Month: June 2020

Authored by Bryce Coward via Knowledge Leaders Capital blog,

Regular readers of our content know that we have been building the case for several years now on why gold deserves a place in diversified portfolios. Sure, we see significant upside in gold (unlimited upside, in fact), aided as I will show by the unprecedented rise in US dollar money supply in response to the COVID crisis. But the case for gold is much deeper than simply a story of potential capital appreciation.

These days, gold as an asset class is in an entirely unique position to not only provide upside potential, but also provide a layer of diversification within a portfolio that neither stocks nor risk-free nominal bonds can achieve on their own or even together. Much of this has to do with the rather disadvantageous position of risk-free bonds at the moment that have brought us to the death throes of the 60:40 portfolio. Indeed, with risk-free rates so close to zero (even on the long end), bonds simply don’t have enough convexity (aka capital appreciation potential) left in the tank to act as a sufficient diversifier of equity risk. After all, if the 10-year bond yield drops to 0.00% from the current 0.68%, that would provide owners of that bond with a whopping 6% capital appreciation, which is not nearly enough to cushion a 20% or 30% equity selloff.

Now, things may be different if the Federal Reserve was open to the idea of setting the Fed Funds rate at -3% or -4%, but that idea has been sufficiently brushed into the dusk bin. Instead, the Fed appears more likely to add some form of yield curve control to its policy toolbox. This will relegate risk-free bonds to a purgatory of sorts in which they can provide neither income nor capital appreciation potential of any magnitude.

Conversely, gold provides both capital appreciation potential as well as diversification to equity risk. Said in modern portfolio theory parlance, gold has the potential to bring one’s portfolio closer to the efficient frontier. That can no longer be said of nominal risk-free bonds.

Now, let’s get to some charts to illustrate these points.

The fundamental case for higher gold prices is really quite simple. While many view gold as an asset class that rises when inflation expectations or actual inflation rises, it’s even simpler than that. The quantity of gold is relatively fixed. The quantity of money is not. Therefore, when the quantity of money rises, the price of gold as priced in terms of that form of money must also rise. Sure, inflation may be a consequence of a rising money stock (Milton Friedman’s “inflation is always and everywhere a monetary phenomenon”), but it also may not be (see 2009-2019).

So from an empirical perspective, we observe that gold has a closer relationship with the quantity of money in the economy than it does actual inflation. The first chart below shows the US dollar price of gold compared to United States M2 money supply. The price of gold tracks the quantity of money quite well, with some deviations from trend that have always corrected over a fairly short period of time (see the late 1970s-1980s, early 2000s, 2010-2011).

Another way to show this idea is to plot the price of gold relative to the money supply. What we observe is a flat overall trend with the bulk of the distribution concentrated around a rather narrow central tendency (blue bars on the right of the chart show the distribution of observations). Sure, the price of gold is not entirely a function of the quantity of money, otherwise the line would be flat as a pancake, but it’s close enough for government work.

Now, when we do the same exercise again and plot the price gold relative to consumer prices, we see something entirely different. First, the trend is not flat, but has a positive slope. Second, the distribution of the series is not concentrated around a narrow central tendency, but instead the distribution itself (blue bars on the right) is kind of flat. Basically, this chart shows that gold really is a rather imperfect inflation hedge. The other explanation is that our measurement of consumer prices is imperfect, but that is a topic for another day.

Since the price of gold generally rises with the with the quantity of money, it makes perfect sense that gold would perform well with the M2 money supply growing at 23% YoY, as it is currently.

Further, it doesn’t take much extrapolation or imagination to see the path toward continued fast money growth. After all, with policy rates at 0.00%, the remaining tools of fiscal spending that is funded by an ever-growing Fed balance sheet (i.e. money growth) makes logical sense at this juncture.

With the fundamental case for higher gold prices out of the way, let’s move onto gold’s application as a portfolio diversifier. The reason it makes sense to form multi-asset portfolios vs all-equity portfolios is that equity risk hard to diversify away with a portfolio of… equities. Indeed, even as there exists idiosyncratic risk exposures of individual stocks, there are market forces of demographics, interest rates, productivity levels, economic growth rates, etc. that affect both public and non-public equities. One way to show this concept is simply to plot the average correlation between stocks in the S&P 500. The average correlation between the S&P 500 constituents ranges from 40-60% in normal times and then rises towards 100% in selloffs (see early 2018, late 2018, early 2020). In other words, all that idiosyncratic risk exposure of equities as an asset class (both public and private as we recently learned) gets tossed out the window in a selloff and one’s “diversified” equity portfolio morphs into market risk only, or beta.

It used to be that long-term Treasury bonds could be used as a diversification tool to cushion the blow of equity selloffs because they typically appreciated a lot during market drawdowns. We can show this by plotting the correlation between US stocks and long-term bonds in the bottom panel in the next chart. Since 2014, long bonds were nearly always negatively correlated with stocks and had a central tendency of -10% correlation to -40% correlation. That negative correlation is what you want from a hedge, or diversifier. But, you also need capital appreciation potential from that hedge. Bonds don’t have that anymore, as I previously showed.

What about inflation protected bonds? TIPS don’t have an interest rate floor the same way nominal bonds do. Theoretically, TIPS yields could trade severely negative if the Fed caps 10-year nominal bond yields at say, 0.50%, while actual inflation runs at 3% or 4%. TIPS also have a negative correlation with stocks just like nominal bonds as we see in the next chart. So, it appears, that TIPS may still have a place in a diversified portfolio as a hedge.

Now, let’s turn to gold. Gold exhibits the same negative correlation with stocks that both the nominal bonds and TIPS do. However, unlike nominal bonds it has no theoretical upside. And unlike TIPS, gold may appreciate in price independent of actual or expected inflation trends.

That is not to say, however, that gold and TIPS aren’t related. Indeed, gold and TIPS sport an average correlation between +40% to +60% (chart below).

This compares to a negative correlation between nominal long-term bonds and gold (chart below).

But the drivers in their price are different enough to justify places for both asset classes in a diversified portfolio. Indeed, gold has outperformed TIPS by 20% over the last 12 months and is undergoing what a technician might call a base breakout vs TIPS (chart below).

This action undoubtedly is a result of that growing supply of money to offset what is admittedly a hugely deflationary economic backdrop currently.

A Facebook content moderator has come forward to reveal rampant bias against conservatives at the social media giant.

Ryan Hartwig, an Arizona-based Facebook content moderator for third-party contractor Cognizant, says he witnessed egregious double-standards both targeting conservatives or favoring liberals.

“I was seeing them interfering on a global level in elections. I saw a blatant exception that just targeted conservatives or favored liberals—and you know, we’re deleting on average 300 posts or actioning 300 posts a day,” said Hartwig, adding “If you magnify that by however many content moderators there are on a global scale, that’s a lot of stuff that’s getting taken down.”

Hartwig wore a hidden camera to document reviewing of content and office interactions. In an interview with Project Veritas CEO James O’Keefe, Hartwig said although he signed a confidentiality agreement, he could no longer ignore the suppression of Facebook content supporting President Donald Trump, Republican causes or the conservative agenda with a massive exception to the company’s public position on protecting political speech across the platform. –Project Veritas

“That was the tipping point. Knowing about what I knew about how they were giving exceptions for the policy, I knew that it was likely that it was happening elsewhere on a global scale,” said Hartwig. “Just seeing such blatant bias from Facebook really bothered me.”

*  *  *

Read more via Project Veritas (emphasis ours):

Content Moderators Express Hostility to Trump, His Supporters

One of the moderators Hartwig recorded was Israel Amparan, who he said typifies the worldview of most of the content moderators he encountered.

“Trump supporters are f*cking crazy *ss *ssholes, that every other f*cking word out of their mouth is you know ‘Come take it,’ ‘Seal the border,’” said Amparan. “Come take it” refers to the “Come and Take It” slogan Texan colonists put on their flag after the Mexican government demanded they turn in their cannon.

Amparan said he targeted content by Trump supporters because it scared him.

“I hate government as much as the next f*cking person, but you’re not gonna catch me riding over the f*cking. It’s like impeachment. It’s like a PRAW. Trump called it a f*cking coup–and it’s like that should scare you more than anything.” A PRAW, or Python Reddit API Wrapper, is a Reddit program to allow user to more quickly and easily post on Facebook.

Hartwig also videotaped Steve Grimmett, who is a team lead at Facebook-Cognizant’s content review—and who said Trump supporters are in the same speech category as Hitler, under the Facebook policy on Dangerous Individuals and Organizations.

“One of my projects before now was, was hate,” Grimmett said. “I’ve spent quite a bit of time looking at pictures of hate organizations, Hitler, Nazis, MAGA, you know, Proud Boys, all that stuff all day long.” MAGA is the acronym for Trump’s 2016 slogan: Make America Great Again.

Facebook CEO Mark Zuckerberg testified before Congress the only speech Facebook targets for deletion is speech advocating hate, violence and terrorism, but not political speech.

Facebook Waived Hate Speech Policies to Advance its Pro-Pride/LGBTQ Agenda

One example was when Facebook-Cognizant policy and training manager Shawn Browder told all the content moderators in Hartwig’s section for the 2018 Pride Month hate speech would be allowed to stay up if it was in support of the LGBTQ agenda.

Hartwig said Browder told the moderators to implement the special policy, which in the case of Pride Month allowed attacks on a single group of people, quoting Browder: “Hey, we’re making the exceptions for our policy to favor the, LGBT community.”

O’Keefe: Hate speech is allowed if it’s ‘intended to raise awareness for pride LGBTQ,’ so hate speech is allowed in some cases, but apparently not others?

Hartwig: Yeah.         

According to a screenshot of the policy captured by Hartwig:

Anything that is a delete per our Hate Speech policies but is intended to raise awareness for Pride/LGBTQ. This may occur especially in terms of attacking straight white males.”

Hartwig also videotaped Steve Grimmett, who is a team lead at Facebook-Cognizant’s content review—and who said Trump supporters are in the same speech category as Hitler, under the Facebook policy on Dangerous Individuals and Organizations.

“One of my projects before now was, was hate,” Grimmett said. “I’ve spent quite a bit of time looking at pictures of hate organizations, Hitler, Nazis, MAGA, you know, Proud Boys, all that stuff all day long.” MAGA is the acronym for Trump’s 2016 slogan: Make America Great Again.

Facebook CEO Mark Zuckerberg testified before Congress the only speech Facebook targets for deletion is speech advocating hate, violence and terrorism, but not political speech.

Hartwig also told O’Keefe he witnessed how Facebook carves out exceptions in its speech policies if the speech boosts its own political agenda.

Facebook Waived Hate Speech Policies to Advance its Pro-Pride/LGBTQ Agenda

One example was when Facebook-Cognizant policy and training manager Shawn Browder told all the content moderators in Hartwig’s section for the 2018 Pride Month hate speech would be allowed to stay up if it was in support of the LGBTQ agenda.

Hartwig said Browder told the moderators to implement the special policy, which in the case of Pride Month allowed attacks on a single group of people, quoting Browder: “Hey, we’re making the exceptions for our policy to favor the, LGBT community.”

O’Keefe: Hate speech is allowed if it’s ‘intended to raise awareness for pride LGBTQ,’ so hate speech is allowed in some cases, but apparently not others?

Hartwig: Yeah.         

According to a screenshot of the policy captured by Hartwig:

“Anything that is a delete per our Hate Speech policies but is intended to raise awareness for Pride/LGBTQ. This may occur especially in terms of attacking straight white males.”

Example: “Straight white males are filth for not fighting more on behalf of LGBTQ.”

‘No one has the white man’s back anymore’

Hartwig also told O’Keefe he himself was targeted at work for being a white male. This cultural bias was documented in a previous Project Veritas undercover investigation, when a PV journalist recorded Leslie Brown, who was a human resources contractor for Google and who now works at a human resources executive at Facebook, talking about the ease of firing a white male without repercussions or any due diligence requirements. 

Project Veritas Journalist: I mean, they were able to fire him without having to worry about discrimination.

Brown: Due diligence, right. Because he’s a white man. Yeah, white man. No problem. You can’t do it that easily if there are other issues.

Journalist: Oh, it’s easier when they’re-          

Brown: White man. 

Journalist: Yeah, no protected class. 

Brown: No one has the white man’s back anymore.

O’Keefe said Project Veritas still targets Facebook and other social media giants for more investigations—and those investigations are propelled by insiders like Hartwig and the other Facebook insider Zach McElroy, who was featured in the first video released from this investigation into Facebook’s content moderation policies and practices.

As June started, Nomura’s Charlie McElligott warned of the Option-expiration line in the sand this month that could ruin (albeit briefly) the V-shaped recovery narrative in stocks:

“It is then VERY IMPORTANT to turn our attention back to the sequencing of the month – particularly as there might then be “two trades” based around the first two weeks of June being the “historically risk / equities bullish” trade up into Serial / Quarterly June Options Expiration, vs the last two weeks of June being more “defensively” postured.”

Given this week’s post-op-ex plunge, it would appear the cross-asset strategist nailed it.

However, the question is – what happens next?

The last three weeks are exactly how it was supposed to look all along – the “trade up into-, trade down out of-“ the June serial options expiration phenomenon finally kicking-in.

As history shows, the more robust the trade “UP” was into June Op-Ex, the larger the down-trade thereafter (from 1993):

While this week’s weakness has been pinned on second-wave COVID concerns, McEllligott notes some more technical factors that are more likely to the drivers:

The gamma “unclenching” (after last Friday’s large quarterly expiration options de-risking) would allow for a broader distribution of trading outcomes this week due to reduced Dealer hedging flows which had been suppressing the range, in conjunction with overwriter call “rolling” flows abating, the corp “buyback blackout” commencement and qtr-end pension rebalancing out of stocks into bonds all conspiring to send index lower… just as the seasonal phenomenon has conditioned us to expect in the back-part of June, which already sees a period of “Defensives over Cyclicals” leadership.

The aforementioned catalysts then grew particularly interesting due to the anticipated clustering this week of 1) the Dealer “gamma flip” level (from “long” to “short”) around the same 3050-3080 approximate location over the course of the week where too we expected 2) CTA deleveraging in the legacy S&P futures “+100% Long” signal, which triggered on the close below 3053 yesterday and was likely a large part of the flow on the trade down to 3005 overnight (the S&P signal is now “-28% Short” FWIW), both of which would act as “accelerant” flows on a move lower.

Dealers are now even more incrementally deeper “Short Gamma”:

And now, here we are in the June Op-Ex day-count analog:

And so, as McElligott notes, here’s the good news for longs:

Due to the ferocity of this down-trade (-4.5% from Tuesday high to the overnight low), we have already achieved DOUBLE the median downside trade typically experienced for the 2w window post Op-Ex

As such, the Nomura MD suggests (going back to the second chart above), we can see that the 1m-, 2m-, 3m-, 6m- and 12m- out median returns turn incrementally bullish again – and also come with very high “hit rates,” higher 76%, 71%, 76%, 76% and 88% of the time, respectively. Additionally, McElligott points out that he expects the TVIX delisting (and its recent ~85m of Vega) to lean on front VIX futures over the ~1m, especially as its not certain that this exposure will go 1:1 back into other remaining VIX ETN products, as it is almost exclusively a retail spec trading vehicle and not a “holding”.

And so, at this point, McElligott thinks the next trade sets up pretty bullishly for the next 1-2m, with potential for a “stocks up, USTs down / yields up” trade – especially as clients have continued to voice a desire to “buy the dip” into negative earnings revisions (a +++ for fwd S&P returns), and too with the recently highlight mentions of ongoing re-allocation into Equities exposure from the Vol Control universe (which likely then too could look like Variable Annuity “sell” flows out of USTs)…

…and all with a fresh CTA “Equities Short” base as fodder for a squeeze higher into any additional macro relief after this latest “wave 2” swoon (perhaps as investors grow numb to “case growth” and instead theoretically see hospitalization rates remain low).

Here’s Charlie explaining the way forward on CNBC this morning:

Nomura’s McElligott breaks down a technical analysis of market volatility from CNBC.

Authored by Carrie Sheffield via JustTheNews.com,

Even though new coronavirus infections are rising in America and around the world, new coronavirus deaths are largely flat, a trend largely missing from most mainstream media coverage.

Experts say the fact that new coronavirus deaths appear to remain flat is driven by more younger patients getting infected and recovering amid reopenings as the worst of the pandemic passes. 

On Wednesday evening, the Washington Post issued a breaking news email alert headlined “New coronavirus cases in the U.S. soar to highest single-day total.”

“Across the United States,” reported the Post, “more than 36,000 new infections were reported by state health departments on Wednesday — surpassing the previous single-day record of 34,203 set on April 25.”

Yet the article failed to mention that even while new infections are on the rise, new COVID-19 deaths are not. 

This vital information gap in the media is causing some health policy experts to worry that fear about the coronavirus — evidenced, for example, by Wednesday’s sharp stock market drop — is not founded in facts, particularly about how the virus disparately impacts different age groups. The spreading of unfounded alarm, the experts fear, could risk deep harm to Americans’ livelihoods and mental health due to a prolonged, widespread shutdown. 

The coronavirus has ravaged elderly populations in nursing homes and those with underlying comorbidities, but now the virus appears to be striking those who are younger and healthier and more able to withstand the disease and return to life normally. 

Vanderbilt University School of Medicine professor Dr. William Schaffner, who specializes in preventive medicine and infectious diseases, noted in an interview with Just the News that for example, in Florida, reports indicate that it is middle-aged and younger adults now being hit with COVID-19. 

Data from Oxford University show that even though the confirmed daily reported COVID-19 cases have been ticking up in the United States in recent days (as testing has soared), daily confirmed deaths have not risen. 

Similar trends are seen worldwide, according to Oxford: Daily confirmed cases have been rising, but daily confirmed deaths have not. 

“The data has made it clear that the impact of COVID-19 on those in long-term care facilities or older adults with underlying conditions has been devastating, and more cautious policies are suggested,” Joshua Archambault, a senior fellow in healthcare policy at the Foundation for Government Accountability, told Just the News.

“But for younger adults, if local hospital capacity is not an issue, then more open policies can be recommended, as long as they are paired with the common-sense best practices that most know to follow already.” 

Archambault recommended that to find a sustainable “new normal” leaders should analyze data daily or weekly to update any advice to citizens, instead of blanket recommendations or mandates for citizens based on older data. 

“Without nuance, individuals’ economic lives are ruined, and the negative impacts of isolation can set in, leading to more domestic violence, and suicide,” Archambault said.

“There are two sides to pandemic shutdowns. This will mean different recommendations for different groups and will reflect local concerns related to hospital capacity. That is why looking at just one data source is not enough. Leaders should be looking at running averages for hospital admission rates, mortality rates, and infection rates by different groups to make recommendations.” 

The Supreme Court handed the Trump administration a big victory on Thursday, allowing for the expedited deportation of some asylum seekers, who won’t be allowed to argue their case to a federal judge.

In a 7-2 ruling written by Justice Alito (and included Breyer and Ruth Bader Ginsberg in the majority), immigrants who fail their initial asylum screenings will be eligible for expedited removal, according to AP.

The ruling comes in the case of a Sri Lankan man who slipped into the US from Mexico. He was quickly arrested, but was unable to convince immigration officials that he would face danger if forced to return.

The high court reversed a lower-court ruling in favor of the man, Vijayakumar Thuraissigiam, who was placed in expedited removal proceedings that prohibit people who fail initial interviews from asking federal courts for much help.

Since 2004, immigration officials have targeted for quick deportation undocumented immigrants who are picked up within 100 miles of the U.S. border and within 14 days of entering the country. The Trump administration is seeking to expand that authority so that people detained anywhere in the U.S. and up to two years after they got here could be quickly deported. –AP

The Trump administration has long argued that the immigration system is rife with abuse and inundated with claims that have no merit. This was reinforced by Thursday’s ruling, which notes that “In 2019, a grant of asylum followed a finding of credible fear just 15% of the time.”

Dissenting were justices Sotomayor and Kagan, who argued that granting “functionally unreviewable” expedited removal proceedings “flouts over a century of this Court’s practice.”

“Today’s decision handcuffs the Judiciary’s ability to perform its constitutional duty to safeguard individual liberty and dismantles a critical component of the separation of powers,” wrote Sotomayor. 

On Monday, the Trump administration published new rules which would make it far more difficult to gain asylum, which will take effect after a 30-day period for public comment.