iftttwall

The President will deliver statement explaining, we assume, why Harry Reid’s “nuclear option” vote is good for all American citizens…

 

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The President will deliver statement explaining, we assume, why Harry Reid’s “nuclear option” vote is good for all American citizens…

 

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For all purists still stuck in a world in which humans are the most efficient allocators of capital, and where, under Ben Bernanke’s centrally-planned New Normal, shorting stocks has become blasphemy, the following table showing the monthly return of quant giant RenTec’s chief equity fund open to the outside world, the Renaissance Institutional Equities Fund (RIEF B), whose AUM has ballooned to $8.7 billion in the past few years, will come as a shock. Because the quant strategy-driven fund, which does not look at fundamentals but purely at technical relationships and quant arbs, just posted its best month in history in October returning 8.65% nearly doubling the 4.60% return of the broader market.

But the truly stunning aspect of RenTec’s October performance is that it was not driven by a highly levered beta position (2x leverage on the S&P would do it easily) which is how virtually everyone else does it (a strategy that works great as long as the market is going higher), but instead thanks to that nearly forgotten aspect of a “hedge” fund’s exposure – shorts.

From RenTec:

Where did RIEF’s alpha come from? The answer is that it came from the short portfolio. In fact, we made so much alpha in the short portfolio that we made positive profits from our short positions despite the S&P 500’s 4.6% return in October. Drilling down further, we note that almost half of RIEF’s alpha was made in the Barra Biotechnology and Drugs industries. Within those industries, RIEF is short in many of the smaller and (presumably) more speculative names. Those issues fared particularly poorly in October as the two industries combined had a cap-weighted return of 2.8% but a flat-weighted return of -4.3%. Since RIEF is long overall in Biotechnology and Drugs, but made its alpha in the short portfolio, the fund’s gains are a result of stock selection rather than sector or industry selection.

 

The good news: alpha generation still works. The bad news: one has to be a math genius or a robot to figure out how to do it. For everyone else – especially those 90% of hedge funds underperforming the S&P for the fifth year in a row – the Pied Piper of Marriner Eccles has an unbeatable deal on all time high beta-chasing margin debt.

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The following five themes (and three bonus ones) are what UBS Andrew Cates believes will be of the greatest importance for global economic and capital markets outcomes for the next five years. There is little to surprise here but the aggregation of these factors and the increasingly binary outcomes of each of them suggest there may be a little more uncertainty about the future than most people sheepishly admit…

 

Via UBS,

We highlight five themes we expect will be dominant for global economic and capital market outcomes over the next five years. For the curious, we also mention a few themes that didn’t quite make the cut, but are nevertheless worthy of consideration.

#1 Right-sizing monetary policy

Cleary, a major challenge facing central banks at some point in the next five years will be restoring ‘normality’ to monetary policy. The first task, in all probability, will be right-sizing bloated central bank balance sheets (followed by a normalisation of policy rates). The challenges for the central bankers—and market participants—are both unprecedented and enormous. How will central banks manage that process? Can they manage it? What will be the implications for real economic activity, capital flows and asset prices? Those are all topics we’ll explore in this theme.

#2 Right-sizing fiscal policy

As if monetary policy weren’t enough, fiscal policy in many economies—advanced and emerging—requires right-sizing as well. For some, the focus is on deficit reduction. For others, it is debt stabilisation. And for still others, it is meeting demographic challenges to government spending and tax revenues. For some, it is all of the above.

#3 Age of plutocracy

In many advanced economies returns on capital—physical and human—have soared. Income and consumption distribution have become more skewed. Yet, populist backlashes against unequal outcomes are relative tepid. Indeed, business seems to be getting its way politically—witness the reality of more corporate tax cuts than hikes in recent years or the new-found will to press ahead with globalisation via free-trade deals spanning (much of) the Pacific and the Atlantic. How long can an era of plutocracy last? What challenges lie ahead?

#4 A world not re-balanced

Although current account imbalances have shrunk since the outbreak of the financial crisis, much of the decline is due to recession and subpar recovery. Sources of domestic demand are few and largely concentrated in the US. Emerging economies, once the poster children for domestic-led growth and re-balancing, are now facing debt hangovers. Emerging economies, along with Europe and Japan, are returning to a greater reliance on net exports as their chief drivers of growth. The consequence is a return to a world of imbalanced growth. What are the implications for the world economy and asset pricing?

#5 Technological innovation

New technologies applied to energy extraction, information systems and manufacturing hold great promise for lifting potential growth around the world. How big might the impact be on real output? Who are the likely winners and losers of the next technological revolution? What are the implications forinvestment returns?

Finally, we felt it important to consider key themes that didn’t quite make the cut into our top-five. That doesn’t mean they won’t occasionally capture the attention of investors and policy makers. But in our opinion they aren’t likely to be as durably important as the five we’ve listed above. Here are some of those candidates:

Eurozone risk

Just because Eurozone sovereign risk premiums have declined does not mean all is permanently solved. The European monetary union remains incomplete and hence fundamentally flawed. Moreover, the prospects for a more robust re-design of the Eurozone—which would include a banking union with single resolution authority and mutualised deposit insurance, plus enhanced labour mobility or fiscal transfers—remain bleak. So, too, do the prospects for re-employing the millions left jobless in Europe’s periphery, chief among them young people. Against that backdrop, ‘exit’ or ‘breakup’, but also political stress, will form a spectre hanging over the single currency project for considerably longer.

Japan rising? Or Japan setting?

‘Abenomics’ is not hype. It’s decisive. If Japan can restore inflation, achieve a reasonable rate of GDP growth, raise potential output, and rein in its explosive debt dynamics, it and the world economy will be vastly better off. Investors would have much to cheer. But if ‘Abenomics’ fails, Japan will probably return to its deflationary malaise of recent years and could be potentially on an irreversible course to default via hyper-inflation. A great deal is at stake. How will it turn out?

Emerging reforming? Or emerging deforming?

As we have noted in a series of reports over the past two years, productivity growth is slowing rapidly in emerging economies. Equally, relative returns on capital are slumping. And debt trajectories are unsustainable in many emerging economies, including China. A common prescription is required to get emerging back on track: Reform. To be sure, the required reforms differ considerably from country to country, but the overarching question is whether emerging politics and policy can deliver. We’re sceptical, not because the challenges aren’t recognized (witness the reform language of China’s 3rd Plenary session or of Mexico’s reformminded president). Rather, reformers are up against vested interests, such as the banks and state-owned enterprises in China, nationalism in Mexico, or business, labour and legal opposition in India. Absent a crisis, reform is politically very difficult and, for now, most of the emerging complex is not sufficiently in crisis mode to embark on reform.

 

 

[ZH: So apart from all that… why not BTFATH?!!]

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Submitted by John Rubino of the Dollar Collapse blog,

Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” Soon, we were told, China and India’s billions would enter cyberspace. And after they were happily on-line, the Internet would morph into versions 2.0 and 3.0 and so on, growing and evolving without end. So don’t worry about earnings; this is a land rush and “eyeballs” are the way to measure virtual real estate. Earnings will come later, when the dot-com visionaries cash out and hand the reins to boring professional managers.

During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.”

Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. They only happen if a country decides to stop depressing interest rates – and why would they ever do that? Here’s an article out of the UK that expresses this belief perfectly:

Our debt is no Greek tragedy

“The threat of rising interest rates is a Greek tragedy we must avoid.” This was the title of a 2009 Daily Telegraph piece by George Osborne, pushing massive spending cuts as the only solution to a coming debt crisis. It’s tempting to believe anyone who still makes it is either deliberately disingenuous, or hasn’t been paying attention.

The line of reasoning goes as follows: Britain’s high and rising public debt causes investors to take fright and sell government bonds because the UK might default on those bonds.

 

Interest rates then spike up because as less people want to hold UK debt, the government has to pay them more for the privilege, so that the cost of borrowing becomes more expensive and things become very, very bad for everyone.

 

This argument didn’t make sense back in 2009, and certainly doesn’t make sense now. Ultimately this whole Britain-as-Greece argument is disturbing because it makes the austerity project of the last three years look deeply duplicitous.

 

If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.

 

Why? Because the Bank directly controls the interest rate on short-term government debt, so it can vary it at will in line with any given objective. Interest rates on long-term government debt are governed by what markets expect to happen to short term rates, and so are subject to essentially the same considerations.

 

It doesn’t matter if investors get scared and dump government bonds because this has no implication for interest rates – it is what the Bank of England wants to happen that counts.

 

If investors do suddenly decide to flee en masse, the Bank can simply use its various tools to bring interest rates back into line.

 

The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.

 

Greece and the other troubled Eurozone countries are in a totally different situation. They don’t have their own currency, and have a single central bank, the ECB, which tries to juggle the needs of 17 different member states. This is a central bank dominated by Germany, which apparently isn’t bothered by letting the interest rates of other nations spiral out of control. Investors, knowing this, made it happen during the financial crisis.

 

On these grounds, the case of Britain and those of the Eurozone countries are not remotely comparable – and basic intuition suggests steep interest rate rises are only possible in the latter.

 

Britain was never going to enter a sovereign debt crisis. It has everything to do with an independent central bank, and nothing to do with the size of government debt. How well does this explanation stand up given the events of the last few years? Almost perfectly. The US, Japan and the UK are the three major economies with supposed debt troubles not in the Eurozone.

 

The UK released a plan in 2010 to cut back a lot of spending and raise a little bit of tax money. The US did nothing meaningful about its debt until 2012, and has spent much of the time before and since pretending to be about to default on its bonds. Japan’s debt patterns are, to put it bluntly, screwed – Japan’s debt passed 200 per cent of GDP earlier this year and is rising fast.

 

But the data shows that none of this matters for interest rates whatsoever. Rates have been low, stable and near-identical in all three countries regardless of whatever their political leaders’ actions.These countries have had vastly different responses to their debt, and markets don’t care at all.

 

By the same token, the problems of spiking interest rates inside the Eurozone have nothing to do with the prudence or spending of the governments in charge.

 

Spain and Ireland both had debt of less than 50 per cent of GDP before the crisis and were still punished by markets. France and the holier-than-thou Germany had far higher debt in 2007, and are fine.

 

The takeaway is that problems with spiking interest rates amongst advanced countries are entirely restricted to the Eurozone, where there is a single central bank, and have no obvious relation to the state of public finances.

 

So what we have, then, is a disturbingly mendacious line of reasoning . Back in 2010 the Conservative party made a perhaps superficially plausible argument about national debt that was wrong then and is doubly wrong now. They then – sort of – won a mandate to govern based on this, and used it to radically alter the size of the state. The likelihood that somehow this was all done in good faith beggars belief.

 

Britain has had a far higher proportion of austerity in the form of spending cuts than tax rises relative to any comparator nation. On this basis austerity is a way of reshaping the state in the Conservative image, flying under the false flag of debt crisis-prevention.

 

If the British public had knowingly and willingly voted for the major changes made under the coalition in how the go
vernment taxes, spends and borrows, this wouldn’t be such a great problem.

 

Instead, they were essentially conned into it by the ridiculous story of Britain as the next Greece.

Some thoughts
What’s great about the above article is that it doesn’t beat around the bush. Without the slightest hint of irony or historical sense, it lays out the bubble rationale, which is that central banks are all-powerful: “If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.”

So this is the end of history. Interest rates will stay low and stock prices high and governments will keep on piling up debt with impunity – because they control the financial markets and get to decide which things trade at what price. Breathtaking! Why didn’t humanity discover this financial perpetual motion machine earlier? It would have saved thousands of years of turmoil.

At the risk of looking like a bully, let’s consider another peak-bubble gem:

“The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.”

The writer is saying, in effect, that the value of the British pound – and by extension any other fiat currency – can fall without consequence, and that the people who might want to use those currencies in trade or for savings will continue to do so no matter how much the issuer of those pieces of paper owes to others in the market. If holders of pounds decide to switch to dollars or euros or gold, that’s no problem for Britain because it can just buy all the paper thus freed up with new pieces of paper.

This illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy. Governments couldn’t stop tech stocks from imploding or home prices from crashing, and when the time comes, the Bank of England, the US Fed, and the Bank of Japan won’t be able to stop the markets from dumping their currencies. Nor will they be able to stop the price of energy, food, and most of life’s other necessities from soaring when the global markets lose faith in their promises.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/OjiFfbD3Otc/story01.htm Tyler Durden

While the abysmal rollout of Obamacare hardly needs any additional debacles, a recent hearing by technology experts in Congress added yet another, quite major, wrinkle to an already insurmountable problem: healthcare.gov is so fraught with security flaws, and so bloated with code, that it may easily expose the personal data of millions (we are being generous here) of users – it collects user names, birth dates, social security numbers, email addresses and much more – to even the least experienced of hackers.

It gets worse: when asked “Do any of you think today that the site is secure?” the answer from the experts, which included two academics and two private sector technical researchers, was a unanimous “no.”

And worse when the experts were asked “would you recommend today that this site be shut down until it is?” three of the experts said “yes,” while a fourth said he did not have enough information to make the call.

But the worst news of the day the experts said the site needed to be completely rebuilt to run more efficiently, making it easier to protect. They said HealthCare.gov runs on 500 million lines of code, or 25 times the size of Facebook, one of the world’s busiest sites.

Well… “Obama built that”

More from Reuters:

David Kennedy, head of computer security consulting firm TrustedSec LLC and a former U.S. Marine Corps cyber-intelligence analyst, gave lawmakers a 17-page report that highlights the problems with the site and warned that some of them remain live.

 

The site lets people know invalid user names when logging in, allowing hackers to identify user IDs, according to the report, which also warns of other security bugs.

 

Avi Rubin, director of the Information Security Institute at Johns Hopkins University and an expert on health and medical security, said he needed more data before calling for a shutdown of the site.

 

“Bringing down the site is a very drastic response,” he told Reuters after the hearing.

 

But he would not use it because he is concerned about security bugs that have been made public, he said.

The White House spin was prepared and ready to go:

“The privacy and security of consumers’ personal information are a top priority,” White House spokesman Jay Carney said after the hearing.

“When consumers fill out their online marketplace applications they can trust that the information that they are providing is protected by stringent security standards.”

Perhaps what he meant is that since the NSA already knows all the private information on every American there is no need to be concerned.

Finally, should Obama finally do the right thing and scrap the three year project and start from scratch, “in written testimony, Kennedy said it would take a minimum of seven to 12 months to fix the problems with the site shut down, given the site’s complexity and size.”

As a reminder, this is how “big” healthcare.gov is:

 

 

Perhaps it is not all bad news: it may be time to test the broken website falacy – just think of the GDP boost that would be created if Obama were to hire 1,000,000 inexperienced programmers coding randomly for three years (again).

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/sCLPe5oqjHY/story01.htm Tyler Durden