snake oil in new bottles.”

Below are the salient points from Montier:

As I have written many times before, leverage is far from costless from an investor’s point of view. Leverage can never turn a bad investment into a good one, but it can turn a good investment into a bad one by transforming the temporary impairment of capital (price volatility) into the permanent impairment of capital by forcing you to sell at just the wrong time. Effectively, the most dangerous feature of leverage is that it introduces path dependency into your portfolio.

Ben Graham used to talk about two different approaches to investing: the way of pricing and the way of timing. “By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such value… By timing we mean the endeavour to anticipate the action of the stock market…to sell…when the course is downward.”

 

Of course, when following a long-only approach with a long time horizon you have to worry only about the way of pricing. That is to say, if you buy a cheap asset and it gets cheaper, assuming you have spare capital you can always buy more, and if you don’t have more capital you can simply hold the asset. However, when you start using leverage you have to worry about the way of pricing and the way of timing. You are forced to say something about the path returns will take over time, i.e., can you survive a long/short portfolio that goes against you?

 

Exhibits 10 and 11 highlight this problem. Exhibit 10 shows the value/growth expected return spread over time. I’ve marked three points with red stars. Let’s imagine you had all of this time series history in the run-up to the late 1990’s tech bubble. Given history and assuming you were patient enough to wait for value to get one standard deviation cheap relative to growth, you would have put this position on in September 1998. If you had been even more patient and waited for a 2 standard deviation event, you would have started the position in January 1999. If you had displayed the patience of Job, and waited for the never before seen 3 standard deviation event, you would have entered the position in November 1999.

 

 

Exhibit 11 reveals the drawdowns you would have experienced from each of those points in time. Pretty much any one of these would likely have been career ending. They nicely highlight the need to say something about the “way of timing” when engaged in long/short space.

 

As usual, Keynes was right when he noted “An investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money.”

 

Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea 

 

At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. We have written about the inherent risks of risk parity before, however I think they can be stated simply as the following:

 

I. Wrong measure of risk

 

Many proponents of risk parity use volatility as their measure of risk. As I have argued what seems like countless times over the years, risk is not a number. Putting volatility at the heart of your investment approach seems very odd to me as, for example, it would have had you increasing exposure in 2007 as volatility was low, and decreasing exposure in 2009 as volatility was high – the exact opposite of the valuation-driven approach. As Keynes stated, “It is largely the fluctuations which throw up the bargains and the uncertainty due to fluctuations which prevents other people from taking advantage of them.”

 

II. Leverage

 

I’ve already discussed leverage in the previous section, enough said I think.

 

III. Lack of robustness

 

There are no general results for risk parity. That is to say that adding breadth doesn’t necessarily improve returns. The returns achieved in risk parity backtests are very sensitive to the exact specification of the assets used (i.e., J.P. Morgan Bond Indices vs. Barclays Aggregates). Furthermore, decisions on which assets to include often appear fairly arbitrary (i.e., why include commodities, which, as Ben Inker has argued, may well not have a risk premia associated with them). All in all, the general lack of robustness raises the distinct spectre of data mining, and hence fragility.

 

IV. Valuation indifference

 

Proponents of risk parity often say one of the benefits of their approach is to be indifferent to expected returns, as if this was something to be proud of. I’ve heard them argue that “risk parity is what you should do if you know nothing about expected returns.” From our perspective, nothing could be more irresponsible for an investor to say he knows nothing about expected returns. This is akin to meeting a neurosurgeon who confesses he knows nothing about the way the brain works. Actually, I’m wrong. There is something more irresponsible than not paying attention to expected returns, and that is not paying attention to expected returns and using leverage!

As it turns out, Montier was right, and all it took was for one word out of Bernanke mouth to launch an market avalance which showed just how fallible the supposedly infailable can also be when trading a “market” that now is anything but.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rPbiaE8gzwA/story01.htm Tyler Durden

When Risk Is Not In Parity: Bridgewater's Massive "All Weather" Fund Ends 2013 Down 3.9%

Just over a year ago, in one simple graphic, we showed why Bridgewater, which currently manages around $150 billion, is the world’s biggest hedge fund. Quite simply, its flagship $80 billion Pure Alpha strategy had generated a 16% annualized return since inception in 1991, with a modest 11% standard deviation – returns that even Bernie Madoff would be proud of.

And, true to form, according to various media reports, Pure Alpha’s winning ways continued in 2013, when it generated a 5.25% return: certainly underperfoming the market but a respectable return nonetheless.

However, Pure Alpha’s smaller cousin, the $70 billion All Weather “beta” fund was a different matter in the past year. The fund, which touts itself as “the foundation of the “Risk Parity” movement“, showed that in a centrally-planned market, even the best asset managers are hardly equipped to deal with what has largely become an irrational market, and ended the year down -3.9%.

Ironically, we voiced our skepticism about All Weather last January long before the market’s Taper Tantrum and subsequent actual Taper, when we provided our opinion on (what was then and probably still is) the “world’s biggest and most successful “beta” hedge fund.” We said:

[W]hile we absolutely agree with Dalio that “there is a way of looking at things that overly complicates things in a desire to be overly precise and easily lose sight of the important basic ingredients that are making those things up” (they need those Econ PhDs for something), we certainly don’t agree with Bob Prince’s assessment that the entire world is merely a “machine” which can be understood, in terms of its cause-effect linkages.

 

While this may be true in simple two actor environments, and in theoretical, textbook markets, it is certainly not the case in a enviornment filled with irrational actors, who respond in times of crises – so vritually all market inflection points – with their feelings, instincts, phobias and gut reactions, than with anything resembling logic and reason. And especially not in times of “New Normal” central planning.

What happened next is well-known to most.

The NYT describes it succinctly: “A number of risk-parity funds like All Weather were caught off guard by a sudden rise in Treasury yields last summer. Treasury yields began to rise last May after speculation began that the Federal Reserve would soon scale back its monthly purchases of United States Treasury’s and mortgage-backed securities. The Fed began slowly scaling back its purchases, which are intended to stoke economic growth, last month. Last year also was a particularly rough one for TIPS and other inflation-protected securities. TIPS tend to perform poorly when Treasury yields rise and inflation is low. Last year, iShares TIPS, an exchange traded fund that tracks the inflation-protected securities market, fell about 9 percent.”

Long story short, the internal assumptions behind Risk Parity blew up spectacularly in a year in which yield soared, while equity markets dipped initially only to rebound furiously, without a concurrent spife in inflation expectations. Welcome to the New Normal.

To be sure, we narrated the implosion in Risk Parity in almost real time. Recall from When Will “Risk Parity” Blow Up Again:

In March we suggested that in a rising rate environment risk parity was susceptible to draw-down as yields gap higher. As it turned out this happened even sooner than we expected after the Federal Reserve’s June 19th FOMC statement. Despite the fact that the statement said nothing new, markets interpreted it as hawkish and Treasuries took a pounding. In the next two weeks ten year Treasuries lost over 4% in total return, creating an overall loss of 7.5% since the beginning of May. The situation was worsened by the fact that equities also fell briefly, but unlike Treasuries also rebounded quickly.

 

 

The consequence for some risk parity funds was a significant loss. For example the AQR Risk Parity Fund lost 13% from May 9th to June 24th and fared worse than shares, credit or Treasuries in response to the FOMC sell-off. The question is whether this will happen again, or was this event a one-off? We believe that this is a relatively mild foretaste of what is to come. Consider that this was a response to a hint that the Fed could start to taper its asset purchases which occurred while the Fed was moving its balance sheet far beyond historical limits at a rate of over $1 trillion per year. The responses to the actual onset of tapering and rate hikes are likely to be more severe. Our US economists believe tapering will begin in Q4 this year and end in Q2 next year but that rate hikes will be delayed.

But nobody was more critical of Risk Parity than GMO’s James Montier who in a December note equated the Risk Parity concept with “Snake oil in new bottles.”

Below are the salient points from Montier:

As I have written many times before, leverage is far from costless from an investor’s point of view. Leverage can never turn a bad investment into a good one, but it can turn a good investment into a bad one by transforming the temporary impairment of capital (price volatility) into the permanent impairment of capital by forcing you to sell at just the wrong time. Effectively, the most dangerous feature of leverage is that it introduces path dependency into your portfolio.

Ben Graham used to talk about two different approaches to investing: the way of pricing and the way of timing. “By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such value… By timing we mean the endeavour to anticipate the action of the stock market…to sell…when the course is downward.”

 

Of course, when following a long-only approach with a long time horizon you have to worry only about the way of pricing. That is to say, if you buy a cheap asset and it gets cheaper, assuming you have spare capital you can always buy more, and if you don’t have more capital you can simply hold the asset. However, when you start using leverage you have to worry about the way of pricing and the way of timing. You are forced to say something about the path returns will take over time, i.e., can you survive a long/short portfolio that goes against you?

 

Exhibits 10 and 11 highlight this problem. Exhibit 10 shows the value/growth expected return spread over time. I’ve marked three points with red stars. Let’s imagine you had all of this time series history in the run-u
p to the late 1990’s tech bubble. Given history and assuming you were patient enough to wait for value to get one standard deviation cheap relative to growth, you would have put this position on in September 1998. If you had been even more patient and waited for a 2 standard deviation event, you would have started the position in January 1999. If you had displayed the patience of Job, and waited for the never before seen 3 standard deviation event, you would have entered the position in November 1999.

 

 

Exhibit 11 reveals the drawdowns you would have experienced from each of those points in time. Pretty much any one of these would likely have been career ending. They nicely highlight the need to say something about the “way of timing” when engaged in long/short space.

 

As usual, Keynes was right when he noted “An investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money.”

 

Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea 

 

At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. We have written about the inherent risks of risk parity before, however I think they can be stated simply as the following:

 

I. Wrong measure of risk

 

Many proponents of risk parity use volatility as their measure of risk. As I have argued what seems like countless times over the years, risk is not a number. Putting volatility at the heart of your investment approach seems very odd to me as, for example, it would have had you increasing exposure in 2007 as volatility was low, and decreasing exposure in 2009 as volatility was high – the exact opposite of the valuation-driven approach. As Keynes stated, “It is largely the fluctuations which throw up the bargains and the uncertainty due to fluctuations which prevents other people from taking advantage of them.”

 

II. Leverage

 

I’ve already discussed leverage in the previous section, enough said I think.

 

III. Lack of robustness

 

There are no general results for risk parity. That is to say that adding breadth doesn’t necessarily improve returns. The returns achieved in risk parity backtests are very sensitive to the exact specification of the assets used (i.e., J.P. Morgan Bond Indices vs. Barclays Aggregates). Furthermore, decisions on which assets to include often appear fairly arbitrary (i.e., why include commodities, which, as Ben Inker has argued, may well not have a risk premia associated with them). All in all, the general lack of robustness raises the distinct spectre of data mining, and hence fragility.

 

IV. Valuation indifference

 

Proponents of risk parity often say one of the benefits of their approach is to be indifferent to expected returns, as if this was something to be proud of. I’ve heard them argue that “risk parity is what you should do if you know nothing about expected returns.” From our perspective, nothing could be more irresponsible for an investor to say he knows nothing about expected returns. This is akin to meeting a neurosurgeon who confesses he knows nothing about the way the brain works. Actually, I’m wrong. There is something more irresponsible than not paying attention to expected returns, and that is not paying attention to expected returns and using leverage!

As it turns out, Montier was right, and all it took was for one word out of Bernanke mouth to launch an market avalance which showed just how fallible the supposedly infailable can also be when trading a “market” that now is anything but.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rPbiaE8gzwA/story01.htm Tyler Durden

The Real China Threat: Credit Chaos

As Michael Pettis, Jim Chanos, Zero Hedge (numerous times), and now George Soros have explained. Simply put –

“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”

The “eerie resemblances” – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained below…

Submitted by Minxin Pei via The National Interest,

The spectacle of a game of financial chicken in the world’s second-largest economy is both entertaining and terrifying. Twice in 2013, the People’s Bank of China (PBOC), the country’s central bank, tried to demonstrate its resolve to rein in runaway credit growth. In June, it engineered a sudden credit squeeze that sent the interbank lending rates to more than 20 percent and caused a short-lived panic in the Chinese financial markets. Apparently, the financial turmoil was too much for the Chinese government, which quickly ordered the Chinese central bank to reverse course. As a result, the PBOC lost both face and credibility.

However, as credit growth continued unabated and activities in the most risky segment of China’s financial sector – the so-called shadow banking system – displayed alarming recklessness, the PBOC was left with no choice but try one more time to send a strong message that it could not be counted on to provide unlimited liquidity to the banking system.

It did so in December 2013 with a modified approach that provided liquidity only to the selected large banks but pressured smaller banks (which are the most active participants in the shadow banking system). Although interbank lending rates did not spike to nose-bleeding levels, as they did in June, they doubled quickly. Most Chinese banks held on to their cash and refused to lend to each other. Chinese equity markets fell nearly 10 percent, giving back nearly all the gains since mid-November, when the Chinese Communist Party’s (CCP) reform plan bolstered market sentiments.

Unfortunately for the PBOC, the renewed turbulences in the Chinese banking sector were again viewed as too dangerous by the top leadership of the CCP even though it seemed that the PBOC initially received its support. Consequently, the PBOC had to beat another hasty retreat and inject enough liquidity to force down interbank lending rates. Thus, in the first two rounds of a stand-off between the PBOC and China’s shadow banking system, the latter is widely seen as the winner. The PBOC blinked first each time.

For the moment, the conventional wisdom is that, as long as the PBOC maintains sufficient liquidity (translation: permitting credit growth at roughly the same pace as in previous years), China’s financial sector will remain more or less stable. This observation may be reassuring for the short-term, but overlooks the dangerous underlying dynamics in China’s banking system that prompted the PBOC to act in first place.

Of these dynamics, two deserve special attention.

The first one is the rapid rise in indebtedness (or financial leverage) in the Chinese economy since 2008. In five years, the country’s total debt-to-GDP ratio (including both public and private debt) rose from 130 percent to 210 percent, an unprecedented increase for a major economy. Historically, such expansion of credit hasrarely failed to inflate a credit bubble and cause a financial crisis. In the Chinese case, what makes the credit explosion even more risky is the low creditworthiness of the major borrowers. Only a quarter of the debt is owed by those with relatively high creditworthiness (consumers and the central government). The remaining 75 percent has gone to state-owned enterprises, private real-estate developers, and local governments, all of which are known to have weak loan repayment capacity (most state-owned enterprises generate low cash profits, private real-estate developers are overleveraged, and local governments have a narrow tax base). Staggering under an unsustainable debt burden of roughly 160 percent of GDP (equivalent to $14 trillion), these borrowers are expected to default on a significant portion of their bank debt in the coming years.

The second dynamic, closely related to the first one, is the growth of the shadow-banking sector. Two drivers shape activities in this sector, which operates outside the banking system. To minimize their exposure to risky borrowers, Chinese banks have curtailed their lending. But at the same time, these banks have embraced the shadow banking activities to increase their revenue. Specifically, Chinese banks peddle new “wealth management products” – short-term securities promising high interest rates – to their depositors. The issuers of such securities, which are not protected or insured by the government – are typically high-risk borrowers, such as local governments (and their financing vehicles) and real estate developers.

In the meantime, these borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).

Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.

Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.

So the task for the PBOC in the coming year will remain as difficult as ever. It will have to navigate between gently disciplining the banks and avoiding a financial panic. Its ability to do so is anything but assured. It has already lost the first two rounds of this game of financial chicken. We can only hope that it can do better in the next round.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/62RB6qSi-t4/story01.htm Tyler Durden