Month: August 2016

Almost three years after we first explained why Abenomics is a failure, the reality of Japan’s sad economic state is finally starting to seep in, and overnight none other than one of Shinzo Abe’s most trusted advisers warned that he’s starting to see a chance that Abenomics may not do well. One day after Koichi Hamada, an outspoken former Yale University professor who is among the circle of economists that Abe’s drawn on for ideas, suggested that the BOJ should monetize foreign bonds, admitted that “I’ve studied economics for more than 50 years and I’ve believed that what works in the world mostly works in Japan as well,” Hamada, 80, said at a seminar in Tokyo. “But, in the past six months, I’m starting to see there is potential that Abenomics may not work well.”

Koichi Hamada

Having found some initial success in the early years of the program, when the Yen plunged as a result of the BOJ’s unprecedented monetization campaign, only the send import price inflation soaring, the Japanese currency has since moved against Japan this year, with the yen appreciating about 16% versus the dollar, eroding any competitive advantage that Japan’s exporters enjoyed during the first years after Abe came to power in late 2012. Meanwhile, consumer prices are falling again and investors are questioning the sustainability of the Bank of Japan’s massive monetary stimulus program.

This “paradox” has shocked Hamada, who said that “Japan’s falling bond yields should weaken the yen against the dollar, but it hasn’t been the case and I’ve felt frustrated or down,” said Hamada. He added that he’s feeling a little more relaxed since the gathering of central bankers at Jackson Hole, Wyoming, over the weekend because there’s “some hope that conditions in the foreign exchange market may be changing.”

He is referring to the spike in the USDJPY, which has bounced over 200 pips since the weekend with the Yen trading at its weakest levels in a month, not so much on any renewed jawboning by Kuroda which appears to have lost its market moving credibility, as much as a return to the hawkish tone by Janet Yellen and various Fed members. He will probably be disappointed when the Fed once again folds and ends up not hiking next month.

Hamada also added that Japan’s finance ministry has the right to intervene in currency markets if it sees fit. Also, as noted previously, he also said the BOJ could buy foreign bonds as one way to nudge the yen lower, although the U.S. would probably object to this.

Quoted by Bloomberg, Takashi Shiono, an economist at Credit Suisse Group in Tokyo said that “Hamada couldn’t help but starting to worry because you have no trouble finding evidence that Abenomics isn’t working as intended,” said . “The strong yen is one of the biggest factors weighing on Japan’s economy and something that Abe advisers didn’t expect.”

Sure enough, with everything else failing, Hamada suggested that it may be better for Japan to move the goalpost and to focus on a consumer price gauge that strips out both food and energy costs, rather than the BOJ’s preferred index which only excludes fresh food. Why the change: the latest print of the former indicator was a positive 0.3% while the latter registered a negative 0.5 print.

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Submitted by Jeffrey Snider via Alhambra Investment Partners,

A eurodollar futures contract affords the buyer the opportunity to obtain a $1 million eurodollar deposit for a three-month term at the expiration and execution of the contract. The rate to be paid for that deposit is 100 points minus 3-month LIBOR for spot settlement on the 3rd Wednesday of the contract month. If 3-month LIBOR on June 20, 2018 is, for the sake of argument, 1%, then the June 2018 contract itself will price 99.00 at that expiration. You are essentially buying into a discounted view of future money rates.

Because we are dealing with prices and views on rates into the future, there are different perhaps seemingly conflicted sets of risks and parameters. This is especially true when examining the current offerings in LIBOR. If eurodollar futures are predicated upon future LIBOR rates, why do they seem to move opposite to current LIBOR? The London rate has been rising for more than a year and a half going back, importantly, to December 2014. Yet, during that time eurodollar futures all over the curve have been rising (in price), too. That seems to be conflicting information as one would expect the current price of LIBOR to get discounted into the futures price.

After all, if LIBOR is rising today as a result of “normalization” of interest rates after so many years of ZIRP, it stands to reason that such a benign (that is, rising rates not predicated upon rising risks, rather as a matter of intentional policy changes) increase would be passed along into the futures market. If 3-month LIBOR was to hit 90 bps as a matter of normalization, then the June 2018 futures price, you would think, would take that 90 bps as a starting point.

The current June 2018 price is around 98.80, meaning there is very little time value (just less than two years) reflected in that price given 3-month LIBOR is currently fixed above 83 bps. In fact, eurodollar futures have been rising as LIBOR has been rising, suggesting that normalization is not the primary discounting mechanism.

Since LIBOR is a reflection of money rates at different maturities as of right now, where eurodollar futures are a reflection of money rates as of that future point, these two related rates do not necessarily need to be directly translatable. When rising risk rather than benignity is indicated, rising LIBOR (current) alongside rising eurodollar futures prices (future) is easily interpreted as the former leading to the latter. In other words, where rising LIBOR right now would suggest increasing credit or (more so) liquidity risks, rising eurodollar futures suggest the ultimate economic damage those risks are expected to unleash if left unchecked.

We need only, as ever, reflect back to money behavior in 2007 and 2008 to calibrate these interpretations as perfectly consistent. Eurodollar futures in general (I will use the June 2011 contract as a general proxy for the whole curve, but keep in mind there are other dimensions to consider especially calendar spreads as an element of risk measurement; i.e., flatness of the curve) fell in price in the middle of 2007 as it appeared the initial risks of subprime had passed. In June 2007, however, eurodollar futures began to rise (in price) again, confounding the FOMC to no end.

On August 9, 2007, LIBOR rates jumped signaling the start of the crisis – which, as eurodollar futures prices suggested, meant overall a sharp decline in rates as well as crunching of the time premium of money before it was all over. We can easily observe both “waves” of the 2007-08 crisis in eurodollar futures as LIBOR declined sharply over time (apart from the sharp spikes where “dollar” pressure was most acute in first near-panic and then full panic). On first blush, it seems as if contrary to our current condition, LIBOR and eurodollar futures were acting as they “should”, moving in opposite directions – rising eurodollar futures prices, which Bill Dudley swore must have been at “disequilibrium” because the Fed had no intentions in mid-2007 of reducing rates (as if it were up to the Fed), and then falling LIBOR that eurodollar futures had described all along.

Dudley got it all wrong as eurodollar futures got it all right; LIBOR rates by 2009 were near zero, a probability that eurodollar futures were increasingly pricing going all the way back to June 2007. From the perspective of the TED spread, rising liquidity risk through the period meant translation into the greater possibility for lower rates (as a reflection of economy as much as policy) after it was all over. Eurodollar futures were trying to assess the possible damage from the whole affair, meaning that these highly dramatic liquidity events were risking a permanent reduction in “dollar” capacity (as we have since observed).

As you can see from the TED spread overlay, eurodollar futures prices remained highly elevated even though liquidity risks by the middle of 2009 had fallen back to “normal” – by then the damage was done. Remaining priced near and above 97 (June 2011 contract), the futures market was projecting that the economic problems the panic had created would linger for a long, long time, meaning that the overall probability spectrum of a futures price for June 2011 was skewed to the low side and to an extreme even though by then markets seemed to be recovering.

It took a second wave of financial disruption for such pessimism to become just that permanent. From the failure of Bear Stearns (technically its “merger”) in the middle of March 2008 until June 13 that year, eurodollar futures did decline in price as liquidity risks seemed to fall and normalize. (SIDE NOTE: to this day I have no idea what the significance of June 13, 2008 was and I have looked thoroughly; it may just be the vagaries of market imagination; see below). This was the period of “cautious optimism” perfectly punctuated right near its end when Chairmen Bernanke told an audience of bankers in Massachusetts on June 9 that, “although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” Falling eurodollar futures prices suggested an increasing probability that he was correct, as did the TED spread, though neither would last more than a few days after Bernanke’s words.

Other indications, however, showed this was impossible, meaning that eurodollar futures deal in probabilities not certainties (and reminds us to be mindful of all these various related dimensions), and thus the extraordinary efforts of monetary policy were for a time given the benefit of the doubt. It was still doubt as, for instance, the spread of 3-month LIBOR over effective federal funds never came close to normalizing, and in fact only got worse throughout the spring of 2008 where eurodollar futures were being sold. The fact that LIBOR was steady was misleading, as TED would eventually show that summer.

It may have been that this stubborn geographical divide in the “dollar” finally hit home by early June and that money markets finally woke up to the realization that what had happened from August 2007 until Bear Stearns was not the whole play, only its opening Act. From June 13 until Lehman, the TED spread was rising again along with eurodollar futures prices even though 3-month LIBOR remained almost perfectly steady (12-month LIBOR and the spread over EFF, however, were both more consistent with rising TED and eurodollar futures).

That means that what we find in these periods of uncertainty and “tightening” especially in the global, wholesale “dollar” framework (including repo and collateral conditions which do get translated into TED through the T-bill rate) is rising risk and then futures translation of those possible risks into probabilities for what might happen should those risks become real. In that sense, the greater the risk, the greater the potential damage; rising LIBOR or really TED, rising eurodollar futures.

That, of course, leads us in the direction of the past two years in money behavior. The key in that paraphrasing is risk rather than normalization. If LIBOR was reflective of intentional monetary policy, and thus steeper curves and nominal rates throughout credit and funding, we would, again, expect eurodollar futures to sell off.

As with the 2008 period, though, it needs to be pointed out to not nearly the same extreme, the dramatic, general increase in eurodollar futures prices are perfectly consistent with rising LIBOR even though they would be contradictory under the normalization scenario. The TED spread confirms risk not policy as the underlying mechanism, while the eurodollar futures price reveals the growing pessimism about what that could mean for the intermediate and long terms in real economic conditions.

Once again FOMC policy is at odds with what is taking place in deeper and far more intellectually-sound money markets. Referring back to August 9, 2007, eurodollar futures were absolutely right about what these risks were as I wrote a few weeks ago:

It is that single day that explains why real GDP is $16.5 trillion instead of $21 trillion; why nominal disposable personal income is $14 trillion rather than $18 trillion; why global trade is figured by the OECD to be $22 trillion this year, $9 trillion less than it should have been if the prior growth trend had been maintained; and so on and so on in economic account after economic account all over the world. In other words, had the Great Recession actually been a recession we wouldn’t be thinking about August 9 for the tenth time.

With LIBOR, TED, and eurodollar futures where they are now and how they all got that way over the past two years, does 2a7 money market reform or even Janet Yellen’s stubborn optimism really seem so convincing? After all, eurodollar futures in particular were absolutely correct about what all that money mess truly meant for the future of the world economy as risks turned frighteningly real in ways the Fed (or any central bank) still doesn’t comprehend.  

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Gallup recently released what it described as the "most robust and comprehensive study of the millennial generation" combining more that 30 separate studies involving more than 1 million respondents.  In summary, the report found Millennials to be disengaged, aloof and completely incapable of prioritizing their own workload all while requiring constant pats on the back from management.  Well, we could have told you that (and we have on many occasions) without doing any research at all.

 

The study, conducted by Brandon Rigoni and Bailey Nelson, found only 29% of millennials to be "engaged" at work with 60% being open to alternative employment. 

The report, How Millennials Want to Work and Live, revealed that only 29% of millennials are engaged at work, with the remaining 71% either not engaged or actively disengaged. What's more, six in 10 millennials say they're open to different job opportunities, and only 50% plan to be with their company one year from now.

 

This low engagement is troubling, as Gallup's latest meta-analysis shows that business units in the top quartile of employee engagement are 17% more productive, suffer 70% fewer safety incidents, experience 41% less absenteeism, have 10% better customer ratings and are 21% more profitable compared with business units in the bottom quartile.

Apparently millennials are also incapable of prioritizing tasks at work.  Only 54% of millennials felt they knew how to prioritize work responsibilities versus 71% from other generations. 

Regardless of generation, for example, employees need to know what's expected of them in the workplace. It's extremely stressful for any worker to lack an understanding or awareness of job responsibilities. In fact, Gallup finds that 72% of millennials who strongly agree that their manager helps them set performance goals are engaged.

 

Setting performance goals is one major necessity; of similar importance is knowing how to prioritize work responsibilities. Employees require job clarity so they have an understanding of what to do. They also require direction in establishing priorities — knowing the order in which tasks should get done.

 

Prioritizing is a distinct need for millennial employees: Just 54% of millennials strongly agree that they know how to prioritize responsibilities at work, compared with 71% of those from older generations.

And finally, the report found that millennials were much more engaged at work if their bosses held their hand and provided constant feedback. 

In reality, millennials want to be held accountable for their performance. In fact, nearly six in 10 millennials (56%) who report that their manager holds them accountable are engaged in their work.

 

To put this in context, if only 29% of millennials are engaged at work, then these findings suggest that managers can double the likelihood of engaging millennial employees by doing something many would consider simple and intuitive: holding them accountable. Millennials, like all employees, seek and desire accountability. When leaders and managers consistently hold employees accountable, they get the most out of employees' performance and make them happier and more likely to stay.

And just to add icing to the cake, Gallup points out that while millennials only represent 38% of the workforce today they should account for roughly 75% by 2025.  We assume the 75% incorporates the many "cheerleading departments" that will have to be added to corporations around the country.

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Having constantly demonstrated his uncanny ability to “predict” the market, Dennis Gartman has decided to branch out into the realm of forecasting presidential elections. In an interview with Kitco, this is what Gartman said:

Now that the likelihood of a Trump presidency has dropped, gold prices have also moved lower, falling to two-month lows this week.

 

Could there be a correlation or is this just mere coincidence?

 

“It has to be a coincidence, because the market is wise enough to know that Mr. Trump has no chance of becoming the next president and thus cannot and will not affect monetary and/or economic policy here in the U.S. or abroad,” popular newsletter publisher Dennis Gartman told Kitco News Tuesday.

And with that we can throw away all the public polling for the next two months, Dennis Gartman has just called it.

h/t @chigrl

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Submitted by Michael Lebowitz via 720Global.com,

Volumes have been written on behavioral finance and the seemingly “irrational” decisions investors tend to make to avoid straying from the herd. This article examines a current example coined “FOMO” (fear of missing out), in today’s texting parlance. Through a better understanding of the psychological dynamics of bubble mentality, we hope to help investment managers better grasp the complex role they must play when their concern for poor expected returns and higher levels of risk  are pitted against their client’s fear of not keeping pace with the market.

Candid Camera

Allen Funt and Candid Camera filmed a famous episode designed to show how humans tend to behave like each other, regardless of the logic in doing so. In their experiment, an unknowing man entered an elevator, followed shortly by a few Candid Camera actors. After entering the elevator, the actors faced the rear of the car. The man, clearly befuddled, slowly turned around and faced the rear of the elevator. In a second skit, another man not only followed the actors and actresses facing backwards, but then proceeded to rotate back and forth with the crowd. As the skit goes on, he also removes his hat and puts it back on following the actions of the actors and actresses.

While the skits were meant to be humorous, they clearly highlight the innate desire that humans have to follow the actions of others, regardless of whether there is any sense or logic in such actions. The Candid Camera skits can be viewed by clicking here.

Bubbles and Elevators

From time to time, financial markets produce a similar behavioral herding effect as those described above. In fact, the main ingredient fueling financial bubbles has always been a strong desire to do what other investors are doing. As asset bubbles grow and valuation metrics get further stretched, the FOMO siren song becomes louder, drowning out logic. Investors struggle watching from the sidelines as neighbors and friends make “easy” money. One by one, reluctant investors are forced into the market despite their troubling concerns.

Justification for chasing the market higher is further reinforced by leading investors, Wall Street analysts and the media which use faulty logic and narratives to rationalize prices trading at steep premiums to historical norms. Such narratives help investors convince themselves that, “this time is different”, despite facts evidencing the contrary.

To better appreciate the history of financial bubbles and the behavioral traits they seem to share, we recommend reading “Manias, Panics, and Crashes” by Charles Kindelberger. In the book, Mr. Kindelberger gives detailed analysis of numerous financial bubbles that were built on false premises and wild popularity.

Limiting Losses Redux

In “Limiting Losses” we detailed the basic math that explains how consistent positive returns, even if relatively small, provide a powerful compounding effect that has proven to be an efficient way to accumulate wealth. Such a “boring” investment style tends to outperform one with a volatile path that includes larger gains but significant losses on occasion. It is with this conservative mindset that investment managers should focus on the task of building wealth over the long term and aim to avoid the pitfall of large drawdowns at all cost. This logic is equally appropriate at market bottoms. Some of the greatest investment opportunities have occurred when the majority of investors were panicked and selling despite compelling valuations.

Dare to be Different

As a fiduciary of your client’s wealth, you are paid and trusted to quantify and understand the potential risks and rewards and invest their wealth accordingly. You cannot fall prey to periods of grossly unwarranted market optimism, nor should you be shy to invest during periods of deep pessimism. Avoiding these natural instincts, like not turning with the crowd in an elevator, is difficult to put it mildly.

While there are many ways to keep a level-headed approach, we think there are two concepts investment managers should consider:

Investment Strategy and Goals

Create appropriate investment strategies that encourage steady, long term returns. To do this, managers must have rules in place to limit exposure to assets that are overpriced, and increase exposure to those that are underpriced. They should also encourage clients to allow inclusion of a wide variety of permissible assets to make this task easier. Furthermore, understanding the correlation between portfolio assets during severe market drawdowns and periods of crisis is a key risk management metric that should be closely followed.

The task above is made easier when clients have clear and concise objectives that stress long term wealth management. When managers benchmark their clients’ performance to that of the stock and/or bond market, they are blindly aiming for a return that does not correspond with their clients’ wealth objective, but to the whims of other investors. A clear wealth building objective would be to outperform inflation by a given margin or, in other words, increase purchasing power. That said, we know most managers and their clients are programmed to compare investment results to market returns. To see the problem with such a goal, consider a manager who in 2008 said “we were only down 30%, while the market dropped 50%, didn’t we do well?”  NO!!! The clients’ wealth decreased significantly.

Obviously, proper investment management and strategic goal setting is a complex and time consuming job. We do not make light of that or the “way things are done” by the vast majority of investment managers. Our point is to stress that when you buy what is cheap, sell what is expensive and sit on additional cash at appropriate times, your odds of long term investing success increase dramatically. As Warren Buffett said, “the stock market is a no-called-strike-game”. Successful investors understand that you can look at as many pitches as you wish until you get one you know you can hit – the proverbial “fat pitch”.

Client Education

The second requirement for taking an out-of-favor investing posture is properly educating clients on that approach and managing their expectations. First, clients need to understand and be consistently reminded that your goal is to grow their wealth over the long term, which is best done by avoiding losses. Contrast this perspective with the anxiety most investors feel because their returns are not keeping up with the Dow Jones Industrial Average or their neighbors’. Waiting for good opportunities and avoiding losses is the long game of wealth creation. Eliminating the short-term view of wealth management that most investors harbor is important.

The hardest part of helping clients understand this goal is convincing them that, at times like today, the market is fraught with risks. Ironically, such an environment fosters a sense of urgency, FOMO and a perceived need to “chase returns”.

In order to help investors understand the approach, a manager must clearly, succinctly and repeatedly explain their thesis on markets, particular investments, and economics. A client can more easily avoid popular investment urges when their manager has explained the logic behind a posture that is more conservative or aggressive than the norm. This can be accomplished through frequent verbal and written communication.

Summary

TINA is another popular acronym – “There Is No Alternative”. We think there is an alternative to chasing assets whose valuations imperil client wealth.  Focus on the fundamentals that underpin stock prices and own securities that are appropriate given the risk/reward objectives. Though it is especially difficult to be a contrarian at such times, the reward for doing so is preservation of wealth and the assurance of excellent value opportunities in the future.

FOMO can also be thought of as FONC “fear of not conforming”. As a steward of your client’s wealth, it is imperative that at market junctures like the present one, special care is taken to understand the risks and allocate investments accordingly. Timing the market is impossible, but keeping an eye on the long term goals will help your clients avoid the pitfalls (i.e. losses) that inevitably set investors back years. Equally damaging at that point is the inability to take advantage of the multitude of opportunities that no doubt will emerge.

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The hacker known as "Guccifer 2.0" recently uploaded new material to his website which he claims to have received courtesy of Nancy Pelosi's PC.  The new release includes several internal memos from DCCC staff as well as talking points on various topics.

Among the most interesting of the new disclosures is a memo from Troy Perry with talking points on how candidates and campaign staff should address various topics related to the Black Lives Matter movement.  The memo notes that "presidential candidates have struggled to respond to tactics of the Black Lives Matter movement"  and refers to the group as a "radical movement to end "anti-black racism."  Perry also warns not to use "trigger" phrases like "all lives matter" or "black on black crime."  The memo goes on to offer the following "Background" and "Tactics" for "best practices" when dealing with Black Lives Matters members:

“This document should not be emailed or handed to anyone outside of the building.  Please only give campaign staff these best practices in meetings or over the phone.”

 

"Be a Partner & Lead From Behind.  BLM needs partners to achieve their agenda and they want to be a part of the conversation."

 

“However, BLM activists don’t want their movement co-opted by the Democrat Party.  They are leary of politicians who hijack their message to win campaigns.”

 

“Do not say ‘all lives matter’ nor mention ‘black on black crime’.  Such phrases are “viewed as red herring attacks,” and such a response “will garner additional media scrutiny and only anger BLM activists.” noting that “This is the worst response.”

According to RT News, Perry no longer works for the DCCC and is now a member of the Hillary campaign.

 

Another controversial memo was written by DCCC Executive Director Kelly Ward to DCCC Chair Steve Israel of New York ahead of a Congressional Hispanic Caucus BOLD Political Action Committee weekly breakfast in October 2013.  Within the memo, Ward notes several sore points that the CHC has with the congressional committee including the "“lack of Hispanic staff at the DCCC, particularly at senior levels.”  Per RT News:

The biggest problem is the “lack of Hispanic staff at the DCCC, particularly at senior levels,” she wrote, noting several ways in which the committee is addressing their concern, including asking Israel to acknowledge the work of the DCCC’s CHC liason, “who has played a critical role in our Hispanic outreach efforts this cycle.” Ward also asked him to mention open positions with the committee.

 

“CHC members are divided on their support of DCCC’s Candidate Mayor Pete Aguilar (CA-31).  It is in your talking points to acknowledge their divided support for Baca/Aguilar,” she wrote. “The CHC Members might ask you about Luz Robles, UT-02 Latina candidate. DCCC’s political team has been in contact with CHC BOLD PAC staff regarding this race, although it is not a competitive district.”

 

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