Oct 222014

Exchange Traded Funds are becoming an important market for hedge funds as BofAML notes, they have shifted their profiles from shorting single stocks to more actively using ETFs as a hedge. On aggregate, BofAML reports that hedge funds owned $36.9bn worth of ETFs at the beginning of 3Q 2014, up notably from $33.8bn in the previous quarter, and these are the top 25 by market value.

Notably, hedge funds bought Agricultural business (MOO) along with Emerging Markets (EEM, VWO), while selling gold (GDX and GLD) and Italy index (EWI).


Our universe consists of 758 ETFs listed in the US with market caps of at least $100mn as of June 30, 2014.

Source: BofAML

Oct 222014

Submitted by Sean Corrigan via The Cobden Center blog,

The Economist Discovers The Entrepreneur

In its latest edition, in a piece entitled ‘Monetary policy: Tight, loose, irrelevant’, the ineffably dire Ekonomista considers the work of three members of the Sloan School of Management who conducted a study of the factors which – according to their rendering of the testimony of the 60-odd years of data which they analysed in their paper, “The behaviour of aggregate corporate investment” – have historically exerted the most influence on the propensity for American businesses to ‘invest’.

The article itself starts by deploying that unfailingly patronising, ‘it’s economics 101′ cliché by which we should really have long ago learned to expect some weary truism will soon be rehashed as fresh journalistic wisdom.

It may be only partly an exaggeration to say that the weekly then adopts a breathless, teen-hysterical approach to a set of results which, with all due respect to the worthies who compiled them, should have been instantly apparent to anyone devoting a moment’s thought to the issue (and if that’s too big a task for the average Ekonomista writer, perhaps they could pause to ask one of those grubby-sleeved artisans who actually RUNS a business what it is exactly that they get up to, down there at the coalface of international capitalism). Far from being a Statement of the Bleedin’ Obvious, our fearless expositors of the Fourth Estate instead seem to regard what appears to be a tediously positivist exercise in data mining as some combination of the elucidation of the nature of the genetic code and the first exposition of the uncertainty principle. This in itself is a telling indictment of the mindset at work.

For can you even imagine what it was that our trio of geniuses ‘discovered’? Only that firms tend to invest more eagerly if they are profitable and if those profits (or their prospect) are being suitably rewarded with a rising share price – i.e. if their actions are contributing to capital formation, realised or expected, and hence to the credible promise of a maintained, increased, lengthened or accelerated schedule of income flows – that latter condition being one which also means the firms concerned can issue equity on advantageous terms, where necessary, in the furtherance of their aims.

[As an aside, do you remember when we used to ISSUE equity for purposes other than as a panic measure to keep the business afloat after some megalomaniac CEO disaster of over-leverage or as part of a soak-the-patsies cash-out for the latest batch of serial shell-gamers and their start-up sponsors?]

Shock, horror! Our pioneering profs then go on to share the revelation that firms have even been known to invest WHEN INTEREST RATES ARE RISING; i.e., when the specific real rate facing each firm (rather than the fairly meaningless, economy-wide aggregate rate observable in the capital market with which it is here being conflated) is therefore NOT estimated to constitute any impediment to the future attainment (or preservation) of profit. Whatever happened to the central bank mantra of the ‘wealth effect’ and its dogma about ‘channels’ of monetary transmission? How could those boorish mechanicals in industry not know they are only to invest when their pecuniary paramounts signal they should, by lowering official interest rates or hoovering up oodles of government securities?

At this point we might stop to insist that the supercilious, wielders of the ‘Eco 101’ trope at the Ekonomista note that these firms’ own heightened appetite for a presumably finite pool of loanable funds should firmly be expected to nudge interest rates higher precisely in order to bring forth the necessary extra supply thereof, just as a similar shift in demand would do in any other well-functioning market (DOH!), so please could they take the time in future to ponder the workings of cause and effect before they dare to condescend to us.

They might also reflect upon the fact that when the banking system functions to supplement such hard-won funds with its own, purely ethereal emissions of unsaved credit – thereby keeping them too cheap for too long and so removing the intrinsically self-regulating and helpfully selective effect which their increasing scarcity would otherwise have had on proposedschemes of investment – they pervert, if not utterly vitiate, a most fundamental market process. Having a pronounced tendency to bring about a profound disco-ordination in the system to the point of precluding a holistic ordering of ends and means as well as of disrupting the timetable on which the one may be transformed into the other, we Austrians recognize this as theprimary cause of that needless and wasteful phenomenon which is the business cycle. It is therefore decidedly not a cause for perplexity that investment, quote: ‘…expands and contracts far more dramatically than the economy as a whole’ as the Ekonomista wonderingly remarks

Nigh on unbelievable as it may appear to the policy-obsessed, mainstream journos who reviewed the academics’ work, all of this further implies that the past two centuries-odd of absolutely unprecedented and near-universal material progress did NOT take place simply because the central banks and their precursors courageously and unswervingly spent the whole interval doing ‘whatever it took’ to progressively lower interest rates to (and in some cases, through) zero! Somewhere along the line, one supposes that the marvels of entrepreneurship must have intruded, as well as what Deidre McCloskey famously refers to as an upsurge in ‘bourgeois dignity’ – i.e., the ever greater social estimation which came to be accorded to such agents of wholesale advance. This truly must shake the pillars of the temple of the cult of top-down, macro-economic command of which the Ekonomista is the house journal.

Remarkably, the Ekonomista’s piece is also daringly heterodox in inferring that, given this highly singular insensitivity to market interest rates, we might therefore return more assuredly to the long-forsaken path of growth if Mario Draghi and his ilk were to treat themselves to a long, contemplative sojourn, taking the waters at one of Europe’s idyllic (German) spa townsinstead of constantly hogging the limelight by dreaming up (and occasionally implementing) ever more involved, Cunning Plans directed towards driving people to act in ways in which they would otherwise not choose to do, but in which Mario and Co. conceitedly deem that they should.

Rather, the hacks have the temerity to assert – and here, Keynes be spared! – it might do much more for the investment climate if the Big Government to which they so routinely and so obsequiously defer were to pause awhile in its unrelenting programme to destroy all private capital, to suppress all economic initiative, and to restrict the disposition of income to thecentralized mandates of its minions and not to trust them to the delocalized vagaries of the market – all crimes which it more readily may perpetrate under the camouflage provided by the central banks’ mindless and increasingly counter-productive, asset-bubble inflationism.


Having reached this pass, might we dare to push the deduction one step closer to its logical conclusion and suggest that the only reason we continue today to suffer a malaise which the self-exculpatory elite (of whom none is more representative than the staff of the Ekonomista itself) loves to refer to as ‘secular stagnation’ is because its own toxic brew of patent nostrums is making the unfortunate patient upon whom it inflicts them even more sick? That, pace Obama the Great, The One True Indispensable Chief of the NWO, the three principal threats we currently face are not Ebola, but QE-bola – a largely ineradicable pandemic of destruction far more virulent than even that dreadful fever; not the locally disruptive Islamic State but the globally detrimental Interventionist State – the perpetrator of a similarly backward and repressive ideology which the IMF imamate seeks to impose on us all; and definitely not the Kremlin’s alleged (though highly disputable) revanchism being played out on Europe’s ‘fringe’ but the Kafkaesque reality of stifling and undeniable regulationism at work throughout its length and breadth?

We might end by reminding the would-be wearer of the One Ring, as He lurks warily, watching the opinion polls from His lair in the White House, that in being so active in propagating each one of these genuinely existential threats to our common well-being, He (capitalization ironically intended) will not so much ‘help light the world’ – as He nauseatingly claimed in His purple-drenched, sophomore’s set-piece at the UN recently – as help extinguish what little light there still remains to us poor, downtrodden masses.

*  *  *

The offending article:

Monetary policy – Tight, loose, irrelevant: Interest rates do not seem to affect investment as economists assume

IT IS Economics 101. If central bankers want to spur economic activity, they cut interest rates. If they want to dampen it, they raise them. The assumption is that, as it becomes cheaper or more expensive for businesses and households to borrow, they will adjust their spending accordingly. But for businesses in America, at least, a new study* suggests that the accepted wisdom on monetary policy is broadly (but not entirely) wrong.

Using data stretching back to 1952, the paper concludes that market interest rates, which central banks aim to influence when they set their policy rates, play some role in how much firms invest, but not much. Other factors—most notably how profitable a firm is and how well its shares do—are far more important (see chart). A government that wants to pep up the economy, says S.P. Kothari of the Sloan School of Management, one of the authors, would have more luck with other measures, such as lower taxes or less onerous regulation.

Establishing what drives business investment is difficult, not. These shifts were particularly manic in the late 1950s (both up and down), mid-1960s (up), and 2000s (down, up, then down again). Overall, investment has been in slight decline since the early 1980s.

Having sifted through decades of data, however, the authors conclude that neither volatility in the financial markets nor credit-default swaps, a measure of corporate credit risk that tends to influence the rates firms pay, has much impact. In fact, investment often rises when interest rates go up and volatility increases.

Investment grows most quickly, though, in response to a surge in profits and drops with bad news. These ups and downs suggest shifts in investment go too far and are often ill-timed. At any rate, they do little good: big cuts can substantially boost profits, but only briefly; big increases in investment slightly decrease profits.

Companies, Mr Kothari says, tend to dwell too much on recent experience when deciding how much to invest and too little on how changing circumstances may affect future returns. This is particularly true in difficult times. Appealing opportunities may exist, and they may be all the more attractive because of low interest rates. That should matter—but the data suggest it does not.

* “The behaviour of aggregate corporate investment”, S.P. Kothari, Jonathan Lewellen, Jerold Warner

Oct 222014

By now, 6 years after America’s grand experiment in recreating Soviet-style central planning started, it should be clear to all except that subset of Homo Sapiens also known as “economists”, that the Fed’s QE is not helping the economy. In fact, it is merely boosting wealth inequality, leading to asset price (hyper)inflation, middle class devastation, and its inevitable outcome is yet another asset bubble can which will need to be kicked eventually leading to even greater economic misery, greater inequality, more conflict, and increasingly: outright warfare. In fact the two final outcomes of more QE are becoming increasingly clear: broad hyperinflation a la the Bernanke chopper to offset ever steeper episodes of deflation (as one monetizing nations exports its deflation to all the other nations), which implies a failure in the reserve currency, and rising social conflict, which culminates in a French revolution-type social revolt when the poor finally roll out the guillotines.

The above is also largely clear to most, except the abovementioned economists and members of the Fed of course. So it is for their benefit that we present what two people who actually work successfully in the markets for a living, something that nobody in the Marriner Eccles can say, have to say about QE. We can only hope someone in the US money printing department reads it, but we doubt it.

First, here is David Einhorn, who spoke at the annual, and amusingly misnamed, hedge fund gala known as the Robin Hood Investor Conference, talking about Fed policy:

“I think they’re behind the curve in terms of helping the economy. It’s like too much of a good thing. They’re actually, I think, slowing down the economy, even though they don’t realize that they’re doing that,” he said.

Spot on. And the following is even more accurate:

When interest rates increase, the economy would ultimately benefit, he said.


“I don’t really concern myself that much with the exit (of quantitative easing) because first of all, if they did raise rates I think it might be bad for Wall Street, but I think it would be good for the real economy and everyday, normal people out in the world, and, ultimately, you’d have faster GDP that would come from that,” he said. “So, yeah, there would be a little hiccup in the market, but I think that would be a good thing to have happen.”

Sadly, as both Williams and Bullard confirmed last week, the only thing the Fed cares about is the market. The economy is low on the Fed’s list of priorities.

And speaking of the market, as a follow up from the same conference, here is another billionaire who has made his name in the market: Carl Icahn, on the topic of the market:

The Fed is really holding the market up…. The Fed turned this market around here because it let it be known that the Fed funds rate isn’t going to be raised in March. I am concerned about the high yield market, I think that’s in a major bubble, but nobody knows when it’s gonna burst…

Good luck Fed with the whole “exit” thing.

Oct 222014

Submitted by Michael Snyder of The Economic Collapse blog,

Barack Obama and the Federal Reserve are lying to you.  The “economic recovery” that we all keep hearing about is mostly just a mirage.  The percentage of Americans that are employed has barely budged since the depths of the last recession, the labor force participation rate is at a 36 year low, the overall rate of homeownership is the lowest that it has been in nearly 20 years and approximately 49 percent of all Americans are financially dependent on the government at this point.  In a recent article, I shared 12 charts that clearly demonstrate the permanent damage that has been done to our economy over the last decade.  The response to that article was very strong.  Many people were quite upset to learn that they were not being told the truth by our politicians and by the mainstream media.  Sadly, the vast majority of Americans still have absolutely no idea what is being done to our economy.  For those out there that still believe that we are doing “just fine”, here are 19 more facts about the messed up state of the U.S. economy…

#1 After accounting for inflation, median household income in the United States is 8 percent lower than it was when the last recession started in 2007.

#2 The number of part-time workers in America has increased by 54 percent since the last recession began in December 2007.  Meanwhile, the number of full-time jobs has dropped by more than a million over that same time period.

#3 More than 7 million Americans that are currently working part-time jobs would actually like to have full-time jobs.

#4 The jobs gained during this “recovery” pay an average of 23 percent less than the jobs that were lost during the last recession.

#5 The number of unemployed workers that have completely given up looking for work is twice as high now as it was when the last recession began in December 2007.

#6 When the last recession began, about 17 percent of all unemployed workers had been out of work for six months or longer.  Today, that number sits at just above 34 percent.

#7 Due to a lack of decent jobs, half of all college graduates are still relying on their parents financially when they are two years out of school.

#8 According to a new method of calculating poverty devised by the U.S. Census Bureau, the state of California currently has a poverty rate of 23.4 percent.

#9 According to the New York Times, the “typical American household” is now worth 36 percent less than it was worth a decade ago.

#10 In 2007, the average household in the top 5 percent had 16.5 times as much wealth as the average household overall.  But now the average household in the top 5 percent has 24 times as much wealth as the average household overall.

#11 In an absolutely stunning development, the rate of small business ownership in the United States has plunged to an all-time low.

#12 Subprime loans now make up 31 percent of all auto loans in America.  Didn’t that end up really badly when the housing industry tried the same thing?

#13 The average cost of producing a barrel of shale oil in the United States is approximately 85 dollars.  Now that the price of oil is starting to slip under that number, the “shale boom” in America could turn into a bust very rapidly.

#14 On a purchasing power basis, China now actually has a larger economy than the United States does.

#15 It is hard to believe, but there are 49 million people that are dealing with food insecurity in America today.

#16 There are six banks in the United States that pretty much everyone agrees fit into the “too big to fail” category.  Five of them have more than 40 trillion dollars of exposure to derivatives.

#17 The 113 top earning employees at the Federal Reserve headquarters in Washington D.C. make an average of $246,506 a year.  It turns out that ruining the U.S. economy is a very lucrative profession.

#18 We are told that the federal deficit is under control, but the truth is that the U.S. national debt increased by more than a trillion dollars during fiscal year 2014.

#19 An astounding 40 million dollars has been spent just on vacations for Barack Obama and his family.  Perhaps he figures that if we are going down as a nation anyway, he might as well enjoy the ride.

If our economy truly was “recovering”, there would be lots of good paying middle class jobs available.

But that is not the case at all.

I know so many people in their prime working years that spend day after day searching for a job.  Most of them never seem to get anywhere.  It isn’t because they don’t have anything to offer.  It is just that the labor market is absolutely saturated with qualified job seekers.

For example, USA Today recently shared the story of 42-year-old Alex Gomez…

“I’ve had to seriously downgrade my living situation,” said Alex Gomez, a 42-year-old with a master’s degree in entrepreneurship. Gomez lost his last full-time job in 2009 and has been looking for work since a short-term contract position ended in 2012.


Gomez’s home was foreclosed on, so the Tampa resident lives with three roommates in a college neighborhood. He drained his 401(k) trying to save his house, and he has around $150,000 in student loans. His mother is tapping her 401(k) to pay his rent. Gomez subsists on that and about $200 a month in food stamps.


“I have been applying and looking for pretty much anything at this stage,” he said. Although he’s looking for work in engineering or data management, “I applied to a supermarket as a deli clerk because I used to be a deli clerk as a teenager,” he said. He was told he was overqualified and turned down.

Does Alex Gomez have gifts and abilities to share with our society?

Of course he does.

So why can’t he find a job?

It is because we have a broken economy.

We are in the midst of a long-term economic decline and the system simply does not work properly anymore.

And thanks to decades of very foolish decisions, this is only the start of our problems.

Things are only going to get worse from here.

Oct 222014

By: Brad Thomas at http://capitalistexploits.at/

As mentioned in my writing on the Singapore dollar, the most dangerous thing in finance is the “thing” that never moves. This stability creates an illusion of control around which many positions are built, the greater the perceived stability the greater the positions, and the more other assumptions and forecasts are made.

The stability (or lack of volatility) in the Renminbi has been the one of the foundations that has made so many other variables more forecastable. No one can imagine the Renminbi being a highly volatile currency, let alone coming remotely close to repeating what happened during the Asian Tiger crisis of 1997! If this foundation of stability suddenly disappears then there will be a great increase in uncertainty and volatility in many markets across the globe.

I don’t know exactly how a breakdown in the Renminbi will play out. However, it is a sure bet that all those markets that prospered over the last 15 years or so on the back of a China will do badly. Where things become shady is the collateral damage to other markets that have had nothing to do with the Chinese economic miracle.

I think a reasonable bearish position on the Renminbi will be a great way to hedge out the uncertainty of outcomes with respect to how the Chinese economic miracle “unwinds”.

For a long time I have been highly skeptical on the Chinese “economic miracle”. Every contrarian bone in my body has been telling me that there is something not quite right with China’s meteoric rise from an economy that was seemingly insignificant some 15 years ago to the economic powerhouse that we are led to believe it is today.

The Chinese economy has risen to prominence too quickly too soon. What has been the driver of this rise? Why did commodity prices explode skywards in 2002 having gone nowhere for the previous 30 years? I find it hard to believe that commodities became scarcer all of a sudden!

CRB Commodity Index

The CRB Commodity Index (the CCI)

Well, no one has been able to give me a straight down the line answer – at least one that an ordinary average trader like myself could understand. That is until I came across the following discussion with Mark Hart. Hart came to prominence together with Kyle Bass after shorting the “sub-prime thing” in 2007.

Hart’s discussion on China starts at about the 55 minute mark. Note what Hart says about how he is applying his view on China (via options on the Renminbi). The interview was conducted in September but note that he has been “bearish” on China at least since 2011!

For more on the issues facing China you might like to read the writings of Gordon Chang and Michael Pettis. I think both present very objective views on China. I am not going to pretend to offer anything more than what these gentlemen offer with respect to the view on China.

Hart talks about buying “puts” on the Renminbi. What makes the trade so attractive is the extreme low level of volatility. Below is an index of implied volatility for 12 months to expiry at the money (ATM) calls on the USD/CNY.

Renminbi volatility

So we can buy calls on the USD/Renminbi for about 2.5% volatility. For comparison purposes – implied volatility on the AUD/USD is about 10%!

Hart talks about buying the CNY 7 strike call on the USD/Renminbi. To give you an idea of the leverage offered on a 12-month option at the CNY 7 strike – about $1,100 will get you a notional position of $1,000,000! To achieve a payoff of 10x all the USD/CNY would have to close at is 7.07, and at 7.15 a 20x payoff is achieved!

One can now appreciate what Mark Hart is on about – the gearing offered by options on the Renminbi is huge because volatility is grossly underpriced.

Is it so crazy to think that the Renminbi can get to a “tick or two” above 7 within 12 months?

CNY Chart

Well, let’s not forget what happened to currencies in the past. Note what happened to the Mexican Peso during the “Tequila” crisis:

Mexican Peso Chart

…the Thai baht during the Asian Tiger crisis:

Thai Baht Chart

…or to the Russian Ruble during the LTCM crisis:

Russian Ruble Chart

Currencies can move and they move significantly when they have been sailing in calm waters for extended periods of time – just like the Chinese Renminbi now. Position for the unexpected. It is why Hart and Bass made so much money during the Subprime crisis.

– Brad


“Never think that lack of variability is stability. Don’t confuse lack of volatility with stability, ever.” – Nassim Nicholas Taleb