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As Its Investors Panic, Natixis’ Imploding Fund Unveils Clever Trick To Halt Redemptions

While it may not yet be the sequel to the GAM Absolute Return Fund or the more recent Neil Woodford investment fiasco, which saw the “investing legend” gate his clients from redeeming money following a serious of terrible investments, the grotesquely named Natixis H20 funds, which we profiled last week as the latest example of how quickly investor panic can escalate once it is discovered how illiquid most fixed income fund investments truly are.

To be sure, the H20 Asset Management fund – yes, the fact that it is named for liquidity when the reason it is about to collapse it that there is none is not lost on us, or anyone else for that matter – refuses to go away quietly and in recent days its parent, troubled French bank Natixis went into crisis-fighting mode to stem a wave of outflows by selling €300 million euros of its unrated private bonds. It then unveiled an ingenious way to halt redemptions without actually imposing gates: according to Bloomberg, it marked down the balance of its holdings “to remove incentives for investors to pull even more.”

You see, when times are great and when funds are happy to demonstrate their performance and portfolios to the world, they tend to “accidentally” mismark their portfolios rather high to appear even more skilled at generating alpha (than they are). However, should the scene flip 180 and the fund finds itself in mortal danger of a redemption avalanche, the first thing the fund’s creative managers do is suddenly reprice all the holdings in the fund sharply lower, forcing those investors who demand their money back to take huge losses.

Truly odd how mark-to-“market” works, when the market for illiquid securities in question does not exist. Perhaps one day regulators will actually look into that.

For now however, we will observe just how successful the anti-H20 fund is in curbing investor enthusiasm to recoup their money, even if they know full well that the longer they wait, the less they will recover.

As Bloomberg explains, the move cut the aggregate market value of the bonds, which were issued by companies linked to German scandal-ridden financier Lars Windhorst, to less than 2% of assets under management, H2O said in a statement on Monday.

So in an attempt to crush investor enthusiasm to pull money, H2O’s funds, whose assets doubled since 2017 to $37.6 billion before last week’s tumult, will be priced at a discount between 3% and 7% – with the thinking here being that anyone who liquidates will be forced to take a major hit – and the company will remove all entry fees across its funds, it said.

Will this plan work? That’s the question as fund managers hope to reverse outflows from a group of H2O funds that saw their assets drop by 1.1 billion euros on Thursday as analysts questioned their holdings.

By moving swiftly and having fund investors take valuation losses now, H2O is seeking to avoid the fate of famed U.K. stock picker Neil Woodford and Swiss asset manager GAM Holding AG, which both froze funds over the past year amid concerns about whether they’d circumvented investment restrictions. Of course, by admitting just how overvalued its “assets” were until now, it risks accelerating the redemptions as investors in other funds seek to recovery as close to par as possible before they too are steamrolled.

As reported last week, Morningstar questioned the “liquidity and appropriateness” of some of H2O’s corporate-bond holdings as well as potential conflicts of interest, and suspended its recommendation on Wednesday, while research firm Autonomous said the notes are akin to loans, which aren’t permitted.

Meanwhile, in an attempt to halt its tumbling stop price, Natixis brought forward a periodic audit of the unit to start June 21. Its shares rose slightly on Monday, halting the two-day slump that followed Morningstar’s move. The bank lost almost 12% last week, falling to the lowest level in nearly three years on Friday.

Additionally, H2O sold about 300 million euros worth of private placements on Friday, according to a letter seen by Bloomberg. The money manager also said it planned to appoint an independent auditor to reassure investors about its investment process and valuation policy regarding non-rated private bonds in their funds, according to the note.

So how did the fund justify the valuation cuts of its illiquid holdings?

According to Bloomberg, the fund said it depreciates all portfolio assets in line with market prices and that it started marking down net asset values as of Wednesday. This is why “our funds have overall posted daily negative performances, despite the good showing of our main investment strategies,” H2O said in the letter. In other words: anything you want to sell will be priced sharply lower.

Separately, a fund spokesman said the aggregated value of the non-corporate bond holdings across H2O’s range of funds was 500 million euros as of Monday, although these numbers tend to magically increase over time.

“The long-term performance drivers of H2O funds, which have been proven over numerous years to the benefit of our clients, remain unaffected as they are not related to this type of investment,” Natixis said in statement on Monday.

“The liquidity of the securities is ensured and will allow it to face potential additional withdrawals” it concluded, although by that point nobody believed it because as has emerged in recent years, starting with Third Avenue and the UK property funds following the Brexit vote, and continuing through GAM, Woodford and now, Natixis, all it takes is for one seller to emerge before everyone else realizes just how illiquid the investments truly are, creating a self-fulfilling prophecy of selling which in turn results in more selling, until the fund itself is forced to liquidate at massive losses.

That this is happening in broad daylight and before the eyes of regulators is stunning because this is also a blueprint of how the next crash will play out, not only for bonds but stocks as well, once the overall market goes bidless.

For now, the only questions that have emerged is whether Natixis and other fund managers, most notably Woodford have faced questions over whether they’ve circumvented liquidity restrictions by re-packaging assets. The question now, as we asked last week, is whether the illiquid investments that have caused trouble for H20, GAM and Woodford represent a wider trend in the fund-management industry. Jacob Schmidt, CEO of Schmidt Research Partners, a global investment firm, argues that they are, drumroll, “isolated incidents.” And yes, we are not the only ones to find that an investment firm would argue that all investment firms aren’t liquidity Ponzi schemes.

 

Iran – Message Sent, Message Delivered

Authored by Tom Luongo,

It is clear that Iran is sending the U.S. a stern message. And that message is we can hurt you asymmetrically as much as you hurt us.

Over the weekend Iran’s leadership made it clear there was no mistake in their actions last week. They purposefully shot down one of our most advanced drones to send the U.S. a very clear warning.

‘Our capabilities far exceed your tolerance for withstanding them.’

The more we learn about this incident the more the initial story concocted by the U.S. looks specious. Drone in international airspace? Most likely not.

Trump said someone made a mistake? No, completely deliberate.

The drone that was shot down, an RQ-4A Global Hawk, was the cream of our surveillance drones. It was flying in tandem with an anti-submarine Poseidon P-8 spy plane, which, according to Elijah Magnier was carrying far more than its normal crew of 9.

Try 38.

That was not reported at first either in the initial flush for war. Iran then revealed just how loose with the truth the U.S. turned out to be and that forced a complete rethink of the situation.

There was no mistake involved. No IRGC officer panicked. Iran deliberately targeted the Global Hawk after it failed to respond to hails to leave Iranian airspace and turned off its GPS, lights and digital systems.

It was acting as a hostile and Iran treated it as such. After sparing the Poseidon P-8 and its crew and passengers Iran shot down the drone.

That said Iran made this decision only after getting confirmation that the U.S. ruled out going to war with them. So, they stood down from shooting the Poseidon, which was the initial target, according to Magnier’s sources within the IRGC.

“Iran was about to hit and destroy the US Navy P-8 Poseidon spy and anti-submarine Boeing that was flying in the area when we received confirmation that the US had decided not to go to war and not to bomb any control and command or missile batteries positions, cleared or non-cleared, along the Straits of Hormuz. Had Trump decided otherwise, we had orders to hit several US and US allies’ targets and the Middle East would have been the theatre of a very destructive war with huge losses on all sides”, said an Iranian IRGC General.

But even after that confirmation came down Iran still chose to shoot down the drone. This was a clear message that actions speak far louder than words.

The Iranian leadership decided it was time to test Donald Trump’s mettle. They didn’t have to shoot down the drone. But if they didn’t it would give the U.S. carte blanche to violate Iranian airspace without fear of reprisal solely because back-channel communications say, for now, the U.S. has stayed its hand.

This is likely why Trump was so angry at the presser the other day with Justin Trudeau when asked about the incident. He made what he thought was a gesture of good faith to Iran and, to him, Iran spit in his eye.

And this is where Trump’s fundamental character flaws come to the fore. He’s simply not able to see things outside of his own personal costs. A classic narcissist. And this is why he wanted desperately to bomb Iranian targets in response.

Because of his fundamental flaws he had to be talked off the ledge by, reportedly, Tucker Carlson. Good on Tucker if this is even remotely true, but should it have come to this?

If this is what passes for the decision-making flowchart of the Trump administration then we should all be really worried.

In the end, this was just a drone and one that was 1) somewhere it shouldn’t have been and 2) acting in a very suspicious manner, if the Iranian side of the story is to be believed.

And given the potential costs for Iran if they were wrong, the onus of proof, in my mind, lies with the U.S., which it will not provide. That’s a clear signal that we don’t have the evidence to back up our story.,

Then Trump floats this nonsense about killing 150 Iranians wouldn’t be “proportionate.” So people who starve or are denied a better life because of sanctions and threats aren’t casualties, Don? Only those killed by bombs?

Again, this is the position of a sick and dangerous narcissist. And don’t think I would only say this about Trump. No, this goes for all of this country’s leaders going back decades.

Sanctions are acts of war. Embargoes are immoral. Just because you can’t tie deaths to it directly doesn’t mean the effects of them aren’t real.

So Trump sends out two signals today.

First, he tells everyone in the region they are on their own to protect their regional assets, i.e. oil tankers. This is a clear message that he’s done escalating this stand-off with Iran and is looking for ways out of this.

Because if he were truly serious about taking all of Iran’s oil off the market he would be pledging 5th fleet escorts today rather than complaining that China should pay for securing their oil shipments.

Trump started this fight now he doesn’t know how to get out of it. I expect Putin and Xi will sit him down at the G-20 and work through his options. These men always allow Trump to save face. Iran can’t. The only way they win here is to beat him thoroughly such that everyone knows it.

But as I said over the weekend, Iran isn’t interested in allowing Trump to save face here without him giving up something yuge. He started this fight and it’s up to him to put something tangible on the table. And saying, “I won’t bomb you back to the stone age over a drone” is not an olive branch.

The second thing he did today, confirming his impotence, was putting ineffectual and idiotic sanctions on Iran’s political leadership.

I’m sure they are shaking in their turbins now!

The war-gaming after this incident was clear, however. Any retaliation by the U.S. would be catastrophic for the world economy. It would unleash a regional conflict on multiple fronts which would not be any kind of controlled theater. I’m sure even the biggest hawks on the Joint Chiefs of Staff would have been uncomfortable with fighting those battles.

In the end, it looks like Iran’s message was sent and delivered. Trump found out that no amount of external direct pressure will get the Iranian government to fold.

That for all the might of the U.S. military and financial empire, its weaknesses are deep enough that even a relatively weak military and economy like Iran’s can stop it all dead cold because of basic things like geography, logistics and simple human resolve.

*  *  *

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15,000 Mexican Troops Deployed To US Border

In an ongoing effort to stem the flow of illegal immigration into the United States and avoid tariffs from the Trump administration, Mexico has deployed approximately 15,000 National Guardsmen and soldiers to the border, according to AFPciting the country’s army chief. 

Mexico promised earlier this month to send 6,000 National Guardsmen to its southern border, and has promised to build more migrant detention centers and checkpoints to catch and deter northbound Central Americans. 

“We have a total deployment, between the National Guard and army units, of 14,000, almost 15,000 men in the north of the country,” announced Defense Minister Luis Cresencio Sandoval while standing alongside Mexican President Andres Manuel Lopez Obrador. 

When asked if troops were detaining migrants to prevent them from entering the US, Sandoval said “yes.” 

“Given that (undocumented) migration is not a crime but rather an administrative violation, we simply detain them and turn them over to the authorities” at the country’s National Migration Institute. 

The government has faced criticism over migrant detentions at the northern border since an AFP photographer documented last week how heavily armed National Guardsmen in Ciudad Juarez forcefully stopped two women and a young girl from crossing the Rio Grande river into the United States.

The policy is a shift from previous practice. The Mexican security forces had not typically detained migrants at the US border in the past.

Fleeing chronic poverty and brutal gang violence in their home countries, the Central Americans crossing Mexico mostly lack migration paper –AFP

Mexico signed a deal with the Trump administration on June 7, giving the country 45 days to show meaningful results in their efforts to counter the flood of migrants entering the United States. 

Chinese Drone Maker Planning To Manufacture In California Amid DHS Security Concerns

One Month after the US Department of Homeland Security warned that Chinese-made drones may be sending sensitive flight data to their manufacturers in China, DJI – which makes 80% of the drones used in the US and Canada, plans to build them in the United States according to Reuters.  

DJI said it will assemble its Mavic 2 Enterprise Dual drones in Cerritos, California, after the U.S. Customs and Border Protection determines that the U.S. produced value of its drones will qualify under the U.S. Trade Agreements Act. That designation should make it easier for some U.S. government agencies to buy the drones, the company said. –Reuters

“This new investment will expand DJI’s footprint in the U.S. so we can better serve our customers, create U.S. jobs, and strengthen the U.S. drone economy,” the company said in a Monday statement. 

DHS’s Cybersecurity and Infrastructure Security Agency said on May 20 that DJI drones are a “potential risk to an organization’s information,” and “contain components that can compromise your data and share your information on a server accessed beyond the company itself.” 

“The United States government has strong concerns about any technology product that takes American data into the territory of an authoritarian state that permits its intelligence services to have unfettered access to that data or otherwise abuses that access,” reads the May alert. 

Those concerns apply with equal force to certain Chinese-made (unmanned aircraft systems)-connected devices capable of collecting and transferring potentially revealing data about their operations and the individuals and entities operating them, as China imposes unusually stringent obligations on its citizens to support national intelligence activities.” 

In 2017, the US Army banned DJI drones, alleging that critical law enforcement and infrastructure data was being passed along to the Chinese government. Another report that year an internal intelligence assessment by the Immigrations and Customs Enforcement agency (ICE) in Los Angeles concluded that DJI was “selectively targeting government and privately owned entities within (the US. critical infrastructure and law enforcement sectors) to expand its ability to collect and exploit sensitive US data.”

Users are warned to “be cautious when purchasing” drones from China, and to take precautionary steps like turning off the device’s internet connection and removing secure digital cards.

“Organizations that conduct operations impacting national security or the Nation’s critical functions must remain especially vigilant as they may be at greater risk of espionage and theft of proprietary information,” the alert states. –CNN

Senator Rick Scott (R-FL) asked at a Senate Commerce subcommittee hearing if Congress should outlaw the US sale of Chinese-made drones, stating “I think we’re crazy to do business with the Chinese.” 

“We ought to be buying American products in every way we can…. They are not our friend,” Scott added. 

Democrat Ed Markey added that Americans who own Chinese-made drones have concerns, claiming that “Chinese animate (drones) with their values, which are inconsistent with ours,” said Markey. 

Meanwhile, President Trump said in a June 10 memo that “the domestic production capability for small unmanned aerial systems is essential to the national defense,” while National Defense University faculty member Harry Wingo told the Senate panel that “the US is over-reliant” on DJI drones, which have captured over 70% of the market by some estimates. 

“The glaring gap between U.S. and Chinese companies like DJI in the (drone) platform market should be a wake up call,” said Wingo, suggesting that the issue “presents a national risk, similar to that highlighted by President Trump in calling out the risk of using 5G equipment from Huawei in U.S. telecommunications networks.” 

On Monday, DJI introduced Government Edition, a package of hardware and software controls to create a data firewall for the photos, videos and flight logs created by a drone. The company said it is currently available on some of its products but not yet on Mavic 2. Those drones “cannot access the internet and only stores information on the device.”

The company’s drones are used by many U.S. government agencies, including the New York Police Department. Police in Fremont, California in February used a DJI drone to find an emotionally troubled deaf boy, and last week game wardens in Coleman County, Texas used a DJI drone to find two kayakers missing along a rural river after dark. –Reuters

According to DJI, the company is “deeply concerned that, left unchecked, the unsubstantiated speculation and inaccurate information presented during your subcommittee hearing will put the entire U.S. drone industry at risk, causing a ripple effect that will stunt economic growth and handcuff public servants who use DJI drones to protect the public and save lives.” 

Ethereum Co-Founder Slams Facebook’s Libra Token For Centralization

Authored by Adrian Zmudzinski via CoinTelegraph.com,

Ethereum co-founder Joseph Lubin said that Facebook’s Libra token is like “a centralized wolf in a decentralized sheep’s clothing” in an article published on tech news outlet Quartz on June 21.

image courtesy of CoinTelegraph

The social media giant released the white paper for a its cryptocurrency dubbed Libra earlier this month to mixed reviews from experts in the cryptocurrency and blockchain industries and concern from government regulators.

In his article, Lubin notes that Libra’s white paper describes feelings common among many in the cryptocurrency community. It states that “sending money across the globe should be as simple and inexpensive as sending a message on your phone,” and “financial infrastructure should be globally inclusive and governed as a public good.”

While noting the white paper’s claim that “People will increasingly trust decentralized forms of governance,” Lubin pointed out the need for users to trust Libra’s fiat currency and government bond backing, and merchants to trust that the network be responsibly run. Furthermore, Lubin also noted its centralized infrastructure:

“Perhaps most importantly, it requires our trust that Libra will eventually transition to a more ‘permissionless,’ decentralized system, whereby anyone can validate the network, rather than the restrictive member evaluation criteria keeping control in the hands of the initial 28 firms.”

Still, Lubin admits that he sees some good in the project. He says that in a few years there could be two billion Libra users, and cryptocurrency user experience (UX) could be vastly improved in the process:

“In one fell swoop, talented UX designers could reduce the current friction of using cryptocurrency. Managing private keys, understanding ‘gas payments,’ and installing crypto browser plugins could be as simple as pressing ‘send’ in WhatsApp, another Facebook-owned entity.”

Lubin also claims that developers at Ethereum-centric development company ConsenSys already analyzed the code and noticed that the project borrows a lot of ideas from Ethereum. Lastly, he notes that he expects Libra to be well-executed from a technical point of view.

As Cointelegraph reported yesterday, the governor of the Reserve Bank of Australia, Philip Lowe, cautioned that Facebook’s announced Libra currency may not attain mainstream usage in the near future.

Also, earlier this week a G7 taskforce was created to examine how central banks can regulate cryptocurrencies.