Wednesday 9 November 2016

Trump from here...

I think Trump is a mouthpiece for a social trend.

I think the following led up to here:

Volker killed inflation in early 80s, cut rates, ignited a credit cycle that with Greenspan underwriting it transformed into a credit super cycle so far lasting 35 years...

China entered the global labour market in the early 90s and drove down manufacturing wages. That led to the current framework of falling incomes until recently for ordinary workers, governments subsidising their living through deficit spending and the corporate sector enjoying record profits. The two sectoral deficits (individuals and govts) drove up the credit/ gdp levels and gave the corp sector/ 1%ers/ CA deficit excess sectoral profits.

Greenspan lucked out with the internet bubble after the initial impact of Chinese mercantilism, then when that blew up he pumped up a housing bubble that culminated in the GFC.

Post GFC we have had the same policy framework, namely governments try and reinflate the prior bubble: housing, government deficit spending to support incomes/ aggregate demand, debt to gdp rising. Anything to keep the credit cycle growing and to support aggregate demand within an over indebted economic balance sheet.

However inflation has most impact nearest its source and least impact distant to the source. So you have successive blow ups in peripheral assets that have progressively gotten closer to the source, the source being Fed/ PBoC. Namely Dubai (09), Greece (10), PIGS (11/ 12), EM/ Industrial commodities (11-16), Oil (14-16), UK (June 16- ), what next? US, France?

From here:
EM has gone through its cyclical downturn (April 11-March 16). They have had a terms of trade shock, declining FX rates, BoP rebalancing, have growth, lower debt and many countries have new reform minded governments. Asset valuations are lower, banks are working through an NPL cycle.

That is an new economic cycle in EM combined with reform.

From a cyclical standpoint, if Trump drives a reflation, commodities should be bid. Historically that has been good for CTAs, but it also boosts the terms of trade of most EM countries. In the US higher wages, lower corp profits, higher defaults, higher yields, higher discount rates, its all negative for long biased investment. The USD must be weak medium term. Short term, I expect a strong USD on liquidation, we have seem EM FX dump today but G4 FX mixed.

I think right now we have a liquidation phase and then sometime after, maybe Jan-Feb we see the new trends emerge.

In Europe, all I will say is that most core countries have the same social statists mindset. Most of France's problems are self inflicted. Could we have a Frexit? Yeah, But that has nothing to do with France's problems or the solutions. UK was never a core country. Overall the Euro is the only credible reserve currency after the USD, so I think it must start a new bull market next year. 

As for the US, the just voted in a serial bankrupt construction contractor with access to a printing press and a $500bn 'New Deal' infrastructure plan. 

Saturday 5 November 2016

Trading Trump

My view now is that Trump wins a landslide and that maybe both houses go Republican.

US is in a slow growth/ full employment stage of cycle and Trump announces fiscal stimulus in form of infrastructure spending and sending home illegals further tightens labour markets.
Fed is constrained from hiking. Libor is nearly 1% so even if Fed hikes to 1% it will have no impact anyway. Dont think they will hike beyond that.
USD will become a weak currency. Im waiting for a market liquidation to sell my USD longs and go long EURO and EM. Staying short Sterling for now though.
Inflation/ Wages/ Nominal GDP start to rise and although the government increases its deficit from a sectoral perspective, corp profit margins fall, but not enough for a recession, just growth scares and an increase in defaults. I think you should consider what happens to CLO equity if there are sustained 4 or 5% default rates. You might be better off in BB or B.
Bond curve steepens.
If there is a recession this could temporarily reverse a lot of this, so USD and bonds up, but I think that that is temporary and we are back to inflation fairly quickly .
Dont forget in the 16 years preceding Volker inflation eroded 90% of the USD purchasing power.
You want to be long cheap economic assets and short debt for that. However most equity is overvalued at the moment, need it to crash first. It will crash as margins come down, discount rates and inflation go up.  
...EM has crashed already and yields are high in private credit. 

As for Trump, I think he will make George W look like Abraham Lincoln, and Bush invaded Iraq while allowing Rumsfeld to ignore Colin Powel's State Dept's plans to administer the country afterwards, and he oversaw the Fed pumping up real estate leading to the GFC.

Discounted property sales


over 1500 pages of property for sale at 15 ads a page

Almost 1/3rd are discounted

275 pages of property on the market for a year or more, more or less

Sunday 26 June 2016

Real time house price monitoring in Knightsbridge and the surrounds

So using the Mouseprice monitor to see what level of price cuts are at the bottom of page 1 and page 5 for a few 'hot' areas of the London property price bubble

Knightsbridge and Belgravia

The Royal Borough


Weybridge, Surrey,+surrey?SortBy=5

Price reduction at the bottom of Page 1
Date      26 Jun   3 Jul    11 Jul   17 Jul   24 Jul   19 Feb
K&B       -15%     -15%     -15%     -16%     -17%     -15%
RB         -25%     -25%     -25%     -25%     -25%     -26%
Ful.       -18%     -18%     -18%     -18%     -18%     -19%
Weyb.    -13%     -13%    -13%     -13%     -14%     -12%

Page 5
Date      26 Jun   3 Jul   11 Jul   17 Jul  24 Jul
K&B       -4%       -5%     -5%      -6%      -6%     -7%
RB         -15%     -15%   -15%     -16%    -16%    -18%
Ful.       -9%       -10%   -10%     -10%    -10%    -10%
Weyb.    Flat      -1%     -1%      -1%       -2%       0%

Monday 13 June 2016

Brexit and the EU programme

I think the reason the macro community has misjudged the major developments in Europe so badly over the last 5 years is due to their viewing of Europe primarily through the financial dimension.

Its clear that ruling the social-democratic political elite and their Brussels-based administrators, which are at the heart of the European project, see the EU primarily as a social and political progamme of integration. That's why Grexit has never happened and why Cameron was offered little in terms of renegotiation and the EU seems to be losing little sleep over the prospect of a peripheral member like the UK leaving, while Greece has been treated as a wayward adolescent that needs to be brought to heel via reforms before any debt forgiveness takes place, the slow process of which has crashed the Greek economy up to now.

However younger people don't see the benefits of an EU superstate but have to face many of the social and economic problems that its poorly coordinated implementation has brought. In part, as a consequence alternative political parties are taking or gaining power. It seems the only thing that will stop the EU becoming a centralised, administrative super-state, is political reform driven by a core member and at the moment Marine Le Pen seems to be the only potential candidate, although she may opt to leave over reform as well.

It seems that the UK will chose Brexit for a great many reasons. I think its unlikely Brexit will have much impact on anything outside of short term sentiment trades and that the economic benefits of being 'out' will only be felt over multiple-years, for instance it will take two years to negotiate an exit.

As regards the Euro(dollar), apart from the common dire macro predictions not coming true and the above comments, I think the reason the 'Euro at parity' calls have failed is the Euro is cheap by REER and the 'Deutschemark' is almost as cheap as its ever been, even lower than post-reunification.

As a reserve currency with not much inflation, some overall political stability and upwards BoP pressure on the FX rate, Draghi has struggled to get the Euro lower. 

Friday 27 May 2016

Corp profit margins getting squeezed from here

Due to the political dynamics in the US (i.e. against recessions, asset market crises, pro growth, pro full employment etc.), although it appears to me the Fed wants to get rates to about 1%, I think the pace is slow and they will be very reluctant to go much beyond that for fear of triggering a recession.

In my opinion Trump will engage in infrastructure projects to inject some demand into the blue collar labour markets. If wages outpace nominal GDP by even 50bps a year you have a progressive compression in economy wide profit margins in favour of labour, reversing what has happened in the last 20 years due to a combination of outsourcing and debt supported aggregate demand. US corp profits have to fall about 40% before this rebalancing is done.

Many listed companies wont have this pricing power, by definition, and profit margin compression is likely to cause an ongoing de-rating of the equity market - there are overall headwinds to investing in US shares, while Draghi is still at the stage of inflating the asset prices.

You can see here the top is in already for US corp margins:

From here this rebalancing towards labour and away from the financial system and capital is more or less unavoidable whether its inflation or a recession delivering it and most of the actors are strongly biased towards inflation. 

Thursday 26 May 2016

Minimum wage luddites?

When I was a child I heard about the Luddites. The were a group of angry workers who smashed machines because machines 'destroyed jobs'. How ridiculous, machines increase productivity. Yet today as machines replace min wage workers, these same complaints are raised, even on the likes of zerohedge.

Its certainly true that other jobs will need to be created for these people to find work, which comes back to my Trumponomics infrastructure call.

I once asked a Finnish friend how Finnish companies worked with the high labour costs. His simple answer was you need high value businesses and high productivity. Ie pushing up a minimum wage forces up productivity and forces businesses to invest in value adding investments.

Max Keiser used to talk about the 'gulag debt serfdom' of workers in the current economic model. Pushing up min wages to the point where you can live off them is a key driver of my view that from here we have inflation and that from an economic sectoral balance perspective the cycle tilts in favour of labour and away from capital and financial instruments.

Monday 23 May 2016

What are machine learning hedge fund strategies?

There is a lot of resources being poured into machine learning strategies in the hedge fund industry. So what are machine learning based strategies?

Put simply AI/ neutral networks/ pattern recognition/ machine learning are all part of the same group of quantitative research processes. They are one part of the research process that leads to the actual trading strategy.

Most active investment strategies are based around a formal strategy, which aims to identify mispriced securities or to out trade other traders. The problem is how do you know you have the best strategy? I how do you know you have specified the strategy best?

Older quant strategies often started with a thesis, such as trading around directors dealings or earnings. The quant would research it on a semi quant/ semi discretionary basis, and if they believed they had an inefficiency that was exploitable, build a model to capture it.

The problem is, how do you know you have built the best model?

Simple, ask a computer to run as many combinations of the parameters that could describe the situation as possible and come up with clusters of similar situations/ trades and then build models around those optimal trades. This often leads to thousands of discrete models across multiple trading strategies. Take Directors dealing for example, some Directors may have a better track record than others, buying vs selling may offer different information, preceding earnings/ share price behaviour may have information in it, the job title of the director may have different information. Once you ask the computer to look down as far as the contextual track record of individual directors across thousands of stocks over 20 years of history, apart from the huge computing power need, you end up with thousands or tens of thousands of individual computer models.

These individual models aim to better capture the inefficiencies than one or a few models that are applied across all stocks and time frames. Ie you are going from a blunt one size sits all series of quant models to many discrete, tailored models. The ultimate objective being to capture the inefficiencies better than the next guy, whether he is a quant or not.

Trumponomics - what might it look like?

With Americans likely facing a Trump/ Hillary election and Americans having an almost perfect track record of electing the personable, charismatic candidate over the awkward, DC insider, Ivy leaguers, looks to me like Trump will be in the White House in January.

What might the economic/ market impact of his presidency be?

These are just my musings.

The US is in a debt trap with debt growing ~3x faster than GDP. To effect even greater negative real rates Trump needs inflation. For inflation you need labour demand. Ipso facto Trump will monetise a 'people's QE' focused on infrastructure. This could be as simple as directing the Fed to exchange Treasuries for new infrastructure loans without increasing the size of the Fed's balance sheet.

With negative real rates rising due to wages outpacing GDP growth, corporate profit margins will be squeezed to below long run averages, which means maybe a 40% fall in economy wide margins from here. This will see domestic stocks which lack pricing power trading near book value while within the indices the money will go into real assets and growth names.

The US 10yr Treasury has got to have a chance to seeing over a 3% yield by year end and higher later assuming this tightening doesn't trigger a recession.

The Dow went sideways for 16 years from the late '60s to the early '80s, when Volker killed inflation. Over this time span inflation eroded 90% of the USD's purchasing power. I think we are in the process of entering a 10-20 year inflation cycle after a three decade credit expansion.

Gold was pushed up by commodity index demand into 2011 and pushed down on the subsequent unwind, despite not being an industrial commodity. Gold also had a 45% price correction in the middle of the 1970's bull market. I think $2000 plus gold is a near term target and $10k medium term.

Emerging markets are going through a rebalancing process with weaker FX, terms of trade shock, commodities bottoming and political changes in many countries as reformists are elected. Emerging Markets should begin a new investment and reform-led credit cycle this year. But not all EM's are equal and there is no long run direct connection between equity returns and GDP growth.

Like with any new cycle the winners of the new cycle are unlikely to be the same winners as from the last cycle. As such; smart phones, FANG's, biotech etc look stretched and anything related to EM, commodity, real assets might end up looking cheap at these levels.