iftttwall

With an ever-increasing horde of hedge fund "speculators" daring to confront The PBOC, here is how they are placing theirs bets on Yuan devaluation…

 

Spot trades are simple but less levered and prone to direct interventionist manipulation. So traders turn to derivatives (more capital effective with their prime brokers) to place their bets.

In the forward FX market…

The FX forwards market has shown significantly more selling pressure than spot as traders place bets on timing and expectations of a devaluation.

 

In the options market…

As the following chart of risk reversals shows, the difference in volatility (i.e. demand for upside vs downside) between similar call and put options is surging towards the downside bets.

Its is clear that while expectations are rising for short-term expectations of a devaluation, over the next year speculators are increasingly confident of the inevitable.

The last time R/Rs were this skewed was right as China devalued in August.

 

And in the CDS market…

Perhaps the cleanest pure bet on devaluation – and least prone to direct government intervention – is the sovereign CDS market where China is trading 128bps and while everyone points to the manufactured "stability" in spot FX markets, it is clear that CDS (which is priced in USD) clearly shows investors betting on a devaluation…

 

*  *  *

Tracking these three indicators (CNH Spot-Forward spread and Risk-Reversals) will provide indications both of speculative positioning as well as market implied odds of a devaluation. Bank of America is speculating that China will devalue before the Feb 27th G-20 meeting in Shanghai and we also note that next week is Chinese lunar new year and Golden Week… with banks closed, perhaps the perfect time to do a major devaluation?

via Zero Hedge http://ift.tt/1PuLvPn Tyler Durden

Authored by Michael Meyer, originally posted at Project Syndicate,

The idea that oil wealth can be a curse is an old one – and it should need no explaining. Every few decades, energy prices rise to the heavens, kicking off a scramble for new sources of oil. Then supply eventually outpaces demand, and prices suddenly crash to Earth. The harder and more abrupt the fall, the greater the social and geopolitical impact.

The last great oil bust occurred in the 1980s – and it changed the world. As a young man working in the Texas oil patch in the spring of 1980, I watched prices for the US benchmark crude rise as high as $45 a barrel – $138 in today’s dollars. By 1988, oil was selling for less than $9 a barrel, having lost half its value in 1986 alone.

Drivers benefited as gasoline prices plummeted. Elsewhere, however, the effects were catastrophic – nowhere more so than in the Soviet Union, whose economy was heavily dependent on petroleum exports. The country’s growth rate fell to a third of its level in the 1970s. As the Soviet Union weakened, social unrest grew, culminating in the 1989 fall of the Berlin Wall and the collapse of communism throughout Central and Eastern Europe. Two years later, the Soviet Union itself was no more.

Similarly, today’s plunging oil prices will benefit a few. Motorists, once again, will be happy; but the pain will be earth-shaking for many others. Never mind the inevitable turmoil in global financial markets or the collapse of shale-oil production in the United States and what it implies for energy independence. The real risk lies in countries that are heavily dependent on oil. As in the old Soviet Union, the prospects for social disintegration are huge.

Sub-Saharan Africa will certainly be one epicenter of the oil crunch. Nigeria, its largest economy, could be knocked to its knees. Oil production is stalling, and unemployment is expected to skyrocket. Already, investors are rethinking billions of dollars in financial commitments. President Muhammadu Buhari, elected in March 2015, has promised to stamp out corruption, rein in the free-spending elite, and expand public services to the very poor, a massive proportion of the country’s population. That now looks impossible.

As recently as a year ago, Angola, Africa’s second largest oil producer, was the darling of global investors. The expatriate workers staffing Luanda’s office towers and occupying its fancy residential neighborhoods complained that it was the most expensive city in the world. Today, Angola’s economy is grinding to a halt. Construction companies cannot pay their workers. The cash-strapped government is slashing the subsidies that large numbers of Angolans depend on, fueling popular anger and a sense that the petro-boom enriched only the elite, leaving everyone else worse off. As young people call for political change from a president who has been in power since 1979, the government has launched a crackdown on dissent.

On the other side of the continent, Kenya and Uganda are watching their hopes of becoming oil exporters evaporate. As long as prices remain low, new discoveries will stay in the ground. And yet the money borrowed for infrastructure investment still must be repaid – even if the oil revenues earmarked for that purpose never materialize. Funding for social programs in both countries is already stretched. Ordinary people are already angry at a kleptocratic elite that siphons off public money. What will happen when, in a few years, a huge and growing chunk of the national budget must be dedicated to paying foreign debt instead of funding education or health care?

The view from North Africa is equally bleak. Two years ago, Egypt believed that major discoveries of offshore natural gas would defuse its dangerous youth bomb, the powder keg that fueled the Arab Spring in 2011. No longer. And to make matters worse, Saudi Arabia, which for years has funneled money to the Egyptian government, is facing its own economic jitters. Today, the Kingdom is contemplating what was once unthinkable: cutting Egypt off.

Meanwhile, next door, Libya is primed to explode. A half-decade of civil war has left an impoverished population fighting over the country’s dwindling oil revenues. Food and medicine are in short supply as warlords struggle for the remnants of Libya’s national wealth.

These countries are not only dependent on oil exports; they also rely heavily on imports. As revenues dry up and exchange rates plunge, the cost of living will skyrocket, exacerbating social and political tensions.

Europe is already struggling to accommodate refugees from the Middle East and Afghanistan. Nigeria, Egypt, Angola, and Kenya are among Africa’s most populated countries. Imagine what would happen if they imploded and their disenfranchised, angry, and impoverished residents all started moving north.

via Zero Hedge http://ift.tt/1QD0VAa Tyler Durden

While federal, state and local programs aimed at securing permanent housing for certain groups, such as veterans and the chronically homeless, have helped bring down the number of homeless people nationally, but amid Federal-Reserve-"wealth"-fueled gentrification, WSJ reports many cities are seeing the number of homeless soar. In New York, the homeless population increased nearly 42% to 75,323 from 53,187 and though the roots of the clashes vary, a common theme runs through many: The conflict between established homeless populations and new residents drawn by redevelopment.

As once derelict or sleepy downtown districts in U.S. cities evolve into thriving hot spots, The Wall Street Journal reports, officials are grappling with what to do about homeless populations that have long inhabited them.

The tension is “all over the country,” said James Wright, a sociology professor at the University of Central Florida who has researched the issue. “Its major effect is just to displace them to other places in the city.”

 

 

 

Experts say a variety of factors fuel homelessness. Incomes aren’t keeping pace with rising rents in some high-price markets, and demand for affordable housing far outstrips supply, according to a 2015 study by the Joint Center for Housing Studies of Harvard University. In 2013, there were only 34 affordable units in the U.S. for every 100 extremely low-income renters, those earning 30% of the median in the area, the study found.

Cities everywhere are facing this tension between established homeless populations and new residents drawn by redevelopment…

The tension in San Francisco has led to allegations that the city is looking to move its homeless out of trendy areas. That is what “municipalities like to do when they have big events, … try to create this fairyland where no poor people are present,” said Jennifer Friedenbach, executive director of the city’s Coalition on Homelessness.

 

Christine Falvey, a spokeswoman for Mayor Ed Lee, said the city has no plan for a crackdown and has stepped up efforts to end homelessness by getting people into permanent housing.

 

In Miami, where downtown has become an increasingly vibrant area, the homeless population has crept up since 2013. The city’s Downtown Development Authority, which promotes the area, sparred last year with the Miami-Dade County Homeless Trust over how best to tackle the issue.

 

Ronald Book, chairman of the homeless trust, said a DDA plan to provide mats for homeless people at a nearby shelter was merely an attempt to sweep them from the street—a claim Alyce Robertson, executive director of the DDA, denied. As the dispute grew heated, the DDA created a detailed “poop map” showing where human feces, presumably from homeless people, was spotted on downtown streets.

 

Another fight is brewing in Atlanta, where a four-story homeless shelter sits amid a building boom in Midtown and downtown that is drawing new residents and businesses. Mayor Kasim Reed has vowed to shut it down, arguing it is a magnet for drugs, disease and crime and does little to help the homeless.

 

Shelter board members say he is trying to push homeless people out of an increasingly chic area along Peachtree Street, the city’s main drag, at the behest of business leaders. “They want us dead and gone,” said Charles Steffen, one of the board members. Backers of the facility say it is serving Atlanta’s most-desperate people and needs to stay open near the city center so the homeless have access to public transportation and other services.

As once derelict or sleepy downtown districts in U.S. cities evolve into thriving hot spots, officials are grappling with what to do about homeless populations that have long inhabited them. The tension is “all over the country,” said James Wright, a sociology professor at the University of Central Florida who has researched the issue. “Its major effect is just to displace them to other places in the city.”

Oddly no mention of this in Obama's State of The Union?

via Zero Hedge http://ift.tt/1PNrwY3 Tyler Durden

In a stunning finding, moments ago Gallup reported that as voting begins in the 2016 presidential primary, suddenly Bernie Sanders, once seen as a long-shot bid for the Democratic nomination, has the edge over Hillary Clinton in net favorability among U.S. adults who identify or lean Democratic.

For the two-week rolling average spanning Jan. 18-31, Sanders has a net favorable score of +53 – tied for his highest reading since Gallup began tracking candidates’ images in early July of last year. Clinton, long the leader in the popularity metric, has a score of +49.

What makes this transition remarkable is that when Gallup began tracking the favorability scores of the presidential field in early July, Clinton had a substantial advantage over Sanders. Democrats were overwhelmingly positive about the former secretary of state and long-time political figure, as her +56 net favorable score demonstrated. Sanders, by contrast, held a net favorable of +29 in early July and, just as crucially, a majority of Democrats (52%) either did not know him or had no opinion about him. Virtually all Democratic adults, on the other hand, knew Clinton.

In the meantime, something changed, and while Super-PACs have been pouring cash into the Hillary campaign, much of her original support appears to have shifted to Bernie:

Clinton does still maintain the upper hand in overall familiarity with Democrats. For the most recent two-week rolling average ending Jan. 31, 93% of Democratic adults know Clinton well enough to have an opinion about her, while 75% of Democrats know Sanders. But Sanders’ name recognition has improved by 26 percentage points over the course of the campaign, and the vast majority of those who have learned about Sanders view him favorably.

For the broad Jan. 1-31 time period, Democratic men, young Democrats aged 18 to 29 and whites like Sanders better than they do Clinton. Clinton has an advantage most notably with black Democrats, but also with women, Democrats aged 65 and older as well as Hispanics.

The question for Sanders is whether he can translate this newfound popularity advantage over Clinton into a series of primary victories: with the first case occurring tonight in Iowa, we will have the answer in hours. But even if Clinton can muster out a victory tonight and beyond, she will, for the benefit of her general election run, want to find ways to arrest her sagging favorability scores with Democrats and national adults.

Gallup’s conclusion:

Iowa does not mark the end of the primary campaign, but it is, at least, the first benchmark in what could be a long primary season. Sanders finds himself arriving at this first marker in fine fashion: His popularity is on the upswing, and he is no longer an anonymous figure to most Democrats. Clinton’s campaign is, instead, limping into the first contest, making for an inauspicious beginning for a candidate who once seemed a sure-lock for the Democratic nomination.

If Bernie does somehow manage to pull it off, however, and become the equivalent of the establishment shocker that Trump is shaping up on the right, then the Bernie-Donald debates will truly make for epic political history in a few short months.

via Zero Hedge http://ift.tt/1PuIwX5 Tyler Durden

When it comes to all things China, the old adage “go big or go home” certainly applies.

The country’s monumental expansion in the wake of the financial crisis was financed by borrowing on a massive scale, as the country’s debt burden rose from “just” $7 trillion in 2007 to more than $28 trillion today. That’s big.

Last year, at the peak of the country’s equity bubble, margin financing outstanding amounted to 18% of the SHCOMP’s free float market cap. Also big.

When the PBoC moved to devalue the yuan last August, Beijing ended up triggering an enormous amount of volatility that reverberated through global markets and culminated with an 8% one-day decline for the SHCOMP on August 24 and a 1,000 point drop in the Dow the same day. Again, big.

On Monday we got the latest “big” news out of China when Beijing announced it had arrested 21 people over a $7.6 billion P2P fraud Ezubao. 900,000 people were defrauded, making the fiasco the biggest ponzi scheme in history by number of victims.

Ezubao’s model was simple: they pitched the “business” as a P2P lending company through which investors could fund a variety of projects. The problem: 95% of the projects didn’t exist. Ezubao just made them up and used the new money to repay existing investors who were promised annual returns of between 9% and 15%.

(the locked door at Ezubao’s office in Hangzhou)

Zhang Min, the former president of Yucheng Group, Ezubao’s parent, calls the company “a complete Ponzi scheme.”

Yes, a “complete ponzi scheme”, and one that was quite lucrative for Yucheng chairman Ding Ning who allegedly bought extravagant gifts for friends including a CNY12 million pink diamond ring and a CNY50 million green emerald.

The company’s assets have been frozen since December. Investments were pitched to unsuspecting Chinese as “high yield, low risk.” 

“According to more than one suspect confessed, Ding Ning and several closely related group of female executives, their private life extremely extravagant, spendthrift to suck money,” a highly amusing Google translation of the original Xinhua story reads. 

Ding Ning paid his brother CNY100 million per month, Xinhua says.

“Police used two excavators and dug for 20 hours to unearth 80 bags of evidence that Ezubo executives had buried six meters underground on the outskirts of Hefei, a city in the eastern province of Anhui,” Bloomberg adds.

On thing we’ve discussed at length over the past year is the extent to which China is teetering on the verge of social unrest. Between the stock market meltdown, the cratering economy (which will invariably lead to massive job losses) Chinese policymakers are going to have their hands full explaining what went wrong to the country’s 1.4 billion people (see here for more).

Needless to say, the revelation that 900,000 people were defrauded in a ponzi scheme run through China’s largely unregulated P2P space won’t help matters. “Cases of illegal fund-raising related to peer-to-peer lending have grown quickly in the past two years, according to the local authorities, and officials pledged in December to tighten regulation of the industry,” The New York Times writes. “Because of the enormous sums involved and the large investor base, the collapse of a major online-financing platform could raise concerns over confidence in the security of such investments.”

Here’s a clip of Ezubao’s defrauded “clients” protesting late last month. Expect more of this to come. And not just as it relates to ponzi schemes.

via Zero Hedge http://ift.tt/1P1m4U7 Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

I recently wrote an article discussing some of the issues of “buy and hold” investment advice as it relates to what I call a “duration mismatch.” The issue that arises is individuals do not necessarily have the “time” to achieve the long-term average returns of the market.

As I stated in the article:

“Most have been led believe that investing in the financial markets is their only option for retiring. Unfortunately, they have fallen into the same trap as most pension funds which is hoping market performance will make up for a ‘savings’ shortfall.

 

However, the real world damage that market declines inflict on investors, and pension funds, hoping to garner annualized 8% returns to make up for that lack of savings is all too real and virtually impossible to recover from. When investors lose money, it is possible to regain the lost principal given enough time, however, what can never be recovered is the “time”  lost between today and retirement. “Time” is extremely finite and the most precious commodity that investors have.

 

In the end – yes, emotional decision making is very bad for your portfolio in the long run.

 

Emotions and investment decisions are very poor bedfellows. Unfortunately, the majority of investors make emotional decisions because, in reality, very FEW actually have a well-thought-out investment plan including the advisors they work with. Retail investors generally buy an off-the-shelf portfolio allocation model that is heavily weighted in equities under the illusion that over a long enough period of time they will somehow make money. Unfortunately, history has been a brutal teacher about the value of risk management.”

Not surprisingly, the article generated numerous comments focused on why “market timing” does not work. However, I am NOT ADVOCATING, and never have, market timing which is being “all in” or “all out” of the market. Such portfolio management can not be successfully replicated over time.

What I am suggesting is that individuals MANAGE THE RISK in their portfolios to minimize the destruction of capital during market down turns. 

It is important to remember that we are not investors. We do not control the direction of the company, their management decisions or their sales process. We are simply speculators placing bets on the direction of the price of an electronic share that is heavily influenced by the “herd” that makes up the markets.

More importantly, we are speculating, more commonly known as gambling, with our “savings.” We are told by Wall Street that we “must” invest into the financial markets to keep those hard-earned savings adjusted for inflation over time. Unfortunately, due to repeated investment mistakes, the average individual has failed in achieving this goal.

With this in mind, this is an excellent time to review 10 investment lessons from some of the investing legends of our time. These time-tested rules about “risk” are what have repeatedly separated successful investors from everyone else. (Quote source: 25IQ Blog)

1) Jeffrey Gundlach, DoubleLine

“The trick is to take risks and be paid for taking those risks, but to take a diversified basket of risks in a portfolio.”

This is a common theme that you will see throughout this post. Great investors focus on “risk management” because “risk” is not a function of how much money you will make, but how much you will lose when you are wrong. In investing, or gambling, you can only play as long as you have capital. If you lose too much capital but taking on excessive risk, you can no longer play the game.

Be greedy when others are fearful and fearful when others are greedy. One of the best times to invest is when uncertainty is the greatest and fear is the highest.

2) Ray Dalio, Bridgewater Associates

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

Nothing good or bad goes on forever. The mistake that investors repeatedly make is thinking “this time is different.” The reality is that despite Central Bank interventions, or other artificial inputs, business and economic cycles cannot be repealed. Ultimately, what goes up, must and will come down.

Wall Street wants you to be fully invested “all the time” because that is how they generate fees. However, as an investor, it is crucially important to remember that “price is what you pay and value is what you get.” Eventually, great companies will trade at an attractive price. Until then, wait.

3) Seth Klarman, Baupost

“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”

Investor behavior, driven by cognitive biases, is the biggest risk in investing. “Greed and fear” dominate the investment cycle of investors which leads ultimately to “buying high and selling low.”

4) Jeremy Grantham, GMO

“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.”

Successful investors avoid “risk” at all costs, even it means under performing in the short-term. The reason is that while the media and Wall Street have you focused on chasing market returns in the short-term, ultimately the excess “risk” built into your portfolio will lead to extremely poor long-term returns. Like Wyle E. Coyote, chasing financial markets higher will eventually lead you over the edge of the cliff.

5) Jesse Livermore, Speculator

“The speculator’s deadly enemies are: ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal….”

Allowing emotions to rule your investment strategy is, and always has been, a recipe for disaster. All great investors follow a strict diet of discipline, strategy, and risk management. The emotional mistakes show up in the returns of individuals portfolios over every time period. (Source: Dalbar)

6) Howard Marks, Oaktree Capital Management

“Rule No. 1: Most things will prove to be cyclical.

 

Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”

As with Ray Dalio, the realization that nothing lasts forever is critically important to long term investing. In order to “buy low,” one must have first “sold high.” Understanding that all things are cyclical suggests that after long price increases, investments become more prone to declines than further advances.

7) James Montier, GMO

“There is a simple, although not easy alternative [to forecasting]… Buy when an asset is cheap, and sell when an asset gets expensive…. Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance.”

“Cheap” is when an asset is selling for less than its intrinsic value. “Cheap” is not a low price per share. Most of the time when a stock has a very low price, it is priced there for a reason. However, a very high priced stock CAN be cheap. Price per share is only part of the valuation determination, not the measure of value itself.

8) George Soros, Soros Capital Management

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

Back to risk management, being right and making money is great when markets are rising. However, rising markets tend to mask investment risk that is quickly revealed during market declines. If you fail to manage the risk in your portfolio, and give up all of your previous gains and then some, then you lose the investment game.

9) Jason Zweig, Wall Street Journal

“Regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”

The chart below is the 3-year average of annual inflation-adjusted returns of the S&P 500 going back to 1900. The power of regression is clearly seen. Historically, when returns have exceeded 10% it was not long before returns fell to 10% below the long-term mean which devastated much of investor’s capital.

10) Howard Marks, Oaktree Capital Management

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”

The biggest driver of long-term investment returns is the minimization of psychological investment mistakes. As Baron Rothschild once stated: “Buy when there is blood in the streets.” This simply means that when investors are “panic selling,” you want to be the one that they are selling to at deeply discounted prices. The opposite is also true. As Howard Marks opined: “The absolute best buying opportunities come when asset holders are forced to sell.”

As an investor, it is simply your job to step away from your “emotions” for a moment and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question, but to manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

As I stated at the beginning of this missive, “Market Timing” is not an effective method of managing your money. However, as you will note, every great investor through out history has had one core philosophy in common; the management of the inherent risk of investing to conserve and preserve investment capital.

“If you run out of chips, you are out of the game.”

via Zero Hedge http://ift.tt/1QUTnuC Tyler Durden

Two months ago, when we calculated that the US would need a new “debt ceiling” of $19.6 trillion to last until after Obama’s tenure, we may have been too optimistic: since the increase in the hard debt limit of $18.15 trillion which was raised at the end of October, the US appears to be growing its debt at a far faster pace than we had originally expected, and according to the latest public debt data, as of the last day of January, total US debt just hit 19,012,827,698,417.93.

This means that if the nominal US GDP as of December 31 which was $18.12 trillion grows at the 1.2% rate expected by the Atlanta Fed, total debt to GDP is now on pace to hit 105% at the next GDP tabulation, and rising fast from there.

It also means that since his inauguration in January 2009, the US debt has now risen by a whopping 78.9%, or $8.4 trillion. It was $10.6 trillion when Obama came into office.

via Zero Hedge http://ift.tt/203M18G Tyler Durden