Just over a year ago, in one simple graphic, we showed why Bridgewater, which currently manages around $150 billion, is the world's biggest hedge fund. Quite simply, its flagship $80 billion Pure Alpha strategy had generated a 16% annualized return since inception in 1991, with a modest 11% standard deviation - returns that even Bernie Madoff would be proud of. And, true to form, according to various media reports, Pure Alpha's winning ways continued in 2013, when it generated a 5.25% return: certainly underperfoming the market but a respectable return nonetheless. However, Pure Alpha's smaller cousin, the $70 billion All Weather "beta" fund was a different matter in the past year. The fund, which touts itself as "the foundation of the "Risk Parity" movement", showed that in a centrally-planned market, even the best asset managers are hardly equipped to deal with what has largely become an irrational market, and ended the year down -3.9%.
The “Ig Nobel Prize” is parody of the Noble Prize that is awarded every year for the most trivial scientific achievement. For example, the 2007 recipient for the ‘Ig Nobel Peace Prize’ went to the United States Air Force Wright Lab in Ohio, for proposing the development of a ‘gay bomb’ that could be dropped in hostile territory and make enemy troops sexually attracted to each other. Make love, not war? So when we opened my email yesterday and saw the subject line: “Central Bank Governor of the Year”, we immediately presumed it was a similar satire. It wasn’t...
There are millions of people in that category. And their numbers are growing, not diminishing.
If Americans in particular want to pursue any solution to the threat of globalism or dollar collapse, they are going to have to start with themselves, and the community around them. Online trade is the last thing they should be worried about. Only when neighborhoods, towns, and counties become producers and self suppliers will they be safe from financial instability. Only when those same communities band together for mutual aid and self defense will they be safe from tyrannical political entities. Bitcoin accomplishes nothing in either of these categories, making it possibly the most popular non-solution for liberty to date. Bitcoin is consistently touted as a superior option to precious metals as a way to decouple from central bank fiat. Under examination, though, it appears to me that bitcoin is instead a deliberate distraction away from gold and silver, and other tangible solutions; in other words, we believe it to be a form of controlled opposition.
Some better than expected economic news out of Europe, Greek 10 Year yields dropping to 7.65% or the lowest since May 2010, and futures are... red? Alas, such is life in a world in which the S&P500, aka the E-mini, is simply a derivative of the Yen funding currency pairs, where the USDJPY touched on 105 after a straight line diagonal move only to sell off in recent trading. Heading into the North American open, stocks in Europe are seen mixed, with peripheral stock indices outperforming, buoyed by the prospect of Portugal echoing yesterday’s Irish NTMA return to capital markets with its 10y bond syndication. As such, despite the cautious sentiment, financials led the move higher, with Italian banks gaining for 4th session as IT/GE 10y spread narrowed to its tightest level since early July 2011. Of note, FTSE-100 index underperformed its peers since the get-go, with retailers and tobacco names under pressure. In spite of opening higher by over 3%, Sainsbury's shares have since reversed and are seen lower by almost 2% after co. CFO said that he expects FY LFL sales to be just below 1% and expects Q4 to be similar to Q3. Elsewhere, tobacco names came under selling pressure following reports that China is planning a ban on smoking in public by year's end.
This system works as long as debt continues to stay cheap. However, in the last 12 months the Fed has definitively crossed the point of no return with its policies. It is not just a matter of timing before this debt bubble bursts.
Hayek knew that avoiding the credit-created boom prevents the associated malinvestments and over-consumption while boom-bust cycles will be avoided through prevention or significant reductions in credit creation. Keynes, however, thought differently. Current Fed policy is a policy of illusion, or better yet, of delusion.
Back in September, just before the FOMC announcement in which Bernanke shocked everyone by not announcing a Taper, the 3 Year priced in the early part of the month at a yield of 0.913%: the highest since May 2011. After that, following the delay of the taper, yields dipped, but are once again rising higher, and moments ago the $30 billion 3 Year auction priced - in the first post-taper auction - at a high yield of 0.799%, a jump from the December 0.631%, and a tiny tail to the When Issued stopping at 0.797%, but still shy of the September wides.
Unintended consequences may have developed from QE policies that are not fully understood. They may materialize more clearly during the withdrawal process. Any of a number of obstacles could push the Fed ‘off course’ from the smooth landing that its baseline scenario suggests:
- Certainly, expanding the balance sheet by over $3 trillion has had a significant impact on valuations, market functioning, and asset allocation, so those effects could cause some market turbulence as they revert back to normal.
- Emerging markets, which benefited heavily in the early years of QE, have recently shown some disruptions, such as, slowing economic growth, weakening currencies, and capital outflows.
- Political and social concerns about income and wealth inequalities have grown due to the use of asset prices as a policy tool.
- Structural unemployment from long-term joblessness and technological advancement cannot be addressed through easy money.
- Politics is still polarizing, which in turn creates on-going economic headwinds.
Heading into the North American open, stocks in Europe are seen broadly higher, with peripheral EU stock indices outperforming after Ireland successfully returned to capital markets with its 10y syndication that attracted over EUR 10bln. Financials benefited the most from the consequent credit and bond yield spreads tightening, with smaller Italian and Spanish banks gaining around 4%. Following the successful placement, IR/GE 10y bond yield spread was seen at its tightest level since April 2010, while PO/GE 10y spread also tightened in reaction to premarket reports by Diario Economico citing sources that Portuguese govt and debt agency IGCP consider that the current level of yields already allows Portugal to go ahead with a bond sale. Looking elsewhere, the release of better than expected macroeconomic data from Germany, together with an in line Eurozone CPI, supported EUR which gradually moved into positive territory. In addition to that, smaller MRO allotment by the ECB resulted in bear steepening of the Euribor curve and also buoyed EONIA 1y1y rates. The Spanish and Italian markets are the best-performing larger bourses, Swedish the worst. The euro is stronger against the dollar. Japanese 10yr bond yields fall; Spanish yields decline. Commodities gain, with wheat, silver underperforming and Brent crude outperforming. U.S. trade balance data released later.
"Paper and digital markets levitate, central banks pull out all the stops of their magical reality-tweaking machine to manipulate everything, accounting fraud pervades public and private enterprise, everything is mis-priced, all official statistics are lies of one kind or another, the regulating authorities sit on their hands, lost in raptures of online pornography (or dreams of future employment at Goldman Sachs), the news media sprinkles wishful-thinking propaganda about a mythical “recovery” and the “shale gas miracle” on a credulous public desperate to believe, the routine swindles of medicine get more cruel and blatant each month, a tiny cohort of financial vampire squids suck in all the nominal wealth of society, and everybody else is left whirling down the drain of posterity in a vortex of diminishing returns and scuttled expectations."
Evolutionary theory as a perspective for understanding human behavior within capital markets is a more useful perspective than what economic theory has become... a cloistered, brittle theology that day after day becomes more abstract in its formation and more narrow in its application. The first and most basic lesson of an evolutionary perspective properly applied: we are well served as investors to jettison the superiority complex that comes with living in the present and looking back on what naturally seems a benighted past. The notions of liberal progress and evolution-as-hierarchy are so deeply ingrained that we assume that whatever behaviors are new or modern, including modern investment management practices or modern investment strategies (or modern monetary policy), must be part and parcel of some advancement over what existed in the past. In truth there is no up-and-to-the-right arrow associated with evolution; there is no intelligent design pushing us “forward”.
With the critical 50th Yes vote just being cast, Janet Yellen has officially become the first woman to head the central bank in its 100 years of existence. The vote continues, and the only question now is whether the current tally of 27 No votes will surpass the Bernanke record of 30 objections to the central bank head.
US equities converged down to VIX's warnings from the holiday period as for the 3rd day in a row equities dropped. This is the worst start to the year for the S&P 500 since 2005. Equities improved during the European session but top-ticked at the US open, tumbling to 10-day lows by the time Europe closed. A leak higher with a vertical ramp to VWAP in the afternoon gave way to selling in the last hour. Trannies are the worst year-to-date (-2.2% from 2013 close highs). Treasuries gained further today, with yields down 6-8bps on the year. The USD lost ground during the European session then flatlined for the rest of the day (-0.25% on the day). From Friday's close, commodities are ending almost unchanged but all had a very volatile ride today (most notably in gold and silver).
While there were some concerns that due to adverse weather conditions, the Yellen vote may take longer than usual with many senators’ return to Washington D.C. delayed, for now proceedings are going according to schedule: the vote is expected to proceed at 5:30 pm Eastern, with one option being that the roll call could begin as planned, leaving the tally open for a number of hours to allow latecomers to vote. As a reminder, Yellen needs a simple majority (51 votes if no senators abstain) with Democrats holding 55 seats in the Senate, so there will be no major surprises and Yellen will receive confirmation. The only open question is how many Republicans will abstain from supporting Yellen, and whether this will surpass the previous record of 30 Senators refusing to support Ben Bernanke during his 2010 renomination. . In the meantime, the actual debate surrounding Yellen's confirmation is set to begin at 3 pm Eastern.