Category: global investing

Volatility is at risk of picking up. Not since 2012 has the open interest been this short in VIX. Let’s see for how long hedge funds will continue to pick Pennies in front of a road roller.

Hedge funds are shorting the VIX at rates not seen in at least 15 years – Large speculators = Dumb money = record COT VX futures net shorts.. – Commercials = Smart Money = Patiently waiting for the extremes = Volmageddon = Works like a charm != Different this time????

Only time will tell whether Is it different this time.

Nordea writes…

CAD: BoC lags Fed and house prices are still struggling

Bank of Canada lags the Fed. This still seems to be the case, as Poloz followed in the footsteps of Powell and announced an “indefinite” pause in Canadian rate hikes. If the Fed should enact in precautionary cuts (as discussed in the section above), then BoC is still well too aggressively priced. On top of that USD/CAD has never dropped with house price trends as weak as current in Canada.

USD/CAD has NEVER dropped with as weak Canadian housing trends as currently (note the reversed left-hand axis)

The dollar smile framework

Moving left in the dollar smile?

The dollar smile is a framework through which to understand the direction of the dollar. In the leftmost part of the smile, the US outperforms the rest of the world. The Fed is relatively hawkish, which reduces global USD liquidity. This is bad news for risk appetite but good news for the USD. In the rightmost part of the smile, global growth is slowing. Risk appetite weakens, USD liquidity becomes increasingly scarce. This is good news for safe-havens (USD, JPY, CHF). In the lowest part, global growth is more evenly distributed and robust, risk appetite is solid and global USD liquidity is rising because of improving global trade. This is bad news for the dollar but good news for riskier currencies.

The dollar smile – moving left, not down

Nordea has lately been in the top-right part of the smile, but had hoped we would move towards a lower quadrant due to green shoots in China and eventually also a pick-up in the Euro-area. Alas, there are yet no clear signs that a weaker EUR is paving the way for improving Euro-area growth. We do still remain hopeful that we will see such signs in coming months, however.

Strong USD ought to weigh on ISM right about now

Andreas conclude “In the near term, the USD break-out could spell trouble for risky assets. If DXY is now resurgent, it could severely dent the revenue outlook for the S&P500, some 50% of its revenues does stem from abroad, after all. A stronger USD also potentially spells trouble for emerging market currencies, should the nascent rally have more legs.”

Daniel Lacalle writes…..Japan’s low unemployment has nothing to do with monetary and fiscal policy and everything to do with demographics and lack of immigration. Japan’s low cost of debt is not a blessing. It is the result of using the savings of citizens to perpetuate an almost-Ponzi scheme that does not prevent the country from spending more than 20% of its budget on interest expenses. The idea that it is irrelevant because the Treasury buys more bonds tells us how insane we are defending such policies. It is a massive kick-the-can policy transferring the risk to the next generations. It is no wonder that Japanese citizens don´t spend or invest as much as their central planners would want them too. They are not stupid. They know that the government is going to confiscate wealth via monetary and fiscal means at some point. This endless debt machine makes the economy less dynamic, and stagnation is guaranteed.  But the strength of the Yen and the low cost of Japanese debt are only supported by the high level of international reserves and strong financial flows of the country. Japan keeps its imbalances because it is one of the few that has undertaken this concerted policy of zombification. This cannot be transferred to the rest of the world, because the result would not be Japanese-style stagnation but Argentina-style crisis chain.

read more

https://mises.org/wire/central-banks-are-heading-toward-stagnant-global-zombie-economy

World trade volume falls most since Financial Crisis.

World trade volume, which had been growing at a strong pace last year, peaking at 5.6% year-over-year growth in October, started turning down in November, and by February — according to the Merchandise World Trade Monitor, released today by CPB Netherlands Bureau for Economic Policy Analysis — it was down 3.4% from the peak in October and down 1.1% from February a year earlier.

The less volatile three-month moving average sank for the fourth month in a row, and is down 2.4% from the October peak and down about 1% from a year earlier. This kind of decline in world trade just hasn’t happened since the Global Financial Crisis:

read more

https://wolfstreet.com/2019/04/25/world-trade-falls-most-since-financial-crisis-hit-by-china-other-emerging-asia/

Jeffrey Snider writes….

Once you see the whole thing, you can’t unsee it. But therein lies the problem. It is so far out there away from mainstream convention getting anyone to recognize what their eyes are recording is an enormous task. Even when someone happens to uncover, for themselves, a significant piece it is often too unfamiliar to truly appreciate its significance.

In Plato’s Republic, the philosopher tells of his brother being taught by Socrates through the allegory of the cave. Prisoners chained up living forever inside the dark space only perceive the wider outside world via shadows projected upon a blank wall as objects or other people pass by a fire. These inmates even give these shadows names and think of them as real.

They never desire to leave, either. What they know of existence is all they want to know. The shadows suffice for their worldview, having never seen the outside. But once broken out and into the world, the world of observation, they can never go back to the shadows.

Read Full article below

https://www.alhambrapartners.com/2019/04/24/chinas-dollar-problem-comes-out-of-the-shadows/

Nick writes….
Why Personal Finance is a Bit Too…Personal

Though you have probably never heard of Wally Jay, he is considered one of the greatest judo instructors of all time.  Despite never once competing in judo (only in jiujitsu), Jay consistently produced champions in judo and other martial arts.  One of Jay’s key insights was that not everyone learned like he did:

The biggest mistake is for an instructor to teach exactly the way he was taught.  Once a teacher said to me, “All of my boys fight like me.”  Then when we got on the mat, not one of his students could beat one of mine.  Not one.  So I told him that he had to individualize his instruction.

This lesson seems to be lost on many financial commentators/bloggers who provide personal finance advice based on their own experiences, which are typically outside the norm.  The exceptions become the rule and then personal finance becomes a bit too…personal.  I am reminded of the words of Richard Hamming:

Please remember that what made you great is not appropriate for the next generation.

One prime example of this comes from one of the finance bloggers that got me into this scene, The Financial Samurai (aka Sam).  Sam has done a lot of great work, but there are times when he applies his personal experience far too stringently when giving advice to others.  The best example of this is his post titled “The First Million Might Be the Easiest: How to Become a Millionaire by Age 30”.

In this post Sam breaks down his journey to $1 million by age 28.  If you don’t have time to read the whole thing, the summary comes down to:  have one incredible lucky trade in the Dot Com bubble (make 50x), earn a boat load of money in finance, and live a relatively frugal lifestyle.  And for his age, Sam was making a “boat load” of money.

Read More

https://ofdollarsanddata.com/the-problem-with-most-financial-advice/

Philip Grant writes for Almost Daily Grant…China’s Shanghai Composite fell by nearly 2% today, following a Friday statement from the politburo describing first quarter economic conditions as “generally stable and better than expected.” Of course, an abundance of new credit figures prominently in that better than expected start to 2019, as total new financing expanded by an amount equal to 9% of last year’s GDP, rivaling the full-year pace of 2009’s massive economic stimulus (Almost Daily Grant’s, April 12).

The politburo statement potentially signifies that the burst of credit growth will be soon abating. Dai Ming, fund manager at Hengsheng Asset Management Co., told Bloomberg that “people have come to a clear consensus that there won’t be any aggressive stimulus that floods the economy with excessive liquidity, indicating limited room for valuation recovery.” Valuations have already been fattening. Even after yesterday’s pullback, the Shanghai Composite has been the best performing stock market in the world, up 29% year-to-date.  

As Beijing hints that it may tap the monetary brakes, China’s corporate sector races to raise cash.  Bloomberg relays today that since January, nine companies have announced plans to issue rights offerings totaling RMB 40.5 billion ($6 billion), more than double the full-year 2018 figure. Anne Stevenson-Yang of J Capital Research concurs, noting in a report today that 200 Chinese firms have conducted initial public offerings across the local A-share, Hong Kong and U.S. markets over the past 12 months, as companies look “to grab everything that is not nailed down.” Stevenson-Yang cautions that financial shenanigans are particularly prevalent among this cash-raising cohort:

Investors know well—or should know—that fraud is thick on the IPO playing grounds in China, and the incentives to generate nosebleed valuations by fraudulent means are core to the playbook. After all, there are no penalties in China for committing securities fraud in the U.S., where Chinese authorities believe U.S. regulators should look out for their own.

As we recently reported, three insiders at UXIN Ltd., an online dealer and financier of used cars that listed in the U.S. at the end of June last year, managed to take home around $450 million in cash before lock-up had even expired. Listing in an overseas market. . . is the lowest-risk way known to man of robbing a bank. Among the tricks employed by Chinese IPO candidates to achieve more favorable valuations:  Making up profits and, then, overstating capital expenditures to explain away the lack of cash on the balance sheet, generating revenues by selling products below cost (i.e. the Uber model) and using up-front fees generated from a franchise network business model to goose gross revenues on a one-time basis. 

Bryce coward writes…..

The US dollar is on the cusp of making a major move. The question is which way will it go, higher or lower? The directional movement of the US dollar will have significant asset performance implications once the tug of war between dollar bears and bulls is resolved.

The US dollar index has been consolidating its 2018 gains for the better part of six months and is currently in the process of forming what market technicians call an ascending triangle formation. It’s supposed to be a bullish pattern, but the reality is that technical analysis rules of thumb rarely stand up to statistical tests of significance. Regardless, what the pattern tells us is that supply of dollars emerges as the US dollar index approaches 98 and demand emerges as it approaches 96.5. The fact that the triangle is narrowing simply indicates that one of the two sides will prevail soon.

Setting aside the chart pattern setup for a moment, we also observe an historically very low level of volatility between the US dollar and its major currency pairs. In fact, our FX volatility index (which is just the average annualized volatility of the US dollar vs six other major currencies) stands at just 5.2%, a level that has been reached only four times in the last 40 years or so. Since FX volatility is mean reverting – hovering between about 4-14% pretty much all the time – we have every reason to expect FX volatility to resurface sooner rather than later.

The coiled springs of supply and demand points converging and historically muted FX volatility means the US dollar could be in for a fierce move in one direction or the other. For asset allocators, this has huge implications for how one ought to position a portfolio. The three asset classes most at risk of dynamic out or underperformance based on the direction of the dollar move are US small caps, emerging market stocks, and gold.

Read Full article below

https://blog.knowledgeleaderscapital.com/?p=16373

John Hempton writes….I used to be of the view that suggested that buybacks were just another way of distributing to shareholders – a bit like dividends, selectively applied.

You could turn a buyback into a dividend by selling your own shares in precisely the proportion that the company bought shares back. Then your percentage ownership was unchanged and you would have (in cash) your share of the monies that the company distributed to its owners.

I used to think that. But it isn’t quite true because companies can impair themselves with buybacks in ways that you just couldn’t with dividends. Few companies support paying dividends at 2x underlying cash generation. But debt funded buybacks of this size are alas fairly common.
Debt funded buybacks, applied to their illogical limit, will corrupt you, and turn you into a gebbeth – inhabited by the debt (and its evils) you have allowed into your body.
First however I need to recount a parable about how leverage corrupts morality.

read more

https://brontecapital.blogspot.com/2019/04/mattel-buybacks-barbie-and-dead-babies.html?spref=tw

The Great Financial Crisis shook a lot of trees and made many economists/investors/traders go back and question first principles—at least it should have.https://behavioralmacro.com/15-things-global-macro-investors-should-have-learned-from-the-great-financial-crisis-and-aftermath/

Here’s a quick list of Things We Should Have Learned by Now:

1. Potential growth in developed economies is lower than it was before the GFC. And policy can’t do as much about it—whatever your policy inclinations—as we’d like to think.
2. The interest rate sensitivity of economic activity is far less than was believed to be the case.
3. Printing money can cause inflation, but doesn’t always. Asking what are the conditions under which it is likely to, and if those conditions obtain, is the smart question.
4. The economic channel of monetary policy and financial channel of monetary policy have to be thought through jointly and separately, and often have very different requirements and equilibrating dynamics.
5. Oil matters less. It didn’t help the consumer as much as forecast when it fell, and didn’t hurt GDP as much as others suggested, either. Oil intensity of GDP or share of consumption basket is far lower than the levels most observers—consciously or unconsciously—had anchored on.
6. The overall commodity intensity of output has declined significantly and will continue to do so. It is in some sense the very definition of technological advancement.
7. Commodity markets (IDK about softs) are driven in the first instance by speculation, which regularly overwhelms fundamentals.
8. Inflation/wage impulse per increment of GDP has been systematically lower than thought. And transitory shocks are often, well, transitory.
9. EM has structurally changed —for the better.
10. Government intervention is a necessary evil in a financial crisis. What’s desirable isn’t always feasible. Path dependency is dominant. And circuit-breaking the self-reinforcing downward spiral of panic is essential.
11. The bond market—in both shape and level—has been telling us very little about US economic prospects/activity. However, short-term changes do inform us as to the prevailing narrative.
12. Economics should be used for diagnostic purposes, not predictive ones.
13. Very few investors/traders can disentangle their political preferences from their economic analyses. Systematic traders, disciplined risk managers, and passive investors have a big advantage in this regard.
14. The Mexican peso is not a petro-currency; Mexico imports more petroleum products than it exports.
15. Brazilian growth is driven primarily by domestic credit, not commodity exports.