A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It's Not Enough

Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.” 
 

BofA’s Michael Hartnett noted that supersized central bank intervention which he dubbed a “liquidity supernova” is “the best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro…”
To be sure, Hartnett’s “discovery” did not come as a surprise to regular readers: back in October 2014, Citi’s Matt King calculated that it costs central banks $200 billion per quarter to avoid a market crash, or as he put it:

For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.

Today we showed just what central bank buying looks like in practical terms when we demonstrated that the Swiss national Bank had purchased a record $17 billion in US equities in just the first quarter, bringing its total US equity long holdings to an all time high above $80 billion…

… in the process soaking up nearly 4 million AAPL shares in the first 3 months of the year.

 
On the surface, these sums appear vast; however in the latest weekly report by Deutsche’s Dominic Konstam, the credit strategist finds something even more troubling: $1 trillion in central bank liquidity YTD – or roughly $250 billion per month –  is not enough.
The reason is two-fold: on one hand there is the stock of existing central bank assets that keeps growing at an exponential pace, which implies that central banks have to monetize ever more assets just to keep the system from becoming unstable, or “running to stand still” as Citi recently framed the growing problem; on the other hand, offsetting the “organic” expansion of central bank balance sheets is the decline in FX reserves among liquidity managers, the most famous recent episode of which is China’s $1+ trillion drop in reserves which started in mid-2014 and has yet to conclude. Recall that global liquidity is defined in dollar terms “as the sum of all FX reserves, the fed’s balance sheet and the central bank balance sheets of the Eurozone, Japan, UK, China, India, Russia, Saudi, South Africa and Brazil.”
So what happens when in addition to central bank liquidity one adds various other global liquidity components? Here is Konstam’s troubling discovery:

Having accelerated for four straight quarters from 2015q4 to a local peak of +5.0 percent in 20167q4, q1 saw the first slowing to a year over year growth rate of just 2.23 percent. In absolute terms it was $29.5 trillion, almost unchanged from 2016q3. The main culprit (again) was FX reserves that sharply dropped by almost 1 percent versus a year ago, based on February data.

Worse, the Deutsche Banker forecasts that “the weak patch for global liquidity growth is likely to extend through to 2017q4 where even based on flat FX reserves ahead of ECB or Fed balance sheet changes, the current rate of ex Fed central bank liquidity growth should lift liquidity growth back to slightly over 5 percent year over year.”
This is a problem because “5 percent is not a lot at a global level. It doesn’t accommodate faster nominal growth. And as the chart below indicates is consistent with relatively subdued bond yields. In 5y5y US Treasury terms a 3 percent rate seems a little elevated as is and is pretty much discounting liquidity growth closer to 10 percent, a level last seen in 2013.”
But the biggest disconnect between liquidity and implied “fair value” is once again to be found in stocks:

Global equities tell a similar story but even more starkly; they appear to be discounting liquidity growth over 10 percent. This is another example of how the equity market seems to be discounting something very different from the bond market.

Why did Konstam make this analysis? Because, as he writes in his intro, “more than ever before in this tightening cycle we would suggest that the Fed faces the most delicate of balancing acts. There seems to be an almost automatic convergence on a June tightening with September also a possibility and then some kind of balance sheet adjustment. The ECB is widely viewed to be not far behind in terms of another taper and the possibility of an eventual depo rate increase (we think 15 bps priced by August 2018) as a quid pro quo for QE extension.”
In other words, just like Hans Lorenzen from Citi warning one week ago, the market is blissfully ignorant of the threat that imminent global central bank tightening poses on risk assets, a risk neither ETFs, nor algos, nor CTA have considered.
Konstam’s conclusion is that there are two outcomes: either asset prices drops, or central banks will ultimately be forced to inject even more liquidity. Here is his take on the former:

There are a couple of ways in which these disconnects can be resolved. But until they are, global central banks need to tread warily. One resolution is of course equities retreat and yields decline, recognizing the dearth of liquidity. Recently we have used broader liquidity indicators in the context of nominal output for the US, Europe, China and OECD in general to demonstrate that there is falling “excess” liquidity that always implies some kind of loss in real output momentum with a lag. This doesn’t necessarily mean outright declines in output growth but it would, for example, be consistent with weaker PMIs and typically puts a ceiling of where longer term yields can rise to. Specifically we find that yield momentum tends to decline implying, specifically for the US that 10s might be capped around the 2 ½ percent level with downside potential closer to 2 percent on a moderate loss of upward yield momentum.

And then the latter, which can be resolved by either QE4 (or more) or a sharp drop in the USD.

Another way we could see resolution would be an accelerated move higher in liquidity. This seems unlikely in terms of positive new accommodation by central banks, absent deterioration in observed growth or inflation. However it is possible if the dollar were to weaken which would reflate the dollar value of existing liquidity but also probably contribute to a faster recovery in FX reserves. The problem is that dollar rate correlation has remained stubbornly tight although as we have argued since Trump’s election, one senses that that correlation is less assured…. Recent weakness in the likes of iron ore, copper and oil are concerning. The weakness that we have seen in DXY, especially reflecting the European currencies, seems more to do with better growth expectations in Europe and relief around France politics. This will help global liquidity at the margin but Europe can ill afford a very strong euro and we think of this as more an idiosyncratic adjustment to the dollar rather than a US policy induced regime shift that sustains higher inflation.”

The bottom line, however, boils down to the following chart first shown by Citi last September, demonstrating that the marginal cost of central bank liquidity injection is now negative…

… and is located in the lower right quadrant, something both markets and policy makers realize.
Which means that when stocks realize just how insufficient the record $1 trillion in central bank liquidity has become, central banks – which have stepped into every single market correction over the past 7 years with some “liquidity supernova” – will, for the first time since the financial crisis – be out of tools… something Janet Yellen appears to have realized some time ago.

Source: Zerohedge – A Problem Emerges: Central Banks Injected A Record Trillion In 2017… It's Not Enough

Kushner family sells $500,000 'investor visa' to rich Chinese at Beijing ballroom event

The Kushner family came to the United States as refugees, worked hard and made it big – and if you invest in Kushner properties, so can you. That was the message delivered Saturday by White House senior adviser Jared Kushner’s sister to a ballroom full of wealthy Chinese investors, renewing questions about the Kushner family’s business ties to China.

Source: Blacklistednews – Kushner family sells 0,000 'investor visa' to rich Chinese at Beijing ballroom event

RFK Jr.’s Tucker Carlson Interview Promotes Healthy Debate About Vaccine Safety

The liability protection enjoyed by the vaccine manufacturers has served to allow dismissal of large class actions filed by the vaccine injured.Thus, the most powerful legal tool that allows claimants who individually lack legal firepower, to bring claims as a group, thus mustering the resources to conduct sophisticated investigations, hire the best qualified expert witnesses, and survive onerous legal processes while they extract critical secreted information from the manufacturers. Without class actions, only the wealthiest individual claimants can afford to sue a pharmaceutical giant and take on their high-powered well-financed law firms.

Source: Blacklistednews – RFK Jr.’s Tucker Carlson Interview Promotes Healthy Debate About Vaccine Safety

"The Brink Of War": The Horror Of The Deep State's Plan Exposed – Part 2

Authored by Jim Quinn via The Burning Platform blog,
In Part One of this article I detailed how propaganda has been utilized by the Deep State for decades to control the minds of the masses and allow those in control to reap the benefits of never ending war.
In Part Two I will discuss recent events, false flags, and propaganda campaigns utilized by the Deep State to push the world to the brink of war.

“We penetrated deeper and deeper into the heart of darkness” – Joseph Conrad, Heart of Darkness
The use of graphic images, electronically transmitted across the world in an instant, along with a consistent false narrative promoted by the captured corporate media, is the preferred means of appealing to the emotions of those who want to believe atrocity propaganda. Instigating a march to war through the use of unfounded fear, misinformation, staged photo ops, and appealing to passions and prejudices was as revolting to Albert Einstein  in the 1930s as it is today to normal thinking individuals.
“He who joyfully marches to music in rank and file has already earned my contempt. He has been given a large brain by mistake, since for him the spinal cord would fully suffice. This disgrace to civilization should be done away with at once. Heroism at command, senseless brutality, deplorable love-of-country stance, how violently I hate all this, how despicable and ignoble war is; I would rather be torn to shreds than be a part of so base an action! It is my conviction that killing under the cloak of war is nothing but an act of murder.” – Albert Einstein
It seems the level and intensity of the propaganda campaigns has ratcheted up dramatically in the last half dozen years and appears to be reaching a crescendo as we speak. It’s almost as if the Deep State is frantically trying to maintain the status quo, even as the worldwide financial Ponzi scheme of debt approaches the point of collapse. The domestic conditions in Europe, North America, and Asia are deteriorating rapidly. The propaganda doled out trying to convince citizens their financial situation is not worsening has failed.
The people realize they have been screwed and continue to be screwed by the politicians, bankers and corporate fascists running the show. This is the major reason Trump was elected. People were desperate for someone who offered them a promise of economic revival and reduced government interference in their lives.
The problem is no one is capable of saving the US Titanic. The iceberg was struck sixteen years ago when the Deep State engineered a plundering campaign driving the national debt from $5.8 trillion to $20 trillion, and unfunded welfare liabilities to $200 trillion. Unpaid for tax cuts will not save us. Unpaid for shovel ready infrastructure projects will not save us. Threatening foreign countries with tariffs will not bring manufacturing jobs back. Excessively low interest rates will not spur investment, but it will create a pension crisis and impoverish senior citizens.
Devaluing your currency when every country in the world attempts the same “solution” will not work. Passing an Obamacare lite healthcare plan that keeps mega-corporation insurance companies and hospitals in charge solves nothing. The demographic time bomb of boomers turning 65 cannot be reversed. Providing the appearance of normalcy and improvement by artificially boosting the stock and real estate markets to all-time bubble highs only makes the coming crash that much more devastating.
It is clearly evident to me the drumbeat of war is louder than it has been in decades as this Fourth Turning enters its ninth year. Every previous U.S. Fourth Turning has climaxed with a more horrific war than the previous, as the technological “advances” allow the Deep State controllers to create cannon fodder more efficiently. The year 2011 seems to have been the nexus for the Deep State to create new enemies and sow the seeds of discontent and revolution around the globe. U.S. troops withdrew from Iraq in 2011, while troop levels in Afghanistan remained low.
The neo-cons were running out of conflicts to keep the profits flowing. The U.S. economy was headed back into recession as the temporary effects of the Fed’s QE heroin injection and Obama’s massive porkulus plan were leading to the inevitable drug withdrawal and fall back into recession. The Deep State managers had to act fast. They needed new enemies, more wars and more QE.
Was it just a coincidence Hosni Mubarak was overthrown in Egypt during 2011 while the U.S. stood by and did nothing? After the democratically elected replacement turned out to be a Muslim extremist, we fully supported the next coup which placed a military dictator in charge. He just got a grand welcome from Trump a few weeks ago. I guess military dictators are OK when they do what we say.
A dictator who had the nerve to not honor the U.S. dollar as the currency of choice in his kingdom, Muammar Gaddafi, was swiftly overthrown and killed by a NATO force led by the U.S. in 2011. A stable country was turned into a terrorist haven overnight. It’s now a lawless hellhole inhabited by ISIS, Al Qaeda, and various other Muslim terrorist factions. Along with the vacuum left in Iraq, Libya became a breeding ground for terrorists, armed by the U.S.
Shockingly, after decades of stability, factions within Syria began a civil war against Assad and his government in 2011. Do you see a connection yet? Just as U.S. military presence in the Middle East began to wane, all hell began breaking out across the region. McCain and his band of neo-con world changers helped arm the “moderate rebels” fighting against the suddenly evil Assad. These moderates became ISIS, who now suddenly became the new bogeyman to be feared by Americans, as professionally produced videos of beheadings and other atrocities began to be disseminated by the mainstream media.
The War on Terror had a new jolt of gusto and increased funding for more military mis-adventures. The propagandists ignored the inconvenient fact Assad was fighting against ISIS and Al Qaeda. They ignored the fact Assad ruled over a secular country – not a country run by religious American hating Muslim zealots. Fighting against Assad and ISIS doubled the arms dealers’ profits.
Then Russia threw a monkey wrench into the Deep State plans. They fully supported Assad as an ally because they need his ports. The real reason Assad was attacked was because Saudi Arabia and Qatar need to build their natural gas pipeline across Syria to reach Europe. Virtually all of Europe is dependent upon Russia to supply their natural gas. The Deep State’s retaliation for Putin’s support of Assad was to overthrow the democratically elected president of the Ukraine who had rejected NATO for a closer partnership with Russia. The U.S. instigated coup and installation of a subservient puppet led Putin to put Crimea under Russian control and support Ukrainian rebels as they fought the new regime. This dramatic increase in tensions between NATO and Russia again generated more profits for the military industrial complex. Missiles and troops are pouring into the NATO countries surrounding Russia.
The American propaganda specialists now had their new enemies. Syria and Russia, with Iran and North Korea providing occasional fear mongering diversions, became the focus of the neo-cons and their pliant media mouthpieces. The false flag downing of a Malaysian airliner over the Ukraine was blamed on Putin and Russia. No radar proof or physical evidence was ever presented implicating the Ukrainian rebels. They were winning the civil war and the U.S./NATO needed to turn world opinion against Putin.
The first attempt at a false flag gas attack in Syria occurred in 2013, as the U.S. backed rebels murdered over 500 innocent victims in an attempt to turn world opinion against Assad and provoke NATO involvement on par with Libya. When this atrocity propaganda failed to work, the Deep State turned to heartstring pulling photographs of dead and injured children, with a consistent narrative spewed by every media pundit as instructed by the controllers.

The first atrocity propaganda photo was in 2015, functioning as twofer on the propaganda scale. The picture of a three year old Syrian boy who drowned when his boat from Turkey to Greece capsized was spread across the world on every media outlet for a week as faux outrage against Assad and Putin was ramped up to hysterical levels. The evil Assad had caused this refugee crisis, even though it was the rebels who started the war.
The blame for this tragic death was solely due to his father’s recklessness. The entire family lived in Turkey for three years and was not forced to go to Europe. The father was being funded from a relative in Canada and wanted to go to Europe for dental work. The picture was also used to promote the continued Muslim invasion of Europe. How could Europeans turn away these nice people? George Soros’ master plan was working perfectly.

A year later Aleppo boy was the latest atrocity photo used to reverse public opinion against Assad and Putin, as their military success against ISIS, Al Qaeda and the U.S. supported rebels endangered the Deep State plan. As usual, the American public swallowed the propaganda, hook, line and sinker. The picture suddenly appeared and was disseminated on every mainstream media outlet in the country for days, with pontificating pundits tearfully portraying Assad as a butcher. No context, no proof he was injured by government forces, and no proof it wasn’t just a staged photo op like previous attempts. This last ditch attempt to convince the world to support a Syrian invasion also failed. This atrocity propaganda game loses its impact on a video game addicted, ADD ridden, SJW populace fairly quickly.
Private citizen Donald Trump was unequivocal in his opposition to Syrian intervention before being elevated to the presidency, as shown in these tweets:
Many Syrian ‘rebels’ are radical Jihadis. Not our friends & supporting them doesn’t serve our national interest. Stay out of Syria!
Don’t attack Syria – an attack that will bring nothing but trouble for the U.S. Focus on making our country strong and great again!
Trump’s non-interventionist rhetoric regarding Syria and unwillingness to declare Putin an evil enemy of America during the campaign resulted in an all-out assault by the Deep State to derail his candidacy, falsely claiming he was a puppet of Russia. These unsubstantiated claims and vitriolic propaganda campaign against Trump to elect Deep State candidate of choice – crooked Hillary – led to a heroic effort by the alternate media across the internet countering the mainstream media propaganda with facts and reason.
When the corporate media shills rolled out the “fake news” storyline to discredit the alternate truth telling media, it immediately blew up in their faces, as the majority of the public began to realize the fake news was being plied by CNN, MSNBC, CBS, and the rest of the captured corporate legacy media.

The discontent with the status quo among the normal people in flyover America was so great, it overcame all the Deep State propaganda, fake news, vast sums of money behind Clinton, and liberal urban strongholds, to elect Donald Trump as an agent of change who would kick the bums out of Washington. The undermining of Trump’s presidency began before he took office as the propaganda machine kicked into overdrive, with non-stop media squawking about Russia hacking the U.S. election in favor of Trump.
There were no facts, no evidence, no substance, but plenty of innuendo, plenty of unfounded accusations, and fake news reports at a fanatical level by faux journalists being paid millions to do their part. Putin as an evil manipulator, controlling Trump, was the meme flogged 24 hours a day by the Deep State to keep Trump on the defensive.
The only question at this point is whether Trump has already been co-opted by the Deep State military industrial complex or whether he is being manipulated through false flags and traditional propaganda techniques. Based on the slow progress on his domestic agenda of immigration reform, Obamacare repeal, tax cuts, infrastructure spending, and trade reform, it appears Trump decided to take the advice of neo-cons within and outside his administration and distract the masses with some new military adventurism.
The relentless pounding of the Russian hacking narrative put Trump on the defensive. As Syria and Russia were on the verge of crushing the ISIS/Al Qaeda/“moderate rebel” resistance, a new false flag was needed. As McArthur so accurately described seven decades ago, the incessant propaganda of fear is what enriches the military industrial complex.

“Our country is now geared to an arms economy which was bred in an artificially induced psychosis of war hysteria and nurtured upon an incessant propaganda of fear.” – General Douglas McArthur
In Part Three of this article I will discuss how Trump has been co-opted by the Deep State into doing their bidding with military intervention and bullying across the globe. It’s just a continuation of imperialism run rampant. Empires always decline and fall due to military overreach and economic bankruptcy. The American empire will be no different.

Source: Zerohedge – "The Brink Of War": The Horror Of The Deep State's Plan Exposed – Part 2

Bank Of Japan "Bought The Dip" Over Half The Time In The Last 4 Years

A year ago, we noted that The Bank of Japan (BoJ) was a Top 10 holder in 90% of Japanese stocks. In December, we showed that BoJ was the biggest buyer of Japanese stocks in 2016. And now, as The FT reports, the real "whale" of the Japanese markets is stepping up its buying (up over 70% YoY) entering the market on down days more than half the time in the last four years.
Since the end of 2010, The FT notes that the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥6tn. Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥1.2bn of ETFs every single trading day (tailored to support stocks that further “Abenomics” policies), and lumbers in with buying bursts of ¥72bn roughly once every three sessions. 

Some traders say the bank’s supposedly targeted buying has cushioned the whole market. Last year, foreign investors were net sellers of ¥3tn of Japanese shares – a retreat that might have decimated benchmarks had the BoJ not swum in with ¥4.3tn of support via ETFs.
In the afternoon sessions on days the BoJ comes in big, the average return on the index is about 14 basis points higher.
 
Since the annual quota was increased to ¥6tn, Nomura says, the BoJ has provided a cumulative boost to the Nikkei of about 1,400 points.

But, as we've noted in the past, it appears to be the flow, not the stock, that is the big driver…

As in a casino, The FT's Joe Lewis concludes, the whale definition may hinge less on the cash on the table and more on the psychological impact on other gamblers. The BoJ has been at the game long enough for the market to know it reliably buys on weakness.
Of the 1,038 business days between April 2013 and March 2017 there were 449 sessions where the market was down: the BoJ bought on more than half of them. Whale or not, investors are now primed to think they are swimming with one.
So given that we know SNB is extremely active in stock markets, and The BoJ is the Japanese stock market, does anyone realistically doubt The Fed is/has been active?

Source: Zerohedge – Bank Of Japan "Bought The Dip" Over Half The Time In The Last 4 Years

A New Street Drug Can Kill You By Touching Your Skin: What You Need To Know

Authored by Alice Salles via TheAntiMedia.org,

The opioid epidemic is a real tragedy. It has been devastating states like West Virginia, Vermont, and Maine – among others – and it’s been the number one factor in a major incarceration shift that is still seldom discussed by the media.
But as soon as the Centers for Disease Control and Prevention (CDC) released a new set of national standards for prescribing painkillers, yet another deadly drug threat is beginning to concern authorities in certain states.
New Hampshire Governor Chris Sununu spoke at a press conference this week, warning that a drug that’s 10,000 times stronger than morphine has made its way into the state. As a result, many first responders have been left scrambling to find a way to handle this new threat.
Carfentanil, a powerful new opioid, has already claimed three lives.
Engineered to be used as an elephant tranquilizer, the drug’s lethal dosage is 20 micrograms. Since the product can cause deadly effects just by being sprinkled on someone’s skin, authorities are highly concerned.
Manchester Fire’s EMS Director Chris Hickey is warning New Hampshire residents they must be “hyper, hyper vigilant of what is out there, hyper vigilant of where you put your hands, what you come in contact with.”
 
“There is nothing out there other than going on in hazmat suits on every single overdose that is going to completely protect us. We just have to be super, super careful with it,” Hickey told his own crew.

The drug is so powerful that first responders are even having a hard time reversing overdoses when they arrive at emergency locations.
On one occasion, Hickey said, one of his men had to use six to eight doses of Narcan, an overdose reversal drug, to revive a victim – twice the dose used in most cases.
As doctors and first responders notice a pattern, they are also warning the public that Narcan isn’t going to be enough from now on. So what is next?
Fear, of course.
As state and local authorities find themselves panicking over this issue, many will ask for tougher laws. Federal agencies will then intervene, adding further restrictions to the already heavily regulated drug market in the United States. Adding fuel to the fire, the drug war will continue to target opioids like heroin and opium while Congress continues the process of imposing strict limits on some opioid prescriptions.
As more restrictions are applied, users will have a harder time gaining access to the substances they are already addicted to, forcing them to turn to the black market for their fix.
With this, incidents like the ones we’re seeing in New Hampshire will become even more common, prompting further government involvement. As this snowballs into further restrictions, the opioid epidemic will reach unimaginable levels, killing a record number of people, making orphans out of countless children, and creating another boom in U.S. incarceration rates.
While it’s easy to understand why locals in New Hampshire are afraid, the rhetoric and reality on the ground should not be used to push for more heavy-handed intervention from local and federal governments. Instead, it’s time to look deep into how the opioid crisis started, keeping in mind that the government’s own fruitless battle against drugs was the very root of what is now concerning New Hampshire authorities.
Like New Hampshire’s Drug Lab Director Tim Pifer, we agree that “this is certainly unfortunately just the tip of the iceberg.” But just like any iceberg, its base lies in dark, cold waters. Unless we’re ready to be honest with ourselves, finding the courage to dive deep to find where it begins, we will never know how huge this problem really is. And if we’re not willing to look at the root of the problem, we won’t be able to find a proper solution.

Source: Zerohedge – A New Street Drug Can Kill You By Touching Your Skin: What You Need To Know

Axel Merk: "There's More To Investing Than Chasing Companies That Want To Make Mars Inhabitable"

Authored by Axel Merk via MerkInvestments.com,
How does one construct a portfolio in an era of seemingly ever rising and highly correlated asset prices? Years of asset prices moving higher has changed both retail and institutional investors; it has changed the industry; and, in my humble opinion, those changes spell trouble. The prudent investor might want to take note to be prepared.

I allege that for many, investing is no longer about prudent asset allocation, but about expressing themes. If you like green technology, you tilt your portfolio towards green energy. If you are socially conscious, there’s an ETF for that. I have no problem with anyone allocating money to any specific theme. However, has anyone else noticed that it doesn’t matter what theme you allocate money to? Investors are all playing the lottery and guess what: everyone’s a winner!
Now, clearly, that’s an over simplification, as not every industry does well all the time – just ask those who invested in MLPs (master limited partnerships) in pursuit of income from fracking. Let me rephrase: the more of a monkey you have been, i.e. the less you have been thinking, the better you’ve likely performed over the past nine years. “Buying the dips” has been a consistently profitable strategy.
That has created numerous oddities:

Take the investor who diversifies, rebalancing part of a portfolio to near zero-income generating fixed income. Advisors pursing such strategies have seen their clients take money away, as they are not willing to pay a management fee for essentially holding cash.

The problem: cash is discarded even if it may be a prudent investment choice.

Take the investor who diversifies, rebalancing part of a portfolio to alternative income streams.

The problem: Anything that generates an income in a zero-income environment is, almost by definition, risky. That is, both stock and fixed income securities in such a portfolio are so-called risk assets, i.e. I believe they are likely to move in tandem, not providing desirable diversification in a downturn.

Take the prudent investment advisor who has allocated part of a portfolio to true alternatives, such as long/short equities or long/short currencies. While providing diversification, such portfolios have likely underperformed during the relentless rise of equities. Worse, when the markets have had a hiccup, such as in early 2016, many of those portfolios still lost money, as the volatility of risk assets overwhelmed the cushion provided by the alternatives. Read: clients have been abandoning advisors, lured by competitors showing how great their performance has been, investing 100% in equities since the spring of 2009.

The problem: Those solicitations conveniently skip the inconvenient fact that their clients lost huge in 2008.

Take the investor who wants to participate in the upside, but be protected on the downside.

The problem: they spend a small fortune buying insurance, even when they might be better off just holding a cash buffer (again, advisors don’t hold cash, as clients would withdraw that cash at some point).

If many want to buy insurance, someone needs to write insurance. The one thing more profitable than buying stocks may well have been to write insurance. Funds that “sell volatility”, amongst others, have been amongst the best performers in the first quarter. Mind you, we do not recommend you touch any such product with a broomstick unless you know exactly what you are doing and able to stomach some serious losses. The theory behind many of these funds is that you collect what amounts to an insurance premium when volatility is low; the periods when you have to pay up are short and intense, but those setbacks are ultimately temporary.

The problem: Earlier this year, one such fund was in the news for substantial losses, not because volatility spiked, but because portfolio management got cornered when they tried to roll derivative contracts. Let’s just say: something that looks too good to be true, may well be. Interesting things may well happen (read “contagion”) if and when these positions unwind.

Active management is dead. Long live passive investing. Never mind that anything but an index fund on the broad market is an active investment choice. The point being that you don’t want to pay some smart cookie to try to beat the market. That’s because those so-called experts were wrong in 2008 (and many times since). What can they possibly know? Besides, your favorite green tech investment fund is doing just fine, thank you very much.

The problem: Cautions provided by active managers help one frame possible risk scenarios. Managing risk is important, even if many risks never materialize.

Active managers are leaving the industry. Who needs anyone skilled in navigating rough waters when you have robots providing liquidity?

The problem: it may be helpful to have a captain on board when the auto-pilot fails.

Brokers are increasingly hand-holding relationship people, with portfolio allocation decisions being made by a small group creating model portfolios. After all, why risk your job trying to go out on a limb for your client?

The problem: there’s nothing wrong per se with this trend, except that it increasingly concentrates investment decisions for huge amounts of money into very few people. We hope they are smart. Importantly, we hope investors understand who makes the investment decisions and what the conflicts are. Let’s just say: when something goes wrong, class action lawyers will have their day in court.

An increasing number of investors are skipping advisers altogether. After all, why not cut out the middle man if they don’t know any better than you do?

The problem: there’s no problem with do-it-yourself investing except, just as professionals, investors owe it to themselves to make prudent investment decisions. We think that many individual investors do a better job than some professional investors these days in allocating their money. That said, that’s a very low bar.

If you have enough money, you allocate some money to venture capital. At least you have something to talk about at cocktail parties. It might help if you knew what your venture capital fund invested in, but let’s not get distracted by details.

 
The problem: no problem if you can afford it. May I make the suggestion, though, that you first try to understand your overall portfolio, before you dabble in illiquid investments?
What could possibly go wrong?
Quite simply, markets do go down, not just up. In my view there is an increased risk of a flash crash in an environment where we are ever more dependent on automated liquidity providers that might withdraw liquidity the instant there’s an anomaly in the market (read: if you place a market order to sell a security, don’t complain if the market price is dramatically below the most recent trade on an exchange).
While regulators may be all over flash crashes and possibly bail you out by canceling your order, a more pronounced decline is something you might want to prepare for as well. We hear pundits proclaim that we cannot have a bear market unless there’s a recession. There are couple of problems with that:

First, it’s not true. There was no recession during the October 1987 crash.
Second, we often don’t know whether there’s a recession until we are well into it; there have been instances when we didn’t know there was a recession until it was over.
Third, we’ll only know we are in a “bear market” when the market is down 20%. That’s kind of late to prepare for a bear market. Except, of course, if the market tumbles much more than that, such as the Nasdaq after 2000; or the S&P 500 in 2008.

Is there a better way?
The other day, we met with an investor who has 40% of his portfolio in cash. He doesn’t like market valuations and has decided, he’ll put money to work if the market declines by 10%; then more money to work if it declines another 10%. We think this investment philosophy beats that of many. At least, he has taken chips off the table during the good times and has money to deploy. Before readers cry out: “There’s so much cash on the sidelines, this market must go up!”, I would like to caution that this investor is a rare exception of many investors I talk to – and I talk to retail investors, advisors, family offices, to name a few. The same person, by the way, told me he is at a loss on what to advise his friends, as he doesn’t want to encourage them to get into the markets given current valuations.
Indeed, this appears to be a market where just about every pessimist is fully invested. Because folks have been wrong so many times calling the market top, we believe many market bears are fully invested.
I think there’s a better way. The better way of investing is to take the long view. Sure it’s great to have one’s stock portfolio surge, but investing, in the opinion of yours truly, isn’t about gambling, but about asset allocation with humility. Passive investing is all right for certain things, but should not replace common sense. When the likely successor to Janet Yellen (we put our chips on Kevin Warsh) has complained that asset holders have disproportionally benefited from monetary policy, and that the focus has to shift, I think it’s but one indication to do a reality check on one’s portfolio, as headwinds to asset prices may well increase.
The short answer is that investors may well look at their portfolios more like pension funds or college endowments do. Except, well, many pension funds and college endowments have fallen into the same traps individual investors and advisors have. Let me rephrase: investors might want to invest according to a philosophy a well-run endowment might have. Let me just mention a few principles here. Here’s the investment allocation of an endowment of a private college – I’m not suggesting this specific allocation is the right one for any specific person or institution, but want to provide it as food for thought:

31% hedged strategies
27% equities
21% private equity
8% real assets
6% cash
5% fixed income
2% equity-like credit

Note that the equity holdings are less than 30%, not the 60% often touted in a “60/40” portfolio (with 40% referring to bonds). The number can be larger or smaller for any one investor, but I believe we should get away from the notion that one needs to have a large portion invested in equities. Endowments are long-term investors, yet don’t go to 100% equities; so why should a young investor be all in equities? By allocating a far smaller portion, you don’t need to lose sleep over asset bubbles. Instead, you can indeed rebalance or make gradual shifts.
Note the biggest bucket is “hedged strategies.” We have long advocated that investors need to look for uncorrelated returns. A long/short equity strategy or long/short currency strategy might generate such returns. Importantly, this bucket of alternatives is far higher than what many advisors choose. In an era of very expensive assets, we think this may be rather prudent. This doesn’t solve the issue of how to find the right hedged strategy – remember that those strategies will have under-performed the overall market. Important here is the investment process of the underlying ETF, mutual fund or whatever product one might want to consider.
Private equity is obviously not accessible to many investors. Relevant though is that there’s a big bucket allocated to investments where one expects a long-term return without seeing the daily price moves. Sometimes it’s good not to have tick-by-tick data. An individual investor might be able to replicate this by opening another account, selecting a few long-term ideas, then throwing away the key to the account for a few years. Well, one should still review the investments periodically, but the point being: it is okay to invest different portions of a portfolio according to different philosophies. Say, be a day trader for a small portion, but do hold strategic positions. Some of this can be achieved by intentionally mixing up the styles of different investment products. If not all of them perform well at the same time, that’s a good thing!
This particular portfolio has a small allocation to “equity-like credit”; we are not making a judgment whether this is too high or too low; the point again is that there’s a very broad allocation to different asset classes. Note, by the way, that ‘equity-like credit’ is likely to perform, well, like equities. Even with those assets added, the equity portion is still modest.
Not mentioned in this particular portfolio, as least not in the headline numbers, is an allocation to precious metals or commodities. Those who have followed us for some time know that we encourage investors to consider gold as a diversifier. We have often referred to gold as the “easiest” diversifier because it’s easier to understand than some exotic long/short strategy. In our analysis, the price of gold has had a near zero correlation to the S&P 500 since 1970; however, over shorter periods, correlations can be elevated. In our analysis, gold has done well in every bear market since 1971, with the notable exception of the bear market in the early 1980s when then Fed Chair Volcker raised interest rates rather substantially.
The point of all of this is not to suggest that investors need to add equity-linked credit or private equity to their portfolio. No, the point is that there’s more to investing than chasing high flying companies that promise to make Mars habitable.
You might have also noticed that I squeezed in the word “humility” in asset allocation above. Have some respect that things that go up can also go down. Having respect means that one doesn’t adjust one’s lifestyle (expenditures) as a reaction to rising asset prices. Investors can control expenses more so than income. So maybe we should be spending far more time talking about how we spend our money rather than how we invest it. But I digress…

Source: Zerohedge – Axel Merk: "There's More To Investing Than Chasing Companies That Want To Make Mars Inhabitable"

Crisis Meet China – China Meet Crisis

By Chris at www.CapitalistExploits.at
Earlier this week, Kyle Bass spoke on Bloomberg about the reckless expansion of the credit system in the Middle Kingdom.

He warned about the ballooning asset-liability mismatch in the shady $4-trillion wealth management products (WMPs) market.

And went on to say “this is the beginning of the Chinese credit crisis” while admitting it could take some time for things to really start unraveling.

A fair call…
How many of us have figured the trend out, only to allocate too much capital to a trade and even lose on a trade which finally works… eventually? I know I have. I’m pretty sure Kyle’s position sized pretty well. After all, this is far from his first rodeo.

In the interview Kyle referenced an SCMP article from a few weeks ago that went largely unnoticed by most. It was on the Chinese government coming up with more and more creative ways to stem the capital outflow underway since mid-2014:

“China’s foreign exchange regulator, SAFE, has asked for cooperation from multinationals, including Sony, BMW, Daimler, Shell, Pfizer, IBM and Visa, to manage and control the flow of capital out the country.”

This all feels a bit deja vu-ish.

Long-time readers will know we’ve been bearish on China and the renminbi for well over 2 years now. Back in October 2014 we said that:

“I don’t know exactly how a breakdown in the renminbi will play out. However, it is a sure bet that all those markets that prospered over the last 15 years or so on the back of a China will do badly. Where things become shady is the collateral damage to other markets that have had nothing to do with the Chinese economic miracle.”

A few months later, we took a closer look at the cracks appearing in China’s interbank lending market, indeed feeling (correctly in hindsight – lucky us) that timing had arrived to short the currency cross via the options market:

“The interbank lending market is an integral part of any country’s banking system as it is where banks maintain their short-term liquidity requirements. Often a bank will have a mismatch between between short-term assets and obligations and as such they will have to enter the interbank lending market to maintain optimal liquidity. If a bank has excess short-term reserves they may want to lend these out to other banks who have a shortfall in short-term reserves. The opposite also occurs where a bank, with a short-term funding deficit, will enter the market to borrow funds to match short-term liabilities.

 
The behavior of the interbank lending market can provide one with a good appreciation for the liquidity of the banking system as a whole. If there is a lot of liquidity in the system (more short term assets than liabilities) the interbank rate will fall, if there is scarcity of short term assets relative to liabilities then rates will rise. So a rising interbank rate is generally associated with contracting liquidity conditions. Rapid rises in interbank lending rates are often associated with banking or credit crisis. This happened in the lead up to the GFC. What happened was that as banks began to fear the ability of other banks, who are their counter-parties, to make good on their obligations they demanded higher rates especially from banks already facing liquidity problems which only compounded their original the situation.

 
A rapid rise in a country’s interbank lending market is also a good predictor of the direction of a country’s currency, or at worst a confirming indicator. Let’s have a look at the interbank lending market of a few emerging nations over the last 12-18 months and then look at what is happening with the renminbi. I think it is instructive for what we have been positioning for in our funds.”

In truth, it was an easy bet to make.
Volatility was around 2%! NOT buying put options would have been like having Scarlett Johansson invite you into her bed and then falling promptly asleep. You just couldn’t do that. And so you had to buy.

Taking a look at the Chinese interbank lending today:

Not yet getting critical but worth watching.

And pricing of the options:

So a 6.6% move to make 100%. Seems reasonable but nowhere near as good as it looked in late 2014 – unfortunately.

The problem – if there is one – is that 12 months is a long time to date an ugly girl, work for a nasty boss, or drive a Lada. But it isn’t a particularly long timeframe to hold an option for.
And yet that’s the best the option market gives us.

Sure, you can throw your towel into the ring in the futures markets but if, like me, you dislike leverage and margin calls (because you WILL get it wrong at some point), then you’re going to have to figure some better way to ride this pony.

The answer, I think, is this.

– Chris

“What you see when the liquidity dries up is people start going down… and this is the beginning of the Chinese credit crisis.” — Kyle Bass
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Source: Zerohedge – Crisis Meet China – China Meet Crisis