Sorry Guys CAPITALISM is not working but I am worth $ 18 billion

Ray Dalio has a net worth estimated at $18 billion, according to Forbes, largely gained from building and running Bridgewater Associates, the largest and—by some metrics—most successful hedge fund in the world

Main points from article/interview in BARRON’s

Capitalism is basically not working for the majority of people (sorry guys if you have not made your moolah by now the time is up… cycle is over)

“Economics and markets are my day job,” said Dalio ( he tells people how to manage their business)

Jonathan Tepper and Denise Hearn’s forthcoming book, The Myth of Capitalism, argues that the current U.S. system is so dominated by monopolies that it isn’t true capitalism ( ask us Indians,we have closed 5 telecom companies with million jobs lost). There’s also Anand Giridharadas’ Winners Take All, published in August, which posits that the efforts by the global elite to save the world through philanthropy serves to preserve the status quo that benefits them—and to mask their own participation in creating the crises they’re purported to fix

Dalio has spoken about the pressing problem of inequality for years—and has warned that artificial intelligence will help to worsen it. (I can only tell the Indian policy makers to WAKEUP AND SMELL THE COFFEE… there is no more demographic dividend guys)

DALIO cited a Federal Reserve survey statistic that 40% of U.S. households could not raise $400 in case of emergency without selling something. “We might not have contact with those people, but that is a reality,” Dalio told the crowd, who paid thousands of dollars to sit on the Palace Theater’s velvet seats and hear him speak.

The current polarization—both politically and socially—is most analogous to the 1930s, he argued. “It has to be dealt with,” Dalio said, saying if he were running things, he’d declare the wealth gap and opportunity gap a “national emergency.”( can we do that in India, if not ,get ready for social chaos)

Tide turning in favor of Long dated US treasuries

Lewis Johnson writes “Inflation scares this deep into one of the longest cycles in post-war history should be viewed with skepticism, in our view, because of the shaky foundation upon which they are built. Just a few days ago, many feared how the economy would cope with the inflationary pressures from crude oil prices which seemed inexorable in their climb toward a hundred dollars a barrel. Now, it appears investors are again fearfully updating their models, only this time to the downside. Transitory inflationary fears are being replaced with the sober realization: weaker crude oil prices could weigh upon many parts of the economy. Think about it.
The U.S. is now the world’s largest producer of crude oil. Trillions of dollars, much of it borrowed in the junk bond market, went into financing this production increase. In fact, nearly 20% of the junk bonds sold in the past decade have gone to financing this production boom and its associated infrastructure. How much of U.S. industrial production is dependent upon a strong crude oil market? If crude oil prices remain depressed, will weaker debtors be able to honor their commitments? What about the health of the banks who lent them money? What about employment? The questions are starting to mount.

It’s Better to Be Long the Solution Than Short the Problem
In a way, we believe that we can achieve a similar outcome in the financial markets when seeking to hedge out the risks of owning an equity portfolio into the peak of the cycle. Like so many of the world’s elegant solutions, it hides in plain sight, protected only by the controversy that surrounds it. We think that longer dated U.S. government bonds can act as such a hedge, which is why they play an important role for us when we seek to create a more defensive portfolio. ( disclosure… I am heavily long US treasury through leveraged ETF)
You need look no further than the buoyant performance of such bonds during the 2008 and 2011 equity bear markets, when they returned nearly 40% while equities fell.

In Conclusion
The hardest task in portfolio management, in my opinion, is managing a portfolio into the peak of a cycle. Look no further than the squeeze up and crash in the crude oil market. Cycles are volatile.
Our solution, learned through hundreds of cycles, is to manage risk proactively. It’s times such as this that the discipline of valuation and proactive risk management can add the most value to portfolios. We believe that the “cost” of such strategies – selling early and favoring quality to avoid the worst ravages of downcycles – is worth the “risk” of potential near-term underperformance. ( I agree)

The Correlation Between Indigestion And Economy. Ridiculous, But True

Anindya writes

“The biggest contribution to the growth in IIP came from one particular segment – ‘Digestive Enzymes and Antacids’ – the industry patronised by yours truly and millions of other Bengalis.

This subsector of India’s pharmaceuticals industry accounts for just 0.22% of the country’s industrial output. But when it comes to contributing to output growth, it punches way above its weight. The government has published output data for the ‘Digestive Enzymes and antacids’ subsector for 15 out of the 18 months between April 2017 and September 2018. The IIP grew by an average of 4.4% over these five quarters and drugs to treat heartburn and indigestion contributed 23% to this additional output.

An industry group that has a weight of less than one-fourth of a percent in the IIP contributed nearly one-fourth to India’s industrial growth ”

India’s IIP data is simply not trustworthy. At best, it gives us a basic sense of the fortunes of our factories, but it’s probably no better than the sense you’ll get by simply observing what people around you are buying and what the shops in your neighborhood are selling. And every indicator there is pointing to a deep and steady slowdown.

Read More

https://www.ndtv.com/blog/the-correlation-between-indigestion-and-economy-ridiculous-but-true-1946654?pfrom=home-opinion

 

A guide for the Perplexed- Convexity Maven

Harley Bassman writes “Convexity is always lurking at the scene of the crime ”
Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees ?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change).
Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s.
Investors have a conflicted relationship with convexity. It has been observed that the unpleasantness of losing one dollar is greater than the joy of making a similar sum; a social economist would say that people are not risk neutral. Yet incongruously, investment managers display a bias to be short optionality (convexity); a payoff profile where the losses can be greater than the gains.

The reason is simple: Convexity (option) sellers are paid up front, either via a coupon or cash (the option premium). In a nutshell, greed outweighs fear.
For simplicity, let’s assume that US Treasuries (UST) have no convexity, so their yield is just the pure risk-free interest rate received to maturity. As such, we can model a non-callable corporate bond as a UST plus some extra yield for the risk the company cannot ultimately return your money. This will sort of look like being long a UST and short a put on the company’s stock, but more accurately short a credit default option on the company.
A greater risk of default translates into a more expensive option and thus, a higher yield on such bonds. Presently, a bond issued by Apple yields about 42bps more than a similar maturity UST, while a bond backed by Tesla offers an extra yield of 406bps. Investment professionals will ponder which has a better ‘risk-adjusted return’; but there no is doubt that buyers of Tesla bonds will receive an extra 364bps as long as Elon’s company can make the coupon payments.
Among the many under-appreciated consequences of the Fed’s Zero Interest Rate Policy (ZIRP) was how liability managers (pension / insurance) might overweight convexity risk in their effort to reach their return targets. This demand explains the massive growth in the -labrador bar- BBB-rated market relative to the -gingerline bar- BB-rated market

An option is most convex when it is at-the-money; a location where it also has the greatest time value (yield). BBB-rated bonds reside at the credit inflection point – a notch lower and they become “junk” that may need to be quickly liquidated by investment-grade portfolios.

Harley concludes …….
I am loath to use the word “always”, but over the course of my professional career, there always seems to be a concentration of short convexity at the core of extreme market turbulence. Convexity is the measure of unbalanced risk so, almost by definition, a negatively convex portfolio will be unstable. Markets become disturbed when the instability of convexity becomes greater than the market’s liquidity.
Convexity is not the match, but rather the accelerant.

Interim special report on OIL sell off

Adam writes….Where the OIL Sell-Off Has Left Us?

For those willing to do the work, we believe this sell-off has presented inventors with extreme value. After Tuesday’s 7% decline, WTI futures are now the most over-sold ever (14-day RSI) according to Capital One. Oil volatility meanwhile has picked up to levels not seen since the 2016 lows, according to Jeff DeGraff of Renaissance Macro.

The equities also appear to be under massive liquidation. Many names we look at are approaching their lows made in 2016, despite the fact that oil prices have more than doubled. The energy weighting in the S&P 500 is now 5.3% — the lowest reading in eighteen years. This measure has been an excellent predictor of future energy-related equity performance and we would expect the same this time as well.

The sell-off has been indiscriminate and feels to us like a capitulation bottom. There have been reports that a large hedge-fund is unwinding its long-crude short-natural gas trade and that this has only exaggerated the move lower. Energy-related investments today represent the best value we have seen in over twenty years. Despite the steady improvement in fundamentals and oil prices, the relative valuation of energy stocks vs. the S&P 500 is now at an all-time low. The recent events in OPEC (perhaps exaggerated by fund liquidation as mentioned above) have all come together to create nearly unprecedented value. We have often said that we are contrarian investors that like to get involved in markets where investor sentiment is negative and yet fundamentals have turned positive. After the recent sell off, the energy related markets today offer the best value we have seen in nearly twenty years (if not ever).http://blog.gorozen.com/blog/interim-special-report-on-the-oil-sell-off?utm_campaign=Weekly%20Blog%20Notification&utm_source=hs_email&utm_medium=email&utm_content=67543970&_hsenc=p2ANqtz-8laxMLWy2upTbJdN-HXZEuyfL29FR0jrTUS5yXWfejxq3FeazYLh2V0zenZFGD2CYZo1ZkSMa3L4PqcUUePr4lXL1sWg&_hsmi=67543970

Look around you,too many investors are loosing too much money

Markets are getting nervous and investors are getting itchy. Too many assets have lost too much money in a very short period of time.

General Electric bonds are still investment grade with BBB+ ratings and are part of lot of fixed income portfolios. Below is the price of perpetual bond and bond yield

PG&E is Californian utility company and not the only one to see these kind of losses……. don’t know why ? massive fire in California and all utility companies have drawn down their bank limits.

Everybody knows about the losses in crude oil complex. below is the chart of high yield energy/corporate bond index ( see the spread widening over treasuries) and price of the ETF tracking these assets.

Bitcoin, blockchain anyone… well the entire cryptocurrency crashed yesterday and yes…. there are investors who are still invested in this asset

Finally everybody’s favourite stock apart from Amazon and since the prices were going up, investors pushed the prices up more and made it a trillion dollar marketcap….. but I guess consumers are finally tapped out. The fall is more severe in supply chain of APPLE.

When so many assets loose so much money then investors become more risk averse and start cutting on positions leading to vanishing of liquidity and widening of bid/offer spreads.

why the Indian consumer never wins?

Satyakam Gautam writes…”Since 1st oct when brent touched USD 86 levels, it has fallen to current $65 levels. Assuming landed cost as $65 USD/INR at 72.5, per gallon cost is 4712 INR per gallon”.

The Nov contract for MCX crude oil ( which captures crude oil in Indian Rupee) fell from a high of 5600 in oct to almost 4000 today …..a loss of almost 40% . 

 

 

Per litre cost is 712/159= INR 29.63 . Add Oil marketing companies margin and freight cost of Rs 3.82 per litre. Becomes 33.45. Add central excise of Rs19.48 per litre, it becomes 52.93. Add 3.66 commission to dealers, it becomes
56.59. Add 27% state VAT

Per litre cost comes at 71.87.

But today’s petrol price in Mumbai is 83 down only 5% from the high seen few days back

Well central govt is happy, state govts are happy, omc’s are happy ,but the customer is clueless how can this be happening. Then some Eloquent north block bureaucrat might tweet GOVT cant reduce prices because it affects fiscal deficit. Really. If the choice is between filling govt coffers to do wasteful revenue expenditure or letting retail prices truly mimic global prices which helps in lower input costs, lower CPI, leading to lower cost of capital leading to better utilisation of scant economic resources, the choice is pretty clear.

Conclusion

It  does not matter whether brent is at 35 or at 85, the uninformed Indian petro consumer has no choice but to shell out same so that govt can keep on doing wasteful expenditure. So much respect for consumer and that too from govt itself.

what is the correlation between CRUDE and DOLLAR?

Mehul Daya and Neel Heyneke of Ned Bank Writes” The link between the oil price, the US dollar and Global $-Liquidity was born after the collapse of the Bretton-Woods system (the gold standard) in the 1970s. The official agreement between the US and Saudi Arabia to standardise the trading of oil in US dollars for geo-political and economic reasons resulted in oil becoming part of the monetary system. Shortly after this, many other oil-producing nations also began to invoice oil in US dollars. Today, this is what we know as the petrodollar system. This was the single most important factor for propelling the US dollar as the world’s reserve currency. The oil price became a major source of Global $-Liquidity. As the oil price rises, petrodollar balances around the world rise. Oil-producing nations then recycle their excess US dollars back into the US economy (purchasing US assets) or into the offshore dollar banking system (Eurodollar). From this perspective, the financial system would be flooded with US dollars, leading to a weaker US dollar and easier financial conditions (the opposite is true as well).

Hence, NEDBANK is concerned that the falling oil price would put further pressure on Global $Liquidity and exacerbate US dollar shortages, triggering another US dollar bull phase.

JOBS crisis in India- R jagannathan

R Jagannathan’s book, The Jobs Crisis in India, is a must-read for any serious student of economics. It offers a 360 degree view of India’s job crisis. The language used is simple and devoid of jargon, which makes an otherwise dry subject an interesting read even for a beginner.

The book is an account of a real problem in India that some fail to understand, and some pretend not to.

Book Summary below

jobscrisisinindia-181107171525 (1)

Life is not going to Stop…. but Dow Jones is headed for 5000: Charles Nenner

World renowned geopolitical and market cycle expert Charles Nenner is sticking to his long time prediction of a huge correction with a downside target of DOW 5,000. Nenner explains, “You know that has been my prediction for the last couple of years, and it should take until the end of 2021 to the beginning of 2022. Based on my cycles, it is not going to start happening until the end of this year. On the contrary, we should start some bounces soon. . . .In the 1990’s, the DOW was 5,000 to 6,000, and don’t think it will be the end of the world. Life is not going to stop.”

On interest rates

“Lots of people have been concerned that interest rates are going up, but that is the opposite of what Nenner’s charts show. Nenner says, “No interest rates are going down, especially on the long side.”

On Gold

He predicts prices going up during the coming deflation. Nenner says, “It will take a little time to rally, but our target is $2,500 per ounce.

On U.S. dollar

Nenner says, “Short term, the dollar should start getting weaker. . . . I think the dollar in the U.S Dollar Index is around 96, and I think it goes below 96, and I think it will go lower. I think next year the euro will surprise on the upside.”

Full interview below

https://usawatchdog.com/deflation-coming-not-inflation-charles-nenner/