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Unnatural Acts
With some trepidation, last night I called up a guy who manages a hedge fund (with some of my money in it) and asked, “So, how’d we do?” He says, ”We’re down 3% for the month. We got creamed on our longs but we were hedged, so the net was not so bad.”
I say, “Gee that’s great news! So you were long puts?” He gave a surprise response:
"No puts. We were long a bunch of long dated Treasury zero coupon bonds."
My guy’s defensive tactics worked very well in September. I think there was some of the biggest % moves in history in bond land. Consider this chart. Zeros were up 25% while the S&P was down 8%.
This trend has been going on for months. This chart looks at the last three. Note that Zeros are up 50%! Note also how tight the inverse correlation is.
I find this troubling. While I can get comfortable with a balanced portfolio where bonds counter cyclically provide a natural hedge, I do have trouble with hedge funds using the bond market as a synthetic “Put” against long equity exposure.
The reason for my concern is the leverage that is involved in creating a viable hedging mechanism. Based on recent results the hedging ratio of long zeros as a hedge against long stocks is about 3 to 1. So a billion of stocks is “hedged” when a $350mm long zero position is coupled with it. A zero has the duration equivalent of 4+Xs a straight ten-year. So another way of thinking of this is that to “hedge” $1 of S&P one would need to “own” (It's all leveraged) about $2 in ten-year bonds.
I think this an unnatural act of a sort. Leveraged bets in bonds are just that. A bet on bonds. They are not supposed to be a hedge against equity exposure. But they are. So what does that mean?
I conclude that we are in a bubble for bonds. There are people who own them for the wrong reasons. It’s speculation, not investing, that’s driving the bond market. So we are in the worst kind of bubble. A speculative one.
Please don’t read this as a recommendation to get short bonds. It’s not. I think we are in a bond bubble, but I don’t see that changing anytime soon. That said, a final thought from the fellow who runs money.
We’re concerned that our hedges are going to decouple. Interest rates can’t go much lower from here. It’s possible that global stocks can go down and US interest rates don’t follow suit.
If that happens we will have to respond. We may be forced to unwind the zeros and just buy more traditional insurance. The problem is that the alternative is very costly.
What he is saying is that he would be a net seller of Treasuries with a long duration and a net buyer of equity put protection. By itself, this would tend to exert downward pressure on stocks and also downward pressure on long dated bonds.
Where’s the Good News?
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Pls check this post in TF metals:
http://www.tfmetalsreport.com/comment/64599#comment-64599
They allow posting pictures, and thus post becomes much more informative.
Comparison charts between DJIA prediction and actual prices 8 months after forecast:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&start=0&st=0&sk=t&...
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2860#p34298
http://saposjoint.net/Forum/download/file.php?id=3031
Accuracy for last 2 months ( since it was long term forecast, I consider that most important) - 0-5%.
Future trend- accelerating downturn, reaching 10 000 in November 1st, 2011, 9500 end of December 2011, 7500 March 1, 2012, then more or less stable ( as USD takes a hit-devaluation from q2, 2012) , 7000 Nov 2012 ( elections)!
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&start=0&st=0&sk=t&...
From earlier correlations, such stock market prices means 2-4% drop in GDP starting from Q1 2012.
And loss of internal and external creditor trust in the USA debt leading to default - starting from Q2 2012 once double recession is obvious and future is even less happy.
hey bruce, here's the good news:
Guest Post: Bailout Lost Opportunity CostSubmitted by Tyler Durden on 10/01/2011 - 20:25 Germany Guest Post
'This Bloomberg article about German utilities giving away power got me thinking what our world would look like if the trillions in bailout money had instead been spent to build alternative energy infrastructure. From Bloomberg: “The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid.” “You’re looking at a future where on a sunny day in Germany , you’ll have negative prices,” Bloomberg New Energy Finance chief solar analyst Jenny Chase said about power rates in wholesale trading. “And a lot of the other markets are heading the same way.” I will use only simple round numbers and calculations to make my point.'
In the article it explains how we have too much power, and this was inconceivable to we peons not very long ago---we should be rejoicing at the potential think about thinking about what works----that was said to be impossible only a short time ago-----if this is possible maybe it's possible to wrestle the virtual 'money' away from the mob and do ANYTHING different after all, I worked with zeros in 1983----it's old hat come on let's start having some fun om
Wind is a nice option for a small percentage of the world's energy needs, but it is not a good long term strategy. It doesn't scale. The atmosphere only has so much recoverable energy. We can probably scale up to double or triple the current capacity, but past that point there would be rapidly dimishing returns and noticable effects on the environment, winds speeds, weather.
mind,
my point was to point out that a day where consumers are paid for consumption is a 'good news day', a change, a new awakening----it's a big fucking deal, so let's just stay on point and enjoy the impossible happening.
yeah, the machine is broken except for those of us who continue to resurrect it in our minds---the only place it exists.
All that you write must be true because it is what I hear and read all of the time; but,---a question----
Don't you find this event just a little bit exciting?
Not much fun in zeros----simple math---though I always loved the zero---it's magical and of course it was not so simple because a part of mankind's mind was so stuck that zero could not be imagined
look at us now----ZEROhedging like we had invented it
so let's have some fun and see what shows up----maybe a new form of zero om
There are also plenty of days where without fossil fuels...you'd be without power...or very short of it.
Current alternative energy is something to tinker with...not ready for prime time...it's awaiting the next new technology. It won't be wind or solar. Of God forbid, biofuels.
already have it in the form of natural gas. that includes the engine technolog(ies) in all their various forms. it'll be a great day for the American people to see the demise of the gasoline powered internal combustion engine. What a piece of crap.
Isn't NG a fossil fuel?
Actually, what this HF manager has on may be the most practical "hedge". In the event the hedge doesn't work anymore, that probably would be because of a major crash. In a major crash, equity puts might well be useless because of counterparty risk. Whether the counterparty is an exchange or an IB via an OTC position, the likelihood of loser bankruptcy is high. Buying equity puts would just be a waste of money.
What he is really saying is that Bruce's investment is safe, and may even see a gain, provided all hell doesn't break loose. If it does break loose, anybody with any sort of courterparty risk is going to get hammered.
I believe that 2008 was the last market crash in which the shorts will get paid. Next time they will just be on the other side of a Lehman.
For anything less than a crash, his hedge might be more effective if he would buy fixed income puts, rather than equity puts, which tend to carry a higher volatility pricing input.
It is undeniable that the traditional metrics in the 10+ space have now changed and, as you note BK, will continue to diverge from the metrics as we have known them. Further compression is upon us and will be for some time yet. We now have a feedback loop up and running as the drive to create a wealth effect transitions from equities to credit. This is a seeming move of desperation at cutting more firebreaks ever closer to the core.
Stupendous sign of our times and terrific bit of 411
So BK, where do you put the starting point for this bubble?
A maximum megacrazy bubble buildup can go 6 or 7 years...
Bonds in a bubble? No shit? Negative real rates on a 10YR and this is a surprise?
The most comical exercise since 2008 has been watching the FED chase 'investors' back and forth between UST and Equities. They are just like sheep. If you can get one to go through a gate, they all will.
That's because all the investors are trying to avoid whatever chair is going to be pulled out of the game of musical chairs next. What else can they do?
Long Bond to 1.5% ala Japan..
Don't know about 1.5 but those yields are going to plunge. I've had this back and forth with MHFT long before he and I ended up over here and he got his ass handed to him. Came up again locally and the recommender was completely wrong immediately. Bruce if you still have your own business i would recommend sticking to the ZH mantra of "the end the world is near" and leave it at that. Where is Corn42 anyways?
http://www.thereformedbroker.com/2011/09/29/notes-from-the-doubleline-lu...
Good news is that they have Obama Fried Chicken in China:
http://shanghaiist.com/2011/09/30/spotted_in_beijing_obama_fried_chic.ph...
Q. How can you tell Obama Fried Chicken from Kentucky Fried Chicken?
A. Obama Fried Chicken is all left wings
That's some racist shit, up in there now.
OMFG I need a T-shirt. Paging WB7...
Anyone HOLDING long term bond positions now is betting on 2 things .Low inflation rates for 30 years and low rates of growth in the economy for 30 years.If this is the case then growth rates implied in long term budget projections are way too high .In addition if the economy has very low growth rates for a protrated period of time there is going to be immense prssures on politicians to spend more money on social programs .This is only going to increased the budget deficits into the future.This is bad enough as it is ,but every other western indutrialized country is experiencing the same thing at the same time.The argument that we are the same as Japan has 2 sides to it both bad.One way it is a bad argument because in many ways Japan has many more positive things going for it right now.a lower unemployment rate,a cohesive society,a high savings rate (at least until recently),actual deflation , a large trade surplus for decades and ` 1 trillion of foeign reserves.,while the US is the opposite on all counts.The second way it is a bad argument is that both countries are carrying about %360 of total debt,and both countires are facing huge costs from the baby boom generation.Some have argued that the US is better off because of demgraphic advantages.The problem with this argument is that if the bond market is right and there is going to be little growth in the US then both birth rates and immigration will both absolutely crater.Low bond rates are going to require a downward adjustment for any defined benefit pension fund .Municipal funds as well as some corporate funds of this type are considerably underfunded now;with lower impled returns ,it will only get that much worse.,requiring Federal bailouts or receivership.
There are two arguments for lower rates from this level .One is the flight to safety argument and the other is the presence of FEd buying.Maybe Europe is worse off ,but that is like saying that you would prefer to be in the water instead of out of bounds ,while playing golf.Both are bad outcomes .The second argument is the Fed buying..When the FED ventures into completely uncharted waters by buying the 30 year,they are acting just like any other large buyer who is trying to manipulate the market.It is not because there have inside infromation about inflation or the growth rates for the next thirty years;they are just trying to manipulate the market at higher and higher prices just like the HUnt brothers with silver in 1980,although on a much larger scale.And before that you comment the Hunt brothers were stupid idiots,let's wait a few years to see if you will say the same thing about the FED. The ironic thing is that if these policies are successful,then inflation will increase and there will no other buyers but themselves.
If the bond market is correct and stays at these or even lower rates,the implications for stocks are hugely negative.First our exports will fall of the cliff ,obviously affecting our multi national companies.Second if the dollar remains. strong due to a flight of safety ,which shows up in buying of Treasuries,the currency conversion will adversely affect stocks negatively.And third,lower implies growth rates for 30 years will destroy one of the arguments to own securities.And do not think divdends will protect you.as very slow or little growth will cause companies to lower not raise dividends overall in the future.You might say that has never happened and i will argue that almost no growth for 30 years and the interest rates at zero for 3 years has never happened either.Every argument made for higher stock levels involves ,ceteris paribus.I do not think that it takes much imagination to realize that some of these underlying assumptions will just not exist in the future.
We are in the eye of a perfect storm.All western goverenments have large amounts of debt and a rapidly ageing population.We have central bankers who are flooding the world with unneeded liquidity.The real risk and it is not a small risk is that instead of the "Arab spring",we will experience the western spring,where the current forms of governement are overthrown in a country near you.And if you think that it can not happen in the good old USA,then think again.Just imagine demonstrations in Boston Chicago,Philly,St Louis,Atlanta,Dallas,San Fran,DC addition to Ny happeign all at once and on a larger scale and more violent scale
Bonds may be perceived as a flight to sfaety NOW,but for how long
if what you say actually transpires then indeed yields will plunge even lower. All this nation knew during the 19th century were specualations followed by massive depressions. Interest rates were never lower than during the Civil War. That's why we went on a gold stanard--and why we would should start a form of one now.
I'm long the long bond until the trend changes and the channel breaks, period... My guess is the rally continues for at least 2 more months.
Still expecting the gvt mandated mortgage principal write-downs, Mr Krasting?
I'm expecting a significant new ReFi program.
Should that happen it will result in a reduction of the interest rate to about 4%.
There would be no reduction of principal as a result of this.
This would be only for loans held by Fannie, Freddie or FHA.
bk
debt jubilee. At this point it's the only answer. we'll see what the bank(s?) look like at the other end. terms of trade must be maintained and only a gold standard can do it.
This has been building for a while. When even Huffposters know who Bill Gross and Mohamed El-Erian are, the world has shifted on its axis.
That's because both of them went begging to the government to bailout their bets in bonds.
Whenever QE boosts equities, these bastards complain about the fed and say US is doomed to get money back into bonds.
When Fannie and Freddie were about to be wiped out, Pimco got 100 cents on the dollar just as China did.
Moneymanagers are the recipients of most evil kind of socialism.....false justification of their merit. Without Fed, wall st. will be just another boring banking as it should be.
"Fuck the Fed" Boston protest:
http://www.youtube.com/watch?v=0fV0YjQQzYk
Unnatural Acts.
The best thing about ZH.
That and the Unnatural Actors. :o)
Unnatural acts sounds very pornographic and spicy. Unnatural actors sounds like bad porno casting IMHO.
So lets stick to the good porno script that BK proposes! And let the actors act naturally an unnatural scenario!
I think the reference is shared. American citizens taking it up their @ss just like in the movies!
Except few are waking up on how screwed they are...the younger you are the more you are screwed.
They don't want you to see that the revolution can be real.
Occupy Maine - rain or shine
http://www.youtube.com/watch?v=UoCKOPSenPY
Occupy Asheville, NC
http://www.youtube.com/watch?feature=player_embedded&v=8xTDvopzRIU
http://www.mountainx.com/article/35891/Occupy-Asheville-opens-with-assem...
Occupy Seattle
http://www.youtube.com/watch?v=my0-m2_apZ8
Occupy Denver in front of Federal Reserve
http://www.youtube.com/watch?v=1Ap6KEfVoZM
http://www.youtube.com/watch?v=lop4HllGKcU
Occupy Austin, TX
http://www.youtube.com/watch?v=53lsRCn4FHg
Occupy San Antonio, TX
http://www.youtube.com/watch?v=INgl_jHkfm0&NR=1
Occupy Portland
http://vimeo.com/29899204
Occupy Los Angeles
http://www.youtube.com/watch?v=FZr5NS19mw0
Occupy San Francisco - Marines joining in
http://www.youtube.com/watch?v=QPQOU1KNF0U
http://www.youtube.com/watch?v=qIgP1FlqRnA
Occupy DC in starting protest against corporate personhood
http://www.youtube.com/watch?v=uABmme8C_7c&feature=player_embedded
Occupy Chicago in front of the Federal Reserve
http://www.youtube.com/watch?v=luON3CNuq3A&NR=1
Occupy Boston - "Fuck the Fed"
http://www.youtube.com/watch?v=0fV0YjQQzYk
Occupy Wall Street New York 500 arrested on Brooklyn Bridge
http://www.youtube.com/watch?v=yULSI-31Pto
More launching near you: http://www.occupytogether.org/
It is a class war. 1% vs 99%. Make banksters pay!
Wish you were right, Bruce. I think most bonds are owned by folks like Leo, who have to chase yield, even if it's only a half point on the ten year. Maybe a few hair cuts on Greece, Cali, B of A, etc. will put the fear of god in them. Due diligence is only a bad joke.
What about all the bonds that were bought as part of interest rate swaps? Couple of funbux involved there too...
Further to my earlier comment today, here are a couple more blogposts on EEM and on EUR/USD as they finished this last quarter: http://strawberryblondesmarketsummary.blogspot.com/2011/10/emerging-marketsweekly-quarterly-yearly.html
AND
http://strawberryblondesmarketsummary.blogspot.com/2011/10/how-eurusd-ended-3rd-quarter-of-2011.html
didn't find any strawberries there! nor any blondes! Just crazy zig-zags.
So, now it's okay to be a trader again? Not automatically a psychopath?
Only if he is trading bonds, and making less money than Bruce. Envy is such a bitch.
Down 3% on how many $$ under management? Will tell a lot if he's underperforming or not. That said, I'm up 10% on the month, small account, trading nimbly like a willo-wisp.
wow....only 3x leverage.....wha's the world coming to when the hedgies drop from 1000X to 3x???
I did not explain this well. The leverage is nearly infinite.
First you have Zeros. These are derivative instruments that already have high leverage to "duration". Then you have the leverage (repo) on the zeros. Depending on who you are this can be done with as little as 2% money down. So the leverage is 100+Xs.
I hope your guy is already switching. If he thinks puts at VIX 40 are expensive <they are> how much more will they be when VIX is at 70 or 80. It's hard for me to see the decoupling as a kind and gentle process, likely it will be fast, furious and will coincide with a period of high volatility. So what is your guess or thought as to the forces that will cause treasuries to become less attractive? The only reason I can see for having treasuries at these absurd rates is they've killed every other safe haven and the trillions simply have to go somewhere.
"So what is your guess or thought as to the forces that will cause treasuries to become less attractive?"
Ben's printer runs out of ink. Only then will treasuries lose their subsidy.
But it's truly an end-of-the-world trade. And the paper you get paid for shorting them will be worthless.
Yep VIX calls still look really attractive
who's "they"? government? government's spend and do not save. even government at some point has to pay for things. that's all "the crisis in Europe" is. the act of "government" having to pay. Insofar as "1000 times leverage" that's a thing of the past. Why have your money in a hedge fund when the biggest winner is Treasury debt? The vast majority of those hedge funds are completely toxic to me now. What are they backed by? If you say "treasury debt" i've got every bridge in New York City to sell you.
Silvergeddon...the two clowns you mention, Cloward and Piven, are two socialist black professors at Columbia from the late '60s. But yes, the idea was to burden the American economy and gov't with so much debt that the economy simply collapses. Prez Owe believes in this theory and you can see the results...........
" the idea was to burden the American economy and gov't with so much debt that the economy simply collapses."
...and somehow all the black socialists from Columbia got the GOP to sign on with this scheme??
They were not black.
They were two liberal socialist radical contemporaries of Bill (I didn't bomb enough) Ayers and Bernadine (Don't hate me because I am stupid AND ugly) Dorn.
http://theobamafile.com/_opinion/Cloward-Piven.html
And HE's SOOOOOOOOOOOOOOOOOOOOOOOOOOOO Worried!!!
Mr. Benny................
http://www.financialsense.com/node/6505?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+fso+%28Financial+Sense%29&utm_content=My+Yahoo&utm_term=FSO
If you want a reason to panic, read this pile of reality. Your bitch ass is owned lock, stock, and barrel by the banks, compliments of the Fed. They gave it away, and the taxpayer is on the hook for the " loan ", at zero percent, no payback contemplated. All of America, and the world - butt fucked in the middle of the night by the Fed, and D.C. POLITICAL FIREWALL POLITICIANS.
The Federal Reserve is neither Federal nor a "Reserve". This private bank run by the "Bank of England" has been stripping the US of its assets since the days of Andrew Jackson. If the $16,000,000,000,000.00 given away secretly, since 2007, to the member banks isn't reason enough to overhaul our entire government financial system then our country is doomed to financial failure. You won't read this in the mainstream media....but it may emerge in the coming elections. Read about this first ever audit of the Fed and understand why we are in such trouble. Tuesday, September 27, 2011 First Ever GAO Audit Of The Federal Reserve(You can click on the site and read the report).
The first ever GAO audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill (HR1207), so that a complete audit would not be carried out. Ben Bernanke, Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have on markets. Nevertheless, the results of the first audit in the Federal Reserve nearly 100 year history were posted on Senator Sanderâs webpage earlier this morning.
sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3 (Summarized below)
What was revealed in the audit was startling:
$16,000,000,000,000.00 (TRILLION) had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the worldâs banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest.
Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs. To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is only $14.5 trillion.
The budget that is being debated so heavily in Congress and the Senate is only $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world. In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion. ****
When you have conservative Republican stalwarts like Jim DeMint(R-SC) and Ron Paul(R-TX) as well as self-identified Democratic socialists like Bernie Sanders all fighting against the Federal Reserve, you know that it is no longer an issue of Right versus Left. When you have every single member of the Republican Party in Congress and progressive Congressmen like Dennis Kucinich sponsoring a bill to audit the Federal Reserve, you realize that the Federal Reserve is an entity onto itself, which has no oversight and no accountability.
Americans should be swelled with anger and outrage at the abysmal state of affairs when an unelected group of bankers can create money out of thin air and give it out to megabanks and super-corporations like Halloween candy.
The list of institutions which received the most money from the Federal Reserve can be found on page 131 of the GAO Audit and are as follows:
Citigroup: $2.5 trillion($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America: $1.344 trillion ($1,344,000,000,000)
Barclays PLC (United Kingdom): $868 billion* ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank (Germany): $354 billion ($354,000,000,000)
UBS (Switzerland): $287 billion ($287,000,000,000)
Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)
IT WILL BE INTERESTING AS TO HOW MUCH ATTENTION (AS WELL AS THE SLANT) THE MAINSTREAM MEDIA GIVES THIS UNBELIEVABLE POSITION OF OUR GOVERNMENT HAS PLACED US IN WITH NEVER PREVIOUSLY HAVING AN AUDIT OF THE FEDERAL RESERVE.
I AM CONFIDENT THAT WE WILL HEAR SOMETHING LIKE THE FED HAD TO GIVE STIMULUS TO WHOM THE $16 TRILLION WENT TOO BECAUSE IF WE HAD NOT ALLOWED THIS IT WOULD BE THEIR COLLAPSE AND THE OURS.
HAS ANYONE EVER HEARD OF CLOWARD AND PIVEN ECONOMICS? (PARAPHRASING) IT INVOLVES TWO HARVARD PROFESSORS WHOSE BOOK SAID TO CHANGE ANY GOVERNMENTâS ECONOMIC SYSTEM INTO A SOCIALIST ONE, IT SIMPLY DRIVES THEIR ECONOMY INTO THE DITCH THEN THE CITIZENS ALLOW THE GOVERNMENT TO DO WHAT THEY WISH TO SAVE THEM