Monday 10 December 2018

EURGBP near to breakout

All time high was 98.05 on EURGBP.

May has given up on her Brexit deal. I have no idea about what will happen but it wouldnt take many investors to derisk for a few months to push Sterling meaningfully lower, at least against the USD.

Friday 7 December 2018

US oil exports, Indian loan growth

The US was a net oil exporter last week, the blue line chart is only up to the prior week. Over the next 5 to 10 years I expect the US to go to a current account surplus as well. 

It is China who is short oil and the US can take market share by disrupting the Gulf in particular Iran.

Growth also looks to be accelerating into next year in India

Friday 30 November 2018

Brazil post-Bolsonaro election? Macri redux?

Whats the risk that Bolsonaro triggers a credit contraction/ FX tail spin ala Macri in say H2-19? M3 is circa 320% & rising

Im guessing a bit more yield compression first though so curve flattens first and equities rally on hope

With investor flows into EM expected in H119 there is scope for the curve to bull flatten into early next year

But this will make the yield pick up over USTs even more minimal by H219

Some macro numbers had been weakening this year, but a good dose of hopium recently and we could see a bounce into H1-19 the could aling with investor flows into EM

The BOVESPA on a mid-teen P/E is breaking out by the looks of it

But H2 is where the question marks would start to arise

But with final demand dependent on the private sector picking up or the government maintaining its deficit, there is the risk of recession if govt cuts back, if iron ore/ oil prices drop or if confidence falls

With high M3/GDP there is the risk of an Argentina style FX tail spin

Despite USDBRL having devalued, it doesnt look particularly cheap on a REER basis

Wednesday 28 November 2018

Vene slips lower

Vene should be a prosperous, investment grade, OPEC member 

Instead, its a bankrupt, socialist, terrorist financing, narco state run by a small cadre of oligarchs 

At 20c on the $ the debt is still fairly widely owned... At 20c the government and PDVSA debt is worth about $20bn

If it drops to 10c next year it will only be ~$10bn, which is peanuts if regime change happens. But who knows when that will be

Friday 9 November 2018

Pro-forma vs realised hedge fund portfolio returns

Most hedge funds promise high uncorrelated returns but many dont deliver, or performance erodes over time. What impact does this have on investor returns?

When buying new managers/ maintaining existing ones you need to think about the probability of the realised return scenarios. Versus recent history, what's the probability the fund makes;
  • more
  • the same
  • less
  • blows up
Small confidence interval funds
If you buy an investment grade bond fund with say 3 years duration, then likelihood of achieving the running yield over say 3 years is very, very high, lets say 90% probability. Interest rates could rise or fall, but you also have bonds maturing and can reinvest proceeds.

In a high yield bond fund its still fairly high despite the risk of a default/ spread blow out cycle. In a normal spread widening cycle high yield bonds might see 500bps of widening, so 10-20% price drop, but you will have a much higher running yield after that and if the manager avoids defaults then you get to reinvest coupons at the higher yield. So on a longer term basis you could be confident of generating a return that is similar to the running yield but with uncertainty over the path and the potential for a 1-2 year drawdown at some point.

Hedge fund returns have a large confidence interval
Hedge funds however are unbenchmarked strategies. With the exception of stressed credit there is no anchor or 'pull to par' for returns. Equity bear markets can last years and recoveries can be even longer.

As such the confidence interval for the return for an individual hedge fund has to be large.
Anecdotally the HSBC hedge weekly report by year end often has an 80% plus spread between the top few hedge funds and bottom few. Its not uncommon for certain managers to frequent both lists in different years.

Question: What percentage of hedge funds meet their double digit return goals?

My experience with low beta/ uncorrelated institutional portfolios is that realised returns, by the time you have redeemed underperforming hedge funds, are about half of the pro-forma returns.
I.e. if you want to realise 7-8% you need to buy funds making 15% at the point in time that you buy them. This raises an issue if you buy low returning funds.

Question: What if I buy 'conservative' funds that lose less when they go wrong? Generally speaking the average return is lower in my experience and you can see that in the HFRI indices.

Let's assume we buy a portfolio of 9 funds that has an expected/ recent return of 7%, what is the expected outcome of that portfolio:

3 funds make 7%
3 funds make 2%
3 funds average 0%

What is the weighted return of that portfolio? Its 3%, or less than half of the expected 7%, before costs.

What evidence can I supply for portfolio realised returns being roughly half pro-forma expected returns? Simple look at the HFRI FOF index returns and the UCITS index returns.

The UCITS market is dominated by absolute return funds targetting 7%. What is the return for the UCITS index in an environment of QE and ZIRP that has supported asset classes?
The UCITS index has made approximately 10% or an annualised 1.1% since 2010. Meanwhile 'successful' UCITS funds make 7% annualised.

What if there is a bear market?

3 funds make 3%
3 funds make 0%
3 funds average -3%

Weighted return drop to zero. In a market crisis like 2008 the returns could be worse.
So what if we buy double digit returning funds?

3 funds make 12.5%
3 funds make 7%
3 funds average 3%

The average is 7.5%, even though all the funds bought had been making 10-20% prior to being bought. For this to work you need to avoid bad blow ups though.

To boost these returns:
  • If you can average a higher hit ratio than 1/3 that it would boost returns significantly
  • If you have one outlier high returning fund, say 25% IRR, then it would boost the portfolio return to 9%
  • If you aggressively redeem low returning funds, that would boost portfolio returns
  • If you want to take beta bets then thats a slightly separate issue but you can use that to push up the IRRs

What if there is a bear market?

3 funds make 10%
3 funds make 4%
3 funds average -3%

Portfolio still makes almost 4%. It really helps if you have some funds that can make double digit returns in a bear market like 2008, or if there are funds that can exploit opportunities like the 'Big Short' in sub-prime.

So there you have it: buying low returning funds and running them for years.

Its the answer as to why UCITS investors and consultant led institutional investors have hardly made any money from hedge funds.

Why do they keep doing it? Or are they now rotating the money into 'return free risk' in conventional private lending strategies, thereby setting up a great secondaries opportunity when defaults rise.

As for institutional interest in hedge funds I just wonder how it works if QT pushes many asset classes into synchronised grinding valuation bear markets.

The best thing for the hedge fund industry's returns would be for these institutions to exit enmasse and reduce the level of me-too competition in markets.

Tuesday 6 November 2018

3.1% rental yield for central London real estate?

The Trust has £1.15bn in CBRE valued assets, yielding 3.1% gross rent income, £290m of debt that costs 2.1%. If debt costs went to about 6.5% then there would be no distributable income and the equity would be toast.

The managers of the fund are paid on AuM so are benefited by as low a valuation yield as possible.
Investors want out of this Trust, with one blaming Brexit for making the UK 'particularly risky' etc.
That just shows how wrong headed most of these people are. They have held on to what are now vastly over-valued generic assets. 

The truth is Brexit should be good for the UK but London is uneconomic and the medium term outlook for real rents is poor, so the valuation of these assets should fall a lot over the next few years. A BoE rake hiking cycle will also reset valuations and funding costs.

Thursday 1 November 2018

European perfect storm on the horizon?

Could European financial markets be hit by a perfect storm next year?

Fed hikes in H1 but the economy runs hot and markets start looking for higher terminal rates which pressures discount rates and duration

UK has a hard Brexit with WTO rules. UK economy is doing OK and BoE hints at rate hiking cycle in Q2, investors shift assets from EZ to UK

As part of WTO rules the UK will have a 10% tariff plus VAT on car imports. Luxury car sector has been hit by Dieselgate and lack a full PHEV/ EV model line up. The EZ economy is already near recession. Germany product dumps into France, France into Italy and Spain. China facing US tariffs dumps at the low end into Europe. This guarantees deflation/ slow down

ECB is tapering/ ending purchases. TARGET2 imbalances are over €1Tn already. As the Italian confrontation with the European Commission escalates, financial conditions tighten which is then compounded by financial markets pricing the chance of a crisis which tightens conditions further. The 'doom loop' is back

What can the way out be? A weakened Germany post-Merkel or lame duck Merkel could be pressured into a pro-growth framework with a €500bn-1Tn EIB infrastructure/ export support/ a Mid-East and African Marshall plan

But we need the crisis first...

Wednesday 31 October 2018

Is Bitcoin being jammed up by a whale?

Since May as volume has slumped, has a whale(s) been propping Bitcoin up? 

The buy the dip, sell the rally strategy is not seeing rallies to get out of.

Looks like someone jammed it up today after it sold off but volume evaporated after.

Main question is which of the whales defending it folds first?

The volume over the last week has been on price weakness as well, so large or multiple small steady sellers.

Thursday 25 October 2018

JPY - Is BoJ QT the new Plaza Accord?

The Yen has rarely been as cheap as now at about 112 to USD Last time it was this cheap was 1982-1985 and followed by the September 1985 Plaza Accord it then rallied approximately 50% in 3 years
Could BoJ QT deliver the same this time? Ending ZIRP/ QT has so far rallied the USD to rarely seen high levels

We also have a similar 3-4 year topping process as last time - since 2012 BoJ QE sank the Yen from late 2012 to 2015 and since 2015 its been range bound/ slightly strengthened

BoJ QT will rally it

If it goes to an all time high then say 55-65 USDJPY in 30-36 months is in play

What happens to JPYCNH? first stop 7.5c/ 2012 levels, then what?

Tuesday 16 October 2018

Trump's floating rate liability

Trump has at least $180m in floating rate liabilities and with three >$50m loans potentially quite a lot more than that

The loans are against the better properties while others are known to lose money

But higher rates over time will squeeze NOIs, FCF and asset values lower

Much of the debt is from Deutsche, who are known to sometimes sell off credit risk, for example they could sell it to a bank like Alfa Bank

With the whole empire resting on the ability of the profitable properties to prop up the debt, the losing assets and the family's living costs, no wonder he doesnt like Powell's rate hikes

It will be interesting to watch the personalities and psychology play out as so far Powell seems more hawkish than Yellen

Wednesday 10 October 2018

US real interest rates

10 year real returns went over 1% last week while forward inflation expectations remain anchored (at ~2.25%). 

As such it seems its being mainly driven by the Fed, mirroring how low real returns were engineered by ZIRP/ QE. 

Longer term I deducted a CPI measure from Fed funds to give a real interest rate indicator. Real interest rates have not uncommonly been +4 or 5% and are often in the 2.4-3% range mid to late cycle. 

Adding both together gets a potential neutral rate for the Fed for the real economy of 4.65-5.25%. 

A notable exception was the late 70s where the Fed struggled to keep up with inflation until Volcker hiked Fed funds into the teens to finally kill off inflation. 

But the Fed, given the credit and asset bubble that has been blown up, currently looks like it will try and taper out rate hikes next year with a 3-3.5% range. 

The problem they will have it that might be tight for financial assets, but it will still be loose for the real economy. 

The Yellen Fed wouldn't want to hike enough and risk an asset market crash and the Whitehouse won't want neutral rates for the real economy. 

Powell so far seems more hawkish and the whole set up looks similar to the early 70s.

Tuesday 2 October 2018

The People's QE/ loose fiscal/ tight monetary policy era

Nominal GDP inflecting higher on Trumponomics stimulus Wages starting to see a bid (finally)? Underpinning the beginnings of a wage inflation cycle next year? Showing Fed hopelessly behind real economy on rates.

But a 2019 financial economy pressured by higher rates so Fed hesitant to keep hiking. 

So USD higher this year on Fed driven short squeeze, but as a peaking Fed cycle is priced in, USD enters a bear market in Q1 or Q2 next year. Amongst other conclusions

I was discussing with a contact the outlook for markets and policy and so on. We agreed while there are risks of an 08 style rerun, it also clear to the Central Bankers that there are some entities that are too big to fail within what are highly leveraged, credit and liquidity dependent systems. 

But we also agreed that; nothing is too big to slump. In other words a multi-year valuation bear market, induced by QE unwind and higher rates, the Central Bankers should take in their stride, as long as wages and the real economy are doing OK. 

They will hike rates and unwind QE just enough to put a squeeze on debt and asset markets but will still be loose for the real economy. 

The real economy being juiced by loose fiscal stimulus/ People's QE.

The US in H1 2018 has seen non-financial debt grow about $2.7Tn annualised, or roughly 11% of GDP. US debt has never grown anywhere near this fast. 

The result has been to push nominal GDP up to a 7% handle from a 5% handle. 

Meanwhile the market discounts the Fed's hiking guidance for next year with only one hike priced in to September and the 10year struggles to get over 3%...


City population cycles; London peaking out?

Population chart of London, but it has happened many times in history.

City-based booms bring people in, eg financialization era since mid-80s or Victorian empire/ industrialization, but living costs rise and then when the growth is outside the gateway city, eg if manufacturing grows in the Fourth Turning/ post-Brexit, people leave the high-cost city.

If over 30 years the population shrinks, it will turn forecasts and value of 'core' assets on their heads

These cycles can last 3, 4, 5 decades typically. London's current growth cycle is over 3 decades old.

London I have said before is functionally bankrupt. It's too expensive for regular people to live in and have a decent quality of life.

Anecdotally I know many people moving elsewhere in the UK or going back to home countries. Corbyn is obviously going to win the next election and many of his policies will speed this process up. He will help manufacturing and services you can work remotely for anyway.

In the States there is clear evidence of migration away from high tax, high cost coastal gateway cities.

The one exception to this I would expect is Hong Kong, where you have all of these same cost of livign issues, but next door there are 1billion+ people in a dictatorship, so Hong Kong real estate can deflate but I think the population numbers should be stable or even grow. 

US corporate profit cycle due to resume the slide in 2019?

US corp profit cycle peaked in 2012.

Bounced a bit last year with the oil price recovery and has been massively juiced this year by Trump's fiscal stimulus.

But should start reverting lower towards longer run means in 2019/20 as Fed hikes and wages pick up. Just need to really see some movement on wages though.

Eurozone banks under pressure again

European banks resume slide after the Fed.

That's what a $3Tn long in US fixed income, as the Fed hikes, gets you.

The Fed is euthanasing the entities that funded this US credit cycle just as Federal double deficit accelerates.

FT's chart showing debt held by foreigners in the US:

At a time when Sth European banks are dependent on a record amount of ECB funding via TARGET2

Immediately pushing up finding costs into year end. A 25bps parallel shift is worth probably $30-35bn in additional funding for the $3Tn in longs.

Add to that the Brexit and Italy issues and I reiterate my view that the USD is rallying into Q1 and EZ assets remain under pressure.

Tuesday 31 July 2018

US equities, USD, Chinese QE unwind, BoE and Cable...

Did FaceBook ring the bell for the market top, at least for now? Seems like it so far.
The worlds biggest debtor wants to take on the FX and bond markets...  

In the LBO Whitehouse you grow revenues (nominal GDP) while keeping funding costs cheap and you avoid a bad recession at all costs I really think the Fed will struggle to get past the 3-3.5% level for a wide range of reasons, and therefore the Fed stops hiking rates or is forced to by a change in mandate 

At that point the USD sinks as investors look for higher real yields elsewhere and later on the bond market revolts as the wage/ inflation cycle takes hold But this year the USD is up up up and eitherway you don't want interest rate duration from here

Chinese QE unwind.
Chinese now net sellers of CRE having been the trophy price payers last 2 years...

BoE and scaring the Cable shorts (or could it be scarring?)
Thought this was a good short interview on the BoE and what the market has priced in. You never know, Carney might even scare the market into a brief Cable rally.

Thursday 19 July 2018

FX moves: USD, EUR, JPY, CNY

The Yen and the CNY. One of the cheapest majors and one of the most expensive. On say a 2 year time horizon it might be time for the Yen to rally and CNY to devalue... with a target of >7.5c/ Yen

 USD also on the cusp of a breakout

So USD up this year on a rate hike funding short squeeze, potentially a violent top. Then at some point in 2019 as the US transitions into an inflation cycle, a long term (burn off the debt) bear market starts to emerge. 

For the Euro to be genuinely strong though I think we need a crisis and then an EIB bond financed belt and road plan to invest what you could call the Rhine valley goods surplus. Italy can engineer the show down on that.

Wednesday 11 July 2018

First Copper, then...

Copper is rolling over on Trade Wars, China slowing. Should drag HY down first, then equities with a few months lag.

Monday 9 July 2018

My comments on Wolf Street's QE unwind update

In the 9 months since QE unwind started Fed has cut ~5% off the balance sheet. Since then:
  • US Tsy real yields are at top of the QE range, 80bps at 10yr
  • Tsy curve has flattened
  • USD rallied
  • BBB IG bond spreads to 1.6% vs 1.3%
  • US high yield spreads seems to have bottomed
  • EM tanked
  • Liquidity has dried up at times in some areas of bonds markets as they reset to higher yield levels with not much market making to intermediate the move
  • Global Prime Residential is in a bear market in many locations
  • S&P equity breadth narrowed
  • We had one volatility explosion in equities, and one in govvies (Italian 2yr) and several in EM FX/ equities.
Nevertheless with credit growth in Q1 at 18% of GDP annualised, main street USA is doing fine. 

In Q4 balance sheet reductions will go to $50bn a month and next year they are targetting 15%/ $600bn in reductions and potentially 100bps more from here in Fed funds rate hikes which would take Libor to about 3.5%.

If the USD Treasury yield curve steepens on a reflationary policy outlook it could see the 10year at 3.5-4%.

Sunday 24 June 2018

Markets getting narrower and narrower

If you strip out the FANGs and global equities are flat to down for the year, despite all the share buybacks. That's a narrow market.


Friday 22 June 2018

R&D capex leaders

PWC did a survey of the top 1000 innovator companies. If you filter for >$250m R&D capex and $500m-10bn revenue, ie companies with multi-bagger growth potential, the vast majority of the companies are in the US.

Friday 15 June 2018

Real bond returns over the four turnings

Bonds do badly in the 4th and 1st turnings if associated with inflation and well in the 2nd and 3rd. 

Thursday 14 June 2018

3m HIBOR doubles in a quarter

HIBOR rates have to track USD Libor over time given the peg and HKMA is draining liquidity. 3m HIBOR has more or less doubled in the last few weeks.

HK commercial real estate yields 1-2% vs 5% lending rates.

The systemic banks have balance sheats over 50% of HK GDP, 50% LTV mortgage books, so reset to even a 4-5% real estate yield would be a problem.

Anyway the HK real estate market is still on fire and as Chuck Prince famously remarked “As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing."

UK worst ever CA deficit, US borrowing accelerates in Q1

The UKs worst ever CA deficit number I think.

Per the Z1 release, the US created $3.5Tn of credit annualised in Q1, or 18% of GDP, with most of this being the Federal government deficit increase. With the Federal Reserve hiking and QE unwinding, the question is who gets crowded out next and how long before we see some wage inflation... 

Ever since Dubai rolled over at the end of 2009 the crashes keep getting closer to the core.

No rebalancing yet then!

Monday 4 June 2018

Barbados defaults. Didnt Reinhart and Rogoff say these come in cycles?

As Barbados defaults, didn't Reinhart and Rogoff say EM defaults come in cycles? We have have Puerto Rico, US Virgin Islands, Mozambique, Vene in external debt and ongoing problems in other countries or even in US states such as Connecticut and Illinois. Plus local currency devaluations in Argentina, Turkey and other EM countries. 

In many cases, obvious economic reforms have been blocked by vested interests and corrupt politicians, in some cases western owned firms have been instrumental in blocking the reforms. 

A default and reform programme can be a catalyst to implement these reforms. Using PREPA the Puerto Rico power authority as an example. The bond holders are calling to be made whole. But their underlyig generation assets are obsolete oil burners, the cheapest source of power in Puerto Rico now is solar with storage and FEMA is due to pay for the repair and upgrading of the Hurricane damaged transmission infrastructure. As far as I can see the PREPA bonds are worth little to nothing, but the bond holders are tryig to enforce price extortion on the islanders to recoup bond holder losses. 

Or in the case of Vene, jwhen you default, instead of reforming, you just knuckle down even more with the Bolivarian revolution and the corruption and narco trade that goes with it.

Finally on Barbados. If the bonds are at 35, that implies a recovery of 50c or more, but a 50c haircut of 175% of debt/ GDP obnly reduces debt to 87.5% of GDP; that is still more than double the level Reinhart and Rogoff saw as the danger zone. 


 I think we need to see some 5-15c prints to shock some reality into the longs. For me PDVSA bonds or Puerto Rico GO bonds are the two prime candidates out of the bigger defaulters.

Wednesday 16 May 2018

Euro tumbles, German export competitiveness rises

At EURUSD 1.07 last year the Deutschmark and French Franc were at more or less REER all-time lows. Italy is not much more expensive. The ECB is still printing and we may be seeing the re-emergence of the Eurozone crisis. Put another way could we see new all time highs for German export competitiveness? What will the Fed and Trump do with a blow off top for the USD?

Italy, oil, US muni taxes

The EU crisis was always going to be politically triggered, not economics or markets triggered, something many finance people could not understand for years. David Cameron got a zero when asking for reforms. But Italy is big enough to trigger an existential showdown with the European Commission and their compromised politician front men. 

Italy's TARGET2 imbalance is already €444bn, or 24% of GDP on €2.1Tn of debt and a €1.9Tn economy. As Varoufakis said, Greece's mistake was not defaulting on the ECB. Italian government spends over 48% of GDP and is in breach of Maastricht debt levels by more than 2x, having run >3% deficits many years since joining the EZ. 

The two parties seem to have agreed on a further stimulus plan so far as the high debt levels are currently showing up as deflationary. 

Nevertheless, if you are bored of London, they are offering a Non-Dom deal.

Looks like shale growth will overtake demand growth with the former revising higher and the latter set to be revised lower on EM wobbles... Hard to understand why oil is sitting at $78 or so right now. Could plunge back to the 50s to choke off shale growth easily enough.

Illinois and other bankrupt municipalities

What is Illinois considering to do to plug a huge pension deficit? Hint: it's not reducing spending or gilt edged pension benefits.  People are moving out of high cost and high tax areas already.  Amusingly Puerto Rico is now the lowest tax place you can go to in the US.

Wednesday 9 May 2018

Fading consensus trades over the summer

Oil is up about $30 since last June and is probably a fade from here for a few months on high supply levels. USD rally recently should also subdue import price inflation. Just need some weaker growth numbers for a lot of consensus macro trades to be run over during the summer. Political problems in Europe or China slowing headlines could also be a catalyst.

Long EM has already been run over by the USD rally. But long oil and short bonds, long equities, in paricular European ones stand out as vulnerable to me. 

Tuesday 1 May 2018

PCE numbers topping out?

PCE slowed to zero in March as Core-PCE pushed up to recent highs. Seems an industrial slow down may be on, lot of PMIs are off their peaks. Set against record short bond positioning a growth/ Iran conflict scare could trigger a clear out of the bond bears, although I do think yields will be higher and perhaps the curve steeper later in the year. 

Tuesday 24 April 2018

Treasury real yields

Inflation breakevens are above the Fed's 2% target, yet it looks like Treasury real yields might also be about to break out above the 1% cap QE seems to have placed on them. Can the US 10 year try for 3.25%

Sunday 15 April 2018

Wages bouncing following tax cuts

Wages bouncing again following a turgid H2 last year Seems the tax cut is being passed through but so far companies very cautious about paying up and shrinking margins

Part time/ maginally attached workers seeing some initial catch up as well