# Thought Bubbles from the Deep



## DeepState

Starting a thread on some of my thoughts, observations and views.  Maybe some forum readers might find them of interest or use.  I expect that these may be a little ‘specialised’ and therefore uninteresting for most. Hopefully, not all.

I am seeking useful questions, feedback or postulates which sharpen my understanding and abilities. Working collaboratively on areas of common interest would be the ideal outcome for me and the primary purpose of this. This is my signal to space.  There is life here (no claims that is it intelligent). Come visit. 

Some alerts: This is not an effort at a line by line account of my portfolio. I will not disclose my portfolio, or the transactions therein, in a comprehensive manner. I do not undertake to alert the forum to changes in views previously discussed.   I will be wrong a lot of the time.


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## DeepState

The most important decision we make in investment, particularly in somewhat diversified portfolios, is the overall allocations to major risk categories.  Traditionally, these are considered as equities, bonds, cash, property etc. More recently, the concept has moved to risk dimensions somewhat like those in the 3rd chart.

At a overarching level, it is absolutely clear that returns from bonds on an ongoing basis are not going to be good.  Whilst it is arguable that real returns might still be positive, when the return to bonds is lower than the cost of locking cash up in a box and issuing certificates on it (sort of like callable deposits, a form of cash), you have hit the bond floor, particularly if the CBs are inflation targeting and credible enough not to hyper-inflate storage and admin costs.  We are not seeing returns to duration risk being rewarded at all in large swathes.

There is a corollary to equities.  Earnings still haven't done much and yet prices are moving ahead.  Whatever you thought equities would do 'in the longer term' ten to twenty years ago, it is now a fair chunk lower.  The debate really centers around how much lower.  Answer: in all likelihood, a fair bit in the US.  Nothing big looks particularly cheap, although many will argue that EM equities is cheap relative to DM equities at present.



Source: Credit Suisse (market implied real discount rate)
Note: Aust looks fair (relative to history), but our market is dominated by resources and financials.

Let's do some maths.  Intergenerational report says Aust GDP will be 2.8%pa in the next 40yrs.  Inflation is 2.5% per RBA target band.  So-called equilibrium bond yield then works out to be about 5% per annum (sounds about right if the FOMC reckons the long term figure for the short end is 4%pa).  The market implied return for Aust services and industrials is about 7.5%pa.  That's a 2.5% risk premium over long term equilibrium bonds.  Seems a little light.  Do this for the US and you fall over.

To support high returns to equities, you need to rely on arguments like a productivity surprise when labour is returning from the doldrums (usually productivity shocks occur when everyone is losing their jobs) or that equities are going to become more expensive simply because it is the least stupid place to put your money at the moment pending a better idea. Or maybe the profit share of GDP swings even further to corporate, or the listed profit component grows at the expense of the unlisted.  Stuff like that.

Assessable long term returns to long-only bulk beta just aren't what they used to be.  It was made to be so by CB policy and a savings glut due to lack of confidence to convert fresh money into productive capacity and the effects are genuinely visible. 

What now?  $X bucks today doesn't buy the kind of retirement $X bucks bought two years ago, assuming no social security support.  

There are other kinds of risk premia in the market besides equity, duration and credit. I think the way to adapt is by adding meaningful exposures to other kinds of risk premia which you can't buy-hold in a traditional sense and balancing things out.  But you maintain exposure to by trading your portfolio in certain ways.  Carry and momentum, which I wrote of in the forex threads, are examples.

This is where I am currently (sort of):



This is where I think I need to be going to (sort of):



Charts are from Harry Liem, Mercer.  The segments represent proportion of portfolio risk, not physical allocations.

Risk is not having enough money to do what you needed to do with it.  With lower expected returns from traditional buy-hold, other kinds of 'trade-to-hold-exposure' to extract other forms of premia become more viable as offsets to the tiring workhorses that have been equity risk premium and term premium.

I think someone moved my cheese.

When I started out over twenty years ago, it was deemed terribly risky to own anything other than direct property.  Amazing when I look back at it.  Some clients referred to equities as 'those gambling things'.

The key thing here is that investment is about buying cheap stuff.  The innovation here is that this stuff is not just an asset, but an exposure to a kind of risk that looks like it has a reward in it.  When the rewards to buy and hold appear much diminished, I feel compelled to look at alternatives.

I think, for example, the return to carry might re-assert in currency if cross border finance re-emerges as a phenomenon.  Duration looks a really really bad bet with virtually no downside in many markets.  Amazing.  Equities won't give you the real returns that were once expected.  May be this is as good as is possible to obtain and we need to adjust our expectations down.  Maybe not.


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## qldfrog

DeepState said:


> Duration looks a really really bad bet with virtually no downside in many markets.  Amazing.



do you mean no "upside"?
And just for a complete novice trying to understand very unfamiliar concept
"Duration"-> aka the fact of holding onto an asset be it equity, bond, TD, gold?
In essence, a buy and hold for any asset becomes too risky vs the reward potential it might bring?

Sorry for the focus on duration,I understand this is just one risk factor among others but I got troubled by your sentence
Many thanks anyway to take the time to teach that view


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## DeepState

qldfrog said:


> do you mean no "upside"?
> And just for a complete novice trying to understand very unfamiliar concept
> "Duration"-> aka the fact of holding onto an asset be it equity, bond, TD, gold?
> In essence, a buy and hold for any asset becomes too risky vs the reward potential it might bring?
> 
> Sorry for the focus on duration,I understand this is just one risk factor among others but I got troubled by your sentence
> Many thanks anyway to take the time to teach that view




My first visitor!  Welcome welcome welcome....

Bonds are all backwards.  Yields up, price down.  No downside (to yields).

Duration is a concept which expresses the (sort of) average number of years that payments from the bond are made.  If the bond has long maturity, is usually has a duration which is longer than a bond with shorter maturity. At its most technical, duration is a measure of interest rate sensitivity of the price of a bond.  The longer the duration, the more sensitive the bond price is to yield movements.

Duration is thus to do with the time frame over which coupons and capital will be returned and nothing to do with holding period (which can be fractions of a second).

Ordinarily, you get paid to hold long duration relative to short duration.  There is no really super-solid explanation for it other than this stuff moves a lot more in value than short duration and you need to be compensated for that risk over time.  Also, long bonds are usually a bit more specialized and and less people are habituated to these and hence prices trade higher than arbitrage arguments might warrant.  Also, when you make a loan for a long period of time, it's not like you can change your mind part way through (for the most part).  Hence, you need to be compensated for this lack of lending flexibility.  For all these reasons, you get paid for holding long bonds over time and expect to make more money than holding near term debt securities over time.

Right now, any concept of a premium for these things has basically vanished by dint of CB policy moves.  They have priced the risk out in the hope that it encourages borrowing and forces money out of bonds into other risky stuff like direct capex and equities.

You now pay for the right to lend in a heap of places.  This vaguely makes sense if you think prices will fall by more over the period that you hold the bond for (you might, for example, hope to sell it at an even more negative yield and make a capital profit despite negative interest rates - a greater fool strategy rationale).  Alternatively, you think that prices are going to fall at a rate faster than you are losing nominal value.  Except, there is nothing around suggesting the inflation expectations are that weak.

You might lend at negative rates because holding heaps of cash is actually not costless.  You need to allow for rotting of your notes, guarding it, moving it around etc.  Hence, you can put up with negative interest on deposits to some degree.  That forms the floor on which cash rates can flow unless we become cashless and cannot actually take notes and coin out of a bank.  Once the yields on bonds falls below the point at which cash at bank with fees is higher than the bond yield, it is utterly stupid to hold bonds on any argument whatsoever beyond the belief that short term debt will take more of a haircut than long term debt in the event of restructure despite rates being priced as totally riskless.  That, or you expect bank fees to go through the roof over time.  A CB might, possibly, do something incredible to the capital requirements to back short term deposits that achieves this.  You have to reach that deep to justify this stuff.  

We're pretty much at the point where burying your cash is a better option than buying bonds.  This was supposed to be impossible.  Yet, here we are.


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## Faramir

DeepState said:


> The key thing here is that investment is about buying cheap stuff.  The innovation here is that this stuff is not just an asset, but an exposure to a kind of risk that looks like it has a reward in it.  When the rewards to buy and hold appear much diminished, I feel compelled to look at alternatives.




Thank you Deepstate. I understand this but I am struggling to apply it to the real world. I caught two falling knifes in the past 12 months. Thankfully I also got some good shares as well. Of the total amount (which is not much) that I started with 12 months, about 40% is still in cash. Why do I feel some hesitation to spend more? I haven't even looked into EFTs yet. Gut feeling tells me to wait (beginner's gut feeling.) I see in one of the pie charts, "Term" is nearly one third of the pie.



> I think, for example, the return to carry might re-assert in currency if cross border finance re-emerges as a phenomenon.  Duration looks a really really bad bet with virtually no downside in many markets.  Amazing.  Equities won't give you the real returns that were once expected.  May be this is as good as is possible to obtain and we need to adjust our expectations down.  Maybe not.



If someone was to start now (like me), have we missed the boat? Has the opportunity vanished?


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## qldfrog

DeepState said:


> Duration is thus to do with the time frame over which coupons and capital will be returned and nothing to do with holding period (which can be fractions of a second).



ok
5y/10/20y bond and the expected premium due to risk taken irrelevant to the fact you can sell/buy them in a few days if you wish to.
Got that one. thanks so this is specific to bond (corporate/state)


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## qldfrog

and one more point of vclarity:
 EM equities is cheap relative to DM equities at present.
EM vs DM
I initially thought European Market vs ..hum D for Deutsch?? but that was too euro centric based on my background and made no sense related to your graph
EM as emerging market is more like it but vs DM??not an acronym I know to mean first world/aka developed market
and bingo Developed market with a bit of google help
so
unless wrong and to help other beginners
*EM emerging market vs DM developed market*

The discount existing between is one of the reason i actually have a reasonably big exposure to the EM  in my current portfolio


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## DeepState

Faramir said:


> about 40% is still in cash. Why do I feel some hesitation to spend more? I haven't even looked into EFTs yet. Gut feeling tells me to wait (beginner's gut feeling.) I see in one of the pie charts, "Term" is nearly one third of the pie.
> 
> 
> If someone was to start now (like me), have we missed the boat? Has the opportunity vanished?




You might be reluctant to spend for a number of reasons.  
- Fear.  By not fully investing, you will lose less than you might have if investments go bad.  That way, you are going to feel somewhat better than you would have if the worst happens.  We think in relative terms (and it makes us miserable, see Relational Frame Theory if interested).  You will feel less bad....a good thing.  When less experienced, in these types of situations where it is not some form of entertainment for you or a desparate effort to escape poverty via a long shot, downside is the thing we think of most.  You won't be thinking much about how you would make less if the investments actually go well.  You have two anchor points in your head.  Zero and what would happen if things were fully invested.  You are trying to minimize regret against both anchors.  That leads to partial investing.  Most often, you will just do half of what you targeted...in your case, you've invested 60%.
- Lack of opportunity.  Not many ideas coming your way.
- Mentally averaging in over time to reduce the potential regret of getting set on one day and that one day turning out to be a bad day to start.

Given you are not experienced yet and have not been purposefully training yourself on this for a long time, the gut feel is likely not informative to you about genuine money making.

You have not missed the boat.  It's just that the distance traveled in the boat for the same ticket price is now maybe half to two-thirds of what it might have been pre GFC for a typical retirement 'balanced/growth' mix.  If you invest primarily via bonds, it is a total disaster.


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## DeepState

qldfrog said:


> ok
> 5y/10/20y bond and the expected premium due to risk taken irrelevant to the fact you can sell/buy them in a few days if you wish to.
> Got that one. thanks so this is specific to bond (corporate/state)




There are different concepts to duration and we have only been discussing the most common usage.  The concept is applied to nominal bonds issued by gov't at any level, corporates and, maybe, asset backed securities of some stripe.

The second most common is 'credit duration'.  The change in the value of a security for a small change in the credit spread.

You can estimate the duration for equities too, but equities are rarely assessed with this concept in mind.


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## qldfrog

And to follow on Faramir, trying to apply this in concrete terms is not that easy.
The good thing Deepstate is that once again, your email cleared my complacency  and let me had a look at my portfolio as a whole; inc super/real estate
and I am not confortable with what I see

I also am selling my residential IP this month and will get some fair amount of cash coming in at settlement.Where to from there?
while I see short term the ASX jumping above the 6000, I do not expect to be there in early 2016, and the risk is so big of a black swan trigger that i am not confortable to  put that cash back in the market even if I have a short term positive outlook;

Risk approach is personal and based on situation, but as i try VERY hard to avoid having to go back to corporate slave, it is critical for me to manage risk.
Your thread is a gem both for learning and to trigger thought processes;
Why did not I go into finance 20 y ago.....
Many thanks please carry on;
PS: being in Australia, apart from these worl wide trends which obviously impact us, do you sometimes try to use some of the local trends for investing decision?
By that I mean, I have a groundhog day feeling here of a society going thru all what I experienced in the 90's in western europe, in term of immigration, economy,sense of entitlement, politics etc and the sad future here is pretty easy to draw based on this experience.Any meaningful way to leverage that "knowledge" on an investment scale?


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## DeepState

qldfrog said:


> and one more point of vclarity:
> EM equities is cheap relative to DM equities at present.
> EM vs DM
> I initially thought European Market vs ..hum D for Deutsch?? but that was too euro centric based on my background and made no sense related to your graph
> EM as emerging market is more like it but vs DM??not an acronym I know to mean first world/aka developed market
> and bingo Developed market with a bit of google help
> so
> unless wrong and to help other beginners
> *EM emerging market vs DM developed market*
> 
> The discount existing between is one of the reason i actually have a reasonably big exposure to the EM  in my current portfolio




EM: Emerging Markets.
DM: Developed Markets.

The argument is made that the relative P/E between the two favours EM based on historical relationships.  This result is genuinely there, but the implications are just not that straight forward if you look into reasons why that might be the case.  Lots of arguments are made based on things like demography etc.  What is often missing in these arguments is what you get for a dollar spent.  The growth rate for EM nations like China is now much slower than it had been as it matures.  Russia is cheap for a reason. etc. I have some EM, but it is less than 10% of my current total equity exposure.


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## craft

DeepState said:


> You can estimate the duration for equities too, but equities are rarely assessed with this concept in mind.




Duration (as in interest rate sensitivity) is very important for long term equity selection, especially at the moment with interest rates so low. High duration stocks (little pricing power, big current asset bases) – banks spring to mind - seem overpriced too me unless interest rates don’t move up for a long time. Duration margin seems negative in the equities market to me at the moment.  However some of the lower duration stocks are much more attractive from a long term perspective.   One of the few opportunities left in this time of financial suppression.  

Basically the negative duration premium in equities makes the yield chase occurring now dangerous but still leaves opportunities for buying long term growth at a reasonable price.


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## Ves

craft said:


> Duration (as in interest rate sensitivity) is very important for long term equity selection, especially at the moment with interest rates so low. High duration stocks (little pricing power, big *current* asset bases) – banks spring to mind - seem overpriced too me unless interest rates don’t move up for a long time. Duration margin seems negative in the equities market to me at the moment.  However some of the lower duration stocks are much more attractive from a long term perspective.   One of the few opportunities left in this time of financial suppression.
> 
> Basically the negative duration premium in equities makes the yield chase occurring now dangerous but still leaves opportunities for buying long term growth at a reasonable price.



_(My bold above)_

craft  -  when you say "current"  do you mean current as the accounting definition (less than 12 months, ie. high working capital requirements)  or do you just mean companies that currently have big asset bases / capital requirements in general?   I'm thinking that you mean the latter,  and at the end of the day the first thing your post reminds me of is Buffett's comments re See's Candy and the hyper-inflation period in the 70s/80s.

I've been thinking about the yield chase,  and my own personal bias towards stocks that pay healthy dividends right now  (ie.  I'm usually after 4-5%+),  and decided that its for two main reasons:   its easily understood because cash coming to you right now as an investor is tangible and it scratches the short-term success itch  (I paid this much and now I'm getting X% return right now).   It's a bias that I'm trying to move away from:   much of it is comfortably accepting the long-term feedback cycle of the market,  and not comprising it with short-term thinking.  

PS: Thanks for the thread DeepState,   I've often meant to pick your brain about certain concepts I've come across,  but didn't want to derail any existing threads too much.


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## DeepState

This is the kind of development which tells me carry is probably making a come-back in FFX.  Will probably add carry currency exposure in limited quantity later today or early next week.  Rationale and calculations will be outlined at some stage.


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## DeepState

DeepState said:


> This is the kind of development which tells me carry is probably making a come-back in FFX.  ....




FOMC Flow of Funds report for Q4 2014 confirms:

At a time when credit creation is returning towards 'normal' levels, the pattern of foreign borrowers raising funds from the US has declined.  In other words, cross border finance is increasing (increasing gross flows) but they are borrowing less from the US in net terms.  That's carry in action.

---

Prior RBA data indicates that funds are leaking from Japan at a rate of knots.
Prior ECB data shows EU bank lending to offshore is also recovering.

All movements in the expected direction and accelerating.

Carry in FFX is good to go.  This appears real.

Major visible risks: 
ECB upgrade to GDP expectations may mean that the program is cut short relative to expectations.  Event risk.  
EZ monetary set-up is still non-viable but being held together by political will.  Depending on what is called 'Euro' in a dissolution event, major moves in any direction could occur.  
BoJ throws in the towel.  They remain convinced that things are working out for the better.  BoJ Board is being stacked with pro-liquidity doves.
UK property market led financial distress (need to investigate....no immediate impediment for proceeding).
Oil based financial risk (Check CDS spread for majors vs oil)
Recent US Comprehensive assessments give reasonable all-clear on domestic banking system.

Much work to be done to create monitoring tools to make monitoring this position tractable.  However, no immediate impediment noted.


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## qldfrog

DeepState said:


> FOMC Flow of Funds report for Q4 2014 confirms:



And how do you play that game, instead of euro/japanese borrowing in USD, the opposite happens with raising rate in the US expected earlier than the rise elsewhere
so
USD climb vs euro/yen?
And so expect AUD to carry on its descent? (no not that carry game)
I  noticed this morning the AUD was up 1.5 % (6AM or so on yahoo finance probably last trading values) then when I last checked a few min ago was going down again.
After this morning checked i bought a few USD but had to race to get it as it was climbing again.
So yes how do you get in? do you purchase debt in japan/euro , invest in the US?
not that easy to do as a retail investor
or justplay forex with that in mind, knowing any little phrase of teh feb will have teh exchange rate jump right and left
Anyway, enough question from the ignorant pupil


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## CanOz

Deepstate, for your equity portion of your portfolio, why would you not just buy EU equities given that the last two examples of QE bond buying resulting in equity bull markets?


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## DeepState

qldfrog said:


> PS: being in Australia, apart from these worl wide trends which obviously impact us, do you sometimes try to use some of the local trends for investing decision?
> By that I mean, I have a groundhog day feeling here of a society going thru all what I experienced in the 90's in western europe, in term of immigration, economy,sense of entitlement, politics etc and the sad future here is pretty easy to draw based on this experience.Any meaningful way to leverage that "knowledge" on an investment scale?




Yes, I look at Australia specific data.

As for your experiences and potential usage for investments, my view is you use whatever you've got to greatest advantage if you can.  Your direct experiences in Europe may help inform you of potential developments elsewhere - like Australia.  It might lead you to identify where the beliefs of most might be at odds with what you've seen roll out.  Sometimes, there is profit in that.


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## DeepState

qldfrog said:


> And how do you play that game, instead of euro/japanese borrowing in USD, the opposite happens with raising rate in the US expected earlier than the rise elsewhere
> so
> USD climb vs euro/yen?
> And so expect AUD to carry on its descent? (no not that carry game)
> I  noticed this morning the AUD was up 1.5 % (6AM or so on yahoo finance probably last trading values) then when I last checked a few min ago was going down again.
> After this morning checked i bought a few USD but had to race to get it as it was climbing again.
> So yes how do you get in? do you purchase debt in japan/euro , invest in the US?
> not that easy to do as a retail investor
> or justplay forex with that in mind, knowing any little phrase of teh feb will have teh exchange rate jump right and left
> Anyway, enough question from the ignorant pupil




You purchase FFX spot or forward contracts in the relative currency pairs to give effect to the carry trade exposure. These are as you have been postulating above. 

Any FFX trading platform will allow you to do this.  By buying USD and selling JPY (for example), one exposure you are getting is to carry.

This is not a short term timing thing.  It is an exposure which has been shown to be rewarded and has some decent reason to be rewarded going forward.  Doing this is like buy-hold, except that you need to trade a bit to buy-hold carry.  As stocks move up and down, you just buy-hold them if you believe in the LT equity risk premium.  Over the long run, the starting point means less and less.  Same deal with carry.  It's a long-term play.  The difference is that you have to keep re-shaping your portfolio to keep your exposure.

Once you make the mental leap on this stuff, you'll find it is very real world.  It's just different to bulk practice.  The ideas have been around for a very long time.  The ability to capture them is also readily available to retail.  Just that most don't think this way (incl insto).  Right now, the key practitioners are in hedge funds or in hedge fund replication.

The ability to implement this stuff has been heavily democratized with technology.  What is not democratized is the willingness to learn about this and, possibly, the ability to do so.  That smells like opportunity to me.


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## DeepState

CanOz said:


> Deepstate, for your equity portion of your portfolio, why would you not just buy EU equities given that the last two examples of QE bond buying resulting in equity bull markets?




I guess there is more to life than QE...  The positioning is based around questions like 'Would I hold this position for 20 years?' and 'Would that be a stupid thing to do?'   The proposal of just EU, given it is embarking on QE, is quite tactical in nature.  Markets are weird.  Sometimes bad news is treated as good news...and then it changes for reasons that only become clearer afterwards.  I am just trying to look through all of that for the most part without being totally ignorant of current circumstances.  The record of successful market timing is utterly shocking, especially given how much robust commentary is released on it all day long.  I'm not playing that game if it is not necessary to do so.  I have no edge there.


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## DeepState

craft said:


> Duration (as in interest rate sensitivity) is very important for long term equity selection, especially at the moment with interest rates so low. High duration stocks (little pricing power, big current asset bases) – banks spring to mind - seem overpriced too me unless interest rates don’t move up for a long time. Duration margin seems negative in the equities market to me at the moment.  However some of the lower duration stocks are much more attractive from a long term perspective.   One of the few opportunities left in this time of financial suppression.
> 
> Basically the negative duration premium in equities makes the yield chase occurring now dangerous but still leaves opportunities for buying long term growth at a reasonable price.




Without voicing disagreement about the points made on interest rate sensitivity, the concept of duration as applied to equities when the phrase 'duration on XYZ stock' is used is calculated as per a bond.  However, instead of coupons/capital, the FCF to equity owners or Dividends are used in making the determination.  Hence, it is possible for an equity holding to be very long duration in circumstances where the company does not carry any debt at all.  

I do not know of anyone who prices along an implied discount rate/duration curve in equities.  I have only seen the calculation done once in the wild.  

In this context, we can think of duration as the marginal change in the valuation of a stock for a small change in the discount rate implied from the FCF/DDM forecasts and current price.  The longer the duration, the more sensitive it is to changes in the discount rate.


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## CanOz

DeepState said:


> I guess there is more to life than QE...  The positioning is based around questions like 'Would I hold this position for 20 years?' and 'Would that be a stupid thing to do?'   The proposal of just EU, given it is embarking on QE, is quite tactical in nature.  Markets are weird.  Sometimes bad news is treated as good news...and then it changes for reasons that only become clearer afterwards.  I am just trying to look through all of that for the most part without being totally ignorant of current circumstances.  The record of successful market timing is utterly shocking, especially given how much robust commentary is released on it all day long.  I'm not playing that game if it is not necessary to do so.  I have no edge there.




Understand, makes sense. Thanks for the reply.

I'm gathering it's just not that simple either. I have a small position in a European ETF, given the meteroic rises of the Japanese and US equity markets after the QE programs, it seems like a trade I may work my way into. That's why I asked.

Thanks for the thread, reading with great interest.

CanOz


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## DeepState

CanOz said:


> Understand, makes sense. Thanks for the reply.
> 
> I'm gathering it's just not that simple either. I have a small position in a European ETF, given the meteroic rises of the Japanese and US equity markets after the QE programs, it seems like a trade I may work my way into. That's why I asked.
> 
> Thanks for the thread, reading with great interest.
> 
> CanOz




Things to stress test your thinking:

+ When Fed entered QE, equity markets subsequently ran as you noted.
+ The US is far more financially deep in terms of wealth in the form of securities hence the portfolio channel of QE is stronger.  This is a point heavily noted by the ECB as a reason why the EZ version will be less potent.
+ In the US the interest rates were compressing from what, now, look like high levels.
+ The US actually cleaned up its banking system.  It also has far more market friendly rules and regulations, including those related to labour, to let the QE effects flow to the real economy.  This is not the case in Japan and the EZ.
+ In Japan, after the announcement shock of QQE wore off, the Nikkei 225 didn't do a heck of a lot (in AUD) between then and the big increase in the program size in Oct 2014 which included coordinated action from GPIF.  Hence, beware of the currency impacts.  Also beware that Japan policy makers waltzed into the equity markets directly in a very serious way. 
+ In the ECB, the rates are already super low before QE even began and the announcement was well anticipated for months.  The equity market has already rallied hard into it.  The ECB is not planning to buy equities.  The portfolio effect will be weaker due to the lower level of securitization of assets and lower equity culture.  The European banking system is still vulnerable to sovereign risk at a time when the sovereigns of Italy, Spain and France are really in quite some strife were it not for their credit risk being borne by the ECB and mutualized as a result to a degree.  QE increases moral hazard for political reform in the EZ, to an extent which is probably larger than for the US or Japan.

There are design features of the ECB program which also make it less effective as QE within a monetary union with various details in the way the ECB can buy stuff works differently to QE in a single sovereign.

This is worth reading:

Keynote speech by Dr Jens Weidmann, President of the Deutsche Bundesbank, at the 
City of London Corporation, London, 12 February 2015.

The above are just to highlight things where the EZ set-up differs from the Japanese and US experience.  QE doesn't work identically across these places.  These details can matter in forming your inferences for a repeat performance.


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## DeepState

Just realized I turned 1,000 today!!    :dance: :alcohol:


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## CanOz

DeepState said:


> Just realized I turned 1,000 today!!    :dance: :alcohol:




Congratulations DeepState! A great 1000 posts as well...

I for one have been much enlightened by your presence on ASF, hope you continue!

CanOz


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## KnowThePast

DeepState said:


> Just realized I turned 1,000 today!!    :dance: :alcohol:




Happy Birthday!

Likewise, I have been reading all your posts with great interest and look forward to the next 10000.


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## burglar

DeepState said:


> Just realized I turned 1,000 today!!    :dance: :alcohol:




Yay!


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## galumay

Yep, a valuable contribution to ASF and a very high ratio of interesting, informative and challenging posts!

I have to admit I struggle to understand more than about 50% of what you are talking about - which reflects on me rather than you!

Always enjoy trying to understand your posts and improve my own limited knowledge!


----------



## Faramir

Congratulations. Thank you for your reply earlier.


----------



## fiftyeight

Good work. Love this thread and your posts in general.

Most of it is way over my head but I understand just enough to find it super interesting. I will be keen lurker of this thread


----------



## qldfrog

Congratulation indeed, one of the most interesting input in the ASf for my interests.
Just wishing I could be more a discussion partner and be able to debate whereas the truth is I am the pupil/apprentice
Respect!


----------



## tech/a

Macro Economics a favorite topic and one of the few books I'll search out.

Just haven't had the time to join (read research and make sense) in and hold court with ASF resident Professor of Economics.

QE seems at least in the short term allow economies to sort out their spending---
As pointed out each different.
Japan resisted it and paid the price in stagnation.
The US had no choice with credit default swaps all but busting the system.
EU and the PIGS all languish in the "How" of supporting their QE resting on the hope that stimulation will bring surplus to their mismanaged economies. Take Greece---you cant have a Social Security policy if you don't have a taxation system to support it.

Even so in each situation the inevitable is being hidden.
You cant wage wars,supply health care,prop up stupidity in the Financial and domestic sector all the while spending more than you earn and just expect the consequences to disappear as the printing presses roll!

Default has and will continue to happen if Govts world wide don't live within their means---which few wish to do.
Bonds will become Junk.

Perhaps the pepper's who predict anarchy arent that crazy!


----------



## craft

Ves said:


> _(My bold above)_
> 
> craft  -  when you say "current"  do you mean ....



 as in 'now' - not the accounting definition - sorry for the confusion.



DeepState said:


> Without voicing disagreement about the points made on interest rate sensitivity, the concept of duration as applied to equities when the phrase 'duration on XYZ stock' is used is calculated as per a bond.  However, instead of coupons/capital, the FCF to equity owners or Dividends are used in making the determination.  Hence, it is possible for an equity holding to be very long duration in circumstances where the company does not carry any debt at all.
> 
> I do not know of anyone who prices along an implied discount rate/duration curve in equities.  I have only seen the calculation done once in the wild.
> 
> In this context, we can think of duration as the marginal change in the valuation of a stock for a small change in the discount rate implied from the FCF/DDM forecasts and current price.  The longer the duration, the more sensitive it is to changes in the discount rate.




I think of equity duration much more along these lines than what might be the text book definition of equity duration.  I find it makes much more intuitive sense and for me is a major consideration in long term stock selection. 





Thanks for mentioning equity duration - appreciated prompt for me to ponder again an important issue, even if my interpretation of it is a contradiction to mainstream definition.


----------



## DeepState

Today's nugget:

"When learning begins we are unconscious of our incompetence and proceed to a stage were we are conscious of our incompetence; then when training begins we move to conscious competence; and as we master our new skill we arrive at the end point of our training - unconscious competence.  Thinking, one could say, is something we only do when we are no good at an activity."

- Referring to studies of players of Tetris gaining expertise with practice and general observation in a range of fields. 

---

"Remember this rule," advises Kahneman: "Intuition cannot be trusted in the absence of stable regularities in the environment".

---

So...is investment an activity which truly does lend itself to instinct and gut feel for most important decisions, even after prolonged practice and much experience?  I have my doubts. 

---




- Charlie Munger seems to think gut use without effortful and explicit consideration along several disciplines, which are carefully and deliberately synthesized, is not a good idea.  Investment, to Munger, remains a meaningfully conscious and effortful endeavor.

I think he's on the money.  The money, at least, is on him.


----------



## qldfrog

I like th notion of "using these tools checklist style";
indeed how often have i press on the buy button after considering; a trend, a curve or even a P/E but so rarely do I go thru all the checks that i am able to perform.
So for any reason, probably to enforce a gutfeel, a specific factor  enable me to lie to myself and "justify" a buy/sell ..only to be proven wrong a few days at most later; yet I could have see it all coming just using some of the "other" criteria.
Self discipline is hard and the random aspect of the share market allow to have some random wins that one's ego see as confirming your delusion.
I am a quite logical cartesian, maths oriented person, yet ften, it is the unlogical side of me winning in trading.
And the poorer I end up, literally speaking
I need to create a checklist, strictly speaking to funnel my enthousiasm and force the logic in me.
Does anyone usean actual criteria checklist  beforesell/buy (whatever your own criteria are, this is not the issue)

a year or so ago, I worked with amibroker and aimed that way:
i was buying /selling blindly based on my algorithm output...
did not ended up well, even if my backrun supposely gave me an edge..it did not after a year
anyway my 2c worth of experience


----------



## galumay

The 'toolbox' idea certainly resonates with me. My toolbox is my excel workbook that contains sheets for a watchlist of comapnies that come into my radar as possible investment opportunities, a sheet where I then document all the metrics of potential investments from the watchlist and also all the metrics of companies i have already invested in (before my 'check list' was fully developed.). 

I try to keep it dynamic, so I will hide rows where I decide the calculation doesnt help with the decison making process and add metrics when I read about them - even if i am not convinced of their value I will at least give them a try. 

All of this takes time - which puts distance between the emotional impulse to buy and the actual decision to do so!

I also have sheets that display graphically some of the data - like historical FCF and EPS - as I find some things are easier to understand with an image.

Another sheet has my DCF IV calculation formula, this allows me to model various growth patterns and required rates of return.

I also have set up a process for importing current prices of shares I am invested in and interested enough in to have run a full analysis, this gives me a 'live' picture of my analysis.

One thing I would note is that having developed this structured and process driven assessment of opportunities to invest, I am realising I need to make sure the same rigour is applied to the consideration of selling decisions!

I also think the trick is not to let the diverse 'toolkit' just turn into a bigger hammer! I try to remain aware of the truism that 'i dont know, what i dont know', and look for new 'tools' and angles of view.


----------



## qldfrog

and after rereading my email, apologies for the below standard spelling I have used.let's blame it on the rush i was in.
But the meaning is there; a toolbox of analysis tool/'formula", etc and a checklist ensuring you go thru your own self imposed tests before committing;
And yes galumay, a selling strategy is indeed as important as a buy one..
the risk management is also a given so not forgotten in term of position size, sector diversification etc..


----------



## DeepState

Checklists:

They are extensively used in flying (pre-flight checks etc.)  
They have been substantially introduced into medicine (see 'Checklist Manifesto' by Atul Gawande)

Interestingly, to me, the above fields have a lot of stability in them.  The things you observe have a reasonable chance of giving you an accurate read on what is going on.  The actions from there are capable of being honed quite well.  As a result, a checklist approach in these areas is less likely to lead to an improvement in raw outcome - if you are well experienced - relative to something like investments where situational awareness, cause and effect are much more tenuous.  Flying and medicine are more like physics whereas investment is more like economics.

Possibly, the life and death nature of flying and surgery leads to a greater emphasis being placed on smaller gains and avoidable errors.  Feedback loops are also much tighter and hence learning can progress more directly.

Still, I think that it is entirely valid to borrow from these ideas for the field of investment.  I think the concept of some guru investor positioning largely on mythical gut impulses to rake in huge money is pure fantasy - and a dangerous one to try and emulate.


----------



## Klogg

> And yes galumay, a selling strategy is indeed as important as a buy one..



@galumay, what is your selling strategy? I was initially of the opinion of finding a quality company and keeping it, but my investment has branched out into 'average companies at a bargain price', so I have changed this completely. I'm now of the same opinion as Baupost/Seth Klarman:
(see his audio recording here: http://www.bengrahaminvesting.ca/Resources/audio.htm). 
"Feeding the birdies" is an approach I'm a lot more comfortable with.




DeepState said:


> Still, I think that it is entirely valid to borrow from these ideas for the field of investment.  I think the concept of some guru investor positioning largely on mythical gut impulses to rake in huge money is pure fantasy - and a dangerous one to try and emulate.




Not that I'm anywhere near a model investor, but I've recently introduced a checklist that I review after I feel like I've finished my research. It's a good 80 questions long, and covers everything from risk, macroeconomics, industry, cash flows and management quality and incentives. And finally, at the end of it all in big bold letters is the question:
_"Am I ignoring things on the checklist because I feel too complacent or attached to my research?"_
along with a list of failed investments I've made previously (and dollar amounts).

@DeepState, do you use a checklist in your investment activities?


----------



## galumay

Klogg said:


> @galumay, what is your selling strategy?




I am still defining it in reality. Like you I favoured the buy and hold approach in general, by conincidence I recently downloaded Klarman's "Margin of Safety" and it certainly got me thinking more about the idea that if I am using my FA to select an entry point, the same analysis should indicate an exit point! 

I am still mulling over that, I want to be careful to avoid trying to time the market which i think is a default risk of a selling strategy based around value. The other strategy is selling something in order to enter a better opportunity - I am in that situation at the moment with my SMSF, I have something I believe is a very good opportunity to take a position in, and I am considering selling another position which appears near IV and I may have over read its opportunity for growth. 

Like DeepState points out, checksheets work best in very predictable and repeatable fields, I think they do add value in investing for 2 reasons, as mentioned it reduces the risk of brushing over a problematic area because of our emotional desire to be invested and it takes time which deters the impulsive decision making process!


----------



## DeepState

Klogg said:


> @DeepState, do you use a checklist in your investment activities?




In the past, I tried to avoid the man with a hammer syndrome by talking with people with different hammers.  It's much harder in my current (hopefully permanent) position of not being in executive employment.  That's where something like ASF can be helpful. There is a genuine ecology of opinion here.

In general, I am no where near as checklist oriented as you appear to be.  I think that my current practice is below par on this front at present.  

I am going to be building some simple tools to assist in the coming period.  These will gather and manipulate data for me and present them in a structured fashion. I can add data and analysis as I evolve what I think might be important to examine.  Doing this sort of codifies experience gains.  It will be kind of like an assistant analyst with a set work task.  This might include some forms of artificial intel and a low level to seek out new or changed relationships and highlight them.  These comments are referring to gross features of the markets and the economy at this time.  Nothing in super detail.  I think detailed work should follow once something interesting has been identified.

If this proves a good way forward, I will do the same with stocks.  My list of questions can be automatically answered if numerically available.  That doesn't replace the fact that everything needs to actually make sense and that's hard to do on a rules-based basis.  All I seek is to be as aware as I can be of issues.  Making decisions without awareness is not terribly informed.


----------



## DeepState

Help Sought on a Technical Question:

Does anyone have any views about the relationship between market wide EPS growth and nominal GDP over the longer term for valuation purposes?  This figure is useful for long term estimates of market returns.


----------



## artist

DeepState said:


> Help Sought on a Technical Question:
> 
> Does anyone have any views about the relationship between market wide EPS growth and nominal GDP over the longer term for valuation purposes?  This figure is useful for long term estimates of market returns.




Professor Robert Shiller (Irrational Exuberance, http://www.econ.yale.edu/~shiller/ ) worked on the "Cyclically adjusted price-to-earnings ratio or CAPE" ( http://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-earnings_ratio  "Shiller later popularized the 10-year version of Graham and Dodd's P/E as a way to value the stock market.[2][6] Shiller would share the Nobel prize in 2013 for his work in the empirical analysis of asset prices." ) 

"The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. This is similar to market valuation based on the ratio of total market cap over GDP, where the variation of profit margins does not play a role either." - http://www.gurufocus.com/shiller-PE.php

This site http://www.gurufocus.com/global-market-valuation.php  includes Shiller P/E among other things " to provide an overview of the stock market valuations of the 18 largest economies in the world. The indicator we use is still the percentages of the total market caps of these countries over their own GDPs."

This site http://www.philosophicaleconomics.com/2014/08/capehigh/ analyses relationships between Shiller CAPE and EPS (among other things) " . . . I’m going to introduce a schematic that intuitively illustrates why high real EPS growth produces a high Shiller CAPE.".


----------



## DeepState

artist said:


> Professor Robert Shiller...Cyclically adjusted price-to-earnings ratio or CAPE...




Thanks Artist.  I do have a lot of affinity for the Shiller CAPE and its variants.  

To complete an assessment of expected forward looking return, I need to inflate the adjusted EPS figure by some growth rate that makes sense.  In the long run, the upper bound of this figure should not reasonably exceed the expected nominal growth rate of GDP (at least for the domestic component).  Usually, it is a margin below this.  I was wondering if anyone knows of work done to figure out what a reasonable relationship might be.  I have my own beliefs, but I'd prefer stronger data.


----------



## DeepState

Does anyone happen to have a document which explains the construction of the Citigroup Economic Surprise Index in detail?


----------



## DeepState

RBA-speak for "get the hell out of bonds".

Debelle (RBA):


----------



## luutzu

DeepState said:


> Thanks Artist.  I do have a lot of affinity for the Shiller CAPE and its variants.
> 
> To complete an assessment of expected forward looking return, I need to inflate the adjusted EPS figure by some growth rate that makes sense.  In the long run, the upper bound of this figure should not reasonably exceed the expected nominal growth rate of GDP (at least for the domestic component).  Usually, it is a margin below this.  I was wondering if anyone knows of work done to figure out what a reasonable relationship might be.  I have my own beliefs, but I'd prefer stronger data.




It obviously is beyond me but why are you looking to predict long term market returns based on the relationship between GDP and EPS growth? Why not just look at the market EPS itself instead of going from EPS to GDP then from GDP back to market return, which is essentially what EPS will give you, doesn't it?

EPS is earning per share I take it? So to use GDP to predict market growth, you are thinking of finding the link between market's earnings to GDP, then use GDP forecasts (I'm guessing) to then predict market earnings/returns.

And why earnings per share? Wouldn't earnings alone be better? Say CorpX represents half the market and it splits its shares 5x but still earn the same... wouldn't the EPS be greatly diluted but actually earning is still the same? Earnings figure would control for such non-economic changes while EPS in such cases would give wrong impression.

Ignore me if I don't make sense, just thought I'd asked.


----------



## DeepState

El-Erian, PIMCO, Sept 2014 





Pichette, Google, March 2015





....way to go guys.  I hear you.


----------



## qldfrog

definitively, just renewing my 1 day per week contract today for a couple of month;
life is good and so interesting.....So much to discover, learn and enjoy

that was my 2c feel good moment, let's share.


----------



## DeepState

DeepState said:


> Does anyone happen to have a document which explains the construction of the Citigroup Economic Surprise Index in detail?




Sourced elsewhere. Thanks anyway.


----------



## galumay

DeepState said:


> ....way to go guys.  I hear you.




Being on a 'gap year' with my little family has been a strong reinforcement of the importance of getting the life balance right!


----------



## DeepState

FOMC release.

GDP downgrade despite oil price decline impact on PCE and limited change to the employment outlook. 




Interesting that the dots for longer term equilibrium yield are declining...

From Dec 2014:



To Mar 2015:


----------



## DeepState

I am rethinking my approach to gaining equity exposure.  One aspect which is unchanged is that I don't like to be exposed to explosion risk on large asset class exposures.

Any views on stops vs options as a means to protect downside?  I am aware that a stop is an option, but you know what I mean.


----------



## skyQuake

DeepState said:


> I am rethinking my approach to gaining equity exposure.  One aspect which is unchanged is that I don't like to be exposed to explosion risk on large asset class exposures.
> 
> Any views on stops vs options as a means to protect downside?  I am aware that a stop is an option, but you know what I mean.




Care to elaborate on 'explosion risk'?

 Do you mean stock gaps eg. SRX AU/GTAT US
And what timeframes?


----------



## DeepState

skyQuake said:


> Care to elaborate on 'explosion risk'?
> 
> Do you mean stock gaps eg. SRX AU/GTAT US
> And what timeframes?




I'm all over the place on this.  Would be great to have a sounding board.

On asset allocation to equities, I think the best I can do is to say that it is not ridiculous to hold an asset on a long term basis.  That is, I can see a risk premium in there and that makes it alright to hold the asset class with a long horizon in mind.

Somehow, judgment gets clouded when your view suffers a massive drawdown or gets eroded over time.  In either case, the argument in favour of "you know jack-s##t" improves relative to feeling comfortable that you have some notion of what is going on.  Data speaks...what is it saying?  

On near term events, if the market gaps 20%+ in a couple of days, something has happened.  I think it might be a good idea to circuit break and re-group with a cool head.  The risk is missing out on some rebound shortly afterwards.  Other questions....should that ~20% be relative to high water mark, recent average, last night...

If the position is slowly eroded, it could be that my original idea was stuffed, that it is becoming more valuable (getting cheaper), or that random bad news has been tilting towards the ugly side for a while.  Is some form of circuit breaker helpful to initiate a revisit with as fresh eyes as possible from the perspective of no risk on?  Is this a good idea?  Should you force an exit?  Or should you just say...I need to look again...because some price point was reached?  

In theory, we would be disciplined and able to stand aside from the position every day and think fresh.  Experience tells me that this is a pretty high standard of dispassion that is at odds with being a regular human.  It's ok for small positions like individual stocks (taking a bath on VET-AU in percentage terms is no problem and I can stand back and take a fresh look as the dollar amount was small in my case). However, if the losses are truly large in dollar terms (equivalent to a decade of savings etc.) I suspect I'd act a little less dispassionately.  I accept my humanity.  What is a suitable threshold of progressive drawdown (dollar, percentage, time frame...) to trigger a re-set? Relative to what?

What should I do?  What instruments should I use to help implement this?  I have asked about stops and options, but it could well be an issue of ongoing management too.

---

Right now, I use a funky option replication concept which has elements of the above embedded into it.  If this exchange gets going I'll expand if interested.  I have been screwing up the implementation and this has been costly in terms of foregone benefit recently (markets ran and I did not rebuild positions as fully from market low points as would be ideal).  It could be readily solved by improving a few coding things that would only take an hour or so which would lead to different contingent trades being added upon rebalances (ie. stop BUY orders added as well. At the moment, I only have stop SELLs in place...and did not refresh positions quickly enough).  

I am taking the opportunity to throw the question open again.  Could do with some additional perspectives or lessons from your experience.


----------



## skyQuake

Wow where to start? This is a very broad topic

I am firmly of the opinion if your position size allows for stops, use them. If not... well that's a different kettle of fish
Have toyed with option + futs - sector ETF/CFDs smorgasbord in the past but could never get it to be effective after accounting for slippage and spreads. Structured products with cap guarantees, installment warrants, minis (eg SRXKOC) can have their uses in certain circumstances.

As for equity drawdowns, I guess that depends on its relativity to the market, previous drawdowns etc. I don't believe you can significant remove 'explosion risk' without removing a good chunk of the upside too.


----------



## galumay

DeepState said:


> I am taking the opportunity to throw the question open again.  Could do with some additional perspectives or lessons from your experience.




Just jumping in, it sounds to me from the details of that post you are trying to develop a strategy to essentially time the market. It seems to me you might benefit more from understanding and dealing with your emotional responses to the market rather than trying to time it. 

On the other hand I suppose if you truly believe you will become victim to emotional over rides to your core strategy then maybe engaging with a different strategy is a better option even if it has some opportunity cost.

Its certainly not something I have fully resolved in my world either, I am stuck at the point for having a clear strategy of when I might sell a company in a strategy that is essentially buy and hold. (eg price rises well above the intrinsic value i had calculated.)


----------



## tech/a

Think He's trying to mitigate risk.
Outlives are the hardest.

Don't know that its a metal issue.



> I don't believe you can significant remove 'explosion risk' without removing a good chunk of the upside too.




Tend to have some agreement on this.

Other than individual stock explosions to the downside which get everyone broader portfolios are generally hit by GFC type tsunamis

For the Lucky Duck my system stopped generating new trades
I personally stopped trading the system when draw down reached below that shown in testing and as 100s of people had tried to break it I had a good set of Blueprint figures to go by.

So while I was 27% down from Peak to Valley I was out around 6 mths before the GFC--something was clearly wrong as pretty well all top 200 stocks were displaying similar patterns.

Long Momentum signals just didn't occur.
As it turned out had you continued to trade the system all trades would have been closed from exit triggers before the crash.

New signals started to emerge many months later.
Had you continued to trade it---I didn't choosing Futures for Long and Short short term 
The system made new equity highs (Thats above the Peak to Valley Drawdown I mentioned) 
About 14 mths ago.

Don't know if this is helpful
But I try to keep things as simple as possible.
Trying to time options type hedge strategies must be like Brain surgery!


----------



## craft

DeepState said:


> I am taking the opportunity to throw the question open again.  Could do with some additional perspectives or lessons from your experience.




This was penned just recently, and whilst the author may not be in the same league as our forum guru's, I will post it anyway as it is a perspective that I agree with and implement. 

I think there is scope in the implementation of what he has to say in a range between purposeful selection and portfolio concentration, to broad diversification and inter portfolio rebalancing dependent on your appetite for volatility and inclination for taking on stock selection risk.  Personally I'm at the stock selection end of the range - so suffer larger effects from individual stock explosions - but the blow-ups are relative to the gains. Correlation bombs where everything goes down in sync are bigger issues - but the purchasing power concept puts these declines into perspective and what looks like lemons for a while turns out to be lemonade as you cycle the dividend liquidity into cheaper purchases. 



> Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2.Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13 ¢ in 1965 (as measured by the Consumer Price Index)
> 
> There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.”
> 
> The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.
> 
> Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
> 
> It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.
> 
> For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.
> 
> If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure).
> 
> Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.
> 
> The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game.
> 
> There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.
> 
> Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shkespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.”


----------



## DeepState

Japan:

Where the heck is that third arrow when you need it?


----------



## DeepState

Thanks for your responses and thoughts on the issue of stopping out or circuit breaking.  Here is where I have progressed to (progress is not arrival at a final destination):

You cannot risk manage your way to making money over the long term.  If you've got no idea of how to make money, risk managing that doesn't make you money.

Sometimes, when things go down in value, it just means that they have become cheaper and you should be alright with that.  Those with a long term viewpoint should stay involved because the purchasing power of your holdings have not changed...if the underlying value of the holdings have not been seriously impacted.

If you have balls of steel and sufficient foresight to make long term valuation assessments, particularly on diversified portfolios, it may be best just to hold on if you can survive the market to market.

---

My mentality is that I am not trying to time the market beyond saying that I am prepared to be exposed to this investment but may need to circuit-break if something goes against my expectations.  I see the concept of pulling a trade under this circumstance partly as risk management against an acute thesis breakage and partly to avoid the boiled frog problem.

Last time I walked through an airport metal detector, I believe my balls were on my person at the time and no alarms were triggered. No item by item strip down occurred either. I conclude that my balls, such as they are, are not actually made of steel.  That's what the data says anyway.  I am not a Marvel comic hero billionaire playboy philanthropist genius with an iron man suit.  I am short one iron man suit, and at least one zero, from that list.   That puts me at a disadvantage.

It is one thing to have $50bn in net wealth and see it compress to $25bn when everyone else is marked to market. Who cares?  It is another when your lifestyle would be compressed if your asset base is cut in half and you had doubts as to whether the underlying value was fully preserved.  If the price moved, part of it may be animal spirits, part of it may be bad news and part of it might be something that never crossed your worried mind before.

---

I think it is not realistic for me to believe that I can act in that fashion with high confidence.  I am not actually in the position that permits, essentially, risk-neutral thinking, for large exposures.  I also know that bad outcomes mess with your thinking and it is often best to circuit-break to snap you out of it.  Decades of experience have shown me that this is the case even with highly seasoned investors of the mortal variety.

I like this from a book with Ryan_C recommended ("If you can" Bernstein):




We act differently when something big happens and you don't know where that trigger is and how differently you will act ahead of time. Neuro-anatomy and psychology tells you this, unless you have one heck of a well developed Vagal Nerve.  You don't even know that you are impaired in those situations.

---

Nothing stops you from putting on the trade minutes after you get stopped out.  What stopping out does is cuts you away from thoughts about what you bought in at to some degree and resets your mind to a position of taking risk again from a zero position.  Mentally, that is a better place to be when making calls.  This is something I have seen so many times I cannot ignore it.

---

The option replication concept I use is pretty funky stuff.  Calculating it and updating the positions takes about 10 minutes per market.  All of the calculations are codified.

In more recent times, though, the rapid rise in markets more recently and huge whip-sawing has caught me flat footed.  You sell at the lows and buy on highs with this stuff - that's option replication. Buy-hold would have done a lot better in this highly mean-reverting environment.  The price of protection has been large recently.

What now?


----------



## tech/a

From reading your dilemma.

I can see your problem if you are placing at risk your $50 to $100 million
The thought and indeed the reality of blowing 90% of it in an extreme case would be daunting.
Only Daunting because you'd have $10 million left.

But my feeling is that you simply have too much at risk.
Trade with a million and who cares if you blow $900,000.

Now if your worth $1 million in excess cash and your traumatized at the thought of dropping $900K
and the Million is your income producing asset---different problem.

*Yours is easy to solve.*
Regardless of what you decide to do.

Oh and anyone who has 50-100 million wouldn't be asking they'd be way way ahead of the question.


----------



## DeepState

tech/a said:


> From reading your dilemma.
> 
> I can see your problem if you are placing at risk your $50 to $100 million
> The thought and indeed the reality of blowing 90% of it in an extreme case would be daunting.
> Only Daunting because you'd have $10 million left.




Although it seems like a high class dilemma, perhaps like you, I'd have difficulty cutting out my household staff, maintaining my stables and keeping the boat ship-shape and such if I had to live on $400k per annum. If that position were applicable, $10m in the bank won't get me anything like that!  With interest rates at around 2.5% and tax rates as they are, a person in that position would need around $32 million in the bank just to reach your poverty line. Barbados.... Apparently, you might struggle to live on that Tech/A (perhaps the numbers below are pre-tax - still..and a person in this situation may still have kids going through school, say):



tech/a said:


> I know personally my wife and I draw a healthy salary and always have. One of the biggest mistakes in small business is *NOT* paying yourself FIRST! My $180k return trading wouldn't come close to covering our yearly living expenses. Would need a return of at learst twice that. So say $400k a year





... so you see, the dilemma is real even for centi-millionaires fully invested in equities without your trading prowess.  And that makes no allowance for escalation of living expenses.  With real yields on inflation linked bonds at less than a percent, that implies that such a person would need over $50m in busted assets just to make ends meet if the Australian government can actually pay its bills if they simply could not stand to take any more capital loss.  Imagine, a $500m equity portfolio busts down to $50m and they are at your poverty line for ongoing expenses just maintaining real value (let alone keeping up with the Ducks!)... $500m doesn't buy what it used to, I guess. Bygones.



tech/a said:


> But my feeling is that you simply have too much at risk.
> Trade with a million and who cares if you blow $900,000.
> 
> Now if your worth $1 million in excess cash and your traumatized at the thought of dropping $900K
> and the Million is your income producing asset---different problem.
> 
> Yours is easy to solve.
> Regardless of what you decide to do.




So, the idea is to invest so little it makes no difference?  "Who cares" levels of risk on the one hand and vanishingly small on the other?  Easy to solve? Seems to have a few holes in the underlying assumptions and basis.  

By the way, if trading with stops/circuit-breakers somehow implies that I am taking too much risk, does that mean that when you trade with a stop that you are placing too much at risk?  I seem to recall that you placed stops at levels where the idea would be thought busted:



tech/a said:


> A stop loss is placed where your analysis is proven wrong.




Does that concept cease to have meaning outside of the world according to Tech/A?




tech/a said:


> Oh and anyone who has 50-100 million wouldn't be asking they'd be way way ahead of the question.




Fair few assumptions in that one....perhaps they (I ?? the number of zeros less than a some [multi?] billionaire figure was not fully expressed) got way way ahead by asking such stupid questions and staying way way ahead of the problems that were avoided as a result.  Some call it luck.


----------



## skyQuake

DeepState said:


> Does that concept cease to have meaning outside of the world according to Tech/A?




At the end of the day, if the price moves against you *enough*, your analysis is simply wrong. Be it timing or otherwise. eg look at your past trades and set stop loss at a multiple of MAE


----------



## systematic

Love the quote from the Bernstein book...had run into part of that quote recently.

I'm of a similar mind, I believe, when it comes to why you're looking at this.

I come from the thought of just staying invested.  
After all, you can quite fairly argue that with the data.  Timing when market factors will fire or not via valuation methods or time series data....hang on a sec....I've just violated a goal of mine; let me rephrase that.  Timing stuff like value or momentum whether using price or financial statement data ("fundamental" or "technical", ugh, dislike those terms)...can be shown to be a dangerous practice. Best to just stay invested, and ride things through.  Let the stats play out.

Plus, the natural skeptic in me sees  the danger in the recency bias that seems to have all manner of trading authors talking about "market filters" on their systems...more so than before I believe (post 2008, of course).  Anyone selling a system would be crazy to backtest without a market filter - of course it's going to work in the 2000's.
Side note: no one ever seems to talk too much about "price shock" events.  That 10 day or 10 month moving average is not going to help you in a 20% overnight price gap.   

It was looking at, and really trying to think about the '29 crash followed by the downward slump and road to recovery that had me seriously questioning my former youthful confidence re: drawdowns.  Value, Yield Momentum, or just the market, in the US lost 80% or more from peak to 1932 trough.  And it was slow going back up from there.  Someone about to retire, quite pleased with themselves, with 5 million in todays dollars, suddenly (well, over a 3 year period) has  less than 1 million.  What's a 70 year old to do?  That's real life stuff.  It's tough!  What was I saying?  Oh yeah, I was making myself walk slowly through the data and trying to imagine living through it that gave me some appreciation for at least _trying_ to put in some defensive measures.  Ben Graham, even though he did well through the period overall (before and after)...referred to the 1930-1932 period as "trying times." Bet that was a polite way of putting it!

Now, that is the US data.  Doesn't mean it couldnt happen here. The all ords recovered very quickly from '29 crash and had a good decade in the '30's.  The current slump is one of the worst, by my look at it (just on year to year returns).  The basic idea is that anything can happen.  Markets can go backwards or even bust.

Anyway, as to the how to...

For me, refining the stock picking side of things won't cut it.  Defensive factors (volatility, yield, 'quality') might help, but they won't fix.  

For market timing - "Fundamental" based decisions around valuations won't work either.  At least not for the downside (and probably not the upside either) from what I've seen.

For me it's down to simple stuff:

Trend following.  The research seems to show that trend following probably won't hurt (or at least...not too much) and will probably help on the downside.  Not to be dismissed (in my opinion)...are the decades where trend following might hurt your returns significantly enough to be disappointed you used it.  Can happen where there were no decent bear markets.  But if you're an "absolute return" investor (focused on only your own results)...well, who cares...I guess.  I like something to compete against though!  After deciding on using simple trend following comes the decision of what to do (get out completely, get out in part perhaps harvesting tax losses, introduce stops or tighten if already using, hedge so you don't have to sell your holdings etc)

And the other option?  Bonds.  Having enough in your portfolio to reduce the volatility to where you're happy.  I'm familiar with asset allocation (including tactical) but these days I think "old fashioned" stocks and bonds can still do the trick.  In the current fashion of investing in all manner of assets, I know I'm not alone in thinking that way.  But yes, if someone wants to go the whole hog of asset classes, fine by me - I get it.  I would too, probably, if I was going to be tactical about it.

Oh - one other comment...back to the '29 crash and depression.  I forgot to end the story.  Looking at inflation adjusted (this was a period of deflation) and dividends included shows the market getting back to peak by around the end of 1936.  Not too bad.  But what happened then makes it worse.  The world war 2 period sent things backwards again, and it wasn't until near the end of the war, some 15 years later that you were truly recovered.  But recovery isn't what matters to the investor.  Taking it further, I ask - at which point were you finally making 5% or so (real) had you been the unlucky one to inherit or save up a good sum at age 40 and plonk it on market in Sept 1929?  Another 15 years (out to 1959).  So, our 40 year old investing his nest egg in Sept 1929 took 30 years to age 70 to be able to say that he'd made 5% real.  At least at the 15 year mark things were back to break even and slowly going up again.

I've looked at it enough to consider these things real possibilities. I do consider anyone who thinks that something can't happen in the markets is kidding themselves.  Even after the GFC...there is no reason the markets have to produce.  There's no data driven reason why the markets, over the next 10 - 20 years couldn't go backwards again severely...before ever recovering (in real terms) to new time highs (with decent return).  Or that Australia will keep to its great run of the last hundred years.

Scary stuff!  Well, I think it is.  Nothing I would love more than to think that the market doesn't really suffer massive drawdowns (and maybe even more importantly, take massive times to recover).  But they do.  I wish this risk was not real!

Trend following does seem to reduce volatility enough to look at using it.  I still can't use it as a "get in" or "get out" of the market indicator, as I'm aware (as mentioned) of the periods where this can hurt returns.  However, at least a defensive stance can be taken...

May Australia be one of the best performing markets (again) over the next hundred years!


----------



## DeepState

systematic said:


> Trend following does seem to reduce volatility enough to look at using it.  I still can't use it as a "get in" or "get out" of the market indicator, as I'm aware (as mentioned) of the periods where this can hurt returns.  However, at least a defensive stance can be taken...




Thanks for your comprehensive, thoughtful and thought-provoking response.

Imagine if:
- The US was not left as pretty much the only major industrialised country at the end of WWII...
- Australia and Argentina, who shared much in common in the 1900s, swapped places...for reasons of Commonwealth membership and governance.

Scary stuff indeed.  Fairly much accidents of history.

---

Questions and invitations for Comment: 

Stocks AND BONDS can do the trick.  I've got to question you on the bonds part.  Buy-hold nominal (and/or real) returns are completely visible in the prices.  Those are the maximum figures too, assuming no default.  These yields are atrocious.

Just because bonds have done well in the post Volcker era does not imply they will continue to do well.  They cannot do so without yields compressing heavily into the negative yield space....and you would have to time the exit as the buy/hold returns are set at acquisition.  Are you willing to assume that?  That's what is required to get something of a decent real return after tax.

At the big end of town, stocks and bonds are gradually being replaced by less liquid assets and market neutral strategies for reasons previously outlined.  Short of a sustained productivity surprise, inferred returns to a 'balanced' fund are well below where they had previously been a few years back.  Is it not reasonable to adapt?

When we look at long term equity returns from places like Australia and the US, we are loading up on hindsight bias.  If Australian equities had not produced good returns, we would not have anything like the equity culture we do.  Similarly to the US.  Japan, for example, does not have an equity culture, and Europe's is much less so that the US counterpart.  There are many defunct markets we ignore.  The figures we look at are pretty much the rosiest we can find....and we base decisions on this.  Some even use stochastic models or risk-reward calculations, that simply exacerbate any bias, to justify this.

I'm quite sure you've seen that stats on how much of portfolio risk is dominated by the equity decision.  For a balanced fund, it is around 90%.  Get this wrong, a lot goes badly.  Our economic set-up is pro-cyclic partly for this reason.  With increased savings via super etc. which, for the most part, increases the average person's exposure to equities, it is set to become more so.  Shouldn't we protect against this possibility even if we might believe in the equity story?


---


I am interested in your suggestions about momentum.  Are you referring to the cross section or longitudinal?

If longitudinal, where auto-correlation has been found to exist, it does argue for reducing exposures during down swings...a form of position size reduction into falling markets...somewhat like what options would do....which are essentially a series of stops at different prices.

I am not a major fan of tactical asset allocation either.  The extent to which I do it is more like asking 'is this ridiculous on a buy-hold basis' rather than 'oooh, this might go up in the next three months for various mystical reasons'.  Bonds look utterly ridiculous to me..unless everything else falls over and produces an even worse outcome.  Possible, as you say.  My figures don't suggest that, even though the outlook for equities is worse than it had been on a long term hold basis.  But, what if I am wrong?  I am wrong heaps of the time.  Just because some decision has much more on the line has not, in the past, meant that I was suddenly bestowed with greater foresight.  What if the 'correct' exposure to equities is, say, half of what it happens to be based on our current thinking?  Should we not adjust somehow?  What would it take for you to realize that the equity/bond concept was actually incorrect (if it were)?  Are you not concerned that there is a boiled frog issue here? Given the risk cannot be reasonably eliminated that we are plain wrong and that boiled frog risk is present, shouldn't some sort of circuit-breaker be drawn in the sand?


----------



## qldfrog

I like the two last posts, I indeed think our view of equities is indeed so US/locally biaised;
I see a lot of parallel with the japanese situation;
A real estate bubble ending in deflation and stagnant market for 25 years or so and enormopus gov debt;
where are we now in Australia? Eery similar except we do not have any of the sony and toyota of Japan

Stockmarkets always going up trend is based on the economic growth which is largely based on demographic increase;
What happens when the song stops?
Imnorting demography can only work if you can keep it employed;
importing it to have it join the centerlink benefit queues as we do now in Australia does not, and Australia has lost most of its productive advantage with the mining boom bust;
Do you want to bet your saving on the fact that  mining will recover soon enough and here in Oz, and not in Africa, Russia, you name it?
Looking at figures we still have an asx trying to reach 6000, that was the level reached in early 2007 or 8 years ago
With an inflation of 3% or so since 2007. we are still nearly 25% in real term below that level...which was not even  the top.
Compare this to the US and we are well worse off.
As i view it , as an australian based investor, we need to get exposure to increasing demographic/real growth markets;
Indonesia, maybe India, some latin america  adding a currency risk..not for the faint heart.

On a short term, trend seems the way to go in market based on my limited experience, with Stop Loss on, but in most critical falls, my SL were useless as move are usually sudden and SL were zoomed past.
I also have a trust issue with SL: far too often, i saw my SL triggered by "mini crashes" which really look like insider knowledge.
Lastly, we also have to put this in a context where the western government would REALLY like to get your wealth,
So what is the point of having a doubled portfolio account if we are to be seized by our own government  "for our own national good of course" on the next black swan event;
that risk which was so far negligeable is IMHO much much higher now, and should be reflected in your investment choices/spread.
So gold under the mango tree could endup your best ever 'investment " decision....
Hope my rant is not worthless, far less valuable then other inputs..but maybe bringing some issues that are bypassed when dealing too technically.
take a step back...


----------



## DeepState

skyQuake said:


> At the end of the day, if the price moves against you *enough*, your analysis is simply wrong. Be it timing or otherwise. eg look at your past trades and set stop loss at a multiple of MAE




Thanks.  Had to look up MAE.  Got to love these euphemisms. 

Not being a trader, I don't keep these kinds of stats.  So, as usual, amongst the most critical decisions we make, there are those that are simply best guesses. It's like building a watch with high precision on 90% of the mechanism and just guessing at the remaining 10%...makes it hard to tell if the time shown is actually worth anything.  Still, walking on the edges of mountains with poor vision is pretty silly if there are no guard rails to prevent unrecoverable loss (falling off it).  We can argue about how high the rail should be, how wide a path ought to be allowed.. ultimately, some guard is better than no guard. Of that, I am confident.

I am of the mind that I should stop out at some level where I want to force a re-think from another perspective than being at-risk.  This is an effort to avoid boiled-frog issues.  Given there is no magic about some level arbitrarily drawn in the sand, I am of the mind that the extent to which we should be taken out of the market is proportional to the 'excursion'.  This has concepts of option gamma in it.  It tells me that the current practice remains in the ball park.


----------



## DeepState

Australia of the future?







..... from an article about Lee Kuan Yew in the Economist.


----------



## qldfrog

DeepState said:


> Australia of the future?



I think so, in the last 20y since moving to Australia, I saw this country follow the ill fate of my birthplace:
France with a 25/30y gap;
Growing sense of entitlement, labour policies mirroring "the french socialists" with appalling results, and the move toward a society where responsabilities are shifted;
"the rich has to pay" and the rich is anyone but me;
With this state of mind and a nanny state mentality coupled with a migration influx, labour will built itself its own majority electorate based on a policy of stealing assets from the well off initially, then the "better off" , acclaimed by a majority of electorate on welfare/pension/government or  protected jobs.
Ultimately leading to the rise of Far Right,segmented society, local terrorism floating on an abyss of deficit and economic failure
 In politics, a liberal side which at best would mirror Keating's policies if it wants to even have a chance to be elected so no hope will come from there.
I know it is a bit of a Goth vision but time will tell.

To take into account on a 20y +investment window:
wise to avoid real estate for renting. increase overseas exposure ,and local  growth in crime/welfare/unemployment and taxation burden/red tape.

PS:
On an earlier post comparing current ASX200 now and historical values, i neglected dividends gathered since 2007 so the current vs historical figures is not as gloomy.
My apologies


----------



## DeepState

First cut FFX majors carry and momentum portfolio:

Long: 
USD (67%)
GBP (33%)

Short:
CAD (12%)
EUR (72%)
JPY (16%)

No position in AUD or CHF.  Signals aren't particularly strong in short term measures and concentration into EURUSD position calls for limited risk allocation.  JPY risk forecast is higher than for background over the last three years.

Implementation for risk management purposes is tough in terms of stops for such a portfolio.  Still checking on how to put on a basket hedge.


----------



## DeepState

Central Banker hubris from Bullard of St Louis Fed:







- from FT


----------



## DeepState

DeepState said:


> First cut FFX majors carry and momentum portfolio




We're off....and having a bad start....erghh I hate this already.


----------



## qldfrog

DeepState said:


> We're off....and having a bad start....erghh I hate this already.



So are you  really worried that the day the fed actually push rates up could trigger a nasty collapse of other currencies?
I am in two views there:
on one side, USD is already quite high (vs euro/yen/aud at least)
-> it is already factored;

on the other hand, we have been served wit "the US rates are going to go up" for so long with nothing happening that we risk being blase and not believing in it , and be shocked when it does arrives;

But in both cases above, having USD is a good move vs keeping local currencies (AUD)

What seems a bit forgotten is the potential for the USD to actually fall sharply;
While the US news are " kind of " good; this is not exactly a booming situation, some figures are quite gloomy actually, and yet we have ultra low energy price;
So a black swan event could easily change that vision and bring us back to a "US economy is failing" view;
The USD would collapse, other currencies would probably try to follow as well to keep some kind of export sales especially in a downtrend world economy.
Pretty hard to protect yourself in such an environment; Gold could be back then....
Am I delusional there?
have all a great day


----------



## DeepState

qldfrog said:


> So are you  really worried that the day the fed actually push rates up could trigger a nasty collapse of other currencies?
> I am in two views there:
> on one side, USD is already quite high (vs euro/yen/aud at least)
> -> it is already factored;
> 
> on the other hand, we have been served wit "the US rates are going to go up" for so long with nothing happening that we risk being blase and not believing in it , and be shocked when it does arrives;
> 
> But in both cases above, having USD is a good move vs keeping local currencies (AUD)
> 
> What seems a bit forgotten is the potential for the USD to actually fall sharply;
> While the US news are " kind of " good; this is not exactly a booming situation, some figures are quite gloomy actually, and yet we have ultra low energy price;
> So a black swan event could easily change that vision and bring us back to a "US economy is failing" view;
> The USD would collapse, other currencies would probably try to follow as well to keep some kind of export sales especially in a downtrend world economy.
> Pretty hard to protect yourself in such an environment; Gold could be back then....
> Am I delusional there?
> have all a great day





The market in concerned about the capital flight from EM countries with poor external financing positions in the event of lift-off.  They are concerned for a repeat of the taper-tantrum post Bernanke's first discussion about ending QE in May 2013.  The market was surprised despite the fact that the program was never supposed to run indefinitely and that the economic data was improving beyond that which justifies a prolonged period of QE expansion.

Now, the market has been aware of consideration for an increase in interest rates.  Balance sheet expansion ended several months ago.  The curve reflects tightening yields.  Historically, since the GFC onset, the curve has over-estimated the likely path of Fed interest rates.

The impending move is extremely well telegraphed.  Increased risk is highly anticipated and portfolio positioning is adjusting to this.  From today's FT, for example:




It doesn't tend to be the avoidable risks that are visible that cause mayhem.  It is the major events that are not avoidable or were entirely unanticipated that tend to.  I think the Taper-Tantrum and the vast amount of stuff written about this suggests that preparation has occurred, which diminishes risk.  

Ultimately, I have not conducted a case by case viewpoint of EM debt support.

Shiller also makes an interesting observation relating to bonds:





My main concern is that European incoming data has been much stronger of late and US data has been weaker than expected.  This would tend to move EURUSD against my position...at least in theory.

In the event of a black swan, USD would climb for the most part.  Even an event like the downgrade of US sovereign debt led to a climb in the USD.  An event risk leading to a wholesale weakening of USD might be such that we are talking about some systemic event relating to fiat currencies. Perhaps something which questions the sustainability of debt payments by the US...which would flow to Japan and many European nations.  AAA-rated currencies with low debt loads would do very well in that case.  Gold and hard assets would probably do well in that environment.


----------



## qldfrog

Thank Deep State;
funny how whatever the scenario, the USD ends up winning (either on common basis: higher interest rate,relative  depreciation of other currencies for export market share, but also as a refuge currency when disaster strikes.


----------



## DeepState

qldfrog said:


> Thank Deep State;
> funny how whatever the scenario, the USD ends up winning (either on common basis: higher interest rate,relative  depreciation of other currencies for export market share, but also as a refuge currency when disaster strikes.




Hi QF

As mentioned previously, there are several scenarios under which the US can depreciate vs RoW.  Key amongst those is incoming data which is below expectations.  More recently, the data from the EZ has become very positive and the US has ben negative.  Some of the recent appreciation of the EUR vs USD in recent times can be attributed to that.


----------



## DeepState

McKinsey recently released a couple of papers on Japan.  My take:
- GDP growth at approx. 1% per annum through 2040 by OECD is deemed aggressive by McKinsey given demography and trend productivity growth.
- Efforts to increase productivity can work to reduce the workforce. Hence, it is not simply a matter of increasing productivity per worker.
- Needs some sort of major productivity miracle to dig themselves out if immigration on a large scale is not allowed or otherwise a huge increase in exports needs to take root.
- Needs a huge culture change that could be brought about via increased multi-national presence and importing the kind of culture visible in the US etc.  Private sector initiatives are thought of as a potential Fourth Arrow.
- All of this stuff is very aspirational.
- Efforts to increase workforce productivity/flexibility via pushing a greater portion of the workforce into contracts that offer no longer term assurances has served to decrease productivity because these people are not motivated to do well.

---

Some combination of:
- Increased workforce participation via the creation of new industries that can be served by the elderly (eg. old people taking care of older people in aged care facilities);
- Weaker Yen to stimulate export competitiveness to very significant levels;
- Productivity miracle of an incredible magnitude which is sustained (like an Emerging Market becoming urbanized)
- Large scale immigration

is required to get through all of this without heading into defaults etc.

In the absence of a Fourth Arrow led productivity miracle and aspirational developments of new industries to absorb older workers, when is left is a much weaker Yen or default....which would lead to a much weaker Yen.

This will be taking place with another large industrial powerhouse, Germany, undergoes its own demographic challenges.  

...I'd be short Yen on a long term basis vs USD.  It is the greater basket case of the two.  Turns out that the current portfolio structure is in line with this.  Just need to survive the journey...


----------



## skc

DeepState said:


> We're off....and having a bad start....erghh I hate this already.




IMO, macro, hedge fund type strategies that require a high degree of conviction to hold are best done by... hedge funds who manage OTHER people's money.

For my own money, I prefer a journey requiring less conviction, especially when the positions go against me. 

Then again, I don't have a eight-figure sum to invest and worry about. So different horses and courses.


----------



## tech/a

skc said:


> IMO, macro, hedge fund type strategies that require a high degree of conviction to hold are best done by... hedge funds who manage OTHER people's money.
> 
> For my own money, I prefer a journey requiring less conviction, especially when the positions go against me.
> 
> Then again, I don't have a eight-figure sum to invest and worry about. So different horses and courses.




I'm with you skc

For most of us with 7 figure sums we can be more agile than 
a group of 7/8/9 figure investors in a managed fund.


----------



## DeepState

skc said:


> IMO, macro, hedge fund type strategies that require a high degree of conviction to hold are best done by... hedge funds who manage OTHER people's money.
> 
> For my own money, I prefer a journey requiring less conviction, especially when the positions go against me.
> 
> Then again, I don't have a eight-figure sum to invest and worry about. So different horses and courses.




Thanks.  

Your comment made me wonder why such strategies should necessarily require higher conviction than any other strategy.  To me, it's just another source of premium, like the kind of return you might expect for risk bearing in equities (without any particular alpha insight).  If there is a return to it, it is fair game to me, with the main consideration thereafter being risk management within the context of a wider portfolio. Liquidity isn't an issue for DM currencies even in the billions of notional exposure.  No-one is going to notice anything when I do my two cents of movement.

You'd need a lot of conviction to hold a lot of this at risk, for sure.  But, in the 'appropriate' weight, why should it require any more conviction to do this than buy-hold equities?  Certainly, my conviction in carry/momentum is somewhat less than for equity risk premium and position sizes reflect it in terms of risk exposure.  I have more conviction in this than getting a decent return from duration, for example.  To give you some feel for this, a 2std devn move on an annual basis represents +/- 0.5% of total assets at present.  Just another tiny piece in the puzzle requiring little maintenance.  No killer if we encounter a 6std devn event... Four currency pairs are currently in place, the major positions being updated with stops each couple of days, reviewed every couple of weeks by algo. That's the plan anyway.

Then I moved on....why is it that some positions are more comfortable to hold when things move against you?  Perhaps it occurs when you have some sort of conviction around an underlying valuation.  You can get this if this concept is used in equities or certain other assets.  Carry/Momentum has no such grounding.  If things move against you, they just move against you.  There is no reason why the concept just became an even greater bargain.  Is this why you feel that this kind of position requires higher conviction, or is otherwise less comfortable, when things move against you?

On the upside, the more I lose, the more agile I become....erghhhh.


PS. Any comments I have made about my portfolio size are deliberately vague.  Whether I have 6 or 10 figures in assets (with or without decimal points) remains open.  In a Greenspan like comment, if you think you know what I have in assets, you have misunderstood what I was saying.


----------



## DeepState

DeepState said:


> We're off....and having a bad start....erghh I hate this already.




:guitar:


----------



## DeepState

Improving the quality of your day:

Hi.  Just doing a stock-take of how I spend a day.  Current Status: Improvement Needed.  

1. How do you go about trying to get the most value out of your day?  This is not necessarily about spending time in markets.... I mean, how do you go about making the most of a day so that, over time, you are doing and achieving what is right and valuable for you? Work, play, health..etc.

2. What are the thieves of your goals?  eg. procrastination etc.  How do you keep them at bay?

3. How do you decide what to shoot for?


----------



## tech/a

(1) Delgation
(2) Prioritization Perato Principal
(3) Planning
(4) Pleasure


In no particular order

Time thieves
Making time available 
To tasks/people/ which should be delegated.

Your post is a timely reminder.


----------



## skc

DeepState said:


> Then I moved on....why is it that some positions are more comfortable to hold when things move against you?  Perhaps it occurs when you have some sort of conviction around an underlying valuation.  You can get this if this concept is used in equities or certain other assets.  Carry/Momentum has no such grounding.  If things move against you, they just move against you.  There is no reason why the concept just became an even greater bargain.  Is this why you feel that this kind of position requires higher conviction, or is otherwise less comfortable, when things move against you?




Yes. You've nailed it there. Grounding is a good word. I've always thought that FX is the instrument with no grounding. It probably has some longitudinal grounding (i.e. if it's worth X yesterday, and with news such and such, it should worth something > X). But if you are worrying about the "boil frog"... FX is probably the instrument best at boiling it to a tender juicy perfection.


----------



## DeepState

Nortorious said:


> I think everyone should read the richest man from Babylon. Lots of wisdom in there and certainly should be part of every education (be it formal or informal).




This really was worth reading. Thanks for the lead.

Need to start teaching the kids about it.  I asked what their school was teaching them.  Beyond getting a savings account and putting money in it from time to time, not much else.  Need to take up the slack.

Lots of parable stuff in there, good stuff.  Lots resonated.  Much is a reminder of the basics and the need to keep it simple.  As I was reading, it occurred to me that, although the approach of the examples in there for lending were very debt oriented, the principles definitely apply to investment in equities as well.


----------



## DeepState

Outright Equity Shorts.  Going to create a book.  

Any favourite stocks you love to hate out there?


----------



## systematic

(Just for fun, I don't know a thing about shorting)...ran a couple quick numbers, and from ASX200 came up with for closer inspection - PDN Palladin, BKN Bradken (which went up today, if you like that sort of thing) and PGH Pact Group Holdings.


----------



## The Falcon

A talk by Howard Marks at Google on 27 March on "the most important thing". Long but entertaining, bear with it.

https://m.youtube.com/watch?v=6WroiiaVhGo

Really good stuff... I think you will enjoy it DV.


----------



## DeepState

systematic said:


> (Just for fun, I don't know a thing about shorting)...ran a couple quick numbers, and from ASX200 came up with for closer inspection - PDN Palladin, BKN Bradken (which went up today, if you like that sort of thing) and PGH Pact Group Holdings.




Thx. What abt these made it through your screens For highlighting?


----------



## DeepState

The Falcon said:


> A talk by Howard Marks at Google on 27 March on "the most important thing". Long but entertaining, bear with it.
> 
> https://m.youtube.com/watch?v=6WroiiaVhGo
> 
> Really good stuff... I think you will enjoy it DV.




Thanks.  I read his book a couple of years ago and you've prompted me to review my notes again, which I have done just then.  He is so clean in his thinking.  I enjoy the overlap which I get fron reading different viewpoints.  At the intersection of these viewpoonts are just wonderful things.


----------



## systematic

DeepState said:


> Thx. What abt these made it through your screens For highlighting?




Financial statement only - nothing outside of that (macro, opinion, news etc) and no momentum considerations (seemed boring).  In hindsight (it was late) I probably should have looked a bit more for, "expensive" - I was just looking mainly at negative financial info.  I might think about what should go into the soup more constructively if I get a chance over the weekend.  Something similar to Montier's "unholy trinity" (proxies for bad value, bad fundamentals, bad management decisions).  Except I wouldn't rely on just single measures of these things but come at it from a multi-angled approach.  Don't think I'd want to go short in this market though, if I was into that sort of thing...


----------



## systematic

DeepState said:


> Outright Equity Shorts.  Going to create a book.




Whilst we're talking about it - what's the idea/thought here?


----------



## systematic

systematic said:


> BKN Bradken (which went up today, if you like that sort of thing)










Stop loss, anyone?


----------



## The Falcon

DeepState said:


> Thanks.  I read his book a couple of years ago and you've prompted me to review my notes again, which I have done just then.  He is so clean in his thinking.  I enjoy the overlap which I get fron reading different viewpoints.  At the intersection of these viewpoonts are just wonderful things.




As a low IQ investor I find that Howard is just a bit too smart for me....and leaves me with more questions than answers, which is a healthy thing of course. Investing is exceptionally hard, and to think otherwise betrays a lack of depth of thought.


----------



## galumay

The Falcon said:


> Really good stuff... I think you will enjoy it DV.




It was a great video, Falcon, thanks for the link, I read his memos on the Oaktree site but didnt realise he had written a book. Really interesting stuff.


----------



## DeepState

systematic said:


> Whilst we're talking about it - what's the idea/thought here?




Shorts, as part of a wider investment portfolio, are a field where simple screens can work particularly well (things like Montier's ideas).  It appears more likely for a company that screens out as having poor prospects to turn out that way than for the mirror (buying what appear to be good companies).  As most of the big end of town are long-constrained mandates or otherwise restricted for issues of liquidity, an opportunity may be available for short sellers who do not have such constraints.  Still, it's not exactly money sitting on a streetside gutter for collection.


----------



## The Falcon

galumay said:


> It was a great video, Falcon, thanks for the link, I read his memos on the Oaktree site but didnt realise he had written a book. Really interesting stuff.




DV and Galumay you might also like this one, its the same book related theme but Marks has so much experience and knowledge to share he ends up covering different ground in every interview. Interviewer is a twat though!

https://vimeo.com/87644595


----------



## systematic

DeepState said:


> Shorts, as part of a wider investment portfolio, are a field where simple screens can work particularly well (things like Montier's ideas).  It appears more likely for a company that screens out as having poor prospects to turn out that way than for the mirror (buying what appear to be good companies).  As most of the big end of town are long-constrained mandates or otherwise restricted for issues of liquidity, an opportunity may be available for short sellers who do not have such constraints.  Still, it's not exactly money sitting on a streetside gutter for collection.




Hmmm...seems like fun; might have a bit of a look - maybe run a thread.

With shorts, I keep thinking of market state...must've been something I read.

I agree with:


DeepState said:


> It appears more likely for a company that screens out as having poor prospects to turn out that way than for the mirror



 based on the biggest winners are all over the place (valuation), whereas the losers have a way bigger proportion of "expensive" among them (than random).

What's your universe?  Do you have a list / index?


----------



## DeepState

systematic said:


> Hmmm...seems like fun; might have a bit of a look - maybe run a thread.
> 
> With shorts, I keep thinking of market state...must've been something I read.
> 
> I agree with:
> based on the biggest winners are all over the place (valuation), whereas the losers have a way bigger proportion of "expensive" among them (than random).
> 
> What's your universe?  Do you have a list / index?




Going to start creating my sub-universe in the next few weeks.  It will take a couple of days to code it up...well, it can be done in a few hours because it doesn't need 'code' when it boils down to it for the initial phase. Better analytics can be built over time and when the approach gains greater stability. 

The proposed methods won't be a surprise to a guy like you. There really is no need to hyper-engineer this stuff in any case. I want to get a 20-30 stock list for closer inspection from these screens (7-10% most trashy), then manual inspection to find the trashiest of the trashy and to determine portfolio risk management issues. Rinse and repeat maybe monthly (multi-month time frames for a position is what I anticipate and seek). Looking for 5-10 names at any given time.

In order to short, you must get borrow.  I figure an ASX 300 universe is as good a place to start. IG seems to be able to source stuff despite not advertising it.  [For example, I was able to obtain borrow for VET-AU despite the sign saying "unborrowable".  Same deal with MVF-AU when it was initially listed.]


----------



## DeepState

The Falcon said:


> As a low IQ investor I find that Howard is just a bit too smart for me....and leaves me with more questions than answers, which is a healthy thing of course. Investing is exceptionally hard, and to think otherwise betrays a lack of depth of thought.




Whatever your investment IQ might be in reality, it seems that Howard and you have at least one point of view in common:


----------



## The Falcon

Ha indeed. Just realised that IQ was on display referring to you as DV. The change from RY has thrown me, and my cognitive bias has me reading "DeepState" and it becoming "deep value", hence DV. I need to lay off the investment books for a while.


----------



## DeepState

The Falcon said:


> Ha indeed. Just realised that IQ was on display referring to you as DV. The change from RY has thrown me, and my cognitive bias has me reading "DeepState" and it becoming "deep value", hence DV. I need to lay off the investment books for a while.




Change of year, change of name. I like this DS one more. I gave it more thought. The avatar is an indirect double-meaning.  One is a power behind the puppet concept.  Evident enough.  The other is "talk to the hand, the face don't want to hear it". I've not had immediate cause to use this meaning since taking it up.  

Currently reading "Margin of Safety" by Seth Klarman of Baupost Capital on the advice of a seemingly retired ASF poster 'Sinner' - who is one seriously high-IQ guy. OMG.  Some people here are right out of the box.

Klarman is another legendary value investor.  It is interesting to compare/contrast these guys.  Lots of overlap and then disagreement too.  I think it might be useful to conduct a comparative analysis on Graham, Buffett, Klarman and Marks.  Note to self: stop screwing around and get this done.

What's caught your attention lately on the reading front? I have nothing on my list, which reflects my lack of imagination or initiative as much as anything.


----------



## burglar

DeepState said:


> ... I have nothing on my list, which reflects my lack of imagination or initiative as much as anything.




I'd have thought it reflects your speed reading combined with your voracious appetite!


----------



## systematic

burglar said:


> I'd have thought it reflects your speed reading combined with your voracious appetite!





...anyone got something to read with this? corn:


----------



## qldfrog

The Falcon said:


> A talk by Howard Marks at Google on 27 March on "the most important thing". Long but entertaining, bear with it.
> 
> https://m.youtube.com/watch?v=6WroiiaVhGo
> 
> Really good stuff... I think you will enjoy it DV.



Many thanks: i really appreciated the talk


----------



## qldfrog

burglar said:


> I'd have thought it reflects your speed reading combined with your voracious appetite!




And newly found free time ? Good on you


----------



## odds-on

DeepState said:


> Change of year, change of name. I like this DS one more. I gave it more thought. The avatar is an indirect double-meaning.  One is a power behind the puppet concept.  Evident enough.  The other is "talk to the hand, the face don't want to hear it". I've not had immediate cause to use this meaning since taking it up.
> 
> Currently reading "Margin of Safety" by Seth Klarman of Baupost Capital on the advice of a seemingly retired ASF poster 'Sinner' - who is one seriously high-IQ guy. OMG.  Some people here are right out of the box.
> 
> Klarman is another legendary value investor.  It is interesting to compare/contrast these guys.  Lots of overlap and then disagreement too.  I think it might be useful to conduct a comparative analysis on Graham, Buffett, Klarman and Marks.  Note to self: stop screwing around and get this done.
> 
> What's caught your attention lately on the reading front? I have nothing on my list, which reflects my lack of imagination or initiative as much as anything.




Here are some suggestions:

The Basic Writings of Bertrand Russell. A collection of essays on a wide range of topics. 
23 Things They Don't Tell You About Capitalism by Ha-Joon Chang.
Economics: The User's Guide by Ha-Joon Chang.
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2384984/ - this guy is good.

Happy reading.

Cheers.


----------



## DeepState

odds-on said:


> Here are some suggestions:
> 
> The Basic Writings of Bertrand Russell. A collection of essays on a wide range of topics.
> 23 Things They Don't Tell You About Capitalism by Ha-Joon Chang.
> Economics: The User's Guide by Ha-Joon Chang.
> http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2384984/ - this guy is good.
> 
> Happy reading.
> 
> Cheers.




Thanks for the tips.  Hv read both books by Chang previously and can confirm that they were a refreshing heterodox viewpoint on what actually happens behind he headline claims.  The mention of Russell has reminded me that "History of Western Philosophy" would make a good read over an Easter weekend.  

Nice one.

Happy Easter.


----------



## The Falcon

DS, haven't read margin of safety, but know it's highly regarded and print copies sell for near $1k (!).

Just looked at the 3 piles of books on my bedside table, and of the lot of them I recommend to you ;

Education of a value investor, Guy Spier
Devil take the hindmost, Edward Chancellor
Poor Charlie's Almanack, Kaufman. A coffee table classic!
Influence, the psychology of persuasion, Cialdini

As general primers for beginners I really like ;

The Economist guide to investment strategy, Stanyer
A random walk, Malkiel
Beating the street, Lynch
Common sense on mutual funds, Bogle


Good bed time reads ;

Buffett, the making of an American capitalist, Lowenstein
Kerry Stokes, the boy from nowhere, Rule
Made in America, Sam Walton
Business Adventures, Brooks

General kick up the **** / pump up material ;

The prosperity bible, Hill, Franklin, Allen etc - a classic!
Mindset, Dweck

Special interest (value related)

The manual of ideas, Mihaljevic
Berkshire beyond Buffett, Cunningham

And to keep all this stuff in perspective....

Endurance, F.A. Worsley
A fortunate life, Albert Facey


----------



## galumay

If anyone wants a copy of "Margins of Safety", pm for a link.


----------



## tech/a

Would that be it?

http://www.glenbradford.com/files/S...or the Thoughtful Investor - Seth Klarman.doc


----------



## galumay

Different link, I just wasnt sure of the legalities of the downloads so I didnt want to put up a direct link. Mine is also a pdf which means you can read it in iBooks if you prefer.


----------



## DeepState

The Falcon said:


> Just looked at the 3 piles of books on my bedside table, and of the lot of them I recommend to you ;
> 
> The Economist guide to investment strategy, Stanyer
> A random walk, Malkiel
> Beating the street, Lynch
> Common sense on mutual funds, Bogle
> 
> 
> 
> General kick up the **** / pump up material ;
> 
> The prosperity bible, Hill, Franklin, Allen etc - a classic!
> Mindset, Dweck




You can't be describing a bedside table with that list.  You must have a bookshelf there! Thanks!

Of the investment primers reading, I have already had the chance to review each, except for Stanyer....who I used to report to a couple of decades ago! Small world. Very nice man..

Dweck is great.  If you are into this, I can add to your list...and bedside shelf.

Thanks again.


----------



## The Falcon

Just some of the titles in three stacks up to lamp shade height on the bed side table...new house, so new bookshelves are required according to my wife 

Small world eh, Stanyer's book is an ideal starting point. Rather than pile in to a property or stock forum and put the blinkers on, as many investors do, his book is a fantastic starting point for anyone interested in investing. his work is rigorous and thorough. Having picked up a copy of 2 Oz property invesment "classics" It could not be further away from the tripe espoused in these books when talking about other asset classes, risk and expected returns. On the latter, Marks would not approve.


----------



## DeepState

From Klarman (in 1991.....):




Why is dividend yield on stock so often seen in the same light as interest yield on cash?


----------



## tech/a

DeepState said:


> From Klarman (in 1991.....):
> 
> View attachment 62192
> 
> 
> Why is dividend yield on stock so often seen in the same light as interest yield on cash?




Return on Parked capital.
But unlike cash at bank the cash itself can 
Lose or gain value.


----------



## The Falcon

"Beware the yield trap" one of Thornhill's favourite themes, and a cracker it is too. Yield ain't yield. I have some thoughts on this but at the tail end of a good cab/shiraz so will leave it for another day!


----------



## skyQuake

Current read:

https://www.farnamstreetblog.com/mental-models/

Lots of excerpts of Charlie Munger


----------



## McLovin

DeepState said:


> From Klarman (in 1991.....):
> 
> View attachment 62192
> 
> 
> Why is dividend yield on stock so often seen in the same light as interest yield on cash?




Overheard a few months ago getting my car washed...

"The banks pay good yields -- much better than cash -- and they're safe"

Although maybe not implied, I certainly inferred from that discussion that bank shares were an almost substitute for deposit accounts. 

A dangerous belief to have.


----------



## DeepState

skyQuake said:


> Current read:
> 
> https://www.farnamstreetblog.com/mental-models/
> 
> Lots of excerpts of Charlie Munger




Sensational. Thanks.


----------



## galumay

DeepState said:


> Sensational. Thanks.




Agreed, I started having a look thru it yesterday - in between reading the Mark's book! 

If nothing else this thread is throwing up some terrific reading ideas!!


----------



## The Falcon

GMO Q4 letter https://www.gmo.com/Asia-Pacific/CM...aTF3uKPZrVQTnuGM5L8NxxK0rLFaobJ/JQpnqOR9/Fg==


----------



## DeepState

Early lessons from forex.  My vol estimates on a daily basis cross check with the margins required for posting positions.  On a multi-day period (say, longer than a week), they are holding up.  However, for short spurts of two or three days, the P&L movement has been surprising on both ends.  Part of it was due to the fact that I have gone through PMI/ISM and NFP announcements.  Still, it seemed wide.  Overall, the strategy is up since incep.

Led me to look into the underlying autocorrelation structure.  To allow for non-linear stuff, fractals seemed the best way to go.  Here is what I learned:




The charts are just in case there is a freak out there who is into this stuff like I am.

From the Google Translate Jibber-to-English

+ The more volatile the EURUSD exchange rate, the more that near term trends exist.  In other words, there is under-reaction in the near term when big movements are occurring.  So, with positions unchanged, the gains/losses over two or three day periods are larger than would be predicted.  This is the result of a combination of higher volatility and higher auto-correlation in co-movement. 

+ Over the last three years, the most recent period has seen a lot of volatility and a lot of near term trending.

Implications:

+ Set wide stops at explosion protection levels.  Don't sweat the small stuff. You'll get stopped out all over the place otherwise.  The risk budget was already conservative so no adjustment appeared necessary.


----------



## DeepState

Probably the key question for me:




- Plender, FT


----------



## DeepState

What happens when Greece defaults on the IMF or, if it passes that, the ECB?

The EZ powers have every incentive to absolutely punish the country.
Financial stability isn't really the issue in a first level sense.
A successful exit and positive medium term outcome from Greece would destabilize the EZ.

The bigger question:  What is Varoufakis smoking?


----------



## notting

DeepState said:


> The bigger question:  What is Varoufakis smoking?




An ex ministers pension.  Always has been.


----------



## DeepState

notting said:


> An ex ministers pension.  Always has been.




Paid in Drachma?


----------



## notting

DeepState said:


> Paid in Drachma?




He doesn't care!


----------



## DeepState

Having trouble with this from the IMF:




Does anyone know of a situation where there actually was an orderly correction of excesses of this kind of magnitude [however you measure it, I figure it is pretty significant] some time in the last 100 years?  Nothing comes to mind.


----------



## DeepState

One for the newbies:  A useful primer of the asset management industry is in Annex 3.1 of the IMF Global Financial Stability Report.  Gives an intro to the different players, investment types, shape of industry and mechanics of administering money.

http://www.imf.org/External/Pubs/FT/GFSR/2015/01/index.htm


----------



## notting

DeepState said:


> Having trouble with this from the IMF:
> 
> View attachment 62309
> 
> 
> Does anyone know of a situation where there actually was an orderly correction of excesses of this kind of magnitude [however you measure it, I figure it is pretty significant] some time in the last 100 years?  Nothing comes to mind.




Exactly. Nothing. As in - never. 

Pretty long odds if your long!

Shadow banking risk is overstated, it's the distortions dictated by self interested forces that have had no regard for the real economy that have created China's lumpy clinically polluted catastrophe of China Inc's enterprise teetering on the edge of implosion.


----------



## tech/a

DeepState said:


> Sensational. Thanks.




Smart guy.
55000 subscribers @ $7 a month.
Nice earn.


----------



## galumay

tech/a said:


> Smart guy.
> 55000 subscribers @ $7 a month.
> Nice earn.




Wow! Really? I am going thru all the content you can read without signing up, I wondered why some of the links were not live - no doubt they work if you pay.

Nevermind, i wont be helping his retirement fund!

ps. You can sign up to the email newsletter without paying - is that what has the 55,000 subscribers? Or is it the monetised subscription?


----------



## DeepState

One of the significant risk factors currently in play relates to USD borrowings from corporates in the EM - particularly from energy companies.  It exercises a lot of people in strategy roles given what has happened in oil and with the expected lift off in Fed rates some time less than one year from now.

Anyone got interesting data or thoughts to share?


----------



## DeepState

This is a newbie alert. Just found this:










Strangely, the history gets a little 'patchy'.

http://amarkets.com/company/news

Trading is simple.  Point. Click. Done. 
Making money is a little more challenging.

Do you know how hard it is to get a client HR less than 30% on a client base of maybe as small as even 100? Let alone, say, 1,000?  Apparently it's easy in FFX. Does anyone have something on equities? Coins would have a much harder time and would fail dismally to repeat this result even if they tried.

Roll up!  Roll up! Everyone's a winner!  Think of the opportunities!  

Enter at own risk.


----------



## shouldaindex

Humans are strange.


----------



## qldfrog

I actually believe the A-Markets deserves credits for posting these results.
Not sure i would if i was in their shoes, scary results, but not really surprising
I make enough losses on the share market without doing losses  faster on these tools, but the results are quite eye opening.


----------



## qldfrog

sorry, did not read anything about EM USD debt exposure lately, I had some about shale oil but this is now nearly history ;
in short: I saw that as even if oil price rises again, they are doomed if US interest raises as well.
wonder how santos/woodside got their cash for the expansion in gas.Are these USD loans?Would they face a risk similar to the EM debt?
this link focusses on China
https://au.finance.yahoo.com/news/higher-us-interest-rates-mean-190334467.html


----------



## tech/a

DeepState said:


> This is a newbie alert. Just found this:
> 
> View attachment 62329
> 
> 
> View attachment 62330
> 
> 
> View attachment 62331
> 
> 
> Strangely, the history gets a little 'patchy'.
> 
> http://amarkets.com/company/news
> 
> Trading is simple.  Point. Click. Done.
> Making money is a little more challenging.
> 
> Do you know how hard it is to get a client HR less than 30% on a client base of maybe as small as even 100? Let alone, say, 1,000?  Apparently it's easy in FFX. Does anyone have something on equities? Coins would have a much harder time and would fail dismally to repeat this result even if they tried.
> 
> Roll up!  Roll up! Everyone's a winner!  Think of the opportunities!
> 
> Enter at own risk.




This is great info and follows closely the results reported from people I know in the industry and studies that have been done.
I note around 50% have + or - $100 ---I figure a large majority of these would not be trading at all.
Infact I believe most accounts are dormant with many brokers.

This is an interesting read.
http://www.uts.edu.au/sites/default/files/PaperGallagherDavid.pdf

As is this.

http://www.travismorien.com/FAQ/trading/futradersuccess.htm


----------



## Knobby22

tech/a said:


> This is great info and follows closely the results reported from people I know in the industry and studies that have been done.
> I note around 50% have + or - $100 ---I figure a large majority of these would not be trading at all.
> Infact I believe most accounts are dormant with many brokers.
> 
> This is an interesting read.
> http://www.uts.edu.au/sites/default/files/PaperGallagherDavid.pdf
> 
> As is this.
> 
> http://www.travismorien.com/FAQ/trading/futradersuccess.htm




I like this quote from the second document you quoted.

_Conclusions of this study: the great majority of traders surveyed had a risk of ruin so high as to make eventual bankruptcy virtually inevitable. The traders with the shortest time frames (day traders) lost the most money and had the highest risk of ruin._

I know a few very serious successful investors and none of them are day traders. I have learnt from my own history that I do best if I undertake trades with a long term focus. Day trading on high margin - a sure way to lose your capital.


----------



## DeepState

Perhaps cheap advice is more expensive than it might seem.

The evidence suggests, however, that the most over-confident amongst the less experienced/knowledgeable are blown away.  These are often the same who eschew external advice, pronounce professionals as charlatans, have very strong opinions and are not data rational, let alone internally consistent in argument.  Might ring some bells.  Might not.


----------



## tech/a

Suggests to me they just don't know how to trade.


----------



## DeepState

tech/a said:


> Suggests to me they just don't know how to trade.




One step more, perhaps.  Don't know they don't know.
Even worse...go on to tell everyone one else what they think they should know.

But, then, I have to catch myself...how do I know I know???


----------



## luutzu

DeepState said:


> View attachment 62342
> 
> 
> 
> View attachment 62341
> 
> 
> 
> Perhaps cheap advice is more expensive than it might seem.
> 
> The evidence suggests, however, that the most over-confident amongst the less experienced/knowledgeable are blown away.  These are often the same who eschew external advice, pronounce professionals as charlatans, have very strong opinions and are not data rational, let alone internally consistent in argument.  Might ring some bells.  Might not.




Is it just me or are you actually talking about me there 

Why the bad blood DS? I kinda like you. 

Serious, you're alright. Just you think everyone ought to agree with you for some reason.


----------



## craft

DeepState said:


> One step more, perhaps.  Don't know they don't know.
> Even worse...go on to tell everyone one else what they think they should know.
> 
> But, then, I have to catch myself...how do I know I know???




I don't know.


Good post - subtle and deep.


----------



## get better

DS, very interesting articles you've posted there. I'm particularly interested in the article by Fong et al.

What journal is that from? Has it been peer reviewed?

When I get a chance I'll have a more detailed look at where they got the data from and what assumptions they've made. They make a few scathing statements about traders in their abstract - am very interested in the basis of their research.


----------



## DeepState

get better said:


> DS, very interesting articles you've posted there. I'm particularly interested in the article by Fong et al.
> 
> What journal is that from? Has it been peer reviewed?
> 
> When I get a chance I'll have a more detailed look at where they got the data from and what assumptions they've made. They make a few scathing statements about traders in their abstract - am very interested in the basis of their research.




Fong et al was not published in a journal.  The article was sourced from Tech/A.  Here is an SSRN link:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364978

The authors are quality guys with senior positions at our top finance schools (Snr Lecturer, Assoc Prof, Prof).  I have met Gallagher in arm's length business interactions.  He analysed trading data from my firm as part of a wider study and we managed money for a common client. As a group of three amigos, they published quite a bit that made it into journals.

Interested in your thoughts.  

The earliest similar piece of research I know of was Shiller several decades ago who examined the trading records of a brokerage firm in a way that seems to have inspired these guys.  He found that those who traded more frequently lost a lot more money.  They had a certain demographic....


----------



## So_Cynical

DeepState said:


> Perhaps cheap advice is more expensive than it might seem.
> 
> The evidence suggests, however, that the most over-confident amongst the less experienced/knowledgeable are blown away.  These are often the same who eschew external advice, pronounce professionals as charlatans, have very strong opinions and are not data rational, let alone internally consistent in argument.  Might ring some bells.  Might not.




Having a week off work so have some time to kill, spent a few hours reading through 4 of the new listed LICs, they espouse thier professionalism, have uni degrees out the ying yang, flashy web sites, have top down and 5 stage stock evaluation strategys, pay themselfs millions in fees etc etc etc. Couldnt help but notice that there doing pretty much what i do, stock picking and getting a slightly better than average return.

5 hours of reading to come to the inescapable conclusion that these guys are rorters, system rorters, finance professionals that set themselves up to play with other peoples money so they can get a 20% out perform fee for beating the benchmark (RBA cash rate plus 250 bps) - its a rort.


----------



## systematic

There's been a few papers on individual investor's trading.  I can't for the life of me think of the one that I want to remember - it was recent and showed individual investors underperforming the average fund (which in turn, underperforms the index).  So - no more bagging out the funds for underperforming the index.  
I _think_ it might have been the same paper that suggested individual investors typically grossly overstate their performance.  I'll have to go through my files to see if I can dig it up.

Anyway.  There's been a few on this topic.  Terence Odean has written a lot on individual investors.  He co-authored a look into day trading on the Taiwan futures exchange (there was another group who looked again several years later) - basic conclusion is that the day traders pretty much sucked (surprise).  

Wei Chen looked at the Chinese market and showed that individuals went backwards (losing money) whilst institutions made a few percent per annum.  

Terence Odean also did an overview of research on individual investors, you can read on ssrn which showed that individuals pretty much do everything wrong: over-trading leading to large costs and tax burdens, selling winners and holding losers, not diversifying enough and being influenced by media.

A later look at the Taiwanese day traders showed that less than 1 percent of them earned post-cost abnormal returns.  So, it is doable (for anyone who says it isn't)...but you need to be the 1, and not the 99.


----------



## tech/a

*I personally look at it this way*--its how I approach my trading and where I sit in the 100% of those who are in some way involved in the Stock Market (Embracing all forms from Options to Futures to Currencies to Stocks).

Around 90% fail in business.
Of the 10% that succeed 90% are self employed---*as in they generate their own wage and not a lot more.*
10% of the 10% (1%) Excel---they build big businesses---some really big---they become experts in their field.

I realised a long time ago I wasn't going to be George Soros--*didn't--dont want to be*.

I also realised I could be in the 10% so that was my target---here I don't have to spend the hrs required to be in the 1%.* I don't need to*.

I can and do regularly make a good wage from my trading---sometimes many days in a row!
Its stress free
Its fun
Its worth the effort
Its comforting
Its challenging

I don't have to worry about valuations/reports/expert opinion/ability---*I know what I know*.
I'm where I want to be.

Sure it took me many years of education but now its only an hr or so a day---when I want to---when I have time--when I see clear opportunity.
The return on net worth is minor---*it doesn't have to be*----even 10% on net worth! ---but on funds employed more than satisfactory.

*Id rather* play the zero sum game with the 90% losers and the 10% winners than the 1% experts.
Sure they are there but they work for me.


----------



## pixel

Couldn't have said it better myself, tech/a 
As long as you're alive, doing what you enjoy and enjoy whet you're doing - who cares about anything else!


----------



## So_Cynical

systematic said:


> There's been a few papers on individual investor's trading.  I can't for the life of me think of the one that I want to remember - it was recent and showed individual investors underperforming the average fund (which in turn, underperforms the index).  So - no more bagging out the funds for underperforming the index.




The super review of a couple of years ago showed that SMSF's (individuals) outperformed managed funds (professionals) by quite a margin.


----------



## tech/a

So_Cynical said:


> The super review of a couple of years ago showed that SMSF's (individuals) outperformed managed funds (professionals) by quite a margin.




They could have probably done that doing nothing!---well not quite.

http://www.superguide.com.au/comparing-super-funds/smsfs-outperform-large-super-funds


----------



## craft

So_Cynical said:


> The super review of a couple of years ago showed that SMSF's (individuals) outperformed managed funds (professionals) by quite a margin.




The statistics show that size matters with SMSF's




https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Statistics/Annual-reports/Self-managed-superannuation-funds--A-statistical-overview-2012-2013/?anchor=Appendix1#Appendix1


----------



## systematic

So_Cynical said:


> The super review of a couple of years ago showed that SMSF's (individuals) outperformed managed funds (professionals) by quite a margin.




I won't argue with that - who knows, maybe Australians running SMSF's are the 1 percent.

Couple things though...
I thought the emphasis here was on short term trading? Regardless, investors overall (at least in US studies) seem to under-perform the funds (which under-perform the index).

Again - maybe Australian SMSF investors are better than the funds.  But a couple things to note are:
the period tested is short (like, 7 years), and interestingly - covered the GFC period.  That's interesting, because SMSF's tend to be quite cash heavy - which of course ended up being a good thing over that period, but doubtful that it's a good thing longer term.

Finally - 4.3% vs 3.7% - is that, 'quite a margin?'


----------



## DeepState

systematic said:


> I won't argue with that - who knows, maybe Australians running SMSF's are the 1 percent.
> 
> Couple things though...
> I thought the emphasis here was on short term trading? Regardless, investors overall (at least in US studies) seem to under-perform the funds (which under-perform the index).
> 
> Again - maybe Australian SMSF investors are better than the funds.  But a couple things to note are:
> the period tested is short (like, 7 years), and interestingly - covered the GFC period.  That's interesting, because SMSF's tend to be quite cash heavy - which of course ended up being a good thing over that period, but doubtful that it's a good thing longer term.
> 
> Finally - 4.3% vs 3.7% - is that, 'quite a margin?'




The difference in performance arises from some combination of differences in exposure to broad assets, how well they each do within these assets and timing effects.

The Shiller mention I made before was in error.  Your mention of Odean corrected my recall.  This detailed work was published in 2000.  This is the abstract from the Journal of Finance:





This is the key chart:




You will have lots of other data saying pretty much that the average underperforms the index and the more you trade, the worse the result is on average.  There are other interesting correlations we could explore given your penchant for data (thankfully).

There will be data around about the performance of fund managers against the benchmarks.  In aggregate, it is a given they will underperform the index after expenses.  Before expenses, but after brokerage, the evidence isn't quite so stark.  Thus, from a straight investment skill perspective, I'll make the statement that, on average, professional fund managers are not as bad as retail investors who trade a lot.  Controversial, I know.

We can then move to market timing.  The below is from Morningstar.  Right across the board, money weighted returns from retail flows show a devastatingly poor outcome.  You would be very hard pressed to find institutional losses from market timing of this magnitude.  They exist, but amongst the insto long-only medium/long time horizon stuff, it is very uncommon and not central case - particularly over the long periods as analysed here.




The key other element is differences in bulk asset exposures.  SMSFs are overweight (rel to 'Large Funds') direct property of various kinds (possibly? boosted my inflated rents they pay to their own assets as part of tax optimisation arrangements).  They are underweight overseas shares (surprise!) and overseas assets in general.

---

My 2 cents:

To the extent that bulk asset exposure led to outperformance, part of it is tax driven property exposure as opposed to outright investment skill.  Part of it is natural home country bias of a fairly extreme kind.  Exposure to credit style investments (which below up over the GFC) is pretty much remote (just ask FIIG).  How much of the contribution to the difference in performance that arises from this could be regarded as skill?

Then, as shown, market timing is really bad in aggregate. It is an absolute shocker.  Check out ASF post volume relative to market move...sell low, buy high. Retail flow is one of the most reliable counter signals going. Sector performance is awful for the high frequency guys (almost inevitably).  Also, the ATO shows that costs for the larger sized SMSFs (>~$1m) are actually cheaper than most industry funds.

If you actually know what you are doing and calibrate this with how you invest and keep an eye to costs and taxation, you can reasonably expect do better on your own than investing via professionals on average.  Even then, you may wish to delegate some aspects out.  It's your choice to index or go active if you farm it out.  No one forces you to buy anything.

If you have limited experience/knowledge, think things are simpler than what they are, are a young to mid-aged male, trade a lot, enter the markets as a trader to get into the kind of circumstance where you might hit some kind of  a lottery win....on average and in great likelihood, you are totally cactus. Anecdotal evidence suggests that quoting Buffett a lot on ASF is no defence.  Naturally, this segment learns best from direct experience and pays no regard for the data.  It is partly for this kind of reason that there are so many service providers democratising access to markets.  It is liberating...money from these guys into the pockets of others.  

The authors in the ASF ecology could do worse than to collate the advice and prognostications made on these threads into a book to highlight what this archetype looks like and what happens for the most part. This book, if written, should sell well and deserve broad readership.  It obviously won't get that.


----------



## get better

DeepState said:


> Fong et al was not published in a journal.  The article was sourced from Tech/A.  Here is an SSRN link:
> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364978
> 
> The authors are quality guys with senior positions at our top finance schools (Snr Lecturer, Assoc Prof, Prof).  I have met Gallagher in arm's length business interactions.  He analysed trading data from my firm as part of a wider study and we managed money for a common client. As a group of three amigos, they published quite a bit that made it into journals.
> 
> Interested in your thoughts.
> 
> The earliest similar piece of research I know of was Shiller several decades ago who examined the trading records of a brokerage firm in a way that seems to have inspired these guys.  He found that those who traded more frequently lost a lot more money.  They had a certain demographic....




I had a chance to have a more detailed look at the paper tonight.

*Major observations:*
- Intraday profit is calculated by netting all buy and sell trades for each stock on the ASX based on time period - see Table 4 of the paper (would be good if someone could confirm - it's been a long day!). This is an extremely major assumption. I believe this does not conclusively state that trading is unprofitable. There is no clear correlation between net intraday buy and sells and profits from intraday traders. The main reason I say this is that this data set also includes investors that may be buying or selling at that point in time. To counter this argument, you could say that traders would account for the majority of the buying/selling but to counter this counter argument you could also say that day traders are a minority compared to investors. Overall, the assertion that individual investors incur significant losses to institutional investors from intraday trading appears to be inconclusive.

- 84% of turnover is by institutional investors. This is a huge data set that is being ignored in terms of determining whether trading is profitable or not. However, in the context of the paper, we are only looking at the individual investor.

- Credibility of the research appears questionable. The credentials of the authors appear to be good. However, any academic paper should be peer reviewed (unfortunately it's not a journal so I can't check). Not only this but we do need to be careful about taking the abstract as gospel, we need to be objective and take it within context - this is something the media do terribly, always taking 'research' out of context and making outlandish statements (one of my pet peeves). 

- More of a subjective opinion of mine but the paper looks like it was something I would write for a university assignment... the overall quality does not excite me.

*Conclusion*
I feel that the findings of the paper are inconclusive due to the assumptions made in determining intraday profit. However, I would be interested in knowing if there is research based on actual sampling of real day traders or investors analysing their profitability over time. In addition to this, it would be interesting to see what demographic/behaviour/characteristics these people exhibit . My personal anecdotal evidence suggests that the most significant influence on profitability is the behaviour exhibited by the trader/investor than whether they day trade or invest. 

Oh, and just FYI, I don't take a pro technical/pro fundamental view (kinda sounds like I'm bashing fundamentals/investing), I feel that both trading and investing have their strengths and weaknesses, both of which I'm endeavouring to learn and incorporate into my overall investment strategy. 

Also, here are a few notes I made while reading the paper if you're interested.

*Pros*
- Data is sourced from the ASX SEATS trading data (actual data source is from SIRCA)
- FY end book-value data also sourced from Aspect Financial
- Brokers are classified as retail or institutional and is obtained from a variety of sources (newspapers archives, trade magazine articles, and consult senior practitioners) - the basis of this appears to be sound however no citation has been provided
- The assumption is made that individual investors tend to be predominantly serviced by retail brokers - a sound assumption
- Data remediation appears to have been performed, unable to determine whether it was appropriate (Four broker IDs removed - unknown magnitude, 3529 ticker day pairings also removed - 61% of which occurred in 1990), lack of documentation or citation is a concern
- Intuition of their model suggests that certain aspects of the market tend to attract uninformed investors which exacerbates losses of the individual investors group - a very interesting statement worthy of a research paper on in its own right

*Cons*
- Individual investor is used throughout the paper - it does not specifically mention any delineation between investors/traders
- No charts or visuals to summarise or simplify findings
- SIRCA data was missing 6.7% of ticker/days or .69% of total turnover for the sample period, this could potentially be a massive oversight - it really is dependent on the magnitude of the ticker data
- Data sourced ranges from Feb 1990 to Dec 2007, technology has advanced significantly since then, I would be interested to see the profile of the data over the period to see if technology has benefited these traders
- A few citations date from 1988 to 1995 I would question the validity of past research given the significant advances in technology over the last decade


----------



## get better

Oops, forgot to also mention this:

_This research was funded through an ARC Linkage Grant (LP0561160) involving *Vanguard Investments Australia* and SIRCA._

I'd be careful with any papers funded by Vanguard - they may have an ulterior motive in dissuading trading.


----------



## DeepState

get better said:


> I had a chance to have a more detailed look at the paper tonight.




Seriously great stuff!



get better said:


> *Major observations:*
> - Intraday profit is calculated by netting all buy and sell trades for each stock on the ASX based on time period - see Table 4 of the paper (would be good if someone could confirm - it's been a long day!). This is an extremely major assumption. I believe this does not conclusively state that trading is unprofitable. There is no clear correlation between net intraday buy and sells and profits from intraday traders.




This is correct.  All this says is that the buy/sell-hold performance of individual investors is negative on the day of execution.  It does not represent the full round trip.  Hence, they are losing money on intra-day trades...on the day of execution.

Over the slightly longer term, if these positions were held unchanged, individuals actually beat institutions in aggregate (not stat significant).  However, retail full service broker trades did a lot better and retail discount brokers trades did a lot worse.  That was very statistically significant.  What they are implying, and I tend to favour this, is that informed sub-institutional sized investors/traders can do well.  There are simply less market frictions and this makes up for a lot of any further advantage institutions have relative to full-service brokers on price sensitive information (if any).  

Then there was this:  "Purely cost conscious individuals, eg. those who are self-reliant, over-confident or liquidity motivated, are likely to choose discount brokers to satisfy their trading needs."  

I don't see referenced data to support the above, but private client advisers at Morgan Stanley don't tend to day trade on behalf of their clients.

---

This is from IG Markets.  It related to CFD account activity in 2014.  A very recent piece of data (as was the FX stuff posted previously) to highlight outcomes.  CFD is not exactly a market place for buy and hold investors.

So, if CFD accounts are predominantly retail by number and these are predominantly short term traders...talk to an account manager or turn up to their info nights and check for yourself...check the demographic...then listen to their trade rationale and trade type for the most part. A swing trader is positively passive.

AND...I assume that if you are profitable, that you tend to keep trading....

THEN...check this out.




Out of 42k CFD accounts, 8k re-merged from slumber lasting more than 12 months, 10k were fresh meat (me included) and 17k went dormant.  Are these the kinds of stats that indicate broad based profitability or mass extinction followed by a new wave of fresh meat each year?  CFD penetration is still minuscule relative to population so there is a ready supply of fresh hopefuls.

17k of around 40k who traded in 2013 were dormant in 2014.  Would you go dormant after turning in a 30% profit on capital? No wonder the new account guys at IG are so stressed.  Prior year data was not available from IG..who run this survey.

Add this to the stuff from the Forex group previously posted and you have real live data which reflects current conditions.  These fall short of actual performance numbers in the case of CFD accounts, but I'm fairly confident the account behavior is correlated with profits.  This aligns with Fong et. al on the lack of profitability from discount brokerages.  It aligns with Barber and Odean. It aligns with BIS on retail FX in in 2013. It aligns with Morningstar. You/Systematic have other stuff.  You have the makings of a meta-study.  I am looking for counter evidence that high frequency leads to high profit (outside of HFT algo by insto) in aggregate. I do not know of something material (anything).

Given your arguments that a change in market structure over recent times obviates historical study, I suspect you'll only be convinced when you talk to/become a broker/adviser at a CFD place whereupon any alternative thesis to high frequency, short term, trading as a reliable means to monetary loss for retail clients will be firmly shuttered.

---

This is a very recent article on high frequency technical trading...in a peer reviewed journal.  Shefrin is a behavioural finance legend.  Compare the comments with thread contents in ASF...consider the implied trading activity of fundamentally oriented posts...they don't day trade as fundamentals don't operate on that time scale.  




[Anyone reading this from the Diversification threads?]

You can make seriously big money trading on short term movements.  However, the nature of the people who do this are seriously uncommon and they tend to sit closer to the hub of trading flow...rather that at the other end of some CFD/discount on-line terminal.

---

Overall, this is a newbie alert.  The path from young, hopeful, high frequency, short-horizon, trader to dormant account is fairly well worn.  I think you'll find that those who emerge from dormancy after a period of savings to replenish accounts tend to become dormant again too.  A quick chat to the CFD account managers can clarify that.

This game is seriously hard.  However, it is seriously easy to get on the field.

Enter at own risk.


----------



## fiftyeight

Great stuff in the last few posts for a newb such as my self. I wish I could remember the book, but one of the first trading books I read was explaining everything that has been said above. The author was a Mathematician who lost a bunch of money on WorldCom I think. (If anyone knows the book I would love to re-read now a few years later) 

I love the idea of being a short term trader but I am fully aware of the challenges. Only play money is used to fluff around with futures


----------



## Triathlete

DeepState said:


> Seriously great stuff!
> 
> [Anyone reading this from the Diversification threads?]
> 
> You can make seriously big money trading on short term movements.  However, the nature of the people who do this are seriously uncommon and they tend to sit closer to the hub of trading flow...rather that at the other end of some CFD/discount on-line terminal.
> 
> ---
> 
> Overall, this is a newbie alert.  The path from young, hopeful, high frequency, short-horizon, trader to dormant account is fairly well worn.  I think you'll find that those who emerge from dormancy after a period of savings to replenish accounts tend to become dormant again too.  A quick chat to the CFD account managers can clarify that.
> 
> This game is seriously hard.  However, it is seriously easy to get on the field.
> 
> Enter at own risk.




I would add this..... that just because you may be a very good and skilful medium to long term trader using Technical analysis it does not mean you would be able to have the same success  if you decided to trade short term,
they are completely different trading environments which requires a much greater skill and knowledge level.

Short term trading is more complex than medium to long term trading because we are trying to enter as close as possible to the start of a trend and exit closer to the peak.

Therefore, you need to combine trend analysis techniques with your buy and sell rules to increase your probability of success.

Given the high risk nature of this type of trading, it is only suitable for those who have a very good level of knowledge and skill.


----------



## fiftyeight

Found it

A Mathematician Plays The Stock Market


----------



## odds-on

DeepState said:


> If you have limited experience/knowledge, think things are simpler than what they are, are a young to mid-aged male, trade a lot, enter the markets as a trader to get into the kind of circumstance where you might hit some kind of  a lottery win....on average and in great likelihood, you are totally cactus. Anecdotal evidence suggests that quoting Buffett a lot on ASF is no defence.  Naturally, this segment learns best from direct experience and pays no regard for the data.  It is partly for this kind of reason that there are so many service providers democratising access to markets.  It is liberating...money from these guys into the pockets of others.
> 
> The authors in the ASF ecology could do worse than to collate the advice and prognostications made on these threads into a book to highlight what this archetype looks like and what happens for the most part. This book, if written, should sell well and deserve broad readership.  It obviously won't get that.




....


----------



## galumay

...and some of us that have peed on electric fences more than once!


----------



## tech/a

fiftyeight said:


> I love the idea of being a short term trader but I am fully aware of the challenges. Only play money is used to fluff around with futures




Excellent
I'll gladly take your " Play Money " and everyone else with the same
Attitude. ---- 90%


----------



## fiftyeight

tech/a said:


> Excellent
> I'll gladly take your " Play Money " and everyone else with the same
> Attitude. ---- 90%




Haha all yours, but once I have an edge I be expect it back with interest


----------



## tech/a

fiftyeight said:


> Haha all yours, but once I have an edge I be expect it back with interest




Wont get it from me but there are plenty of others just lining up.


----------



## get better

DeepState said:


> This is from IG Markets.  It related to CFD account activity in 2014.  A very recent piece of data (as was the FX stuff posted previously) to highlight outcomes.  CFD is not exactly a market place for buy and hold investors.
> 
> So, if CFD accounts are predominantly retail by number and these are predominantly short term traders...talk to an account manager or turn up to their info nights and check for yourself...check the demographic...then listen to their trade rationale and trade type for the most part. A swing trader is positively passive.




Interesting, thanks for the tip, I'll keep an eye out for an info night and drop in - would be very interested to see what the demographic is (I'm guessing, young and brash/impatient?). 



DeepState said:


> Given your arguments that a change in market structure over recent times obviates historical study, I suspect you'll only be convinced when you talk to/become a broker/adviser at a CFD place whereupon any alternative thesis to high frequency, short term, trading as a reliable means to monetary loss for retail clients will be firmly shuttered.




Perhaps. To be honest though, I agree that a large percentage of short term traders will most likely lead to monetary loss (based on anectodal evidence on the ASF). However, my only gripe is that with academic papers/journals, they do need to have a sound basis and peer reviewed for accuracy and technical adequacy before taken seriously. 

I don't think I can keep up with you in reading all these articles though, I myself am still on the journey of learning so need to make sure I'm learning the right things with the time I have . Love these discussions though!



DeepState said:


> Overall, this is a newbie alert.  The path from young, hopeful, high frequency, short-horizon, trader to dormant account is fairly well worn.  I think you'll find that those who emerge from dormancy after a period of savings to replenish accounts tend to become dormant again too.  A quick chat to the CFD account managers can clarify that.
> 
> This game is seriously hard.  However, it is seriously easy to get on the field.
> 
> Enter at own risk.




I 100% agree with this message. 

Rather than focussing on the methodology, I would be particularly interested in seeing any research that measures personality traits/characteristics of both successful/unsuccessful investors and traders. I suspect that successful investors and traders would have similar positive personality traits/characteristics (i.e. persistence, patience, objectiveness, confidence, logic etc) with traders requiring a greater focus on discipline and technical ability. On the flip side, the unsuccessful investors/traders have similar negative characteristics (i.e. impatient, quick to give up, wants quick profits, does not want to put in the effort etc).


----------



## skyQuake

The uptick in CFD user accounts could be very much bolstered by Interactive Broker's margin issue. An IG acct manager said he was aware of it and the flow of ex-IB clients was 'very noticeable'


----------



## Triathlete

Most people who are unsuccessful in the sharemarket are so simply because they cannot or will not follow a simple plan to succeed.

Often this can be attributed to *lack of knowledge,patience or experience*.

These would be  some questions I would ask before trading.

Do you have a trading plan before you trade?

Are you trading the right markets for your level of knowledge and experience?
( most traders overestimate themselves and often get into trouble.)

Do you have the time available to trade those markets successfully?

and always remember

*"Do not risk your capital if you are not sure you can succeed."*


----------



## tech/a

Triathlete said:


> Most people who are unsuccessful in the sharemarket are so simply because they cannot or will not follow a simple plan to succeed.
> Often this can be attributed to *lack of knowledge,patience or experience*.
> 
> These would be  some questions I would ask before trading.
> Do you have a trading plan before you trade?
> 
> Are you trading the right markets for your level of knowledge and experience?
> ( most traders overestimate themselves and often get into trouble.)
> 
> Do you have the time available to trade those markets successfully?
> 
> and always remember
> 
> *"Do not risk your capital if you are not sure you can succeed."*




Hmmmmm


----------



## craft

My report card on many of the topics raised by Deep State and backed with academic studies and broad data on the averages, is atrocious. (makes his posts very thought provoking for me)

Broadly diversified within asset class: FAIL
Broadly diversified between asset classes: FAIL
Diversified Internationally: FAIL
Counteract Home Bias: FAIL
Maintains portfolio concentrations by re-balancing: FAIL
Uses full service broker: FAIL
Seeks advice from professionals: BIG FAIL
Etc etc etc........ FAIL, FAIL, FAIL.

I know I fail  – I have failed all the way along my journey. In fact early on I didn’t even know the theory I was failing against.  



DeepState said:


> Anecdotal evidence suggests that quoting Buffett a lot on ASF is no defence.



All I have as a defence for my terrible terrible report card is a single example outcome (which I know has no statistical significance) and a buffet concept of circle of competence.





get better said:


> I would be particularly interested in seeing any research that measures personality traits/characteristics of both successful/unsuccessful investors and traders.




I too would like to see this research - Maybe just maybe I could add at least one Acceptable to my report card.


----------



## tech/a

craft said:


> My report card on many of the topics raised by Deep State and backed with academic studies and broad data on the averages, is atrocious. (makes his posts very thought provoking for me)
> 
> Broadly diversified within asset class: FAIL
> Broadly diversified between asset classes: FAIL
> Diversified Internationally: FAIL
> Counteract Home Bias: FAIL
> Maintains portfolio concentrations by re-balancing: FAIL
> Uses full service broker: FAIL
> Seeks advice from professionals: BIG FAIL
> Etc etc etc........ FAIL, FAIL, FAIL.
> 
> I know I fail  – I have failed all the way along my journey. In fact early on I didn’t even know the theory I was failing against.
> 
> 
> All I have as a defence for my terrible terrible report card is a single example outcome (which I know has no statistical significance) and a buffet concept of circle of competence.
> 
> 
> 
> 
> 
> I too would like to see this research - Maybe just maybe I could add at least one Acceptable to my report card.




So have you failed or are you failing as an Investor/Trader?

Not against the Deep State benchmark but your own?

Do *YOU* believe that you or anyone will need a PASS on all FAILS to be successful?


----------



## galumay

craft said:


> My report card on many of the topics raised by Deep State and backed with academic studies and broad data on the averages, is atrocious. (makes his posts very thought provoking for me)....




Me too! I know your report card was largely 'tongue in cheek', but there is an important point to be made and that is that these concepts are not absolute or binary. 

So for me its not a question of pass of fail, but rather to ensure I understand the concepts, research the practical application, and then make an informed decision about the extent to which I include them in my investing philiosophy and strategy.

Thats the real value of DS's postings for me, makes me go and learn more!

As tech/a says, and I think you were implying, all that really matters is how you measure against your own absolute performance targets.


----------



## craft

tech/a said:


> So have you failed or are you failing as an Investor/Trader?
> 
> Not against the Deep State benchmark but your own?







craft said:


> All I have as a defence for my terrible terrible report card is a single example outcome (which I know has no statistical significance)




Trying to be modest her Tech - but what this line means is that I have made a freaking fortune despite the poor report card. (but its only one statistically insignificant example) 



tech/a said:


> Do *YOU* believe that you or anyone will need a PASS on all FAILS to be successful?





The questions that Deepstates posts cause me to ask myself is why the variance between my case and the base case. And more importantly is a fall to the other side of average just lurking around the corner. Worthy contemplations for anybody with so many fails on the report card but end of the day I have every intention of continuing to fail the report card.


----------



## tech/a

Yes I'm sure there are outliers.

Don't get me wrong I feast on Deep States stuff.
Refreshing punch in the face!


----------



## craft

tech/a said:


> Don't get me wrong I feast on Deep States stuff.
> Refreshing punch in the face!




Very apt way to put it.



tech/a said:


> Yes I'm sure there are outliers.




How do you decide if an outlier result is due to luck or some other attribute? Market randomness on its own creates outliers. If your results are just a lucky outlier - you have to cut and run whilst your luck holds. If some other attribute accounts for the outlying result then it makes sense to continue doing what you do.


----------



## tech/a

craft said:


> How do you decide if an outlier result is due to luck or some other attribute? Market randomness on its own creates outliers. If your results are just a lucky outlier - you have to cut and run whilst your luck holds. If some other attribute accounts for the outlying result then it makes sense to continue doing what you do.




I'm being facetious.
In the realm of professional Advisors/Brokers any retail profit is an outlier.
Particularly as an on going study!

It appears many papers support this.


----------



## DeepState

craft said:


> My report card on many of the topics raised: FAIL




It turns out that if:

+ you really have a circle of competence which is sufficiently large; and
+ for your purposes (don't leverage so can't go bankrupt, income drawn from investment is limited, not otherwise too concerned about mark to market, long time horizon..) diversification and risk management issues associated with it have a very small role to play

...what you are doing becomes ever more optimal.  It is so for Buffett and his style is appropriate for BRK which is in that exact position.  It is a really big problem when 'you' act like Buffett without having that circle of competence and/or are not in that position. 

--

Probability is not destiny.  

--

The largest single determinant for investment success, in addition to latent talent of some kind, seems to be approaching the task in a business-like fashion.  Buffett calls it temperament. You'll see that Munger's stuff is full of deliberate thinking rather than seat of the pants got-a-hunch style. You, for example, produced a checklist (somehow confined to things where you've seen fit to award yourself a "FAIL" only). 

Apart from being straight-up ripped off, it looks like the biggest killer is over-confidence (an associated one is acting as if overconfident, but really out of desperation to secure a lottery win and escape a bad situation).  That seems to reside disproportionately with young males...as if that's a surprise.  Another is the opposite of good investment temperament...something like tendency to 'panic'.

--

Buffet's way is not the only way.  However, it might just be the right way for you.  Whatever the case, I'm truly glad that it is working for you (and am when others, who are on a deliberate, heavily rational and considered path to investment/trading success, actually meet with that success).  Many paths to Rome.  Hope to see you there if I am so fortunate.


----------



## DeepState

Fresh meat in China:











Sell low.
Borrow money, buy high.


----------



## qldfrog

DeepState said:


> Fresh meat in China:
> 
> View attachment 62382
> 
> 
> View attachment 62383
> 
> 
> View attachment 62384
> 
> 
> 
> Sell low.
> Borrow money, buy high.



scary as I have exposure thru magellan asia fund
and probably heavier exposure as i am Australian.


----------



## galumay

DS, have you coe across this guys blog? Lots of stuff to think about as you read back thru it. (dont be put off by the first couple of pages that are just quotes, I am about 40 pages into it this weekend and its got some great ideas in it.

http://seekingalpha.com/author/chris-demuth-jr/instablog


----------



## DeepState

galumay said:


> DS, have you coe across this guys blog? Lots of stuff to think about as you read back thru it. (dont be put off by the first couple of pages that are just quotes, I am about 40 pages into it this weekend and its got some great ideas in it.
> 
> http://seekingalpha.com/author/chris-demuth-jr/instablog




I have not seen this before.  Glad you are enjoying it.
Slowly wading my way through Dalio's treatise on how the economy works at the moment.  Could take a while.


----------



## The Falcon

For Dividend Growth Investing these US blogs are worth a read. I particularly like Tim McAleenan Jr's (The Conservative Income Investor) historical stock nerding, some of which is pretty interesting.


http://theconservativeincomeinvestor.com

http://www.dividendgrowthinvestor.com/?m=1

The type of stocks they cover are probably not a bad starting point for the very long term buy and hold equity investor who is interested in looking beyond the ASX.


----------



## DeepState

The Falcon said:


> For Dividend Growth Investing these US blogs are worth a read. I particularly like Tim McAleenan Jr's (The Conservative Income Investor) historical stock nerding, some of which is pretty interesting.
> 
> 
> http://theconservativeincomeinvestor.com
> 
> http://www.dividendgrowthinvestor.com/?m=1
> 
> The type of stocks they cover are probably not a bad starting point for the very long term buy and hold equity investor who is interested in looking beyond the ASX.




Thanks for the links. Are you working through a list of potential positions?


----------



## The Falcon

Indeed DS I have a long watchlist. Tom Russo is a big influence and his thoughts on capacity to reinvest, capacity to suffer, brand power and long term management thinking really strike a chord. Also a bit of div growth thrown in. Lots of sin stocks as it turns out ! I intend to accumulate holdings in each at a fair entry price, add on weakness and hold for a very long time...30+ years.  My working international watchlist ;

Compagnie Financiere Richemont
Nestle
Unilever
Heineken Holdings
SAB Miller
Diageo
Coca Cola
Berkshire Hathaway
Markel Corp
Alleghany Corp
Fairfax Financial Holdings
Annheuser Busch InBev
Pernod Ricard
Exxon Mobil
Chevron
JP Morgan
Wells Fargo
MasterCard
VISA
Phillip Morris
Altria
British American Tobacco
Brown Forman
Johnson and Johnson
Walmart
Proctor and Gamble
McCormick and Co
T Rowe Price
Franklin Resources
Colgate Palmolive


----------



## DeepState

Not good figures.


----------



## DeepState

The world took a step towards financial stability over the last 24 hrs.


----------



## DeepState

The dominant theme of the last few days has been an unwind of carry.

Yields up
Higher yield currencies weaker
Equities off.


Not exactly too sure of why this has been happening to this extent as yet.


----------



## DeepState

Worth review:

- Watch particularly for data mining a block of data and the use and abuse of out-of-sample data.
- The presence of profitable patterns in even white noise is a given.




http://www.economist.com/node/21644202/print


----------



## Triathlete

Probability is not destiny.  


Not sure if I am understanding this statement in your context...DeepState

I would have thought that if you are able to keep your Win/loss and Profit/loss ratio in the positive based on your probability level while trading or investing and depending on your knowledge, experience and with the help of patience that some time into the future it well may  become your financial destiny.


----------



## Triathlete

*Probability is not destiny. 

Not sure if I am understanding this statement in your context...DeepState*


I would have thought that if you are able to keep your Win/loss and Profit/loss ratio in the positive based on your probability level while trading or investing and depending on your knowledge, experience and with the help of patience that some time into the future it well may  become your financial destiny.


----------



## Knobby22

Triathlete said:


> *Probability is not destiny.
> 
> Not sure if I am understanding this statement in your context...DeepState*
> 
> 
> I would have thought that if you are able to keep your Win/loss and Profit/loss ratio in the positive based on your probability level while trading or investing and depending on your knowledge, experience and with the help of patience that some time into the future it well may  become your financial destiny.




Your destiny is death.
The probability of it being next week is low.


----------



## qldfrog

Knobby22 said:


> Your destiny is death.
> The probability of it being next week is low.



you can not change your destiny but you can change the probability;
What about this russian roulette game?


----------



## qldfrog

Interesting:
http://finance.yahoo.com/news/not-enough-bonds-and-too-much-oil-114924883.html
so the China stockmarket crazyness might start to crack, oil falling 3% last night after a hard to explain jump in the last week and German bonds move by half a point...
DeepState, we need your guidance there to look ahead;
And the AUD fell 1% last night
yeppeee will cover some off my double diggit losses on the market in the last 3 days
VERY instable, are we at the top of the rollercoaster?


----------



## Triathlete

A smart man cannot follow another man blindly even though the other man is right,
because you cannot have confidence and act on advice when you do not know what 
it is based on.
You will be able to act with confidence and make* profits* when you
*can see and know for yourself why stocks should go up or down.*

*WD GANN*


----------



## DeepState

qldfrog said:


> Interesting:
> http://finance.yahoo.com/news/not-enough-bonds-and-too-much-oil-114924883.html
> so the China stockmarket crazyness might start to crack, oil falling 3% last night after a hard to explain jump in the last week and German bonds move by half a point...
> DeepState, we need your guidance there to look ahead;
> And the AUD fell 1% last night
> yeppeee will cover some off my double diggit losses on the market in the last 3 days
> VERY instable, are we at the top of the rollercoaster?




This is what I think is going on.

Leading into the ECB QE program, EZ yields sharply compressed.  Yields, apart from Greece, continued to compress as the Tsipras impasse became more acute.  For some reason, from 14 April, the world decided that things had improved and Greek yields came in.  In a mirror action, the flight to safety evident in core EZ yields reversed.  These movements happened sharpest in the EZ, as you would expect.  This can be regarded as a slippage in QE for all intents and you can see the expected outcome of a fall in the equity market and also EUR vs USD.

Bond yields around the developed world also backed up as relative value considerations asserted themselves.  It gives you and idea of how much influence EZ yields have on the RoW.  Japanese yields didn't move.  This is in accordance with the fact that very little of their bonds are owned by foreigners outside of the official sector.

The USD moved down as the upward move in yields and perception of greater financial stability led to an unwinding of its safe-haven status (of all the banking systems, it is one of the strongest nowadays).

The Australian stock market fell as well.  The degree of decline was certainly impacted by a poor report from CBA.  This offset the iron ore outcomes post VALE-BR that boosted the outlook for related stocks.

If you want to know what happens next, if these drivers continue to be dominant, you will need to know what happens with Greece next.  I have no insight.  

The size of the moves are quite large and may be influenced by the reduced level of OTC market making ability in the bond markets nowadays.  It was also interesting that credit spreads did not move much through all of this.  They never really blew out, and they never really came in.  I guess the search for yield effects there are pretty much washing out.


----------



## qldfrog

Thanks, 
Greece, the butterfly wings flapping in the world of finance...Never know what it will ytrigger yet so insignificant n perspective.
Could the Greece default scare just be a mirror image of a bigger malaise: when most (if not all ) central banks/governments debt might never ever be paid back? Especially in a low inflation/stagnation world?


----------



## DeepState

For those using DCF on FCF out there.  What discount rate are you seeing implicit in levered owner's earnings in the Aust market right now?  My estimate, rubbery as it is, is around 8%pa.   Implies about a 5% equity risk premium on QE suppressed yields.


----------



## galumay

DeepState said:


> For those using DCF on FCF out there.  What discount rate are you seeing implicit in levered owner's earnings in the Aust market right now?  My estimate, rubbery as it is, is around 8%pa.   Implies about a 5% equity risk premium on QE suppressed yields.




I am no longer sure how relevant equity risk premiums are when otherwise yields are effectively negative after inflation and tax - perhaps the risk premium lies with bonds!

My rubbery estimate is 5%, but I do apply a much lower growth projection than most so its probably swings and roundabouts as far as a deduced value range.

If you really want a heavily calculated figure for equity risk premium then Damodaran is your man.


----------



## kid hustlr

Aussie bond yields out the back really increased lately with the curve steepening sharply. Is this action world wide??

Is this Greece related (everything is ok!?!?) or a world growth theme of 'perhaps it's not THAT bad'??

Enjoying the thread DS.


----------



## qldfrog

DS,
I invite you to look at the last post of Rimtas that I found quite interesting on  Re: Elliott Wave and the XAO 
is stock market economic more than Elliot Wave and worth reading.
Thanks Rimtashttps://www.aussiestockforums.com/forums/showthread.php?t=15355&page=23&p=869392#post869392


----------



## DeepState

galumay said:


> I am no longer sure how relevant equity risk premiums are when otherwise yields are effectively negative after inflation and tax - perhaps the risk premium lies with bonds!
> 
> My rubbery estimate is 5%, but I do apply a much lower growth projection than most so its probably swings and roundabouts as far as a deduced value range.
> 
> If you really want a heavily calculated figure for equity risk premium then Damodaran is your man.




1. Thanks for the guide to Damodaran.  

2. ERP is just an outcome observation in my case rather than the basis for developing the discount rate for equities.  

3. You are a bear amongst bears for equities as a whole!


----------



## DeepState

Need to know more about luxury clothing brands and the power of CRM via customer cards and Enterprise Resource Planning (for transport and distribution to retail businesses..ie. no manufacturing) to maintain their value.  Anyone got a handle on this stuff?


----------



## DeepState

qldfrog said:


> DS,
> I invite you to look at the last post of Rimtas that I found quite interesting on  Re: Elliott Wave and the XAO
> is stock market economic more than Elliot Wave and worth reading.
> Thanks Rimtashttps://www.aussiestockforums.com/forums/showthread.php?t=15355&page=23&p=869392#post869392




Thanks.  However, I don't think the commentators are talking about cash in the sense that Rimtas is referring to (cash sitting in the hands of portfolio investors).  It is this (cash sitting on balance sheet).  This is the cash sitting on the sidelines awaiting (direct, as opposed to portfolio) investment. This is real and supports arguments of EPS growth potential beyond normal during a recovery because it can be internally financed for a while.  In turn, this supports prices:


----------



## DeepState

kid hustlr said:


> Aussie bond yields out the back really increased lately with the curve steepening sharply. Is this action world wide??
> 
> Is this Greece related (everything is ok!?!?) or a world growth theme of 'perhaps it's not THAT bad'??
> 
> Enjoying the thread DS.




Yes, duration premia have expanded.  It steps tightly with Greece and that seems one valid reason in a correlation sense.  As to why Greek bond yields are coming back in, I have absolutely no idea as to the reason for that.  I just observe it to be so.

It's funny that the world is focused on Greece.  There is another 'Greece' in the Pacific.  It's called Japan.  The major difference is that Japan is not part of a currency bloc and is largely internally financed.  Major difference, for sure.  But not so different in terms of debt sustainability.


----------



## qldfrog

DeepState said:


> Thanks.  However, I don't think the commentators are talking about cash in the sense that Rimtas is referring to (cash sitting in the hands of portfolio investors).  It is this (cash sitting on balance sheet).  This is the cash sitting on the sidelines awaiting (direct, as opposed to portfolio) investment. This is real and supports arguments of EPS growth potential beyond normal during a recovery because it can be internally financed for a while.  In turn, this supports prices:
> 
> View attachment 62601



Seen that way it is absolutely crazy:
reaching 30% of assets of a company waiting in the bank for???
right time for acquisition, 
new tool?

Do you know if these figure are including borrowing facilities ( I could understand figures with that) or are actual positive cash fully own by corporations;
in that case it is mindblowing
I wish this was the case for our banks!!!!
Thanks for your answers


----------



## DeepState

qldfrog said:


> Seen that way it is absolutely crazy:
> reaching 30% of assets of a company waiting in the bank for???
> right time for acquisition,
> new tool?
> 
> Do you know if these figure are including borrowing facilities ( I could understand figures with that) or are actual positive cash fully own by corporations;
> in that case it is mindblowing
> I wish this was the case for our banks!!!!
> Thanks for your answers




Pls beware: This is as a %of CURRENT assets.  That figure is likely higher partly for tighter inventory control and also due to precautionary cash to reduce risk for debt rolls etc if facilities get pulled.  This figure is 'cash', not facilities.

There has been good balance sheet repair since the GFC.  Along with a strong interest coverage (albeit at QE rates), there is higher capacity for companies to borrow as well. Lending standards have been consistently easing from the peak of the GFC. Basically, there is a lot of balance sheet capacity to lever into GDP growth without dilution.  This justifies a higher than 'usual' PE ratio.


----------



## rimtas

DeepState said:


> This is the cash sitting on the sidelines awaiting (direct, as opposed to portfolio) investment.
> 
> 
> 
> View attachment 62601





That is actually a nice chart (with five waves approaching a peak by the way). 

The question is-if this is the cash, waiting to be invested, it's accumulation during decades probably leads to think that companies lack worthy economic investments, which is terrible situation.  Also I noticed that the amount of cash in this chart rose the most  during and after GFC(maybe  due to margin liquidation ?) so it probably has little value in determining whether current levels can support further growth. Now  it's just started to flatten out.  But that's just the first look guess, I need to do more research on this.  
Also, it would be good to know maybe this cash serves as a collateral for buybacks(though this sounds bizarre), as this is widespread phenomenon. 
I found a Bloomberg article on this:

“Companies in the S&P500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled. Stock buybacks, which along with dividends eat up sums of money equal to almost all the S&P500 Index earnings, vaulted to a record in February, with CEO’s announcing $104,3 billion in planned repurchases. That’s the most since the Trim Tabs Investment Research began tracking the data in 1995 and almost twice the $55 billion bought a year earlier and an average of more than $5 billion in buybacks each day. 
Companies that are earning a lot of money and generating cash are borrowing money at basically zero rates and buying back. From an investor standpoint, you want the highest return on your dollar, period. If the highest return comes not from growing your business but buying your shares back, that’s fine” (Bloomberg3/3).

Technically speaking, if the profits of these companies are being generated by a rising stock market, which is rising due to their own stock buying what will happen to corporate profits when the market turns down?


----------



## DeepState

rimtas said:


> That is actually a nice chart (with five waves approaching a peak by the way).
> 
> The question is-if this is the cash, waiting to be invested, it's accumulation during decades probably leads to think that companies lack worthy economic investments, which is terrible situation.  Also I noticed that the amount of cash in this chart rose the most  during and after GFC(maybe  due to margin liquidation ?) so it probably has little value in determining whether current levels can support further growth. Now  it's just started to flatten out.  But that's just the first look guess, I need to do more research on this.




I look forward to the outcome of your further research.  My perspective on this differs rather materially from the one(s) you are espousing.




rimtas said:


> Also, it would be good to know maybe this cash serves as a collateral for buybacks(though this sounds bizarre), as this is widespread phenomenon.




That's not how it works.



rimtas said:


> Technically speaking, if the profits of these companies are being generated by a rising stock market, which is rising due to their own stock buying what will happen to corporate profits when the market turns down?



Technically, that is not what is occurring.


----------



## DeepState

Kathmandu (KMD-AU) looks too cheap to me.  Position initiated a couple of days.

Priced for perpetuity of gross margins following liquidation of overstock following the FY14 Winter season.  Further, assumes that same store growth will be 1%per annum.

The market is pricing a perpetuation of circumstances that I find hard to argue should be embedded as central case.  These include:
+ Currency effects (AUD weakened for NZD reporting);
+ Overstock and liquidation of Winter 2014 season; 
+ Weak consumer sentiment and sales in Dec;
+ Installation of enterprise software, new head offices etc..
+ Expense rates in line with budget, but higher proportionality on H1 realised sales (which is exaggerated because the seasonal element of sales is heavily weighted to H2).

This type of thing has happened before in 2012 and represented a fabulous entry point as the market over-extrapolated a weak period that sounds like a strong echo of what is happening here.

Pricing lower end of management guidance for gross margin, 2.5% same store sales growth (at the lowest bound of five year history), tapering to zero and the company dying without recovery in 40yrs, $20m+ capex for the next two years, 30 more stores in the next 2.5yrs and flat thereafter, brand build for UK in perpetuity without any benefit, higher baseline expense for IT to support stronger Enterprise Systems in perpetuity... the stock has a good baseline valuation support already.  When you move these things to more central case figures, it is definitively cheap.  If the on-line strategy, UK/Europe hit inflections, this stock will multi-bag.  I have no interest in using these as rationale required to make the case and make no allowance at all.  I assume they will keep spending on it, but not get much out of it.

The street hates it. A buy signal for me in this situation.  Major downgrades arrived after the H1 FY15 for not much other than the usual management underplay of market conditions etc, with downshift in gross margin due to weaker currency (not bad when you consider how much the AUD has fallen) and price pressure (as if that was somehow a revelation for the first time).

I initially looked at this as a candidate to short the heck out of.  Instead, the stock looks oversold to a reasonably strong extent.  In no financial distress.

Big Risks: New CEO is an idiot. Investment in ERP fails to provide better stock control and data-mining benefit arising from Summit Membership data. Rental expense erodes margins due to strategy of moving to high street locations as part of brand positioning.  Sales fail to revert despite consumer sentiment reverting to square at some stage after Budget, RBA cut and eventual rebalancing of the economy. Tastes change towards lower end gear despite increasing household wealth, or away from adventure stuff.  Failure to differentiate, brand erosion/confusion etc.  

The market is already pricing a moderately busted franchise in zombie mode.  Seems a little extreme.  It wasn't so long ago that this stock was pricing in things like the take-over the fashion world.  That seemed a little extreme too.  I think Mr Market has been skipping a few tablets.

Position initiated with more in the tank should further weakness develop from the winter season.


----------



## skc

DeepState said:


> Big Risks: *New CEO is an idiot*. Investment in ERP fails to provide better stock control and data-mining benefit arising from Summit Membership data. Rental expense erodes margins due to strategy of moving to high street locations as part of brand positioning.  Sales fail to revert despite consumer sentiment reverting to square at some stage after Budget, RBA cut and eventual rebalancing of the economy. Tastes change towards lower end gear despite increasing household wealth, or away from adventure stuff.  Failure to differentiate, brand erosion/confusion etc.
> 
> The market is already pricing a moderately busted franchise in zombie mode.  Seems a little extreme.  It wasn't so long ago that this stock was pricing in things like the take-over the fashion world.  That seemed a little extreme too.  I think Mr Market has been skipping a few tablets.
> 
> Position initiated with more in the tank should further weakness develop from the winter season.




Interesting. FWIW I also think KMD has the making of a busted franchise. There'd be ebb and flow but the tide is going one direction. For a long time, stuff from Kathmandu were pretty cool but also mighty expensive. Now, they are pretty ugly and still mighty expensive. 

The first page of the "men's shirt" on their website tells the story imo. A short sleeve shirt with conservative design has a regular price of $120, Summit Club price of $71.99, and a clearance price of $30. On that page, there were 53 products, and 26 of them were on clearance price levels. Who in their right mind will buy essentially the same shirt at full price... which is 4x the clearance price? May be the odd man going through middle age crisis and have to go on a a big adventure tomorrow can't wait for the clearance. Was that Craft whom I saw in a KMD shop the other day? ... but that market size isn't that big. 

Historical margin is historical. Their pricing strategy is all over the shop, and they don't deserve much of a premium. May be it's fixable... but it doesn't seem likely if the bold part above is true.


----------



## DeepState

skc said:


> Interesting. FWIW I also think KMD has the making of a busted franchise. There'd be ebb and flow but the tide is going one direction. For a long time, stuff from Kathmandu were pretty cool but also mighty expensive. Now, they are pretty ugly and still mighty expensive.
> 
> The first page of the "men's shirt" on their website tells the story imo. A short sleeve shirt with conservative design has a regular price of $120, Summit Club price of $71.99, and a clearance price of $30. On that page, there were 53 products, and 26 of them were on clearance price levels. Who in their right mind will buy essentially the same shirt at full price... which is 4x the clearance price? May be the odd man going through middle age crisis and have to go on a a big adventure tomorrow can't wait for the clearance. Was that Craft whom I saw in a KMD shop the other day? ... but that market size isn't that big.
> 
> Historical margin is historical. Their pricing strategy is all over the shop, and they don't deserve much of a premium. May be it's fixable... but it doesn't seem likely if the bold part above is true.




Excellent observations as usual.

They have flagged that their pricing strategy is causing sub-optimal buying behaviour.  The clearance behaviour leads customers to adapt.  I figure that awareness is a good start and better inventory control will assist.  If your inventory is better controlled to demand, you don't have as much need for clearances.  A lot of this issue stems from: design choices that have missed the mark recently, poor inventory control, and pricing issues causing sub-optimal buying behaviour.  All of these are readily acknowledged.  This has also occurred through the company's history.  They ran out of stock once not so long after listing.

Personally, I have no expectation that gross margins will be at historical levels.  I am assuming they will be 'well below' these figures.  Even Oroton, Nike, Tiffany etc. did not show such margin contraction over the cycle which is being priced into Kathmandu. What is priced are margins that came about due to a fairly material overstock of inventory leading into Winter of last year that was liquidated in the subsequent period, causing pull forward of demand etc... You could see the inventory overhang in the accounts. It was large. Yet same store sales growth in FY14 was 4.2% (vs 5.6% pcp on constant currency basis).  It's not a sudden stop in demand.  It's oversupply from poor inventory control. Then, to add insult to injury, Dec trading was weak.  You can see it in other dept store retailers as well. Dec was a bad period but you need to assume that it will stay bad...it's already not. 

My issue is with the extrapolations of these developments, not that they did not occur or have some lasting elements to them.  I do not assume that things will go back to what they were in the good old days.  Quite a bit worse, but not as bad as the Winter 2014 and Dec 2014 trading period suggests if simply extrapolated.

Virtually no-one pays full price. That is a small fraction of revenue and not a driver. You'd have to be too lazy/rich to fill in a Summit Card membership.  This pricing idea is to push customers into giving away their purchasing data.  That is the focus, not selling at the nominal full price.  How much value there is in that remains to be seen.  However, it has been a major push for many years and such data is seen to be valued from the days when frequent flyers were launched (and before that).  This strategy has been in place for many years now. They have spent a stack of money on this recently, all I am saying the value of that is will produce same store growth close to the bottom end of five year experience (FY2010, which was cycling post-stimulus comps) with gross margins about 2/3rds towards the recent period from historical levels when the AUD was stronger and consumer confidence was not notably to the weak side.  Add to that a heck of a lot more on capex than has been the case proportionally (think of a perpetual brand refresh program in motion), and you still end up with a "Clearance" valuation.  There is no premium in here.  Premium is what was in place in 2013/14...I could not get those figures if I tried.  What we are seeing priced now is the stock equivalent of secular stagnation.  I am seeing lowflation with materially poorer productivity of capital than history. 

There is no argument from me that they are not likely to trade as well as had been the case historically.  It doesn't need that.  My argument is that the market is extrapolating issues that would require a continuation of what look to be transient issues into the future.  I think that is an over-reaction, probablistically (I regard is as something like -1 std devn. It is probably cheap).  This stock has demonstrated that pricing over-reactions have occurred in both directions and there is a reasonably close equivalent in 2012.

This franchise could break.  I just don't think it is in that position as a central case as it is evident what occurred to produce those results which are now embedded are more likely somewhat transient than entirely permanent.

I guess we'll see if the CEO is an idiot.  I have no insight on that.  If he is, he'll have me as company.


----------



## skc

DeepState said:


> This franchise could break.  I just don't think it is in that position as a central case as it is evident what occurred to produce those results which are now embedded are more likely somewhat transient than entirely permanent.




Depends on your time horizon I suppose. I have the stock chart on close watch and am willing to take a trade if it goes above $1.40 with some conviction. But it'd be just a trade.


----------



## Miner

Sometimes look could be deceptive.
With this caveat I am presenting my visits to Kathmandu shop.
Customer service appalling . Hardly you see a sales person available or seen. The shop looks deserted. Stock of goods is pathetic. Price is so high that even after regular discounting the price is too high. This observation I am making from CBD Kathmandu shop in Perth. 
I have stopped going to Kathmandu shop and preferred to go competitors.
So if this scene is not repeated in other Cities great. If this is the same story in other City stores then KMD is in a doom state as far as I am concerned. I will put my money elsewhere. 
Probably the name Kathmandu is cursed . 
Do not hold KMD.


----------



## The Falcon

Appreciate the analysis on KMD DV and SKC. A value play based on downside mispricing and mean reversion. I will have a bit of a dig around on this one


----------



## tech/a

Miner said:


> Sometimes look could be deceptive.
> With this caveat I am presenting my visits to Kathmandu shop.
> Customer service appalling . Hardly you see a sales person available or seen. The shop looks deserted. Stock of goods is pathetic. Price is so high that even after regular discounting the price is too high. This observation I am making from CBD Kathmandu shop in Perth.
> I have stopped going to Kathmandu shop and preferred to go competitors.
> So if this scene is not repeated in other Cities great. If this is the same story in other City stores then KMD is in a doom state as far as I am concerned. I will put my money elsewhere.
> Probably the name Kathmandu is cursed .
> Do not hold KMD.




I agree.
Way way over priced.
Look a customer---just ignore them.

There is way better.
I reckon its priced exactly where it deserves to be.


----------



## DeepState

tech/a said:


> I reckon its priced exactly where it deserves to be.




Is there anything tangible you can offer about how you came to this conclusion?


----------



## McLovin

skc said:


> Interesting. FWIW I also think KMD has the making of a busted franchise. There'd be ebb and flow but the tide is going one direction. For a long time, stuff from Kathmandu were pretty cool but also mighty expensive. Now, they are pretty ugly and still mighty expensive.
> 
> The first page of the "men's shirt" on their website tells the story imo. A short sleeve shirt with conservative design has a regular price of $120, Summit Club price of $71.99, and a clearance price of $30. On that page, there were 53 products, and 26 of them were on clearance price levels. Who in their right mind will buy essentially the same shirt at full price... which is 4x the clearance price? May be the odd man going through middle age crisis and have to go on a a big adventure tomorrow can't wait for the clearance. Was that Craft whom I saw in a KMD shop the other day? ... but that market size isn't that big.
> 
> Historical margin is historical. Their pricing strategy is all over the shop, and they don't deserve much of a premium. May be it's fixable... but it doesn't seem likely if the bold part above is true.




I agree with you. KMD used to sell expensive, well made outdoor clothing and equipment. Now they sell less well made clothing at ridiculously high everyday prices but with constant sales in the order of 50%-60% off. You're a real idiot if you pay full price at KMD because there's always a sale just around the corner. I have a KMD jacket, I remember when I bought it it was "reduced" from $499 to $199. They've tried to imitate the North Face by moving away from their core outdoors demographic. It hasn't worked, imo, because it was never really a brand that got people excited, and as you observe the products are fairly basic/boring; some of those shirts look like they're straight outta Don Burke's backyard. The product pricing structure probably confuses customers to the point that they don't know if they're getting value for money. The mild winters in Australia probably don't help.


----------



## tech/a

DeepState said:


> Is there anything tangible you can offer about how you came to this conclusion?




Well as tangible as I am comfortable with.

I'm arguing that investors/traders are valuing a company on a daily basis.
KMD is no different.
For it to drop 50% in price and needing a 100% increase to return to old highs
I personally think that My and miners sentiments are being played out in the perceived 
value of the company.

You can argue till your blue in the face that book value indicates its a bargain but unless
the masses agree (And one day they might) Its not going to return to anything like old highs.
In Fact it will have trouble closing the last gap---but hey what do the masses know?

If things change Ill see it all in good time---just like everyone else.


----------



## DeepState

tech/a said:


> Well as tangible as I am comfortable with.
> 
> I'm arguing that investors/traders are valuing a company on a daily basis.
> KMD is no different.
> For it to drop 50% in price and needing a 100% increase to return to old highs
> I personally think that My and miners sentiments are being played out in the perceived
> value of the company.
> 
> You can argue till your blue in the face that book value indicates its a bargain but unless
> the masses agree (And one day they might) Its not going to return to anything like old highs.
> In Fact it will have trouble closing the last gap---but hey what do the masses know?
> 
> If things change Ill see it all in good time---just like everyone else.
> 
> View attachment 62708




Yep, perceptions have certainly changed.  They went from dire in 2012 to ebullient in 2013/14 and are seemingly dire once again. Somewhere along the line, these sentiments were proved to be very wrong as they created opportunity for less sentimental investors.  

I can't be certain that this is the situation today.  It just seems more likely than not based on what I can see is happening to sentiment which is not reflected in the actual developments as visible in the accounts but are extrapolations of things better regarded as transient than permanent when examined.  Future developments can surprise in either direction, but would have to keep disappointing a lot to justify current poor sentiment and pricing.  It could happen. What is the likelihood? The market is pricing 'this time it is different'.

Each of your arrows occurs in synch with fundamental developments that are quite clear, even if the reactions seem a bit much in aggregate.  That last capitulation occurred when brokers nearly blanket downgraded the stock.  Take a look at why...ask yourself if it makes any sense.  The rationale looked a little light, to say the least.  Still, change generates brokerage....

Generally, you'll find stocks that go up in greater number over a reasonable time-frame not measured in minutes, hours or days, amongst those whose sentiment is appalling and argued on that basis alone without reference to what it is actually worth, particularly if the best argument in support of the poor sentiment is that there is poor sentiment.  Poor sentiment is a hunting ground for under-priced opportunities.  It is when sentiment ignores fundamental concerns when the greatest opportunities are present.  

What has been useful here is to highlight just how bad sentiment is without a whole lot of argument in relation to stock valuation.  If sentiment is already so poor, there is buffer. SKC can see that. Even your chart shows that the price has found a level. I agree with at least that aspect.  We'll see how the fundamentals roll out over the years ahead and whether sentiment is an accurate reflection or not.

As for being a rip-off:

Kathmandu Men's shirts -





North Face Men's shirts -





Which is the rip-off?


----------



## sinner

DeepState said:


> Currently reading "Margin of Safety" by Seth Klarman of Baupost Capital on the advice of a seemingly retired ASF poster 'Sinner' - who is one seriously high-IQ guy. OMG.  Some people here are right out of the box.




Thanks for the compliment. I am retired because despite a handful of good names on this forum I find the value derived in aggregate to be negative due to other names.

Re your question on GDP and EPS...Hussman has done good work on this. If you look at most of his "shorthand" valuation methods (shown here http://www.hussmanfunds.com/wmc/wmc130318.htm) you can see there is an assumption (for US stocks) of 6.3% PA EPS growth.

This is calculated as the long term peak to peak historical measure of both GDP and EPS growth.

Unfortunately too busy to find the "Weekly Market Comment" which explains how this works. There are 52 WMC per year with articles going back pre 2000, so a lot to sift through.

Some quick googling turned up:

http://www.hussmanfunds.com/rsi/expectationscontext2.gif

and

http://www.hussmanfunds.com/html/peak2pk.htm

I suggest googling terms like "hussman gdp eps peak-to-peak" or similar.

In about 1 month it's likely I will be finishing my Directorship at the company I'm working for. If you're interested in hiring me as an analyst, I would work for $150,000


----------



## tech/a

*D/S*

Don't disagree with anything you've said.
But half yearly snap shots of the books are a look back at the previous 6 mths.

NOW----may take until the next reporting or the one after.

Things can and do change and not be reflected in the books. While a level has been found and you have argued that there is potentially more upside than down---there is also the potential for another gap down.(If reporting is poor).

Personally Id rather see some clear signs of recovery (in the chart) before sitting in a position in anticipation that all is good and everyone will realise their foolishness.


----------



## get better

DS, very interesting observations as usual.

I have one question - how have you converted those qualitative observations into a quantitative measure to determine future profitiability of the business? This is something I am currently battling with my fundamental systems I'm developing, I would be interested in hearing how you approach this issue - particularly using KMD as an example.

Funny thing is, I bought $500 worth of gear last weekend at KMD. This seasons stuff is actually quite fashionable and I got suckered into their sales technique - can't resist anything that says 40% off most stock...


----------



## tech/a

get better said:


> DS, very interesting observations as usual.
> 
> 
> Funny thing is, I bought $500 worth of gear last weekend at KMD. This seasons stuff is actually quite fashionable and I got suckered into their sales technique - can't resist anything that says 40% off most stock...




Simply add it on first then take off whatever you like.


----------



## fiftyeight

I do not get to the snow as often as I would like, but there is no way me or any of my mates would wear Kathmandu


----------



## DeepState

fiftyeight said:


> I do not get to the snow as often as I would like, but there is no way me or any of my mates would wear Kathmandu




No way me and my mates would wear luxury lingerie either.... Still:





Price Comparison:

VAN-BE





KMD-AU










Brings a whole new perspective on the concept of Summit Club.  
Hope all is good with you 58.


----------



## fiftyeight

I tapped that reply out on a break at work, not my best attempt at English.

I know which business I would rather be involved with.

First Alan Joyce and now Twiggy... I really need to pick better companies to work for haha. On the plus side, I will have some time in front of a screen again


----------



## DeepState

get better said:


> DS, very interesting observations as usual.
> 
> I have one question - how have you converted those qualitative observations into a quantitative measure to determine future profitiability of the business? This is something I am currently battling with my fundamental systems I'm developing, I would be interested in hearing how you approach this issue - particularly using KMD as an example.
> 
> Funny thing is, I bought $500 worth of gear last weekend at KMD. This seasons stuff is actually quite fashionable and I got suckered into their sales technique - can't resist anything that says 40% off most stock...




Pls PM me with contact details and a couple of suitable times for me to call.  I'd be happy to take you through it and discuss your efforts.


----------



## DeepState

Full of admiration for this bold innovation by Vanguard.  Surprised/disappointed it has not been taken up to a much larger degree:


----------



## qldfrog

I was not aware but can indeed make a difference.a + for vanguard.


----------



## DeepState

sinner said:


> Re your question on GDP and EPS...Hussman has done good work on this. If you look at most of his "shorthand" valuation methods (shown here http://www.hussmanfunds.com/wmc/wmc130318.htm) you can see there is an assumption (for US stocks) of 6.3% PA EPS growth.




Thanks for this reference Sinner.

Weird that Hussman would assume EPS growth matches nominal GDP growth (I agree with his assertion that 6.3% is too high for the level of productivity gains being realized nowadays).  In a closed economy, that would only happen if all innovation occurred within the existing companies, none from new companies entering the economy.  Further, these companies would never dilute as they grew.  Certainly, it is plausible for total corporate profits to grow at the same rate as the economy, but that is different to EPS growth.

Something of interest from MSCI Barra:


----------



## sinner

DeepState said:


> Thanks for this reference Sinner.
> 
> Weird that Hussman would assume EPS growth matches nominal GDP growth (I agree with his assertion that 6.3% is too high for the level of productivity gains being realized nowadays).  In a closed economy, that would only happen if all innovation occurred within the existing companies, none from new companies entering the economy.  Further, these companies would never dilute as they grew.  Certainly, it is plausible for total corporate profits to grow at the same rate as the economy, but that is different to EPS growth.
> 
> Something of interest from MSCI Barra:
> 
> View attachment 62781




It's an assumption/inference made with full understanding of the shortfalls (the important bit is to know the assumptions and be explicit about them), that basically over the long term, peak to peak (which is a very different measure from correlation between the two timeseries), they match.


----------



## DeepState

sinner said:


> It's an assumption/inference made with full understanding of the shortfalls (the important bit is to know the assumptions and be explicit about them), that basically over the long term, peak to peak (which is a very different measure from correlation between the two timeseries), they match.




It's great to see you actively posting again.

From reviewing your links (esp the Peak 2 Peak one, thx again) and cross referencing the data with Shiller and Damodran, it appears that he is looking at an index of total earnings growth on the S&P 500.  This will track nominal GDP if corporate profit share is a constant proportion of nominal GDP and the share which is listed is roughly unchanged (one reason why Buffett probably regards market cap to GDP as a valuation indicator, I think).This figure will be higher than EPS growth for the companies that are presently (were previously) available to investors.  The MSCI study (2010) and another one from Arnott & Bernstein (2003) both show that dilution effects will result in a linked year to year EPS growth being about 2% below nominal GDP.

Neither figure is right or wrong, unless used incorrectly and without appropriate knowledge of the assumptions.  However, if someone is going to use an assumption which represents earnings growing at about nominal GDP, then they really should make allowance for financing that growth in your calculations when assessing value.


----------



## DeepState

From Stanley Fisher, Vice-Chair of the US Fed:




It appears that incentives and behavioural issues combine to produce financial crises.  These appear to be an underlying cycle in the functioning of a monetary/credit system within a fairly broad range of political settings.

Efforts to make the system safer simply move risk to a new place.  In re-shaping risk, it may be that there are fewer crises.  However, those that occur, because the system is believed to be safer, may be more severe when participants find their assumptions of heightened safety and security of the system are challenged.

More than ever, it is important to insure tail events.


----------



## DeepState

From FT:









I just love how international relations works...


----------



## McLovin

I sympathise with China. It's Eastern approaches are completely controlled by the US. Great powers, and rising super powers need to be given space. America needs to realise this.


----------



## tech/a

DeepState said:


> From FT:
> 
> View attachment 62834
> 
> 
> 
> 
> View attachment 62835
> 
> 
> I just love how international relations works...




Yeh heard it all before.
Whale research ----- Those Japanese have been world leaders for years.


----------



## DeepState

McLovin said:


> I sympathise with China. It's Eastern approaches are completely controlled by the US. Great powers, and rising super powers need to be given space. America needs to realise this.




+1.  I just enjoy how the clear underlying developments and purposes of action are disguised in oblique language and said with a totally straight face.  It's not unique to China whatsoever.


----------



## sinner

DeepState said:


> It's great to see you actively posting again.




Thanks. Not sure how long I'll continue though.



> This will track nominal GDP if corporate profit share is a constant proportion of nominal GDP and the share which is listed is roughly unchanged (one reason why Buffett probably regards market cap to GDP as a valuation indicator, I think).




Yes Hussman has been explaining this a lot recently in his WMCs. Basically, valuation measures like CAPE are good, they have a correlation approaching 70-80% to 10y nominal total returns. 

But if you account for variations in profit margin, the correlation is much much higher.

Turns out that "accounting for the profit margin" essentially gives you Price/Revenue (which I think is Price/Sales with a different name?) ratio.

Also turns out that Market Cap / GDP is essentially an almost perfect proxy for "total market Price/Sales". The other one he mentioned recently in this vein was Market Cap / Gross Value Added which supposedly has the highest correlation to future nominal total returns without any tweaking required.



	

		
			
		

		
	
 (from http://hussmanfunds.com/wmc/wmc150601.htm)


----------



## DeepState

The hope (2009):





The present reality (recent CNN Poll):


----------



## DeepState

Nugget of the day from Howard Marks:


----------



## DeepState

An acronym I've not heard of but will now embed in my head:

FOMO risk: Fear of Missing Out risk.

I doubt there is a risk premium associated with it.  Or, maybe, it's what causes momentum effects.  Not sure.

Credit to: Howard Marks


----------



## DeepState

On the importance and value of financial independence, risk-taking, geo-politics, collateral, taking profits, cutting losses, property, trading prop money, avoidance of excessive debt and life wisdom.  So directly and succinctly explained. Best I've ever come across.  Should be required viewing for all budding speculators.

In my mind, when I was working, there was always a number....and when that number was reached...."f*#k you"

Warning: Explicit language


----------



## Trembling Hand

DeepState said:


> In my mind, when I was working, there was always a number....and when that number was reached...."f*#k you"




Trouble is that if there is a formula representing the value of _fu_ as the period reduces towards said _fu_ event the _fu_ amount increases,




Like chasing the right side of the train track while being stuck on the left side.


----------



## DeepState

Trembling Hand said:


> Trouble is that if there is a formula representing the value of _fu_ as the period reduces towards said _fu_ event the _fu_ amount increases,
> 
> View attachment 63181
> 
> 
> Like chasing the right side of the train track while being stuck on the left side.





That would be the well-worn fate for someone who doesn't know enough about the probability of ruin and the toxic mix it has with the decrease in utility arising from further wealth...possibly because greed makes them think otherwise until reality dawns that chasing that little bit extra was picking up pennies in front of steam rollers (or trains, if you prefer) in actual life terms. It is the classic toxicity that arises from living relatively as opposed to in absolute terms.  Such people generally get hit by locomotives eventually whilst trying to jump from one side of the track to another...because the train rides on both rails.  

At least for me, the fu-point meant an adjustment to preservation.  Some others who passed that point long ago and kept pushing are doing really well.  All power to them.  But they have their fu-point fortressed. A train wreck will still allow them to live the fu-life.


----------



## sinner

Trembling Hand said:


> Trouble is that if there is a formula representing the value of _fu_ as the period reduces towards said _fu_ event the _fu_ amount increases,
> 
> View attachment 63181
> 
> 
> Like chasing the right side of the train track while being stuck on the left side.




So what you're saying is buy stocks and avoid synthetic longs?  

http://www.theoptionsguide.com/synthetic-long-stock.aspx


----------



## skc

DeepState said:


> The market is already pricing a moderately busted franchise in zombie mode.  Seems a little extreme.  It wasn't so long ago that this stock was pricing in things like the take-over the fashion world.  That seemed a little extreme too.  I think Mr Market has been skipping a few tablets.
> 
> Position initiated with more in the tank should further weakness develop from the winter season.




Another Kiwi retailer to the rescue... no details on the takeover price yet, but Briscoes paid up to NZ $1.80 for aa 19.95% stake.

DS, when you posted the share price was ranging $1.30-1.40. It went as low as $1.10. I hope you followed your plan and acquired a meaningful stake.


----------



## VSntchr

skc said:


> Another Kiwi retailer to the rescue... no details on the takeover price yet, but Briscoes paid up to NZ $1.80 for aa 19.95% stake.
> 
> DS, when you posted the share price was ranging $1.30-1.40. It went as low as $1.10. I hope you followed your plan and acquired a meaningful stake.




Maybe DS is actually Rod Duke, and that meaningful stake is 19.9% :
Jokes aside, should be a nice premium offered to your entry DS - at least based upon what price Briscoe has been paying insto's for their stake.

EDIT - KMD.NZ currently down 1.4%...hmmm?!


----------



## DeepState

KMD-AU

Sometimes, even the sun shines on a dog's ahrse...

Did not re-load as the trigger for that was announcement of FY15 figures where I could update anything I was thinking and step in if the market was particularly punishing or otherwise not recognising that things were more ok than what was priced.  Still, a nice outcome relative to any alternative.  Set in at $1.34 cum div.

Overall, this bid looks a bit opportunistic.  Have to see how KMD reacts.  Maybe a bump yet to come. 

The nicer outcome would be to turn up as CEO, loaded full of price related incentives, and receive a take-out on day #2 when you were still getting to know your secretary's name.  Xavier Simonet would have sunburn....


----------



## DeepState

Greece:

Why bother holding a referendum and campaign for the Oxi vote to resist pension reform and further fiscal measures, win...and then come back to the table a few days later offering more of them then you had?  What the..? This whole process has been very weird.  Clearly making it up on the fly.


----------



## avion

DeepState said:


> Greece:
> 
> Why bother holding a referendum and campaign for the Oxi vote to resist pension reform and further fiscal measures, win...and then come back to the table a few days later offering more of them then you had?  What the..? This whole process has been very weird.  Clearly making it up on the fly.




Yeah, standard issue pollie, backflip it seems is 'new normal' these days...

This world is starved for a true leader. Such a rare species...extinct really.


----------



## DeepState

Greece: Didn't think it would get so close to the wire, but a deal is done.  Hopefully the debt relief and refi elements actually make sense.

Interesting that there was nearly biffo in the Finance Ministers' meeting into the matter:


----------



## luutzu

DeepState said:


> Greece: Didn't think it would get so close to the wire, but a deal is done.  Hopefully the debt relief and refi elements actually make sense.
> 
> Interesting that there was nearly biffo in the Finance Ministers' meeting into the matter:
> 
> View attachment 63393




A few are calling it a coup. 

In hindsight, what were the Greeks thinking. Owing money and thinking they can just declare bankrupt and not pay? Have no idea who they're dealing with.


----------



## McLovin

Is this a real solution or another can kicking exercise? Apparently debt relief will follow, I hope so! My thinking from the outset was that Greece needed to get out of the EZ to improve have a meaningful improvement.

But I'm just some booner in Sydney.


----------



## luutzu

McLovin said:


> Is this a real solution or another can kicking exercise? Apparently debt relief will follow, I hope so! My thinking from the outset was that Greece needed to get out of the EZ to improve have a meaningful improvement.
> 
> But I'm just some booner in Sydney.




It's kicking the can down the road and collecting a few ports and island and gas exploration rights and other assets on your way there.

It's a cool and profitable game when you can play it. Unless you're the European taxpayers who will have to fork out the cash now and may not see it when time's up again in 3 years.


----------



## DeepState

McLovin said:


> Is this a real solution or another can kicking exercise? Apparently debt relief will follow, I hope so! My thinking from the outset was that Greece needed to get out of the EZ to improve have a meaningful improvement.
> 
> But I'm just some booner in Sydney.




Although the institutions have come a long way in fro the economy-breaking requirements of the last bailout, Greece has also moved in and can be regarded as the party which blinked.  Had they not blinked, I think they would have been in a very bad way for many years.  Who knows what might have happened with the Russian as financiers, the Turks as aggressors and the historically volatile Balkans to the north.

The deal is done without clear commitments from the institutions in terms of debt relief and restructuring.  I think there is a desire not to be in this same position again in 2 years.  Further, it is clear to the IMF that wholesale restructuring is required for Greece to be viable.  Who knows, but the idea from here would be to sort this crap out properly.  The EZ is no-where near as unstable as it was when the last two deals were slammed together.  Then, another swing factor is whether legislation which is created can even be implemented and enforced.

Who knows?  At each step, all sorts of twists took place that require liberal translation of the legal structure.  Drop dead dates became less critical along the way....it's been entertaining.


----------



## McLovin

DeepState said:


> The EZ is no-where near as unstable as it was when the last two deals were slammed together.  Then, another swing factor is whether legislation which is created can even be implemented and enforced.




Yer. Although the Greeks have admitted there was no plan B, which is farcical really. On Bloomberg I saw that two people close into the talks independently described Tsipras as a "beaten dog". It also turns out he never wanted to win the referendum. Again farcical. America had hinted that they were not happy with cutting Greece loose but beyond that they hadn't done or said much, so I'm not really sure just how important geo-politically Greece actual was.

One thing for certain is that when the initial bailout was cobbled together it was more about saving the EZ, this time around much of the periphery is in far better shape and I don't think the Greeks realised that their hand wasn't as strong.


----------



## Klogg

McLovin said:


> Yer. Although the Greeks have admitted there was no plan B, which is farcical really.




That's really scary actually (for the Greek people). I do remember an FT article talking about issuing government IOUs in lieu of another currency, but that's all I heard of it.
Surely you'd be readying another currency incase all these deals go south.




McLovin said:


> One thing for certain is that when the initial bailout was cobbled together it was more about saving the EZ, this time around much of the periphery is in far better shape and I don't think the Greeks realised that their hand wasn't as strong.




Given the ECB and IMF own a lot more of the Greek bonds than last time, and the banks need an immediate top-up from the ELA, I don't see how Greece thought they had the upper hand at all...


----------



## McLovin

Klogg said:


> That's really scary actually (for the Greek people). I do remember an FT article talking about issuing government IOUs in lieu of another currency, but that's all I heard of it.
> Surely you'd be readying another currency incase all these deals go south.




Serious question: How were they ever going to print such a currency? I don't know the mechanics of printing money but AFAIK they only print 10 euro bank notes currently and it's not like you could pay De La Rue with IOU's that they've just printed for you. So did they even have enough money to print their own currency?


----------



## sinner

McLovin said:


> Serious question: How were they ever going to print such a currency? I don't know the mechanics of printing money but AFAIK they only print 10 euro bank notes currently and it's not like you could pay De La Rue with IOU's that they've just printed for you. So did they even have enough money to print their own currency?




Easily. The physical portion of base money is the smallest portion and can be handled last of all.

As soon as the bank accounts get "bailed in" to the new currency, the FX rate for the new currency would drop and have a market value that De La Rue or Securency could take to the foreign exchange.

That is of course, if you believe such a thing is the possible outcome. I have a lot of faith in the Euro and ECB and don't assign a high probability to Grexit.


----------



## McLovin

sinner said:


> Easily. The physical portion of base money is the smallest portion and can be handled last of all.
> 
> As soon as the bank accounts get "bailed in" to the new currency, the FX rate for the new currency would drop and have a market value that De La Rue or Securency could take to the foreign exchange.
> 
> That is of course, if you believe such a thing is the possible outcome. I have a lot of faith in the Euro and ECB and don't assign a high probability to Grexit.




Makes sense. Thanks, Sinner.


----------



## Klogg

sinner said:


> Easily. The physical portion of base money is the smallest portion and can be handled last of all.
> 
> As soon as the bank accounts get "bailed in" to the new currency, the FX rate for the new currency would drop and have a market value that De La Rue or Securency could take to the foreign exchange.
> 
> That is of course, if you believe such a thing is the possible outcome. I have a lot of faith in the Euro and ECB and don't assign a high probability to Grexit.




Interesting... 

You may not know the answer, but I'll ask anyway - is this how Argentina did it in the 90s?


----------



## DeepState

Klogg said:


> Interesting...
> 
> You may not know the answer, but I'll ask anyway - is this how Argentina did it in the 90s?




Argentina had its own currency before and after the debt problems of the 1990s.  It was the peg vs USD which broke.  This is unlike the situation in Greece, where debt is denominated in Euro (as opposed to in Drachma which is pegged to Euro, which would be the Argentinian analog).  If Greece cannot borrow sufficiently in Euro from foreign 'investors', and yet needs finance sourced internally via printing in large part, it will have to create a new currency and force the populace to accept it as payment by the government for services and require that this currency is used when tax is paid (haha..tax being paid!! chortle).


----------



## Klogg

DeepState said:


> Argentina had its own currency before and after the debt problems of the 1990s.  It was the peg vs USD which broke.  This is unlike the situation in Greece, where debt is denominated in Euro (as opposed to in Drachma which is pegged to Euro, which would be the Argentinian analog).  If Greece cannot borrow sufficiently in Euro from foreign 'investors', and yet needs finance sourced internally via printing in large part, it will have to create a new currency and force the populace to accept it as payment by the government for services and require that this currency is used when tax is paid (haha..tax being paid!! chortle).




Thanks, DeepState. I understand that the situation is somewhat different (i.e. 'shared' vs own currency), but my question was around printing of paper currency in its most literal sense, rather than the 'printing' which is referred to commonly in the media (being the expansion of a Reserve Bank's balance sheet).

I guess to state it more generically - if a country defaults, does it issue a new currency (in a logical sense), capitalise the banks, then use this to print the physical currency? 

Or perhaps I've completely misunderstood the response - apologies if I have.


----------



## DeepState

Klogg said:


> Thanks, DeepState. I understand that the situation is somewhat different (i.e. 'shared' vs own currency), but my question was around printing of paper currency in its most literal sense, rather than the 'printing' which is referred to commonly in the media (being the expansion of a Reserve Bank's balance sheet).
> 
> I guess to state it more generically - if a country defaults, does it issue a new currency (in a logical sense), capitalise the banks, then use this to print the physical currency?
> 
> Or perhaps I've completely misunderstood the response - apologies if I have.




If a country defaults, it does not immediately mean it has to issue a new currency.  For example, Argentina defaulted.  It could not pay its debts, yet it did not have to create a new currency.  It just could not pay its debts.  Leading into that crisis, Russia also defaulted...and still kept the same currency.  

In today's world, literal printing of paper money is not a feature.  If Australia were to default on its debt obligations and the banking system collapsed, and both were effectively shut out of the capital markets, after a bit of argy bargy the government would 'borrow' from the RBA and use those proceeds to recapitalise the banks.  The amount of physical notes and coin in circulation does not need to change one iota for this to occur.  The Aussie Dollar would remain the currency of the realm.

The banks being bailed out do not print currency.  They can only create deposits and loans..and offer other financial services like financial planning.  Currency is only issued by the central bank.  It could still do so even if the deposit taking institutions were completely obliterated and there were no regular banks left standing.


----------



## Klogg

DeepState said:


> If a country defaults, it does not immediately mean it has to issue a new currency



Perfect, this is the point I was missing.

Following on from this, my understand is that the only real triggers for issuing a new currency would be:
- hyperinflation (Germany post WW1)
- removal from the EU (Greece currently)

Am I missing any?


Thanks again.


----------



## DeepState

Klogg said:


> Perfect, this is the point I was missing.
> 
> Following on from this, my understand is that the only real triggers for issuing a new currency would be:
> - hyperinflation (Germany post WW1)
> - removal from the EU (Greece currently)
> 
> Am I missing any?
> 
> 
> Thanks again.




Yes, you had Weimar and you've had Cyprus (kinda).  I suspect there are other sorts of situations where currency gets flipped around.  One route is not to issue a new currency but to adopt an existing one from elsewhere.  For example, much business is done in USD within countries whose official currency often has the word 'peso' at the end of it.  It is also arguable that when convertibility to gold was removed, that the outcome was a new currency....the US changed its notes to reflect that, for example.

Currency is one weird fish/fowl.  And yet our financial system rides off it. When you look at this stuff, it is genuinely horrifying in its fragility.


----------



## sinner

DeepState said:


> Currency is one weird fish/fowl.  And yet our financial system rides off it. When you look at this stuff, it is genuinely horrifying in its fragility.




I read FOFOAs blog and sleep well at night


----------



## Klogg

DeepState said:


> Yes, you had Weimar and you've had Cyprus (kinda).  I suspect there are other sorts of situations where currency gets flipped around.  One route is not to issue a new currency but to adopt an existing one from elsewhere.  For example, much business is done in USD within countries whose official currency often has the word 'peso' at the end of it.  It is also arguable that when convertibility to gold was removed, that the outcome was a new currency....the US changed its notes to reflect that, for example.
> 
> Currency is one weird fish/fowl.  And yet our financial system rides off it. When you look at this stuff, it is genuinely horrifying in its fragility.




Thanks DS - appreciate your answers.


----------



## DeepState

sinner said:


> I read FOFOAs blog and sleep well at night




BS. You can't possibly sleep given the volume of stuff you read.


----------



## DeepState

RBA Guv Stevens speech to the Anika Foundation reads pretty much that a lower AUD is all that's left in the tank to rebalance the economy. Lower interest rates are reaching a point where benefits of additional cuts are decreasing and risks may not be worth the benefits available.  Market pricing ~20% chance of a further cut and that's it.


----------



## Wysiwyg

DeepState said:


> RBA Guv Stevens speech to the Anika Foundation reads pretty much that a lower AUD is all that's left in the tank to rebalance the economy. Lower interest rates are reaching a point where benefits of additional cuts are decreasing and *risks may not be worth the benefits available*.  Market pricing ~20% chance of a further cut and that's it.



It is only in my latter years that I have begun listening to financial commentators and thought I would hear some profound wisdom but not so. I am sure he does more than read statistics and change official interest rates but what are the risks of lower interest rates in Aust. when other major economies have near zero? Please.


----------



## qldfrog

Inflating even more the RE bubble; which seems to be australian typical, as other countries on earth do remember that price can fall (drastically)..
something australians seems to have forgotten in general;
the other issue is that we are a 'beggar" country in perpetual need of O/S finances, and wo the assumed strength of the USD, even Euro;
So we always need to have higher rates than O/S otherwise our whole country falls in a heap as investment/lending to our banks (see point 10 would stop.
my 2c worth, DS would have a more knowledgeable input there but  i believe these two points are a given


----------



## Wysiwyg

qldfrog said:


> Inflating even more the RE bubble;



Parts of Sydney and Melbourne are over priced but nowhere else in Australia of significance. Price growth not extraordinary so I consider country wide house bubble as a fear rather than a reality.


----------



## DeepState

Wysiwyg said:


> Parts of Sydney and Melbourne are over priced but nowhere else in Australia of significance. Price growth not extraordinary so I consider country wide house bubble as a fear rather than a reality.




How are you valuing property to arrive at the perspective that property is not overvalued?
Does recent price growth have to be strong for an asset to be over-valued?  

Housing price rises in Europe are of concern to the ratings agencies. 

This from the FT relating to a recent Moody's report:





In any case, this type of thing may not be relevant to your investment process.  For me, I care because I manage the duration of my debt investments, have active FFX positions in place, hold a chunk of banks within the domestic equity part of my portfolio, have credit exposures whose spreads will be strongly affected by such matters, own a house and would consider investment properties if conditions were conducive.


----------



## tech/a

Perhaps the new " Over valued " price will become the new accepted price.

*Question.*

Over valued relative to?

In my view the only investment in property worth considering is development.
Creating profit rather than waiting for it to hit you.


----------



## DeepState

tech/a said:


> Over valued relative to?




Say, debt securities and equities.


----------



## tech/a

DeepState said:


> Say, debt securities and equities.




For Property have these been good indicators in the past?

*Have we seen a so called bubble burst in housing before-----lead by these indicators*?

I've been around for 60 yrs 40 of them with a strong interest in housing.

In that time I've heard moans and groans about affordability and how the bottom is going to drop out---followed by what a great investment housing is---- just keeps going up. (Think 92-94 where People were supposedly paying stupid prices for developments and getting ripped off blind---then 95-04 where the very same people with the very same developments are doubling the costs of their original investment and Laughing!!! ------ Complaints and doom and gloom stop!)

Ive seen banks tighten and slacken lending policy ----supply and demand I'm sure they evaluate risk just like everyone else---should


----------



## sinner

tech/a said:


> For Property have these been good indicators in the past?
> 
> *Have we seen a so called bubble burst in housing before-----lead by these indicators*?
> 
> I've been around for 60 yrs 40 of them with a strong interest in housing.
> 
> In that time I've heard moans and groans about affordability and how the bottom is going to drop out---followed by what a great investment housing is---- just keeps going up. (Think 92-94 where People were supposedly paying stupid prices for developments and getting ripped off blind---then 95-04 where the very same people with the very same developments are doubling the costs of their original investment and Laughing!!! ------ Complaints and doom and gloom stop!)
> 
> Ive seen banks tighten and slacken lending policy ----supply and demand I'm sure they evaluate risk just like everyone else---should




Recency and attribution bias. Look over the world and over time.


----------



## tech/a

sinner said:


> Recency and attribution bias. Look over the world and over time.




I guess if we are clever enough we can successfully argue black is white.
( Evidently you can mathematically argue this. )


----------



## Klogg

tech/a said:


> For Property have these been good indicators in the past?
> 
> *Have we seen a so called bubble burst in housing before-----lead by these indicators*?
> 
> I've been around for 60 yrs 40 of them with a strong interest in housing.
> 
> In that time I've heard moans and groans about affordability and how the bottom is going to drop out---followed by what a great investment housing is---- just keeps going up. (Think 92-94 where People were supposedly paying stupid prices for developments and getting ripped off blind---then 95-04 where the very same people with the very same developments are doubling the costs of their original investment and Laughing!!! ------ Complaints and doom and gloom stop!)
> 
> Ive seen banks tighten and slacken lending policy ----supply and demand I'm sure they evaluate risk just like everyone else---should




My guess is that 60 years isn't enough.

Have a read of Ray Dalio's take of the Long Term Debt Cycle (I'm sure others have argued this point before, I just think Dalio does it well).

Not to say it'll necessarily follow that pattern, but an alternate view is always worth listening to (within reason)


----------



## sinner

tech/a said:


> I guess if we are clever enough we can successfully argue black is white.
> ( Evidently you can mathematically argue this. )




Let me ask you a different way then tech.



> I've been around for 60 yrs 40 of them with a strong interest in housing.




Last 60y:

* Women join the workforce en masse.
* Energy production goes through the roof with low EREOI energy.
* The internet.
* Huge growth of credit economy and financial sector.

Therefore the last 60y have been essentially a giant uptrend. At least, do you concede that it is *possible* that this has coloured your view?

What do you think it would take for the next 60y to be like the last 60y?

Internet 2? Banks 3.0? Increase retirement age to 90 and reduce the age you can join the workforce to 12? Where is the low EREOI energy coming from? How much bigger can the financial sector get? How much larger can the debt load that supercharged the global economy go?


----------



## tech/a

sinner said:


> Let me ask you a different way then tech.
> 
> 
> 
> Last 60y:
> 
> * Women join the workforce en masse.
> * Energy production goes through the roof with low EREOI energy.
> * The internet.
> * Huge growth of credit economy and financial sector.
> 
> Therefore the last 60y have been essentially a giant uptrend. At least, do you concede that it is *possible* that this has coloured your view?




Don't know about coloured---I agree that NOW if you want to buy a house for profit its simply not an option.
Development is a different story though.



> What do you think it would take for the next 60y to be like the last 60y?
> 
> Internet 2? Banks 3.0? Increase retirement age to 90 and reduce the age you can join the workforce to 12? Where is the low EREOI energy coming from? How much bigger can the financial sector get? How much larger can the debt load that supercharged the global economy go?




I agree you wont get the sort of growth that we have had.

We will get different ways of building Think Modular pre builds that take weeks to build
Whole new opportunities.
I agree that aging population and debt *will alter the known landscape once again*.
One of your unknown certainties.
There will be opportunity but not as we now recognise.


----------



## sinner

tech/a said:


> Don't know about coloured---I agree that NOW if you want to buy a house for profit its simply not an option.
> Development is a different story though.
> 
> I agree you wont get the sort of growth that we have had.




Right. So this is the answer to your own question, "overvalued relative to what".

Sorted! 



> We will get different ways of building Think Modular pre builds that take weeks to build
> Whole new opportunities.
> I agree that aging population and debt *will alter the known landscape once again*.
> One of your unknown certainties.
> There will be opportunity but not as we now recognise.




You are conflating two separate things here. Your ability to "add value" through access to capital, knowledge, experience. As opposed to, the valuations, long term investment merits/sustainability of house prices in Australia for those with risk exposure to the sector and adjacent sectors.

Which is the actual topic DS was asking about. Not on whether it's possible for rich old white people in Australia to get richer.


----------



## tech/a

sinner said:


> Right. So this is the answer to your own question, "overvalued relative to what".
> 
> Sorted!




Sorted---time taken to return any sort of profit is not acceptable to me so over valued relative to potential return---in my foreseeable future. I don't think that's what was meant or is an acceptable measure.

Yet I can make lots on the front end developing---don't know that it ANSWERS the question of over valued relativity.





> You are conflating two separate things here. Your ability to "add value" through access to capital, knowledge, experience. As opposed to, the valuations, long term investment merits/sustainability of house prices in Australia for those with risk exposure to the sector and adjacent sectors.
> 
> Which is the actual topic DS was asking about. Not on whether it's possible for rich old white people in Australia to get richer.




Sorry my intelligence quotient couldn't see that.
I think even moderately well healed Black/Yellow/and well tanned people can do it.
60s not old!! Just ask an 80 yr old.


----------



## Wysiwyg

DeepState said:


> How are you valuing property to arrive at the perspective that property is not overvalued?



Comparative property prices in other locations and comparative historical prices, long term trend of income to price ratio shows an uptrend post war, new normal as they say.


----------



## DeepState

Wysiwyg said:


> Comparative property prices in other locations and comparative historical prices, long term trend of income to price ratio shows an uptrend post war, new normal as they say.
> 
> View attachment 63554




This would be the line from the property bulls, those who make a buck spruiking property or otherwise derive fees from transacting in it.  

That argument is a little devoid of consideration of the primary drivers of those moves and simply extrapolates these as if trees grow to the moon.  For a start, debt to income...which correlates rather directly with prices to income...cannot continue to escalate indefinitely.  It really began in earnest with deregulation in the 1990s. As to comparison with other world markets, the ratio of house prices to average income for 26 property markets examined by the Economist puts Australia 2nd under Belgium as of 2015.  Not exactly a screaming buy indicator on this measure.

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

This argument, that property is cheap/fair, is ultimately momentum oriented, new-paradigm thinking.  The new-paradigms which are required to support arguments that property returns will be similar to those of the last 50 years (even in real terms) are basically impossible as central case arguments. Not surprisingly, I don't subscribe to it.  It seems neither do the regulator, the central bank, Treasury or the banks themselves.  Having looked into it, I tend to favour the argument that property is a bit rich.

The saving grace is foreign dumb money flooding in, buying houses that are largely not lived in by the owner or a renter.  This activity is politically unpopular from different perspectives and is being actively managed with a view to constraining it.  At the moment, those efforts have yet to yield fruit.  Placing reliance on this type of activity as a salve for financial stability seems rather tenuous.

FWIW, it looks like about 20-30% expensive relative to equities and debt.  This doesn't mean that a pop is coming.  It just means that the forward looking returns aren't special in comparison to equities and debt.  Nothing stops it from becoming more expensive.  In the event of a correction and these momentum, new paradigm arguments are swept aside, it is definitely possible that they are replaced with a bearish perspective that we have not encountered for over 20 years.  This could see a property correction of greater than 20-30% over a short period, which is why the industry is reacting the way that it is.  This does not need to be central case for it to be relevant to financial stability or the pricing of credit. 

For me, the actions of the major conduits of credit are in line with what I think is reasonable in the conditions.  Hence, I can appreciate where Stevens is coming from on financial stability.  Property and credit have been implicated in every major financial dislocation.  They are a poisonous combination when extrapolative thinking takes hold.  This is clearly present in Australia.  It would be a mistake to make short term real activity gains at the cost of increasing financial stability risks from these levels.  This is especially the case when unemployment has peaked lower and earlier than previously thought and activity is picking up in dwelling investment. 

I think the credit market is about right in balancing these arguments.  A slight bias to a further cut.  It also leaves the AUD with more of the forward looking workload to rebalance our economy.  Wishing doesn't make it so but, so far, so good.


----------



## The Falcon

Very well considered post DS. Now where is that like button.


----------



## piggybank

Should it break through the 4.44% line then a double bottom will be confirmed...


----------



## Wysiwyg

The Falcon said:


> Very well considered post DS.



Yes I fully agree. Thank you for an experienced perspective.


----------



## McLovin

DeepState said:


> FWIW, it looks like about 20-30% expensive relative to equities and debt.  This doesn't mean that a pop is coming.  It just means that the forward looking returns aren't special in comparison to equities and debt.  Nothing stops it from becoming more expensive.  In the event of a correction and these momentum, new paradigm arguments are swept aside, it is definitely possible that they are replaced with a bearish perspective that we have not encountered for over 20 years.  This could see a property correction of greater than 20-30% over a short period, which is why the industry is reacting the way that it is.  This does not need to be central case for it to be relevant to financial stability or the pricing of credit.




A an ex-colleague, who I am now friends with, recently relocated to Melbourne from London. His primary reason was the weather and lifestyle but is amazed at how affordable housing is. I don't know what sort of $$$ he's pulling in but he works in a fairly senior position for a largish pension fund, so I'm not talking about someone making the median salary. In his opinion Australians don't know how easy they have it in property (his words not mine!). Of course he agrees that property is a very poor investment, but the people pushing up property in western countries aren't necessarily approaching it from an investment perspective.


----------



## DeepState

My view is that gold is a currency in waiting.  This view is taken from the practices of the reserve managers of the largest economies and monetary institutions as well as from historical observation and the customs relating to gold in India and China.  

That gold has functioned as the basis of money is not in doubt.  For various reasons, alternative perspectives that gold is not a monetary asset keep arising.  They appear partially driven by Gold's fall in (USD) price in the last approx. 3 years, raising a question about whether they are a monetary asset and whether it serves as a store of wealth.

Let's deal with the issue of whether gold is more like a currency or an industrial commodity in more recent times.  Over longer time periods, this is not in doubt.  Over the shorter term, casual observation can give rise to a belief that gold is functioning less as a monetary asset and more like an industrial commodity.  This issue is capable of direct analysis.

Over the last three years, gold has performed much more similarly to major currencies than it has to Oil, Copper and Corn.  Gold continues to show characteristics of a currency rather than a standard bell weather energy, industrial metal, or agricultural commodity.  The call on whether gold is closer to a monetary asset or industrial commodity on the ultimate outcome of interest...which is returns...is not even close over the more recent period in which gold has lost favour (in USD).  

This analysis is based on a well-accepted method to assess similarity in returns (or other features under examination).  If of interest: PCA, Euclidian distance (Ward), daily data.





I might leave it to others to discuss the validity of questioning gold's properties as a store of value based on the post 2012 performance in USD.


----------



## DeepState

DeepState said:


> Property and credit... are a poisonous combination...




Was just alerted to this:


----------



## sinner

DeepState said:


> This analysis is based on a well-accepted method to assess similarity in returns (or other features under examination).  If of interest: PCA, Euclidian distance (Ward), daily data.
> 
> View attachment 63592




Nice. 

Are these PCA done from total return? i.e. i.e. accounting for contango on the futs and carry on the FX?


----------



## DeepState

sinner said:


> Nice.
> 
> Are these PCA done from total return? i.e. i.e. accounting for contango on the futs and carry on the FX?




Standardised into Z(0,1) hence looking at correlation.  Sizing can be adjusted so correlation is the focus.  All figures based off spot.  Hence no contango/backwardation effects on commodities.  

No carry effects accounted for Spot FFX either.  Nice point though. Very astute indeed.  FFX would be the most affected issue even on spot but interest rate differentials on overnight cash have been basically static and thus not materially impact correlations if at all (AUD would be marginally affected). Either that or I will just say that AUD and other FFX return is for cash under the mattress.  Could run this again using overnight mid prices, but it's not worth it.


----------



## sinner

DeepState said:


> Standardised into Z(0,1) hence looking at correlation.  Sizing can be adjusted so correlation is the focus.  All figures based off spot.  Hence no contango/backwardation effects on commodities.




The main point here being that it's pretty impossible to hold the spot in the commodities you picked and certainly impossible to trade a barrel of brent or bushel of corn in a liquid market. I think if you used front month futs and adjusted for roll yield (e.g. take a look at USO ETF on the NYSE) you can see the big difference between the spot price and what you actually can "invest" in.

(ergo the return on gold is even more like a currency and less like a commodity)



> No carry effects accounted for Spot FFX either.  Nice point though. Very astute indeed.  FFX would be the most affected issue even on spot but interest rate differentials on overnight cash have been basically static and thus not materially impact correlations if at all (AUD would be marginally affected). Either that or I will just say that AUD and other FFX return is for cash under the mattress.  Could run this again using overnight mid prices, but it's not worth it.




Good point about the differentials, since they haven't moved much I guess we can let it slide. I definitely try to account for it, as I have noticed that the difference in timeseries can have a material impact on backtests.


----------



## DeepState

sinner said:


> The main point here being that it's pretty impossible to hold the spot in the commodities you picked and certainly impossible to trade a barrel of brent or bushel of corn in a liquid market. I think if you used front month futs and adjusted for roll yield (e.g. take a look at USO ETF on the NYSE) you can see the big difference between the spot price and what you actually can "invest" in.
> 
> (ergo the return on gold is even more like a currency and less like a commodity)
> 
> 
> 
> Good point about the differentials, since they haven't moved much I guess we can let it slide. I definitely try to account for it, as I have noticed that the difference in timeseries can have a material impact on backtests.




Enjoying this discourse.  

Had a look at USO ETF as suggested.  It is fully replicating the S&P GSCI Crude Oil index. Although you will pay 0.66 MER for the pleasure of gaining this exposure via the ETF.  I had used Brent in my analysis, but whatever.  You make a good point that the spot market is not accessible.  (Well, you can actually buy the spot contracts on IG Markets...still I found your point interesting).

I was curious about the extent to which the character of returns was distorted by basis risk.  Anyhow, FYI only, the R-squared for S&P GSCI Crude Oil Index vs WTI Spot is 0.95 with correlation of 0.98 for the last 3 years based on daily data.  Basically, in this case, I acknowledge that the relationships portrayed in my analysis may not be exact for the investible equivalents (if that means actually holding the stuff in your hands).  However, if I had added the investible equivalents in the form of front month contracts it would produce a plot which is so overlapping that the labels would be hard to read.  Basis risk is almost completely subsumed by the volatility of the underlying.  I imagine this would be the case for the other commodities examined as well. Still, a good point....and hugely important for trading strategies for alpha, just less so for correlations.

When doing backtests for currency in terms of alpha generation, it is definitely important to include carry effects.  However, for the purposes of identifying correlations, where interest rate differentials are not moving around a lot, the outcomes are pretty much identical because allowing for carry adjusts for the level effect...which is controlled for anyway in PCA.  The carry effects also come with a spread due to the tom-next margins.  Always clipping a ticket somewhere...


----------



## Ves

Hey DS,  been following a bit of the discussion in the gold thread,   and it's been stated quite a few times that are a few of the posters,  yourself included,  use gold as a kind of insurance protection for your portfolios.   Whilst if I was going to calculate how much insurance I needed for my house or car,  it would appear pretty easy to do.   However,  permanent risks to an investment portfolio are obviously much harder,  or even impossible,  to quantify.  What sort of methods do you know that estimate how much portfolio insurance you may need?


----------



## DeepState

Ves said:


> Hey DS,  been following a bit of the discussion in the gold thread,   and it's been stated quite a few times that are a few of the posters,  yourself included,  use gold as a kind of insurance protection for your portfolios.   Whilst if I was going to calculate how much insurance I needed for my house or car,  it would appear pretty easy to do.   However,  permanent risks to an investment portfolio are obviously much harder,  or even impossible,  to quantify.  What sort of methods do you know that estimate how much portfolio insurance you may need?




This is an imperfect hedge.  I call it a jelly hedge.  We are using a cross-hedge.  For the scenarios being insured, there really is no choice as a standard put option would not insure the assets in extreme situations.

The degree of insurance provided will need to be estimated using either/or/all of:
+ scenario based methods informed by observation of long history;
+ checking movements of markets for the most extreme movements...tail hedge delta;
+ making a guess with your best judgment.  I would use a delta like -0.5 for working purposes.  In other words, in a run-of-the-mill disaster, a 50% fall in equities due to disorderly inflation would see a 25% increase in the price of gold.  But this will vary by scenario.  In the very extreme scenario of destruction of productive assets and abandonment of currency due to war, that delta can move towards infinity.

I am not seeking to fully insure this scenario.  I acknowledge that the chances are not zero and seek to make allowance for it, however imperfectly calculated.


----------



## Ves

Thanks DS.   Lots of thinking to still be done on this for me.  Actually I'm much closer to the beginning than I realised...


----------



## DeepState

State Intervention on China equities: An alternative perspective

Had a 1:1 session with the Chief Economist of one of Australia's largest investors recently.  One of the topics we discussed was the fact that Chinese policy is being driven by the equity market.  

I expressed that it is very unusual for a central bank to target an equity market level.  More usually, they target price changes of a consumption basket.  Why on earth would they be doing this?  Such actions are without precedent in terms of scale and reactivity. How bad must things be in the Chinese credit system for such desperate moves to be required? 


His response opened another perspective, which I found interesting:

The Chinese government is trying to create a more active equity market.  They have opened the way for more people to become involved again.  In the past, equities have become much maligned and could not be trusted.  The Chinese government has taken steps to invite retail participation again....

The Chinese government must ensure that the experience of the investors is not a bad one.  Otherwise, the credibility of the government will be severely tarnished whenever the next initiative is proposed.  

Hence, the risk being managed has little to do with financial stability in a direct sense (it is arguable that it might dampen consumer expenditure and impact stability through this channel).  It is to manage the credibility of the Chinese government when its says to its populace that they can invest safely.

He also mentioned that the Chinese economy and government are in a reasonably strong position to absorb bank failure....when compared to what Europe had to go through.


----------



## qldfrog

And that view is probably right, it is a matter of saving face, ensuring a quiet populace; giving people paper gains on the stock market is much easier than providing cleaner water, better food or risking more democratic freedom;
I can see a real parallel here with the australian government(s) and the real estate bubble;
people feeling  rich  is enough to keep the wheel running, the workers slaving away and borrowing/spending.
Who want to stop the wheel, neither liberal or labour here, nor the Communist party in china


----------



## DeepState

A view from McKinsey: Under/Unemployment is significantly the result of mismatched skills rather than lack of jobs


----------



## tech/a

I think the loss of many un skilled jobs buy the intervention of technology has a lot to do with it.
Retail is not what it used to be.
Sales positions and store staff have been crushed
Anything repetitive is now automated.
Those which haven't been are cheaper to produce off shore.

There are simply less jobs for the un skilled.


----------



## qldfrog

And I can tell you that as a 5y uni.educated  in IT, lastest IT skills, BA/PM/team leader you name it, jobs are not that many in Brisbane;
unless you want to be paid peanuts-> there are 50+ applicants per jobs so as a result of open immigration on a crashing market, so the cheapest bidder win;
Not complaining but the problem is much bigger than a simple: 
"all low skills jobs have disappeared, only skilled ones are left"
True, but also due to globalisation, the very skilled jobs left (and they are not that many) are now competed for by the uni  graduates of the whole world:
india and china being 2 billions, that is quite a few graduates, and many are ready to start here for much lower than the typical aussie, as the first job here will also mean a residency.
So as long as immigration is an open gate (to support the RE bubble and keep low salaries), good luck for aussie job searchers skilled or not.


----------



## tech/a

Your right

The vicious cycle continues.

Increases in population with a corresponding increase in work force is
What governments want. More taxes both PAYE and Company/Business taxes.

Population growth through immigration is fine provided you have the demand for 
Labour. This was the case in the mining boom.
As that goes cold the problem comes out of the wood work.


----------



## sinner

qldfrog said:


> And I can tell you that as a 5y uni.educated  in IT, lastest IT skills, BA/PM/team leader you name it, jobs are not that many in Brisbane;




Hi qldfrog,

You are in luck. I broke my ASF hiatus because I received a PM and then noticed this post.

My company would be happy to hire you and anyone you know with the appropriate skills, for very good salary, doing remote work on a globally distributed system for one of our customers (a well known IT firm with market cap >100bn USD), we are looking specifically for people with a background in administrating/operating large scale distributed systems.

The following technologies are in use:

* Puppet
* Cobbler
* Ansible
* Galera MySQL
* RabbitMQ
* ElasticSearch/Logstash/Kibana
* RHEL7
* Ubuntu 12.04 LTS
* OpenStack

Demonstrable previous experience and skills in the above (especially OpenStack) would probably be enough to land you the job (but if you know Chef rather than Puppet or only one of RHEL v Ubuntu that is OK).

If you are a kickass linux sysadmin (any other DevOps/IaaS/PaaS experience considered also), database guru or windows server guru it's possible we'd be interested enough to train you up on the other stuff. 

As an example of the interview process, we'd normally get you to ssh into a pre-broken OpenStack cloud and ask you to fix it while sharing your screen, with the evaluation being less about whether or not you fix it as how you go about trying to figure out how it's broken.

Drop a line to careers AT aptira DOT com with CV and cover letter if you're interested.


----------



## DeepState

Whoops:


----------



## skc

Came across this graphics which I thought was quite interesting.




http://www.bloomberg.com/news/artic...ng-big-and-fundamental-has-changed-in-markets

What's the layman's term for this? Greater fool? Or Ponzi?


----------



## qldfrog

DeepState,
your mailbox is full and you can not be PMed anymore.
Wish this could happen to Tony...;-)
Time for a spring clean up!!!


----------



## DeepState

China Yuan Devaluation....

Issues:
Reserves were draining.
Real effective exchange rate had appreciated as a result of the USD peg.
Monetary easing not quite effective enough.
Slower economy.
IMF reserve currency status.

The revision to the peg could be thought of as an emergency move as monetary policy is failing to stimulate growth adequately.  It could also be a recognition that the Yuan had become over-valued.  It is also an effort to gain membership into the reserve currency club.

All in all, the most concerning of the possibilities is that the internal workings of China as much weaker than might be imagined.  Recent trade and real activity data (less government manufactured) does highlight that things are materially slower then the official stats.  If so, this is a positive move but may be taken as a revelation from the government that things are worse than originally portrayed. 

The other issues raised in the list above point to the fact that a depreciation is appropriate to balance out capital flows and changes to trade competitiveness as a result of pegging to USD.  The IMF welcomes the move.

This should be a net positive for Australia. Looking at the AUD movements, the first instinct was to fear than China was in much worse state than had been imagined.  The later and more considered reaction is that this is positive for terms of trade and also export volumes.


----------



## CanOz

Great to hear your views on this DS, i was wondering the same things myself. It certainly appeared as though the markets feared the worst, that China indeed made the move as a panic reaction. Perhaps the IMF's support has calmed things down a bit...

I'm particularly interested to see if the AUD will appreciate in relation to the CNY....or not.

CNY/USD CHART


----------



## skyQuake

RE: PBOC

China's PBOC told fund managers it wouldn't devalue yuan
2015-08-12 05:51:48.516 GMT


By Angus Grigg
     Aug. 12 (Financial Review) --   
     In early June a group of foreign fund managers arrived in Beijing with one simple question for the People's Bank of China. They wanted to know if the central bank was planning to devalue the currency. 
     The answer they received was surprisingly frank. "They were very explicit in saying there would be no devaluation," 
says one person present at the meeting. "If we did that it would set off a global deflationary spiral," a PBOC official told the group. 
     So what then to make of moves on Tuesday and Wednesday which has seen the central bank lower the Chinese yuan by 3.4 per cent against the US dollar? Either, the PBOC had an abrupt change of heart or its intentions are being misunderstood. 
     The person present at the meeting believes the latter. 
While explicitly ruling out plans to devalue the yuan, the PBOC officials did acknowledge there was a problem in how the currency was set, a process known as the "daily fix". 
     "They were fixated on the fix," says the fund manager. The issue was that the "fix" had been consistently out of kilter with where the currency was trading on the markets - it is allowed to move 2 per cent either side of its daily level. 
     According to the fund manager, the PBOC were keen to see this gap narrow and for it to better reflect how the market was valuing the currency. 
     That's exactly what the PBOC did on Tuesday via its "one-off" adjustment. But then having said it would allow the market to play a greater role is setting the level of the yuan, it further weakened the currency on Wednesday. 
     And so what should be have been a genuine effort at reform is now being viewed by many as the first step in a sizeable devaluation, a currency war even. 
     The markets have reacted accordingly and are pushing the yuan lower. This has forced the PBOC into the awkward position of doing exactly what it said would not happen. "They stuffed it up big time," says the fund manager. 
     But it's not just the credibility of the PBOC and its private briefings which is on the line if Beijing really is in the process of a major devaluation. The credibility of China's top economic official, Premier Li Keqiang will also be shredded. 
     In April he could not have been more definitive on the subject during a rare interview with the Financial Times. 
     "We don't want to see further devaluation of the Chinese currency, because we can't rely on devaluing our own currency to boost export [sic]," he said. "We don't think companies in China should mainly rely on a devalued Chinese currency to boost exports. Instead, they should focus on enhancing their competitiveness by raising the quality of products and making technological innovations." 
     The Premier went on to say China did not want to see a "currency war" where "major economies trip over each other to devalue their currencies". 
     "If China feels compelled to devalue the Rmb [yuan] in this process, we don't think this will be something good for the international financial system. This may ultimately lead to trade protectionism and impede the globalisation process. This is something we don't want to see." 
     Stepping back from such explicit comments will be very difficult even for the un-elected Chinese Premier. This suggests Beijing is continuing down the reform path by making its currency more responsive to market forces, but as usual is doing a very bad job of telling the world and is now locked 
into a sizeable devaluation.   


Click here to see the story as it appeared on Financial Review  web site.


----------



## CanOz

That was a stellar article skyquake, many thanks for sharing.....


----------



## DeepState

skyQuake said:


> China's PBOC told fund managers it wouldn't devalue yuan




It was the same deal with the Swiss Central Bank when it removed the cap on the exchange rate against the Euro in January.  They were vehemently denying it in meetings just days before hand...

However, what else would you expect them to say under these circumstances?


----------



## DeepState

Way to go Australia:


----------



## kid hustlr

Interested to hear your views of this weeks events DS.

On another note, if bond yields are at a 'new norm' of extremely low rates, then why wouldn't shares trade at an extremely high p/e? Or put another way, 4% div yield looks better with a 10 year bond yield of 1% than it does with a 10 year bond yield of 4% doesn't it??!!


----------



## sinner

kid hustlr said:


> Interested to hear your views of this weeks events DS.
> 
> On another note, if bond yields are at a 'new norm' of extremely low rates, then why wouldn't shares trade at an extremely high p/e? Or put another way, 4% div yield looks better with a 10 year bond yield of 1% than it does with a 10 year bond yield of 4% doesn't it??!!




Is there any evidence whatsoever that there is any correlation whatsoever between nominal "bond yields" and future earnings multiples at any time horizon? 

Not that I'm aware of.

It just seems like yet another "new normal" excuse that gets wheeled out as justification to ignore valuations.

Doesn't an interest rate of 0.25% justify a 40 P/E? 

Do P/E multiples even take into account the cyclical nature of earnings and profit margins? Nope...


(h/t vectorgrader.com)



(h/t threadgillfinancial.com)


----------



## sinner

DeepState said:


> It was the same deal with the Swiss Central Bank when it removed the cap on the exchange rate against the Euro in January.  They were vehemently denying it in meetings just days before hand...
> 
> However, what else would you expect them to say under these circumstances?




"'When it becomes serious, you have to lie" - Jean-Claude Juncker


----------



## kid hustlr

Good example sinner. I'll be the first to admit im in way over my head talking about this stuff. Conceptually though If I'm running money (be it a big hedge fund or mum and daddy smsf) 1-2% in the bank vs 7,8,9% in shares its a no brainer.

As you right say whether this has any historical backing I don't know and it appears not - atleast in Japan


----------



## sinner

kid hustlr said:


> Good example sinner. I'll be the first to admit im in way over my head talking about this stuff. Conceptually though If I'm running money (be it a big hedge fund or mum and daddy smsf) 1-2% in the bank vs 7,8,9% in shares its a no brainer.




Dividends are not a right. They are a privilege. How many companies didn't pay out a single dollar of dividends in 2008? How much can you really payout in dividends with negative earnings anyway?

Returns to shareholders (be it via dividend, share repurchase or long term debt repayments) are a function of the returns generated from assets/equity/invested capital/etc. There is no guarantee there either. Individual company returns are completely dependent on a functioning economy.

Meanwhile, returns on "bond yields" as you called them, are *nominally* a function of the Governments ability to issue currency (real returns are again completely dependent on a functioning economy). That is a much lower bar 

Big hedge funds and SMSF are not the only form of "running money" as you put it, in those cases the goal of investment is specifically maximising total return.

What about insurance funds? They sell premiums and need to invest (at least a large part of) those premiums into something that can guarantee a *nominal* return in the event of a payout. In which case the thought of having to pay out huge premiums in the middle of a financial crisis (think AIG?) makes *not* holding stocks a no brainer. Liquidity is more important than returns. Even to seasoned investors like Warren Buffett!



> *At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be*. Accommodating this need, we primarily hold *U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions*. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.




Note the bolds, Berkshire could get "no brainer" get a better rate by increasing duration from 90 days to 2y (or 10y or 30y), or by investing in AAA corporate bonds vs Treasury cash (or junk bonds  ), or even investing 100% of their funds into stocks.

But they don't 

(for those playing at home, Berkshire market cap is ~330 billion USD)


----------



## kid hustlr

Perhaps dividend yield was the wrong concept.

As you point out I should have used 'earnings' and then we are talking about comparing earnings to the 'risk free' rate.

I guess the point I was enquiring about is whether an ever decreasing yield will encourage investors to look elsewhere and ultimately pay greater premiums in other assets.

I've seen the discussions between yourself/DS/craft about these topics in the past and I find them interesting.

With regards to the insurance example, different horses for different courses, obviously there's many players in the market each with differing goals and needs, after all that's what makes a market. I guess I was specifically talking about those investing to achieve a return - I perceive these players to make up the bulk of the market, once again however I could be wrong.


----------



## sinner

kid hustlr said:


> I guess the point I was enquiring about is whether an ever decreasing yield will encourage investors to look elsewhere and ultimately pay greater premiums in other assets.
> 
> I've seen the discussions between yourself/DS/craft about these topics in the past and I find them interesting.




Imagine that the yield is the bond markets "implied annualised growth forecast" for the duration of the bond. It isn't, but imagine it is. So if the 10y risk free rate is 2% then imagine the bond market is forecasting annualised growth of 2% per annum for 10 years.

Now consider Intrinsic Valuation of a listed company. On the one hand, because the interest rate is low, your bar for earnings yield is lower. But the other edge of that sword is that you can no longer realistically forecast high levels of growth far out into the future.

Assuming S&P500 EPS growth of 6.3% and current Cyclically Adjusted P/E (10) of 26.48 and the long term historical average of CAPE as 16, dividend of 2% we approximate the annualised return for the next 10 years as:

100 * (1.063 * (16/26.48)^(1/10) - 1 + 0.02) = 3.07%

Currently the US 10Y yield is 2.05% ...

So the (much more realistic) equity risk premium is only *1%*. Basically, you have to be willing to take on double the volatility for an extra 1% per annum return, and that is assuming you believe EPS can grow at 6.3% per annum with profit margins at record highs, with no cuts to dividends.


----------



## DeepState

kid hustlr said:


> Interested to hear your views of this weeks events DS.
> 
> On another note, if bond yields are at a 'new norm' of extremely low rates, then why wouldn't shares trade at an extremely high p/e? Or put another way, 4% div yield looks better with a 10 year bond yield of 1% than it does with a 10 year bond yield of 4% doesn't it??!!




The main trigger is the China Flash PMI, which came after the Yuan devaluation.  In the background is the expectation of the first step to monetary tightening by the Fed.  

Other matters:
+ US market is unambiguously expensive on metrics.
+ EM commodity exporters are being crunched.  To the extent they are financed by USD loans, credit will be increasingly impaired.
+ There is a flight to safety going on

I believe that this is the trigger that sees US valuations brought more into alignment.  The market sometimes accepts a fantasy for a while and then wakes up.  Some trigger is always identifiable in hindsight, but is not thought to be a trigger at the time until a roll gets going.  In this case, the US market influences everything else, but how it recovers from here relative to other markets will be interesting.

Although economic releases in the developed markets are generally alright, there is a risk of disruption emanating from China.  It is widely believed that the Chinese GDP is very weak because various partial indicators like imports, electricity consumption, demand for commodities related to capital investment... suggest a weakening picture.  The PMI was very weak (77 month low) but, worse, the new orders component is deteriorating...meaning that this will be sustained.

On top of this, the Chinese government and monetary authorities also have a reserve drain issue and a lowflation problem as well.  They also want to become a reserve currency.  The true market value of the CNY is below the previous peg and remains below the current price which is being supported by the PBOC with very significant intervention.  This cannot be sustained and more devaluation is inevitable.

When this occurs, and if the economy remains weak and is getting weaker, it will drain growth from all over the place.  This is part of the reason why bonds have rallied.  It is interesting that investment grade BBB credit, even in financials, is not trading all that much wider.  So nothing in the credit world is getting too stressed...outside of China.

There is something very screwed up that is occurring in China as the reactivity of the officials to the equity market was extraordinary.  Perhaps it was to do with protecting the reputation of the government.  Perhaps it was because there may be contagion effects to sentiment.  

The key swing factor now is whether China can bail itself out again from seeming disaster.  If it can't, the rest of the world will share its pain.  I need to look into this aspect some more.  


---

When central banks push down rates using QE or other measures, they are trying to stimulate growth.  One channel is to push up the prices of securities in the share market.  By doing so, companies can raise funds more cheaply and invest it.  That's the theory. So far, for the most part, all that has happened is that prices have gone up.  However, I cannot know how much more capital expenditure would have been cut if it weren't for this.


----------



## sinner

DeepState said:


> When this occurs, and if the economy remains weak and is getting weaker, it will drain growth from all over the place.  This is part of the reason why bonds have rallied.  It is interesting that investment grade BBB credit, even in financials, is not trading all that much wider.  So nothing in the credit world is getting too stressed...outside of China.




DS...I honestly get the feeling when I read your posts that I should be paying for them.   

One small point, re the BBB spreads, just because I have been looking at these recently. What I have noticed is that it's less about the absolute measure of spread. The "uniformity" (stealing the phrase from John Hussman here) with other assets is more important. i.e. if spreads are widening when the market is rallying, that's a divergence worth paying attention to, re stress.

This is something that only recently clicked for me, but when it finally did I remembered how the TED spread was slowly widening in early 2011, but nobody payed attention because the absolute level was low.

Anyway, here is my payment:

Long term options adjusted daily US BBB from FRED:



Same, zoomed into the last year, up 53%, this warning signal has obviously been flashing for a while:



Bonus round: 1y of monthly AU nonfinancial BBB spread from the RBA, up ~30%, wonder what it'd be with fins included:


----------



## kid hustlr

Brilliant guys thank you


----------



## Klogg

> On top of this, the Chinese government and monetary authorities also have a reserve drain issue and a lowflation problem as well. They also want to become a reserve currency. _The true market value of the CNY is below the previous peg and remains below the current price which is being supported by the PBOC with very significant intervention. This cannot be sustained and more devaluation is inevitable._
> 
> When this occurs, and if the economy remains weak and is getting weaker, it will drain growth from all over the place. This is part of the reason why bonds have rallied. It is interesting that investment grade BBB credit, even in financials, is not trading all that much wider. So nothing in the credit world is getting too stressed...outside of China




@DS - Thanks, very informative post. I am curious about the above quote though...

Why would the PBOC want to maintain a higher level for the CNY, if inflation is low and the economy is struggling? I would have thought the opposite would cause inflation and improve competitiveness of exports (hence increased growth).


----------



## DeepState

sinner said:


> DS...I honestly get the feeling when I read your posts that I should be paying for them.




High praise indeed especially considering the source.  Thanks.

Take your points on BBB.  I guess I was looking for a discontinuity following the equity shake.


----------



## DeepState

Klogg said:


> @DS - Thanks, very informative post. I am curious about the above quote though...
> 
> Why would the PBOC want to maintain a higher level for the CNY, if inflation is low and the economy is struggling? I would have thought the opposite would cause inflation and improve competitiveness of exports (hence increased growth).




The currency is a political issue and not just market oriented.  There are also concerns for international credit market stability.  A depreciation which is sudden may worsen demand for Chinese exports if it causes stress in the European, Asian and Japanese banking systems, for example.  

There is a form of Tragedy of the Commons which can break out if China did this is a disorderly fashion.

Under current circumstances, China needs to devalue.  However, it will likely seek to do so in a 'crossing the river by feeling the stones' method...incrementally.


----------



## Klogg

DeepState said:


> The currency is a political issue and not just market oriented.  There are also concerns for international credit market stability.  A depreciation which is sudden may worsen demand for Chinese exports if it causes stress in the European, Asian and Japanese banking systems, for example.
> 
> There is a form of Tragedy of the Commons which can break out if China did this is a disorderly fashion.
> 
> Under current circumstances, China needs to devalue.  However, it will likely seek to do so in a 'crossing the river by feeling the stones' method...incrementally.




Hadn't really considered any of that. 
Thanks again


----------



## qldfrog

DeepState said:


> The currency is a political issue and not just market oriented.  There are also concerns for international credit market stability.  A depreciation which is sudden may worsen demand for Chinese exports if it causes stress in the European, Asian and Japanese banking systems, for example.
> 
> There is a form of Tragedy of the Commons which can break out if China did this is a disorderly fashion.
> 
> Under current circumstances, China needs to devalue.  However, it will likely seek to do so in a 'crossing the river by feeling the stones' method...incrementally.



And I would add that the Chinese president is seeing Obama next month if I am right and may want to be a "nice guy" till the visit,   and a better chance to join the club of respected currencies
pure politics but there the country, the party and the institution are one


----------



## DeepState

There she blows...AUDUSD now sub 70


----------



## sinner

DeepState said:


> Kathmandu (KMD-AU) looks too cheap to me.  Position initiated a couple of days.




http://www.smh.com.au/business/retail/kathmandu-loses-place-in-asx-top-200-20150904-gjf42c.html

kicked out of the index, normally a price positive signal, stocks tend to outperform the benchmark once they get kicked out, maybe worth complementing this position with a short SPI hedge.


----------



## skyQuake

sinner said:


> http://www.smh.com.au/business/retail/kathmandu-loses-place-in-asx-top-200-20150904-gjf42c.html
> 
> kicked out of the index, normally a price positive signal, stocks tend to outperform the benchmark once they get kicked out, maybe worth complementing this position with a short SPI hedge.




This is a result of the takeover, and implied lower liq and free float even if it fails.
I say good riddance


----------



## DeepState

KMD-AU position was sold a few weeks back. Thanks for the heads up though.


----------



## DeepState

Organising your notes...

Any thoughts on OneNote, Evernote or some other method of storing and organising your notes and observations?


----------



## qldfrog

DeepState said:


> Organising your notes...
> 
> Any thoughts on OneNote, Evernote or some other method of storing and organising your notes and observations?




A colleague used one note quite extensively, and my son is using it as the only support for school.
wonder about sharing these notes via iphone/android..
supposed to be possible but never used..
anyone?


----------



## johnpendles

Didn't know where else to put this, so thought id post it in this great thread.

Thoughts from the legendary fund manager Ray Dalio, published Aug 25 2015:






> *The Dangerous Long Bias and the End of the Supercycle*
> 
> *Why We Believe That the Next Big Fed Move Will Be to Ease (via QE) Rather Than to Tighten
> *
> 
> As you know, the Fed’s template and our template for how the economic machine works are quite different so our views about what is happening and what should be done are quite different.
> 
> To us the economy works like a perpetual motion machine in which short-term interest rates are kept below the returns of other asset classes and the returns of other asset classes are more volatile (because they have longer duration) than cash.  That relationship exists because a) central banks want interest rates to be lower than the returns that those who are borrowing to invest can generate from that borrowing in order to make their activities profitable and b) longer-term assets have more duration that makes them more volatile than cash, which is perceived as risk, and investors will demand higher returns for riskier assets.
> 
> Given that, let's now imagine how the machine works to affect debt, asset prices, and economic activity.
> 
> Because short-term interest rates are normally below the rates of return of longer-term assets, you'd expect people to borrow at the short-term interest rate and buy long-term assets to profit from the spread.  That is what they do.  These long-term assets might be businesses, the assets that make these businesses work well, equities, etc.  People also borrow for consumption.  Borrowing to buy is tempting because, over the short term, one can have more without a penalty and, because of the borrowing and buying, the assets bought tend to go up, which rewards the leveraged borrower.  That fuels asset price appreciation and most economic activity.  It also leads to the building of leveraged long positions.
> 
> Of course, if short-term interest rates were always lower than the returns of other asset classes (i.e., the spreads were always positive), everyone would run out and borrow cash and own higher returning assets to the maximum degree possible.  So there are occasional "bad" periods when that is not the case, at which time both people with leveraged long positions and the economy do badly.  Central banks typically determine when these bad periods occur, just as they determine when the good periods occur, by affecting the spreads.  Typically they narrow the spreads (by raising interest rates) when the growth in demand is growing faster than the growth in capacity to satisfy it and the amount of unused capacity (e.g., the GDP gap) is tight (which they do to curtail inflation), and they widen the spreads when the opposite configuration exists, which causes cycles.  That's what the Fed is now thinking of doing—i.e., raising interest rates based on how central banks classically manage the classic cycle.  In our opinion, that is because they are paying too much attention to that cycle and not enough attention to secular forces.
> 
> As a result of these short-term (typically 5 to 8 year) expansions punctuated by years of less contraction, this leveraged long bias, along with asset prices and economic activity, increases in several steps forward for each step backwards.  We call each step forward the expansion phase of each short-term debt cycle (or the expansion phase of each business cycle) and we call each step back the contraction phase of each short-term debt cycle (or the recession phase of the business cycle).  In other words, because there are a few steps forward for every one step back, a long-term debt cycle results.  Debts rise relative to incomes until they can't rise any more.
> 
> Interest rate declines help to extend the process because lower interest rates a) cause asset prices to rise because they lower the discount rate that future cash flows are discounted at, thus raising the present value of these assets, b) make it more affordable to borrow, and c) reduce the interest costs of servicing debt.  For example, since 1981, every cyclical peak and every cyclical low in interest rates was lower than the one before it until short-term interest rates hit 0%, at which time credit growth couldn't be increased by lowering interest rates so central banks printed money and bought bonds, leading the sellers of those bonds to use the cash they received to buy assets that had higher expected returns, which drove those asset prices up and drove their expected returns down to levels that left the spreads relatively low.
> 
> That's where we find ourselves now—i.e., interest rates around the world are at or near 0%, spreads are relatively narrow (because asset prices have been pushed up) and debt levels are high.  As a result, the ability of central banks to ease is limited, at a time when the risks are more on the downside than the upside and most people have a dangerous long bias.  Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.
> 
> That is what we are most focused on.  We believe that is more important than the cyclical influences that the Fed is apparently paying more attention to.
> 
> While we don't know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces.  These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets—at the same time as the world is holding large leveraged long positions.
> 
> While, in our opinion, the Fed has over-emphasized the importance of the "cyclical" (i.e., the short-term debt/business cycle) and underweighted the importance of the "secular" (i.e., the long-term debt/supercycle), they will react to what happens.  Our risk is that they could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required.
> 
> To be clear, we are not saying that we don't believe that there will be a tightening before there is an easing. We are saying that we believe that there will be a big easing before a big tightening.  We don't consider a 25-50 basis point tightening to be a big tightening. Rather, it would be tied with the smallest tightening ever. As shown in the table below, the average tightening over the last century has been 4.4%, and the smallest was in 1936, 0.5%—  when the US was last going through a deleveraging phase of the long term debt cycle. The smallest tightening since WWII was 2.8% (from 1954 to 1957).  To be clear, while we might see a tiny tightening akin to what was experienced in 1936, we doubt that we will see anything much larger before we see a major easing via QE.  By the way, note that since 1980 every cyclical low in interest rates and every cyclical peak was lower than the one before it until interest rates hit 0%, when QE needed to be used instead. That is because lower interest rates were required to bring about each new re-leveraging and pick-up in growth and because secular disinflationary forces have been so strong (until printing money needed to be used instead). We believe those secular forces remain in place and that that pattern will persist.


----------



## qldfrog

johnpendles said:


> Didn't know where else to put this, so thought id post it in this great thread.
> 
> Thoughts from the legendary fund manager Ray Dalio, published Aug 25 2015:



theory not wrong;
the central banks have no choice but hyper inflation or country bankrupt 
the only way to trigger that is to push the easing to the extreme, so a small tightening in the next week will only be sustainable if the market does handle it well, at the slightest weakness, another QE with limited economic effect 
This might end up starting to scare people, and start generating inflation..
interesting


----------



## DeepState

Interesting article from Dalio.  I had been trying to secure it through official channels.  However, it turns out that there are alternative back channels.

There is too much debt in the world.  We have been pulling forward investment and consumption for decades and there is a limit.  Who knows where that limit truly is.  Dalio's stats (not shown here) compare debt levels and other matters to the Great Depression era.  It is hard to say whether that is an appropriate reference point.

In any case, were the point of deleveraging to be here and a secular reduction in real debt burdens is called for the ideal outcome is one where nominal GDP growth exceeds interest costs and inflation remains stable and somewhat positive.  This "beautiful deleveraging" (Dalio) has occurred in the last century a few times.

It is quite possible that the Fed's dual mandate of inflation and employment will serve as an adequate guide to achieving these ends.  Hence, it is entirely reasonable that the Fed will react to developments in a way which initially tightens (which is what the cyclical components indicate) only to find that this leads to deleveraging, with decreased employment and inflation.  This will cause the need to review the tightening bias.

The Fed has previously stated that it intends to keep rates lower than might be usual and for a longer time period even if inflation returns to target and employment levels are towards true full employment levels.  It is the dot plots which show Fed expectations with a very hawkish stance.  The market does not believe it and has sharply discounted the increased rate path.  Yet, the rate path is upwards in contradiction to the Bridgewater view.

I am not convinced that the Fed is fully committed to a tightening path.  Under Yellen, it has moved to a data dependent rather than prescriptive method.  Further, central banks around the world from Australia, Belarus, Canada, China... have displayed that reversals of courses of action take place as data presents itself.  Why should the Fed be any less able to do so?  In fact, the Fed is now more dovish with the latest rotation of FOMC voters anyway.

Some observations:
+ Whatever the cause of subsequent economic developments (cyclical upswing or secular deleveraging are in focus), the Fed will react according to the data as it unfolds.  It is not on a fixed path;
+ We do not know if the deleveraging point has been reached;
+ There are probably adequate tools in terms of fiscal flexibility, Fed policy flexibility and prudential controls to engineer a beautiful deleveraging....but the margin is tight given the extend of leverage and the way it all cascades;
+ The market is closer to the Bridgewater case than the Fed's case, so the extent of market adjustment which might occur is not as large as might first appear;
+ In the event of an "ugly deleveraging", the best thing to hold is probably cash or bonds with worthy counterparties. Everything else is going to tank it, including commercial and residential property.  If it gets really bad, then you are talking Gold, Fine Art, Farmland and weapons to defend them.
+ US mortgages are fixed rate for the most part.  Private companies are under levered.  The government is being subsidized by the Fed. Systemic risk arising from the US in a direct sense is not so large.  Oil shows that there are other issues going on that can impact stuff as well (by the way, the oil price decline is most likely not the result of deleveraging as per Dalio's comments).
+ It is likely the second round impacts might be of greater concern.  Capital drain as the carry trade from the US to EM in particular is already resulting in phenomena like the "Suspect Six" (which is the contemporary version of the Fragile Five).  Brazil, Mexico etc... are under stress.  However, there has been some Bank for International Settlements research recently published which outlines that this debt growth, if in USD denomination (which is the key risk), has been sourced from outside the banking system.  Further, there is research which shows that debt borrowed in USD is mostly held in liquid form in the asset side or in USD assets.  Each of these reduces the apparent feedback mechanisms from a dislocation.
+ Disorderly inflation financed by cheap money is not what central banks want.  This stuff destroys economies.  If it were to occur in the kind of world Dalio speaks of, it would be because there was wholesale destruction of productive capacity due to disorderly deleveraging not matched by demand. It would be truly epic to achieve.  Interest rates would be kept low to encourage investment and restore production.  it is, however, viable that central banks will try to keep inflation higher than normal, but still orderly, to achieve a prolonged period of orderly deleveraging.  That's a figure somewhat less than 5% per annum.
+ China is the fulcrum point.  Everything rests on what happens here.


Some comments on my positioning:
+ I insure what I cannot hack.  I will keep doing so. This has saved a lot of sleep, but not all, from recent runctions.
+ I remain underweight nominal duration and have zero real duration, but would lengthen both at levels below historical levels.  This is in recognition of debt burdens being high.
+ I own USD.


----------



## tech/a

So currently very little to no exposure.
More about protection of asset than 
Increasing asset.


----------



## kid hustlr

For those who might not have seen it:

https://www.youtube.com/watch?v=PHe0bXAIuk0


----------



## DeepState

tech/a said:


> So currently very little to no exposure.
> More about protection of asset than
> Increasing asset.




I see it as increasing the real value of my assets with a survivable pathway along the way.  All very easy to punch out stuff like 20% expected rates of return and talk of ultra long term perspectives to ride out 60% falls or step into them.  My experience of the actual activity at this time is that this faÃ§ade disintegrates under such circumstances amongst investors for all but the deepest pockets filled with permanent capital.

The dollar amounts at risk did have me waking up at 4:00am in a sweat for the first time since the GFC. I thought I'd left those days behind. I managed to chill out after checking what the protection had done. Still, I learned a painful and costly lesson in margin management along the way which will lead to a change in trading strategy for indices and FX and all things CFD.  So no or little exposure is a concept which does not quite translate to my situation. Position sizes in equities were substantively reduced in early July, which looked stupid for a while when the markets rebounded, and now looks pretty smart.  The truth is somewhere in between.


----------



## fiftyeight

kid hustlr said:


> For those who might not have seen it:
> 
> https://www.youtube.com/watch?v=PHe0bXAIuk0




Awesome, cheers Kid


----------



## sinner

kid hustlr said:


> For those who might not have seen it:
> 
> https://www.youtube.com/watch?v=PHe0bXAIuk0




I think that while the video was fun to watch, simplifying things into a 30minute edutainment clip makes it impossible to cover the really important points, and it is pretty obvious that Dalio subscribes to the mainstream MMT thinking - which IMHO makes him completely wrong, can't build a good house on poor foundations.

I think FOFOA does a much better job of explaining things, of course you will have to read a lot more words.

http://fofoa.blogspot.com.au/2011/03/reference-point-revolution.html
http://fofoa.blogspot.com.au/2011/11/moneyness.html
http://fofoa.blogspot.com.au/2012/11/moneyness-2-money-is-credit.html

EDIT:
Turns out there is a video, but it's basically just an audio transcription of the a post called "Freegold Foundations"
https://www.youtube.com/watch?v=IKPRJKG9o4w

http://fofoa.blogspot.com.au/2011/01/freegold-foundations.html


----------



## DeepState

Been spending the last few days shifting a few things around.  It has been an opportunity to consider prospective investment returns.  It may seem obvious, but when I re-do the calculations it is very stark that an after tax return in excess of inflation at current yields is a very tough thing to achieve. (Developed market) Equities, at best, are expected to return something like 7% per annum pre tax.  Any tail-winds from a strong AUD with respect to overseas assets are diminished.

It means that, relative to more normal times, the amount of money you can spend in real terms is so much lower than it had been.  For example, if you had $1m and inflation was fixed at 2.5%, if you think you would have earned 4.5% per annum after tax in the past, then you can spend about $20k pa in real terms in perpetuity.  Today, that figure is perhaps closer to 3.5% per annum (for moderate weights to equities).  In other words, you can only sustainably spend $10k pa.

For those whose investment income is the primary source of revenue, how have you adjusted your positions or expenditure to allow for the fact that real returns have come down so much?


----------



## tech/a

Fortunately my own solution in my own circumstances for excess funds is to
buy a heap of new equipment and expand market share----generating higher than the returns you mention.
Pretax average Nett Profit in our industry is 7-12% of which we are achieving above average 15-20%

Return for bulk spare $$s is better handled in my own company.
I cant think of a better Super/Pension plan than a profitable company I don't have to 
report to 9 to 5.

For those not in my position it is difficult as you point out.


----------



## DeepState

tech/a said:


> Fortunately my own solution in my own circumstances for excess funds is to
> buy a heap of new equipment and expand market share----generating higher than the returns you mention.
> Pretax average Nett Profit in our industry is 7-12% of which we are achieving above average 15-20%
> 
> Return for bulk spare $$s is better handled in my own company.
> I cant think of a better Super/Pension plan than a profitable company I don't have to
> report to 9 to 5.
> 
> For those not in my position it is difficult as you point out.




Pre-tax net (assuming you've included a fair salary for effort in that figure in any case rather than tax optimized figures) matters less than the return you are making on capital deployed for this purpose.  You can have 50% net and still make terrible returns on capital, for example.  Particularly so on capital intensive businesses. What matters, at least in this instance, is the return on capital deployed. 

As an investor, I own thousands of companies which are profitable and I don't report to at all.  I have to agree, it's pretty sweet. But, right now, the price for that profit is such that you can spend less than might have been possible previously.


----------



## tech/a

DeepState said:


> Pre-tax net (assuming you've included a fair salary for effort in that figure in any case rather than tax optimized figures) matters less than the return you are making on capital deployed for this purpose.




Yes of course



> You can have 50% net and still make terrible returns on capital, for example.  Particularly so on capital intensive businesses. What matters, at least in this instance, is the return on capital deployed.




Yes 
In this case its 2 more excavators.
Cost / Month in raw terms $400K (initial outlay) operator cost $35/hr.
If We use a 5 yr base for the raw calc Works out at around $16/hr---to re coup the $400K.
They are flat out for 45 hrs a week at $150/hrs. Stick an attachment on it like a pylon rig or rock breaker and that goes to $250/hr.---each

Bulk here----play money in the market for me.
We both draw our wage as directors (Head of finance and myself.) week in week out no matter where we are. Working or not.



> As an investor, I own thousands of companies which are profitable and I don't report to at all.  I have to agree, it's pretty sweet. But, right now, the price for that profit is such that you can spend less than might have been possible previously.




Thousands! Wow.


----------



## kid hustlr

DS,

I find your comments interesting (and I agree with them) given the context of an ASX200 share market paying circa 4.5% a year (plus franking) in dividends.

I've not got figures on this but my instinct tells me this would be historically quite a high number.

Are companies paying out a higher portion of profits in dividends these days? Do they not have anything better do to with the cash?


----------



## shouldaindex

Just an example of a hypothetical model:

11 ROE
14 PE
66% Payout Ratio
2.5% Inflation 
30% Tax Rate

----------
3.5% Capital Gain
4.5% Dividend 
2% Franking
10% Total Returns

----------
-2.5% Tax
-2.5% Inflation

----------
5% Post-Tax Real Returns


----------



## DeepState

kid hustlr said:


> DS,
> 
> I find your comments interesting (and I agree with them) given the context of an ASX200 share market paying circa 4.5% a year (plus franking) in dividends.
> 
> I've not got figures on this but my instinct tells me this would be historically quite a high number.
> 
> Are companies paying out a higher portion of profits in dividends these days? Do they not have anything better do to with the cash?




Your suspicion appears correct.

Payout ratios have increased despite cashflow per share not doing anything since pre GFC periods.  As a result, dividend yields are higher.  I suspect that part of this arises due to compositional changes in the market as well (decline of resources in favour of financials).


----------



## DeepState

tech/a said:


> Thousands! Wow.




Via a handful of very vanilla ETFs....yawn.


----------



## tech/a

EFT's generally invoke ---yawn----yawn


----------



## qldfrog

nice fall in Wall Street, rebound as expected has been quite short, find harder to justify the strength of the AUD vs US
I would have expected an actual worsening, even in front of a falling USD vs Euro etc


----------



## sydboy007

qldfrog said:


> nice fall in Wall Street, rebound as expected has been quite short, find harder to justify the strength of the AUD vs US
> I would have expected an actual worsening, even in front of a falling USD vs Euro etc




I was expecting a short term bounce in the AUD if the Fed held.

ont be sad if we get up another cent or so.  Top up on the USD ETF for the eventual fall.  

Could also be biased as I've got a trip to LOTFAP in a month, but I did buy plenty of $$$ when the AUD was much closer to parity.


----------



## sydboy007

kid hustlr said:


> DS,
> 
> I find your comments interesting (and I agree with them) given the context of an ASX200 share market paying circa 4.5% a year (plus franking) in dividends.
> 
> I've not got figures on this but my instinct tells me this would be historically quite a high number.
> 
> Are companies paying out a higher portion of profits in dividends these days? Do they not have anything better do to with the cash?




Definitely churning the cash out instead of investing.  Share buybacks have underpinned the higher PEs, not only here but USA especially.

Banks are hitting aroun 70% payout ratio which annoys me.  APRA should be forcing them to use the good times to increase their buffers since all the majors are in the bottom half of their global peers when you look at the non weighted leverage ratio.  The CET1 ratio will likely be discarded during the next crisis, just as it was durign the GFC.  The banks had their risk weighting for home loans as low as 16 but have been forced to move it back towards 25%, though in the past it has been as high as 50%.

Another headwind for the banks will be NSFR (Net Stable Funding Ration) that's still being developed.  According to the Reserve Bank of Australia, short-term debt currently comprises about 20 per cent of bank funding, with about 60 per cent of that coming from offshore markets.  That is the very type of funding that the financial system inquiry chaired by David Murray said was the most risky, because it could disappear in a crisis.  Banks haven't reduced their reliance on this kind of short term funding since the GFC. 

It will be interesting to see how the Turnbull Govt handles this issue as the banks will argue they can get 1 year paper at 26 bps + bbsw but 5 year is 90 bps + bbsw and will do their best to scare those in debt they'll face higher interest costs.

I think another issue, which some commentators are ignoring, is that the falls in share prices for some companies, especially in the resource sector, make them look like dividend darlings, but it's quite likely that the ability to continue to pay at current dividend levels will be hampered.  The free cash flow for RIO / BHP / STO / ORG etc are becoming very strained, with the likelihood of further falls in most commodities.


----------



## shouldaindex

Good points on all that.   My core is in vanilla ETFs as well, so I don't do too much individual company analysis.  But looking at the top 14 companies that make up 50% of the All Ords.

Banks - CBA, WBC, NAB, ANZ
Commodities - BHP, RIO, WPL
Supermarkets - WES, WOW
Property - SCG, WFD
Investment - MQG
Telecom - TLS
Health - CSL

You can achieve 5% capital growth through a combination of - Either paying fair value and the companies grow at 5%. Or as may be the case in a low growth environment, pay enough of a discount that getting back to fair value achieves 5% growth in SP.  I suspect the medium term will require the latter.


----------



## DeepState

qldfrog said:


> nice fall in Wall Street, rebound as expected has been quite short, find harder to justify the strength of the AUD vs US
> I would have expected an actual worsening, even in front of a falling USD vs Euro etc




It's strange.  The rise in Fed rates was supposed to trigger a sell-off in markets because it signaled the end of the era of cheap money.  Now the delay in this activity is taken as a reason to sell-off.  The delay being generated by global market volatility with associated downside risk to demand and inflation.  What, and this wasn't already known by the market which has had a bit of a dip since the Yuan devaluation(s) and weak Flash PMI.  That and the suspect six, I guess.  Anyhow, as good a time as any to backfill a reason why the market fell today as opposed to yesterday when all the required information was released in minutes and did not provide anything terribly complex to analyse.  I guess it took a day or two for the market to react to the Flash PMI release as well.

The USD weakened because the carry trade is reversed as interest rates turned out not of have been raised when some likelihood of this was being factored.  As a result, the USD fell broadly against other currencies.  Because we are looking at pushing back the curve only a few months, the impact is not very large, at least from this source.


----------



## DeepState

Always amazed at your reading.



sydboy007 said:


> Banks are hitting aroun 70% payout ratio which annoys me.  APRA should be forcing them to use the good times to increase their buffers since all the majors are in the bottom half of their global peers when you look at the non weighted leverage ratio.  The CET1 ratio will likely be discarded during the next crisis, just as it was durign the GFC.  The banks had their risk weighting for home loans as low as 16 but have been forced to move it back towards 25%, though in the past it has been as high as 50%.




Banks maintain dividend yields for cosmetic purposes.  They are raising capital via rights issues.  I'm not sure I entirely believe it but this and retained future earnings is supposed to be sufficient to see the banks at the bottom end of first quartile in terms of capital adequacy - however this is harmonized.

Risk weights depend on aggregate LVRs.  Lending in the past has been more aggressive in this respect than currently.  However, if you look at places like Rabobank, you will see high risk weights.





sydboy007 said:


> Another headwind for the banks will be NSFR (Net Stable Funding Ration) that's still being developed.  According to the Reserve Bank of Australia, short-term debt currently comprises about 20 per cent of bank funding, with about 60 per cent of that coming from offshore markets.  That is the very type of funding that the financial system inquiry chaired by David Murray said was the most risky, because it could disappear in a crisis.  Banks haven't reduced their reliance on this kind of short term funding since the GFC.
> 
> It will be interesting to see how the Turnbull Govt handles this issue as the banks will argue they can get 1 year paper at 26 bps + bbsw but 5 year is 90 bps + bbsw and will do their best to scare those in debt they'll face higher interest costs.




RBA would step in in the event of a liquidity crisis.  That's its job.  However, the less intervention the better I suppose.  Deposit based funding has been steadily climbing.  In the GFC, bank debt issued offshore was government guaranteed which prevented material disruption from funding.


----------



## DeepState

What we have here people is an example of what is wrong with the democratic system of government:




Trump could be the Commander in Chief of the US and the world's strongest military.



Is this the same phenomenon that saw Corbyn elected to lead Labour in the UK? Or Syriza to run Greece?

If the usual stuff doesn't work, I suppose it's time to get ridiculous.  The Republican voters hate their own government representatives.


----------



## skc

DeepState said:


> What we have here people is an example of what is wrong with the democratic system of government:




This explains everything.

https://www.aussiestockforums.com/forums/showthread.php?t=4817&page=4&p=882863&viewfull=1#post882863

Sarah Palin was very close to becoming vice president. Pauline Hanson led One Nation managed 22.7% of primary votes in the 1998 QLD election. I really think voting shouldn't be compulsory... at least those who don't care won't cast random protest votes.

We might start to see a new trend here. Those with presidential ambitions would all start their own TV shows, a few years before entering presidential election, featuring them as intelligent leaders... at the same time, they'd shy away from having any actual political experience as it's a potential detriment.


----------



## McLovin

DeepState said:


> What we have here people is an example of what is wrong with the democratic system of government:




People across the Anglosphere seem to be sick of cookie cutter politicians who offer the exact same thing as the other side just wrapped differently. Corbyn, Trump and Bernie Sanders seem to be the end result. Tbh, I am more shocked by Corbyn's popularity than I am of Trump's.

I guess it's also possible we're at an inflexion point, pax Americana is coming to a close, the economic boom of the 80's, 90's, 00's now seems a long time ago, and people are no longer accepting the status quo.


----------



## banco

McLovin said:


> People across the Anglosphere seem to be sick of cookie cutter politicians who offer the exact same thing as the other side just wrapped differently. Corbyn, Trump and Bernie Sanders seem to be the end result. Tbh, I am more shocked by Corbyn's popularity than I am of Trump's.
> 
> I guess it's also possible we're at an inflexion point, pax Americana is coming to a close, the economic boom of the 80's, 90's, 00's now seems a long time ago, and people are no longer accepting the status quo.




Corbyn's an interesting example of why left wing parties need to limit the role their members have in choosing a leader if they want to stay electorally viable.


----------



## Atari rose

``America still has plenty of problems, starting with a political class motivated by self-gain above national interest. Trump, Democratic presidential candidate Bernie Sanders and other candidates have clearly tapped into disgust with political elites who seem worlds away from the citizens they’re supposed to represent. And compared with its own glory days from 1960 to 2000 or so, the U.S. is underperforming, with growth slowing, wages stagnating and national leaders failing to devise solutions.``


Full article here:

http://finance.yahoo.com/news/memo-to-trump--america-still-wins--here-s-how-173550320.html


----------



## craft

sinner said:


> Imagine that the yield is the bond markets "implied annualised growth forecast" for the duration of the bond. It isn't, but imagine it is. So if the 10y risk free rate is 2% then imagine the bond market is forecasting annualised growth of 2% per annum for 10 years.
> 
> Now consider Intrinsic Valuation of a listed company. On the one hand, because the interest rate is low, your bar for earnings yield is lower. But the other edge of that sword is that you can no longer realistically forecast high levels of growth far out into the future.
> 
> Assuming S&P500 EPS growth of 6.3% and current Cyclically Adjusted P/E (10) of 26.48 and the long term historical average of CAPE as 16, dividend of 2% we approximate the annualised return for the next 10 years as:
> 
> 100 * (1.063 * (16/26.48)^(1/10) - 1 + 0.02) = 3.07%
> 
> Currently the US 10Y yield is 2.05% ...
> 
> So the (much more realistic) equity risk premium is only *1%*. Basically, you have to be willing to take on double the volatility for an extra 1% per annum return, and that is assuming you believe EPS can grow at 6.3% per annum with profit margins at record highs, with no cuts to dividends.




Hi sinner sorry for dragging up an old post but I only just got my login re-established.

(16/26.48)^(1/10) adjusts for the normalisation of the earnings multiple to historical average.  

Do you think this normalisation of earnings multiples will take effect in isolation to changes in inflation/interest rates?  If the normalisation doesn’t occur because we stay in a low rate environment then the adjustment factor could/should be zero (negligible) Implying a much higher equity premium.

If inflation/interest rates do change then the other variables (ie growth and div) will also vary, so it’s not a static equation.  If interest rate jump to 6% bonds get smacked big time in accordance with their duration in a way that is clearly understandable but stocks it depends on how the margin holds and how asset utilisation is managed under increasing inflation. Some companies with strong competitive advantage and good business economics will thrive with some inflation, others will be hurt,  you can’t make blanket assumption like you can bonds, but I guess you can average for the market overall.   

I guess I’m saying normalisation of the valuation multiple independent  of inflation/interest rate consideration doesn’t seem entirely likely to me so I’m not sure there’s a lot of usefulness in the equation.  

Thoughts?


----------



## CanOz

Craft, good to see you back posting


----------



## sinner

craft said:


> I guess I’m saying normalisation of the valuation multiple independent  of inflation/interest rate consideration doesn’t seem entirely likely to me so I’m not sure there’s a lot of usefulness in the equation.
> 
> Thoughts?




Heya,

Yep. Firstly just to clarify the point: the equation posted is a shorthand model for the market overall based on a bunch of assumption using long term historical averages. However these simple models do seem to have a pretty high correlation (>80%) with long term nominal returns and adding another piece for profit margin normalisation increases the correlation even further.

No mean feat, if you ask me! I dispute the equation is not useful, but the problem is that unless you're willing to take historical data for proof, we'd have to wait 10 years or so to find out empirically. However you can go back and look at Hussmans weekly comments from just before the tech bubble burst, 2003 bottom, pre GFC or 2008 bottom to see that they did already provide what might be otherwise considered an uncanny "walk forward" utility.

I do absolutely agree that some companies will thrive in inflationary circumstances more than others, but generally from looking at the data we can see that investors almost always misprice inflation risk so the price of most stocks (even those benefiting from inflation) suffer an initial inflation shock and only then go on to thrive. This can even be witnessed in the data for Argentina stocks which you might know has still huge inflationary pressure and has suffered multiple inflationary periods.

I'm careful not to equate rates with inflation. As I mentioned in another thread recently, the short end of the curve is controlled by the economies CB and the long end of the curve is driven more by marginal expectations for both growth and inflation. You can run a spread against the 10Y and 10Y TIPS to try and see which bit is inflation and which isn't. So it depends of which you speak.

Having said that, none of the factors are in isolation, the 6.3% assumption for growth is based on the long term peak-to-peak rate in S&P500 EPS growth. Of which I believe about 3% is implicitly due to inflation, so if it made you feel any better you could break it out to be (1 + 0.33 + 0.3) rather than 1.063 and say the model assumes 3% inflation . The forecast itself provides its most apparent utility when plugged into a Sharpe ratio (as I attempted to show in the post you quoted), i.e. in comparison to the known future (nominal) risk free rate, with the idea being that you don't want to invest while that Sharpe ratio is negative (i.e. the signal is not impacted by the volatility portion of the ratio). 

On that note here is an awesome little comic representation of one of Eugene Fama's papers on the Fed and interest rates:
http://www.chicagobooth.edu/capideas/magazine/fall-2015/whos-really-in-charge

Interesting topic, happy to discuss more, so if you feel that wasn't adequate I'm happy to try and convince you some more 

EDIT: I do advise just reading the Hussman Weekly Market Comments directly if you're interested, because I am sure he does a much better job of explaining things than I can. When it comes to stuff like this I'm just poorly translating what I read there in my own words.


----------



## systematic

CanOz said:


> Craft, good to see you back posting





Hear, hear!


----------



## fraa

Hello Craft

I am a lurker who is learning from reading and have nothing to contribute here other then to thank you for all your previous posts that you have here. Glad that you are back and posting again.

Back to lurking for me.



craft said:


> Hi sinner sorry for dragging up an old post but I only just got my login re-established.
> 
> (16/26.48)^(1/10) adjusts for the normalisation of the earnings multiple to historical average.
> 
> Do you think this normalisation of earnings multiples will take effect in isolation to changes in inflation/interest rates?  If the normalisation doesn’t occur because we stay in a low rate environment then the adjustment factor could/should be zero (negligible) Implying a much higher equity premium.
> 
> If inflation/interest rates do change then the other variables (ie growth and div) will also vary, so it’s not a static equation.  If interest rate jump to 6% bonds get smacked big time in accordance with their duration in a way that is clearly understandable but stocks it depends on how the margin holds and how asset utilisation is managed under increasing inflation. Some companies with strong competitive advantage and good business economics will thrive with some inflation, others will be hurt,  you can’t make blanket assumption like you can bonds, but I guess you can average for the market overall.
> 
> I guess I’m saying normalisation of the valuation multiple independent  of inflation/interest rate consideration doesn’t seem entirely likely to me so I’m not sure there’s a lot of usefulness in the equation.
> 
> Thoughts?


----------



## sinner

I must concur, craft, good to have you back.

Your keen insight and analysis skills are both an inspiration and an aspiration that has definitely been missed by me.

But it's not just your absence, because I have seen that other smart people play off your posts and you play off theirs, a whole greater than the sum of parts. This has been sorely lacking.

I only learned this recently, did you know that ASF has an ignore function?


----------



## craft

sinner said:


> Heya,
> 
> Interesting topic, happy to discuss more, so if you feel that wasn't adequate I'm happy to try and convince you some more
> 
> EDIT: I do advise just reading the Hussman Weekly Market Comments directly if you're interested, because I am sure he does a much better job of explaining things than I can. When it comes to stuff like this I'm just poorly translating what I read there in my own words.




Thanks Sinner

I really should read Hussman more regularly, thought provoking.  Normalising the growth rate by peak to peak does make sense in light of the equation. So with everything normalised you get the  3.07% expected return against a 2.05% 10 year bond rate – but the normalised inflation figure embedded is 3% which doesn’t equate to a 2.05% bond rate for comparison.  You are going to get a capital loss on the bond as it embeds a 3% inflation number. Maybe the comparison should be against zero duration (cash)

I don’t know, something just isn’t gelling here for me and I can’t put my finger on it exactly. 

The other thing that doesn’t seem to gell is a 6.3%growth rate and 2% div with a normalised ROE for the US of ~ 12%

Any rate thanks for the reply – I’ll consult Hussman and keep trying to fill in some blanks for myself.

Cheers

Ps 
Thanks to those who offered kind words of support but it is not my intention to post regularly anymore.  I only really got my login re-stated to access some of the links posted and for occasional topics like this when I’m trying to clear a roadblock in my thinking.


----------



## McLovin

craft said:


> Ps
> Thanks to those who offered kind words of support but it is not my intention to post regularly anymore.  I only really got my login re-stated to access some of the links posted and for occasional topics like this when I’m trying to clear a roadblock in my thinking.




I hope you have more roadblocks in your thinking then.


----------



## DeepState

Welcome back Craft. The quality of debate and exchange improves for your presence. In line with Sinner, consider exercising the Ignore feature more than what clearly has been past practice. Those who know about this stuff can see your quality.

Shall revert to your question later and hopefully disentangle it with you. I am conflicted, though. If I answer your question, you'll go dark. Hmmmm...what to do, what to do.


----------



## sinner

craft said:


> Thanks Sinner
> 
> I really should read Hussman more regularly, thought provoking.  Normalising the growth rate by peak to peak does make sense in light of the equation. So with everything normalised you get the  3.07% expected return against a 2.05% 10 year bond rate – but the normalised inflation figure embedded is 3% which doesn’t equate to a 2.05% bond rate for comparison.  You are going to get a capital loss on the bond as it embeds a 3% inflation number. Maybe the comparison should be against zero duration (cash)




You should use whichever risk free duration that matches your investment horizon, keeping in mind that these sort of valuation measures are not really effective in the short term.

The rest of the above is a little confusing for me, not sure I understood it.



> The other thing that doesn’t seem to gell is a 6.3%growth rate and 2% div with a normalised ROE for the US of ~ 12%




You know that aside from the valuation mean reversion bit, you can plug in whichever numbers you like, right? The shorthand model uses peak-peak EPS growth and the current dividend yield. More accurate measures will likely lead to more accurate future forecasts 

We are moving into a new house soon and I was over there tonight setting up my new desk and chair (fancy). On the train home I was thinking about this topic and something that came to mind is the Tobins Q. You can read about this on wikipedia as AFAIK the Tobin dude won a Nobel prize for it like Shiller (what's with these valuation ratio guys being Nobel Laureates?). In both cases as it turns out the mean reversion component of the valuation ratio is predictive of long term returns regardless of any other factors, used completely in isolation. Both CAPE and Tobins Q were far more predictive than any other measure previously analysed.

There's a good paper by Spitznagel of Empirica (Taleb protege) called (IIRC) "The Dao of Corporate Finance" which covers this (including some out of sample since it was produced well after Q was publicly released) and keep in mind this guy uses valuations as a major input to decide when to buy volatility!


----------



## sinner

I have posted this chart and blogpost before I think, but I'll post it again because it's apt



http://gestaltu.com/2014/07/valuation-based-equity-market-forecasts-q2-2014.html

including this small disclaimer, obviously written solely for craft himself  ...after rereading I actually think I remember something similar being said in one of the Hussman posts about this.



> Moreover, we are acutely aware that interest rates are a discounting mechanism and thus low interest rates (especially rates which are expected to remain low for a long time) may justify higher than average equity valuations. This may be a normal condition of asset markets, but it doesn’t alter forecasts about future returns. While markets might be ‘fairly priced’ at high valuations relative to exceedingly low long-term interest rates, this does not change the fact that future returns are likely to be well below average. Again, a market can be ‘fairly priced’ relative to long-term rates, yet still exhibit high valuations implying lower than average future returns. We wouldn’t argue with the assertion that current conditions exhibit these very qualities. However, this fact does not change ANY of the conclusions from the analysis below.




The "Considerations & Next Steps" section at the bottom has some juicy stuff to think about.


----------



## DeepState

CAPE

In theory, 'Equilibrium' CAPE should be impacted by the level of interest rates and inflation prevailing at the time.  That and also the nature of the companies in the index at the time.

However, the stats pumped out suggest that the fit of CAPE vs future returns has worked better without any such adjustments.  Hence, standard practice is to utilise absolute CAPE and regress it against future returns.

Most often quoted is US data since about 1929.  Look at the long period returns and you will see only two major cycles in returns.  This, ultimately, is where the regressions are pulled from.  It is two major peaks and three(?) major troughs.  For a measure like CAPE and the application to long term returns only, you will appreciate that this is not a heck of a lot of data points.  Claims of high degrees of fit misuse the statistical method of regression and results in 'spurious regression' or otherwise not allowing for the lag structure in both CAPE and the subsequent returns being regressed.  It's just not correct and overstates the fit.  

The 6.3% long term real returns achieved do not gel with RoE of 12% and 2% divs.  However, the 6.3% real return is measured over the long term. RoE of 12% is also a long term measure. However, dividend yields of 2% are a more recent phenomenon.  Dividend payouts used to be much higher.  In one of those head fakes, dividend yields today are much lower, but the inclusion of buy-backs has meant that the payout has been nearly 100% since 2004.  EPS real growth has been anaemic since about 2007.

The 10 year bond yield is taken to be an equilibrium interest rate.  It supposedly embeds the future expected path of short rates and adds a little bit for taking term premium risk.  On a buy-hold forever style analysis you would compare the IRR on 10 year bonds with  that expected from equities.  The equity hold forever return is basically a Dividend Yield with is compounded by a magic number usually expressed as a sum of: expected future inflation, population growth, productivity growth less capital expenditure required to finance that growth.  That's it.  No fade path for CAPE to some average equilibrium figure.  Unlike interest rates, there is no equilibrium value for CAPE.  CAPE is used as a departure point for what essentially becomes a DDM.  You can compare the two.  There is also no magic number that says the gap needs to equilibrate to X% per annum. 

Once again, it is claimed that CAPE works better without such adjustment anyway based on historical observation. Hence, you could just use current cash, expected inflation, or pretty much any reasonable sounding comparison to your CAPE based DDM.  Just using CAPE on its own in absolute measure on the basis that it mean reverts only makes sense if the expected future growth rate of dividends doesn't foul it all up. As the variation in CAPE is much greater than the variation in expected/actual dividends, the CAPE reversion effect has dominated.  Turns out Shiller wrote a paper on this too.

However, all that will not prevent observers or other market professionals from making allowance for reversion in CAPE and assuming hold to maturity for bonds when compared.  I think this is broadly reasonable, but it is not the result of a bedrock theory.  It is a guess at the market's behaviour based on the observation of the measure over two full cycles of equity return history.  Quite possibly, for a ton of reasons, the right CAPE today is higher than the average of the past (of which there are only 9 independent observations over the data).  Quite possibly, high CAPE will move back to average by means of a reinvigoration of earnings growth and on it goes.  

----

I do believe in the use of cyclically adjusted earnings as one basis for long term valuation. I use it myself.  However, I do not generally compare the measure today to the past and assume reversion in the belief that the figure is stationary.  It is not.  However, it has apparently behaved like it has been over the last century....when observing non-stationary data.  

Hope this helps.


----------



## sinner

Some more sample has been conducted by these guys by trying to examine as many different markets as possible

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2470935

and they made this pretty site

http://www.starcapital.de/research/stockmarketvaluation

But I don't think CAPE is the be-all-and-end-all of what we are discussing, I think we discussed "sufficient statistic" before, lots of measures do just as well or better.

http://www.hussmanfunds.com/wmc/wmc140414.htm


> A corollary to the Iron Law of Valuation is that one can only reliably use a “price/X” multiple to value stocks if “X” is a _sufficient statistic_ for the very long-term stream of cash flows that stocks are likely to deliver into the hands of investors for decades to come. Not just next year, not just 10 years from now, but as long as the security is likely to exist. Now, X doesn’t have to be equal to those long-term cash flows – only _proportional_ to them over time (every constant-growth rate valuation model relies on that quality). If X is a sufficient statistic for the stream of future cash flows, then the price/X ratio becomes informative about future returns. A good way to test a valuation measure is to check whether variations in the price/X multiple are closely related to _actual subsequent returns_ in the security over a horizon of 7-10 years.


----------



## galumay

craft said:


> Thanks to those who offered kind words of support but it is not my intention to post regularly anymore.  I only really got my login re-stated to access some of the links posted and for occasional topics like this when I’m trying to clear a roadblock in my thinking.




I am with McLovin, may there be many more roadblocks, you always elevate the level and intensity of discussion when you engage on the forums. Same with Sinner, its been very refreshing to have both of you popping up again. I am in awe of the level of discussion when you guys are on.

As pointed out, use the ignore function to clear the chaff and keep on coming back. We gain so much from the discussion!


----------



## kid hustlr

I always know things are too far beyond me when I read it twice and still don't come close to understanding. Still fascinating to hear the discussion.

Whilst we are talking 10 year returns, anyone care to lend a thought on the decreasing AUS-USA 10 year spread? Both the causes of the spread tightening and the implications on capital flows?

Is this in anyway linked to the AUD?




Perhaps there is no relevance - I really don't know.


----------



## DeepState

kid hustlr said:


> I always know things are too far beyond me when I read it twice and still don't come close to understanding. Still fascinating to hear the discussion.
> 
> Whilst we are talking 10 year returns, anyone care to lend a thought on the decreasing AUS-USA 10 year spread? Both the causes of the spread tightening and the implications on capital flows?
> 
> Is this in anyway linked to the AUD?
> 
> View attachment 64478
> 
> 
> Perhaps there is no relevance - I really don't know.




US 10 yr yields are rising (ie. Aust spread tightening) relative to all other major developed markets.  It is rising, in a relative sense, for a range of possible reasons:
+ The US inflation outlook is improving
+ The US rate tightening path is more assured
+ US government fiscal situation has improved...is less bad
+ QE is more present in Europe and Japan and being unwound in the US slowly.
+ China downside risk
+ Australian bonds becoming more of a reserve asset
+ Aust banks financing greater amounts of their balance sheets via domestic deposits rather than offshore sourced loans (reduced supply of Aust debt)
+ Aust GDP outlook still very mixed and generally disappointing.

Cross border finance is gradually increasing since the GFC for developed nations.  All in all, this observation is a small force in favour of increasing the value of the USD vs other developed currencies including Australia via currency carry trades (borrow in the low interest rate country to invest in the higher rate country on an unhedged basis).

It is also relevant from a global financial stability standpoint.  To the extent that emerging markets companies have borrowed in USD and are less able to repay that debt because of depreciation of their currency, stuff happens.


----------



## shouldaindex

Quality discussions, love reading this thread.

I've just been reading Whirlpool and HotCopper and feel like I just graduated from primary school to the real world.


----------



## DeepState

Desperately Seeking Beta.  In the insto market, the lower prospective returns to equities, the terrible returns available from bonds and the ever-present need to accumulate real wealth has led to an ever more substantive push into illiquid assets of all kinds to seek additional returns from the illiquidity premium. From Bridgewater:


----------



## DeepState

Credit Risk.

iTraxx CDS Spreads are rising around the world:





Part of it is to do with oil:





Which has impacts on Emerging markets producers and also US indebted oil/shale industries (look at those spreads!!):





Found this interesting.  The decline in oil prices was largely due to reduction in demand.  You can see, though, that supply also contributed, but this has been waning.  As capex for oil projects drop like a stone, what happens?


----------



## DeepState

Around the threads there are lots of references to buying in at market lows with balls of steel because earnings will be there in the long term. Mr Market, weighing machine, prices looking tasty etc.  The ASX is down about 16% from the recent peak.  Trading at levels seen in 2011... So who is stepping in?


----------



## kid hustlr

I'm sure I read an article not that long ago suggesting 1 year forward p/e's for the asx were only at long term averages now - that was before today mind you.

valuations aren't that cheap?


----------



## Triathlete

DeepState said:


> *Around the threads there are lots of references to buying in at market lows with balls of steel because earnings will be there in the long term.* Mr Market, weighing machine, prices looking tasty etc.  The ASX is down about 16% from the recent peak.  Trading at levels seen in 2011... *So who is stepping in?*
> View attachment 64516




Not me...Since I am mainly a medium term trader I have been out since April 2015 when the market turned down. I was looking for it to hold above 5070 find support and then continue upwards again.
If after tomorrow we are below this level then from a purely Technical view we would be in an EW C and further falls are likely.

*I just hope it is not going to be a total meltdown*


----------



## DeepState

kid hustlr said:


> I'm sure I read an article not that long ago suggesting 1 year forward p/e's for the asx were only at long term averages now - that was before today mind you.
> 
> valuations aren't that cheap?




Forward looking P/E is at around average levels since 2001.  However, given interest rates are super low, it could be argued that the fair P/E should be much higher than average.


----------



## luutzu

DeepState said:


> Forward looking P/E is at around average levels since 2001.  However, given interest rates are super low, it could be argued that the fair P/E should be much higher than average.




Ever see yourself as a better paid, much glorified, trend trader DS?
You sound like one mate.

If low PE indicate market is cheap, and so businesses are generally cheap... How does low interest make that cheap business expensive again? Serious question because I can't understand it.

Say I run a business and borrowed some money... The market price of my business is now very low, it's cheap. I could now borrow or renegotiate the debt at lower interests, so more to the bottom line. How does that make my business more expensive?

Oh wait, you're doing the discount model stuff.


----------



## DeepState

The options market is currently pricing a 22% chance that the ASX 200 will finish below 4450 (approx. -10% from here after forward points adjustments) by 15 Dec.


----------



## shouldaindex

Hi DeepState,

Just wondering what information you use to assess with the 22% chance of 4450?

Thanks.


----------



## Triathlete

If we move lower from here then 4535 - 4550 looks like a strong level to find support for the ASX200.


----------



## DeepState

shouldaindex said:


> Hi DeepState,
> 
> Just wondering what information you use to assess with the 22% chance of 4450?
> 
> Thanks.




It is the delta for a put option on ASX200 Dec 2015 futures with calculation inputs including current price, strike price (4450), option price and days to maturity.


----------



## DeepState

Triathlete said:


> If we move lower from here then 4535 - 4550 looks like a strong level to find support for the ASX200.




Then you should sell Dec 2015 4500 puts with impunity...


----------



## Triathlete

DeepState said:


> Then you should sell Dec 2015 4500 puts with impunity...




Maybe if I new more about options....no experience here for me, something I will need to learn in the future.


----------



## DeepState

Triathlete said:


> Maybe if I new more about options....no experience here for me, something I will need to learn in the future.




Pretty straight forward.  Sell ASX 200 Dec 2015 4500 puts.  Collect premium of about $1,120 per contract whose face value is $49,105. Sell a lot of them.  If the support really is support and the index closes above 4500 at 15 Dec, you'll keep the lot.

If the index closes at 4388, you get nothing.  If it closes below that [SUB]you may lose more than you have to your name.[/SUB]

Simple.


----------



## skc

DeepState said:


> Desperately Seeking Beta.  In the insto market, the lower prospective returns to equities, the terrible returns available from bonds and the ever-present need to accumulate real wealth has led to an ever more substantive push into illiquid assets of all kinds to seek additional returns from the illiquidity premium. From Bridgewater:




Have you ever come across BLA? An ASX listed company specialising in alternate (aka illiquid) assets. They have rode the trend very well in the past few years and grown their FUM successfully. Profits are growing but, from what I can see, mostly through revaluation than actual exits of investments.

It won't be pretty when the music stops...


----------



## DeepState

skc said:


> Have you ever come across BLA? An ASX listed company specialising in alternate (aka illiquid) assets. They have rode the trend very well in the past few years and grown their FUM successfully. Profits are growing but, from what I can see, mostly through revaluation than actual exits of investments.
> 
> It won't be pretty when the music stops...




Thanks. Interesting.


----------



## DeepState

Quick trip through recent history.

Stress spikes vs SP500 index levels.

These recent ructions have something in common with the 2010 spike.  At that time, there really was nothing specific which spooked the market.  Lists of concerns at the time:
+ China property hard landing;
+ US recovery not particularly strong;
+ Germany bans short selling...

EPS forward looking revisions have not moved very much in recent times.  Approx 1% downward for next 12 months in ASX, Europe and pretty flat in the US.




Credit markets are not generally as rattled as they were in 2011 although Emerging markets CDS spreads are elevated.

Yet another China wobble leading to poor sentiment?  Yet China estimates are still fairly flat:




Tentative conclusions?  Buying opportunity?  Or China is toppling....bringing commodities down...bringing EM down...bringing world growth down....


----------



## sinner

DeepState said:


> At that time, there really was nothing specific which spooked the market




Aside from the end of massive balance sheet expansion in the Government sector?






> Tentative conclusions?  Buying opportunity?




Valuations remain obscene and market action proxying investor risk preferences is not showing any signs of improvement. In this kind of regime, return of capital is much more important than return on capital. We might be due for a bounce on technical oversold but not much else I can see holding us up, until the next Government sector lawn dump (or frontrunning thereof) begins.


----------



## peter2

Personally I'm very interested in buying the US market (very soon) if there is further irrational selling now or in early Oct. I want to be significantly invested in the US for their seasonally strong period Nov - Apr. I'd prefer to invest in the ASX but don't anticipate BHP RIO going higher any time soon. The banks will lag industrials also imo (XNJ, XEC looking better than XFJ). If I'm correct then the XAO, XJO will have a hard time going up and I anticipate the US market will outperform our ASX over the next six months. 

There are a few US ETFs (geared/non geared, currency hedged/unhedged) available in the ASX (VTS, GGUS, IRU, IVV to mention a few). I may not buy the bottom, but I've an eight month outlook. 

I should be able to construct an acceptable eight month bullish SPY option play which will use less capital than equities. We'll be able to review this opinion in six - eight months.


----------



## Triathlete

DeepState said:


> Pretty straight forward.  Sell ASX 200 Dec 2015 4500 puts.  Collect premium of about $1,120 per contract whose face value is $49,105. Sell a lot of them.  If the support really is support and the index closes above 4500 at 15 Dec, you'll keep the lot.
> 
> If the index closes at 4388, you get nothing.  If it closes below that [SUB]you may lose more than you have to your name.[/SUB]
> 
> Simple.




Thanks for the info deepstate...Are these the type of positions you take yourself..??* if so I am impressed..*

The amount of contracts above are outside my risk and trading plan requirements at the moment ,if I knew more about this type of trading I could take 8 contracts..something to look at in the future...


----------



## DeepState

sinner said:


> Aside from the end of massive balance sheet expansion in the Government sector?




Yields in major economies were falling/static at the time.  If solvency were a concern, they would have moved higher.  Of course gold was rising at the time.  However, the rate of rise was in line with trend for the US QE period prior to taper discussions.

Distress would also have been visible in corporate bond spreads, particularly financials, if sovereign default were on the cards.  Although yields roughly remained static for a little while as sovereign yields fell, the spreads retraced to prior levels.

There was lots of fear about the dissolution of the EZ at the time.  The term PIGS was everywhere.  There was a spike in the spread and in absolute levels at the time, but it appears coincident with the fear spike.







It looks to me that there were lots of background issues at the time.  These are of the type which are present today. China, financial stability, US growth.... These risks are always present.  For some reason, the markets seemed to decide to be worried about it and then decided to stop worrying after some CBT and Mindfulness.

To me, the current situation seems to be more like this (as opposed to exactly like this) than for the other major fear spikes of the last decade.  If so, there is no wholesale earnings destruction going on.  Fear will recede and this can be seen as a buying opportunity.  Maybe.  It's just a thought.





sinner said:


> Valuations remain obscene and market action proxying investor risk preferences is not showing any signs of improvement. In this kind of regime, return of capital is much more important than return on capital. We might be due for a bounce on technical oversold but not much else I can see holding us up, until the next Government sector lawn dump (or frontrunning thereof) begins.




Developed market valuations outside of the US are not particularly extreme in absolute terms.  If we are looking at equity risk premia vs long bonds, it is arguable they might be cheap...although I believe these should be offset by what seems to be lower potential growth nowadays, however this is determined.

I've had a look at how predictive VIX and vol estimates are.  From what I can tell, they are coincident indicators rather than predictive.  In other words, by the time we figure out that risk is not there anymore, the market has already figured that out.


----------



## DeepState

Triathlete said:


> 1. Thanks for the info deepstate...Are these the type of positions you take yourself..??* if so I am impressed..*
> 
> 2. The amount of contracts above are outside my risk and trading plan requirements at the moment ,if I knew more about this type of trading I could take 8 contracts..something to look at in the future...




1. Kinda sorta. I don't do this exact thing. I don't believe in firm limits of support etc. at least on time frames exceeding a day.

2. 8 Contracts would bring you max revenue of about $9k.  If would bring with it a max loss of about $500k.  With this stuff, you are not buying something worth $9k hoping to get appreciation.  You are receiving it and hoping that you won't be blown apart for the benefit.


----------



## DeepState

sinner said:


> We might be due for a bounce on technical oversold but not much else I can see holding us up, until the next Government sector lawn dump (or frontrunning thereof) begins.




This just in...


----------



## DeepState

Property. Australia.

The forum doesn't seem to have referred to an IMF special report into the matter that came out with the recent Article IV.

http://www.imf.org/external/pubs/ft/scr/2015/cr15275.pdf

As might be expected, the IMF looked at it from a stack of different perspectives.  I believe the economic fundamentals based approach is the most sound of the methods they utilised.  As at end 2014, this analysis suggested that housing was 17% overvalued.  

However, this model doesn't take into account changes in the demand arising from offshore purchasing.  Hence, it could be theoretically argued that property is still cheap...because the new foreign entrants to the market who do not form part of the population and do not directly contribute to national income are simply prepared to pay that price and it is fair for them.  Or, it could be that they are stupid to pay that price.

As to Yuan valuations.  Right now, there is reserve drain going on.  In other words, without FX intervention, the Yuan would be lower.  More money would flow out from China were it not for the capital constraints in place.  Property prices in various favourite destinations are being pumped by Chinese demand already...when much of this money is leaving China in shady ways including via Packer casinos in Macao.




I think the swing factor might well be whether the ownership rules for non-residents are truly enforced here in Aust.  Kind of stop-the-boats, property style.


----------



## DeepState

MSN Money claims Greece is the third hardest working nation in the world (survey of hours clocked by average worker):




Mexico: 2226
US: 1790
Japan: 1745
Australia: 1728

I suspect the data might need more careful scrutiny.


----------



## qldfrog

DeepState said:


> MSN Money claims Greece is the third hardest working nation in the world (survey of hours clocked by average worker):
> 
> View attachment 64758
> 
> 
> Mexico: 2226
> US: 1790
> Japan: 1745
> Australia: 1728
> 
> I suspect the data might need more careful scrutiny.



Actually, for the Greek private sector, I would not be surprised: with the high level of unemployment and the low dole benefits, I am sure everyone who has a job gives his/her best to keep it!!!


----------



## DeepState

qldfrog said:


> Actually, for the Greek private sector, I would not be surprised: with the high level of unemployment and the low dole benefits, I am sure everyone who has a job gives his/her best to keep it!!!




Interesting theory.  Checked the data.  Greece hours worked has declined as the crisis wore on and fell further as the restructuring and austerity took hold.




Source OECD


----------



## qldfrog

DeepState said:


> Interesting theory.  Checked the data.  Greece hours worked has declined as the crisis wore on and fell further as the restructuring and austerity took hold.
> 
> View attachment 64763
> 
> 
> Source OECD



do you know the "meaning" of hour worked?
with more unemployed and probably a lot of full time moved to part time , that might influence..
Hard to tell; it is a shame that we reach a stage where redefinition of terms as simple as unemployed are tweaked to increase government figures/results to a point where you are not unemployed if you work 1h a week;
I have read that if we were to use definition from the 1930s, the US unemployment rate would be in the 20% range and i would not be surprised;
then there is work and work: I found that in Japan, corporate employees are highly unefficientbut live sleep drink and eat at their office (I push a bit but not much), and sadly i see the same trend in Oz.How unnoying to be in a corporate lift and hearsay the " too busy, so much work" talk.Coming from a german minded culture, my corporate experience here has been of sharing the workplace with a majority of unefficient, unorganised and unable to plan co-workers whose aim is to make sure they do not leave the office before their boss..quite pathetic overall...
So how do you define "hours worked and productivity out of that?
I think productivity should be: 
overall material production divided by population.
Services and intellectual prop being after all supportive or side effect of the material production if of value;
I somehow find it hard to accept that delivering a coffee twice as fast to someone reading a paper actually increases the productivity of a nation.
Is any index even remotely linked to this idea; my feeling is that productivity in Australia is collapsing due to H%S regulation, governance, red tape, but these still increase the official figures.
In the same way as a terminally ill cancer patient is the best thing to happen to a country GDP figure, I believe current productivity figures are now meaningless...open to discussion  .


----------



## DeepState

qldfrog said:


> I think productivity should be:
> overall material production divided by population.
> Services and intellectual prop being after all supportive or side effect of the material production if of value;
> I somehow find it hard to accept that delivering a coffee twice as fast to someone reading a paper actually increases the productivity of a nation.




Hehe....an engineer's perspective!  Nothing is of value unless concrete.

Delivering coffee twice as fast means that you will need half the people you used to have delivering it.  The labour released can be deployed to other productive purposes. These can include valuable non manufacturing/industrial services like hairdressing or teaching or coding a game or administering an ASF website or trading stock or flying a plane or finishing their medical degree and saving lives.  In this way, the productive capacity of the nation is increased by speeding up coffee delivery per capita.  If it is deployed, this will increase the realised productivity.


----------



## qldfrog

DeepState said:


> Hehe....an engineer's perspective!  Nothing is of value unless concrete..



Indeed  and I stick to this view
I am in IT so none of my produced work is concrete, but unless it actually , somewhere along the chain , improves a physical good delivery, it is from a society/economy point of view worthless;
What is the value of a game coder in an economy?
there is a bit of side effects like: 
if my product is sold O/S then this strenghtens the AUD and so allow more real goods such as oil, corn and fruits/crap from China to be purchased but overall, I feel there is a huge % if not a majority of our services which are just recycling money, and that does not create wealth in any way.
It creates jobs, some individuals wealth but unless you produce goods (and money can qualify for a trader or a venture capitalist f.e.) for the country economy it is a zero game, probably less than 0 as the state will tax it and add some inneficiency, will build pork barrelling infrastructure with a negative effect
As pointed above, if you can sell services O/S (aka our uni-education cashcow system) that is a different matter.
But I saw far far too much waste of resources money and potential in the corporate world associated to H&S, gouvernance and similar services;
They have a place but it should always be as an extention of production


----------



## DeepState

qldfrog said:


> What is the value of a game coder in an economy?




It brings happiness to some. More so than the fifteenth pillow on their bed or the third ton of iron ore in their front yard.  The media and entertainment market generates nearly USD 2tr in revenue per annum at present.  That's rather a lot more than the revenue from global sales of iron ore.  Clearly at least some people out there need less iron ore and more movies in their lives.

The purpose of an economy is to deploy available resources to meet some sort of objective.  In the democratic / capitalist set-up it's roughly to make nearly everyone somewhat happy (compared to the Dark Ages anyway) and a few extremely happy.  It's hard to be happy without shelter or food, but once you have enough of this and other such concrete things, other things take over in relative importance.  Even the cave men had art and made musical instruments.  They made these because food and shelter provided only so much satisfaction in their lives.  

You clearly prefer to focus only on concrete production as a preferred measure of societal production.  However I suggest it would be difficult to gather too many others who will come to the view that a society which eliminated non physical production items like gaming, ASF, haircuts, artists, poets, yoga classes, gardeners, shoe repairers, tennis coaches, French chefs, symphony orchestras, James Bond... but otherwise kept production of all natural resources and industrial production in place was as good.  It would be heavily felt and people would feel that their lives had taken a pretty negative step.  The people in these value chains produce something we want.  They exist because we like other things besides steel.  We like them and thus they are produced.  This is production of a kind at it is thus included in the GDP stats.  Whilst policy makers do care about physical production, they are more concerned for the balance of consumption and investment and the overall quantity of production.

The supply of physical stock to an economy allows it to flourish.  In flourishing, society does not seek to increase the steel intensity of GDP.  It grows its services and is generally seen as successful if this is achieved.

As with overinvestment into property, plant or equipment, there is the potential with creating services which may hinder the achievement of wider societal aims despite good intention.  Possibly, some H&S may fall into this bucket.

The GDP stats do not allow for lots of other things that matter to a human being.  They are not the measure of total societal welfare.  However, they are a pretty decent measure of production of all sorts of things that we can create from raw materials or out of thin air.


----------



## qldfrog

DeepState said:


> The GDP stats do not allow for lots of other things that matter to a human being.  They are not the measure of total societal welfare.  However, they are a pretty decent measure of production of all sorts of things that we can create from raw materials or out of thin air.



I do not see otherwise aka need for music entertainment etc but I see these as a zero game economically, a recycling of money, not creation of wealth, and so outside of productivity on an economic point of view.
I have to rush will extend tonight


----------



## McLovin

DeepState said:


> MSN Money claims Greece is the third hardest working nation in the world (survey of hours clocked by average worker):
> 
> View attachment 64758
> 
> 
> Mexico: 2226
> US: 1790
> Japan: 1745
> Australia: 1728
> 
> I suspect the data might need more careful scrutiny.




Couple of reasons, imo. Greece has far more self-employed workers (think of all those family run tabernas/cafes/small family farms etc) who, almost always, work longer hours than salaried employees. Germany also has a lot of part time workers, iirc it's up around 30% of the workforce, Greece doesn't. Obviously an hour of work in Germany is far more productive than in Greece.

And, just for fun...


----------



## VSntchr

McLovin said:


> And, just for fun...
> 
> View attachment 64795




With a partner who is Greek with a big Greek family, I must say...this is


----------



## skc

McLovin said:


> Couple of reasons, imo. Greece has far more self-employed workers (think of all those family run tabernas/cafes/small family farms etc) who, almost always, work longer hours than salaried employees. Germany also has a lot of part time workers, iirc it's up around 30% of the workforce, Greece doesn't. Obviously an hour of work in Germany is far more productive than in Greece.
> 
> And, just for fun...
> 
> View attachment 64795




Lol. I wonder if the survey result might change after the VW scandal.


----------



## DeepState

McLovin said:


> 1. Couple of reasons, imo. Greece has far more self-employed workers (think of all those family run tabernas/cafes/small family farms etc) who, almost always, work longer hours than salaried employees. Germany also has a lot of part time workers, iirc it's up around 30% of the workforce, Greece doesn't. Obviously an hour of work in Germany is far more productive than in Greece.
> 
> 2. And, just for fun...




1. In all fairness, the OECD source says in footnotes that the hours measured by a country should not be compared to that reported by another (even though the MSN article did).  They reckon it is useful for the purposes of examining trends within countries only.

2. Awesome.


----------



## DeepState

qldfrog said:


> I do not see otherwise aka need for music entertainment etc but I see these as a zero game economically, a recycling of money, not creation of wealth, and so outside of productivity on an economic point of view.
> I have to rush will extend tonight




Here are two scenarios involving Alice, Ben and Ben's kid Charlie.

Scenario A:  Alice receives some money from Ben.  She hands it back to Ben immediately.  Ben plays with it for a moment then puts it into his pocket.  Money has been recycled and nothing else has happened.  Nothing was created in this money shuffle.

Scenario B: Alice, a neurosurgeon, conducts a delicate operation to excise a tumour which had been discovered in Ben's brain.  Ben, a concert pianist who is world-renown for his repertoire and deft touch, pays Alice for the surgery.  After recovering, he returns home to care for his 6-yr old son, Charlie.  After twelve months, Ben plays to a sell-out audience in the Sydney Opera house.  In the audience is Alice, a fan of the classics and an accomplished amateur piano player since childhood.  Over time Alice takes master-classes from Ben and the money paid for the surgery is returned to Ben as payment for attendances at concerts and for lessons.

Ben is alive.  Charlie has a father.  Alice derives satisfaction from becoming a more expert piano player.  Not a single gram of iron ore was extracted.


Under your definition of production, there is no difference between Scenario A and Scenario B.  No physical production occurred.  Money was simply shuffled.  All exchanges between Alice and Ben are somehow regarded as zero sum.  They did not add to the wealth of a nation.

Naturally, you are free to define anything however you choose to. If you view the exchange of services between Alice and Ben as having produced no value at all, then that's fine.

I disagree with a perspective that no value was added.  Whilst the official measures of GDP are not perfect, they have made a deliberate allowance for services provision which make up over 2/3rds of an economy like Australia's.  These definitions are seen to be more relevant to economic management and wealth.  I doubt you'll find too many people who regard the exchange between Alice and Ben to have been just an exercise in money recycling.  Nonetheless, you are free to hold that view.  

Given this exchange began with some mirth at Greece, whose productivity per worker has compared very poorly with the rest of the world in the last decade, it is worth considering what your viewpoint implies for productivity.  As an economy moves from a resource extractor and industrial age economy, it becomes more like the Western economies in aggregate.  If productivity is measured as production per unit labour input and production is physical only, then as our standards of living are clearly rising beyond the age of steam power with improved healthcare, long and healthier lives, superior education etc. productivity is dropping like a stone.  The more advanced an economy we become, with Google, Apple, UBS, ASF...the less productive we are.  In order to increase productivity, all service providers should sit still. GDP per capita would improve if they subsequently died. I wonder what the Harper review has to say about that?


----------



## sinner

DeepState said:


> Here are two scenarios involving Alice, Ben and Ben's kid Charlie.




reminds me of this tweet from Existential Comics:



> Existential Comics ‏@existentialcoms Feb 20
> 
> "What do you want to be when you grow up?"
> "An honest, brave, compassionate human being."
> "No…I mean, how do you want to sell your labor?"


----------



## qldfrog

DeepState said:


> Under your definition of production, there is no difference between Scenario A and Scenario B.  No physical production occurred.  Money was simply shuffled.  All exchanges between Alice and Ben are somehow regarded as zero sum.  They did not add to the wealth of a nation.



indeed: you increased some confort but probably decrease the overall wealth of the nation as the surgeon wil buy import goods, will be taxed to death and his/her taxes will be unefficiently used/serve as a leverage by the government to borrow more from overseas;
I am not arguing the utility and benefits/ confort factor of services, but in an extreme world, where do you think an economy would be if only based on services:
aka
no agriculture, 
no windmill/solar panels/geo or hydro power
no export of services/manufactured products(added value on material goods), 
no extraction of mineral
and no borrowing O/S  this economy will see its citizens dead within a few months
however gifted the surgeons, maestros, teachers are .
Look at places like Egypt f.e., millions and millions of people surviving on debt and tourism only, both hand outs on an economic view from other nations , yet there are services a plenty, actually only services...
but you need to "create" the first $ bill which can then happily be passed around.
So yes our "productivity" in the west is dropping like a stone, and the GFC and the next one are the consequence of it.
Please take a step back, realise that i have nothing against services as i am a pure immaterial goods creator myself, and try to see that point, I doubt it is as stupid as it seems to you.
And how do you measure the "real productivity" aka as i see it?We can name it other way 
that is the initial point i am trying to raise here.
GDP is too biaised and is at its highest with terminal cancer patients in an hospital yard..no thanks
Anyway these were my bubbling thoughts: an indicator of "real wealth creation", add export/import balance and get your "productivity" from there.
Sorry to have pushed you a bit here.have a great day


----------



## DeepState

qldfrog said:


> 1. indeed: you increased some confort but probably decrease the overall wealth of the nation as the surgeon wil buy import goods, will be taxed to death and his/her taxes will be unefficiently used/serve as a leverage by the government to borrow more from overseas;
> 
> 
> 2. I am not arguing the utility and benefits/ confort factor of services, but in an extreme world, where do you think an economy would be if only based on services:
> 
> 3. So yes our "productivity" in the west is dropping like a stone, and the GFC and the next one are the consequence of it.
> 
> 4. Please take a step back, realise that i have nothing against services as i am a pure immaterial goods creator myself, and try to see that point, I doubt it is as stupid as it seems to you.
> And how do you measure the "real productivity" aka as i see it?We can name it other way
> that is the initial point i am trying to raise here.
> 
> 5.  Anyway these were my bubbling thoughts: an indicator of "real wealth creation", add export/import balance and get your "productivity" from there.
> 
> 6.  Sorry to have pushed you a bit here.have a great day




1. The argument that services are a form of production would apply in a closed economy which is free of government. The train of consequence outlined is rather a stretch.  Increased service provision leads to increased government borrowing from offshore as an economic truism??

2. The topic under discussion is whether services are production.  It is not whether services could constitute 100% of production (which it could).  This argument is also not about whether all services created are wealth generating.  Sitting at your desk drawing circles is a service.  If no-one buys it, it is not production.  

3. The GFC came about because there was excessive leverage being applied to...the production of houses. Excess physical stock.  It wasn't due to the excess supply of services for the most part.

4. Yes, it is clear you do not regard anything other than the production of physical items as production.  You are welcome to that perspective.  That definition was roughly what mattered most to policy makers in more primitive economies. So it is not entirely silly at all. However, times have moved on for most who apply these stats.  Perhaps you are a traditionalist.

5. Let's not get into international trade when the building blocks are not firm.  The argument in relation to services as production would apply if you measured GDP in a closed economy.  It would also apply if you measured GDP on a global basis. The trade argument is not relevant for the issue to hand, which is defining services as production.

6. It's all good.


----------



## DeepState

US Employment Stats just out.

Increasingly, an improving labour market is allowing workers to tell their bosses to take this job and shove it.


----------



## sinner

DeepState said:


> US Employment Stats just out.
> 
> Increasingly, an improving labour market is allowing workers to tell their bosses to take this job and shove it.




The quits is interesting hadn't seen that before, thanks.

I didn't really think anyone still takes initial claims seriously though, considering the >9 million people kicked out of the workforce by BLS because they were unemployed for too long.



still at the highest level in decades



U6 unemployment, 1 in 10 unemployed.



and of course, saving the worst till last, the actual "employment" figure, with participation back to 1970s levels. If you drill into this number, the implications are really much worse. The decline in this number has been driven by the exodus of 16-55 cohort from the workforce, and would look worse if it wasn't for the >55 cohort rejoining the workforce in droves as their retirement plans went out the window (thanks to low 401k returns and negative real returns on savings thanks to ZIRP/QE).


----------



## tech/a

DeepState said:


> US Employment Stats just out.
> 
> Increasingly, an improving labour market is allowing workers to tell their bosses to take this job and shove it.
> 
> View attachment 64834




OR

Is it the ability to find a job which is more appealing having settled
for less than Ideal for so long.

OR 

Is it that companies are expanding and now looking/head hunting better people (Mind you the time to head hunt is in bad times).

We rarely have people telling us where to shove it.
That is of course because the duck is such a nice guy.


----------



## Trembling Hand

DeepState said:


> Increasingly, an improving labour market is allowing workers to tell their bosses to take this job and shove it.




Nah they probably just realised that their service jobs making people more comfortable and happy didn't produce anything so quit to hopefully get a job at the steel mill.



sinner said:


> The quits is interesting hadn't seen that before, thanks.
> 
> I didn't really think anyone still takes initial claims seriously though, considering the >9 million people kicked out of the workforce by BLS because they were unemployed for too long.




True but its a big ship and takes a bit of turning to shift it around to another direction. And don't underestimate the confidence boost to people (small biz, main street and muppet CEO's) who are headline readers only.


----------



## DeepState

tech/a said:


> OR
> 
> Is it the ability to find a job which is more appealing having settled
> for less than Ideal for so long.
> 
> OR
> 
> Is it that companies are expanding and now looking/head hunting better people (Mind you the time to head hunt is in bad times).
> 
> We rarely have people telling us where to shove it.
> That is of course because the duck is such a nice guy.




It's an indicator that people are exercising the choice to leave a job.  It could be for many reasons.  Generally, though, it rises when conditions are improving and those who are in work feel confident or are headhunted into leaving one job for another.  In addition to other indicators of labour market conditions, namely wages. job adverts and hours worked, it is seen to be useful to help figure out what's going on.

I imagine that, as labour market conditions improve, bosses are more keen to hang on to their staff as they are more readily tempted by greener pastures.  It's not a "shove it" index, but rather a quits index.  There would undoubtedly be a component of quits that were accompanied with "shove it", but I don't think it is being officially surveyed as yet.


----------



## DeepState

View attachment 64840


Trembling Hand said:


> Nah they probably just realised that their service jobs making people more comfortable and happy didn't produce anything so quit to hopefully get a job at the steel mill.




And it's GOLD for TH.  Except, employment in steel is declining....quite literally as a result of increasing currency exchange rates in anticipation of lift-off.  

The higher currency is constituting a headwind to the trade situation (which contributed to the latest GDP print being sort of low). Lift off is anticipated because the labour market is improving, which is also seeing pricing tension as demand returns.  The growth in employment is away from many industries like oil production and steel production.  It is barely picking up in domestic construction.  Labour is growing fastest in services industries, particularly personal services like *healthcare* and aged services. All of this is seeing less support required by government whose balance is far better than it had been because it is receiving more taxes and paying less unemployment benefits.

An increase in services employment and production (shall we agree on delivery, if not production) is thus leading to increased exchange rates, lower trade surplus, lower government debt being financed domestically and offshore. Wealth, as measured by private household balance sheets, has been sharply increasing. All of this is somewhat in contrast to recent postulates about the influence of increased services (healthcare, being the case in point).


----------



## qldfrog

Trembling Hand said:


> Nah they probably just realised that their service jobs making people more comfortable and happy didn't produce anything so quit to hopefully get a job at the steel mill.



a bit low
 but you will talk to the burger flippers and hairdressers that they are so much better off now that their job at GM or in the farm have disappeared and they are all on part time minimum wages in services and retail.
.
I have a feeling that the west is living a .com phase whereas services are supposed to create that much wealth, we do not produce anything but this is a new paradigm,everything is different, China can produce the added values,German and Japanese factories can have the robotised  production lines, but we will have social media entrepreneurs and beauty therapists and we create so much more wealth this way...
Anyway, it seems it is such an absurd idea that you need to produce physical goods to initiate the transfer chain.All this in one of the only country which has only been spared the GFC by going to the most basic of wealth creation: digging soil. I give up on this one, time will tell.


----------



## qldfrog

DeepState said:


> Wealth, as measured by private household balance sheets, has been sharply increasing. All of this is somewhat in contrast to recent postulates about the influence of increased services (healthcare, being the case in point).



Could it be that at last some of the trillions of vapour money created in QE is ultimately reaching some of the people in the street after lining up the pockets of the top 1% in a cascade downward; a golden shower of its own type 
if we consider that printing $ is increasing wealth, thanks god it manages to trickle down a bit to the commoners.
Would be interesting to know if there is a link/balance between this increase of wealth and the QE events, expected with a delay
Anyway, have all a great week end, I will carry on increasing my wealth by piling up goods andworking the paddocks


----------



## Trembling Hand

qldfrog said:


> but you will talk to the burger flippers and hairdressers that they are so much better off now that their job at GM or in the farm have disappeared and they are all on part time minimum wages in services and retail.




You ever find you're a little too pessimistic for logic? Wages are higher in the service sector than manufacturing so the world has voted that far more valuable. 



qldfrog said:


> a bit low
> 
> I have a feeling that the west is living a .com phase whereas services are supposed to create that much wealth, we do not produce anything but this is a new paradigm,everything is different, China can produce the added values,German and Japanese factories can have the robotised  production lines, but we will have social media entrepreneurs and beauty therapists and we create so much more wealth this way...
> Anyway, it seems it is such an absurd idea that you need to produce physical goods to initiate the transfer chain.All this in one of the only country which has only been spared the GFC by going to the most basic of wealth creation: digging soil. I give up on this one, time will tell.




No it is not low at all. What you are advocating is frankly depressing as all hell! If the only way to measure progress is to work inside a factory (which I have) on a machine-line so we can drive home on bigger highways to park a bigger car made with a greater amount of steel parked in a bigger garage attached to a bigger house with more exotic materials in it to hold up the bigger TV screens we are all F@$<ed.

The endless march to more production is beyond stupidity. We have become a society of extreme specialist and that has enabled us the most wonderful amount of health, safety and spare time. Time and time again its been shown that's what is most satisfying to people's lives is family, friends and experiences. I've already had my fair share of material stuff and frankly it is worthless. I don't get together with my friends and talk about the stuff we bought or produced. We get together laugh, remember and add to experiences. I think that is the same the world over once basic housing, health and food are taken care of. 

As the world become more efficient and rich it takes less to produce physical stuff - I'll do the world a favour and keep my consumption the same and spread the spare $ I have from the efficiency gains to buy services that consume less and produce more health and satisfaction.


----------



## DeepState

qldfrog said:


> 1. Could it be that at last some of the trillions of vapour money created in QE is ultimately reaching some of the people in the street after lining up the pockets of the top 1% in a cascade downward; a golden shower of its own type.  if we consider that printing $ is increasing wealth, thanks god it manages to trickle down a bit to the commoners.
> 
> 
> 2. Would be interesting to know if there is a link/balance between this increase of wealth and the QE events, expected with a delay
> 
> 3.  Anyway, have all a great week end, I will carry on increasing my wealth by piling up goods andworking the paddocks





1. This helicopter money lining the pockets of the rich populist fallacy is terribly misguided.  The QE printed by the Fed never really left the Fed.  The great bulk of 'print' remains within the Fed today as excess reserves.

Nonetheless, it did have wealth effects via other channels as was intended.  The general population benefited relative to the counter-factual, but inequality rose.  I would point out the counter-factual to QE would have completely smashed the poor if this line were to be pursued.  

2.  Of course it links. It raises the prices of assets.  It raises the activity in the economy. As intended.  Is it false?  Monetary policy has always affected asset prices.  Is the Fed move in cash rates any less real than the Fed rolling maturing mortgage backed securities?

3. Enjoy your weekend too.  Some of your physical goods produce, if you choose to interact with the rest of the economy, will be purchased by a vapourware service worker using the same dollars as you use to purchase materials required to generate your produce.  They buy your goods with vapour.  You do 'real work' to produce it. They produce nothing, but get your goods.  Which seems more silly?


----------



## qldfrog

DeepState said:


> 1.They buy your goods with vapour.  You do 'real work' to produce it. They produce nothing, but get your goods.  Which seems more silly?



This is amazing that as a relatively greeny guy, who decided to voluntarily work only a few days a week to enjoy life and has not worked as a salary man for more than 15years->
i have to be on that side of the debate but i genuinely believe you do not see the point i try to raise;
my english is not that good (not native) so that does not help

we have a finite world, an expanding population.money is being passed on in loops and that is fine, but i am deeply convinced that if created by debt which is the situation we are in and have been for a few decades, money is not worth the paper it is printed on [actually it is just worth that] unless there is what I call real production to underpin it;
And services unless traded with another country playing the same fake game, are mostly useless there,

I agree with you wholefully:
someopne cutting a tree, getting some oil out of the ground and selling it against $ which are magically created by the Fed or anyone else playing the debt game is a fool.
Some not so fool exchange their dollars against land titles, goods, gold and other PM.
Sometimes at the level of states..see the chinese government

I would add someone working 50h a week to gather extra figures on a retirement plan which is a set of numbers stored in a database is probably as much a fool. Ask Cyprus pensionners...

how long does it take for that fools game to end?
TH is right: after housing food and basic health the material basics are done, but I would like to see an economic distinction between that and the so call service industry.

Until Brenwood (sp?) at least there was this material link between currency and physical gold (could be seashells, salt would be the same) but the day you sever this, you enter into a "fake" economy build on pretends and I see "service wealth" and talk about a service economy as similar IMHO to these talks before the .com crash about owning .net "real estate", basing valuation on pipe dreams,
Reality has a tendency to hit hard when it readjusts.
I do not advocate extra goods/stuff not at all, the west is buried under a mountain of useless material junk,but a GDP growth of 0 is not to be seen as evil. the point is let's separate GDP/productivity/wealth into the actual creation/generation of initial "wealth trigger??" to the shuffling around happening after. let's use happiness factor, well being index for the rest but let's not try to mix them.
IMHO, you need the first one to have the second, this is the basic input, ideally just sun growing plants if we want a sustainable world.
Extra population must see an extra input created/fed into the system
Seeing a gdp growth after an earthquake destruction is an abomination in my mind, yet i agree the tradies will do a killing and whole departments of red tapes public servants will be generated.
Ahh well, too backward or advanced: the "Back to the roots" is not present in economic sciences yet or ever 
An interesting discussion as i had no idea anyone could even see it otherwise..Really, not that i discuss this matter much/ever  with anyone in day to day life.Have all a nice week end

TH: salary in services higher than manufacturing??? not so sure, 
38h pw  at ford vs 8h pm at mac do is often the trade.......but that is not the debate


----------



## Trembling Hand

qldfrog said:


> TH: salary in services higher than manufacturing??? not so sure,
> 38h pw  at ford vs 8h pm at mac do is often the trade.......but that is not the debate




You are just cheery picking a silly example. For starters there is no relationship between decrease in Ford jobs = increase in Macca's job. (if anything my bet is ford workers are the customers of Macca's ) They are two very different demographics who always fill different jobs. 

If you look at industry wide avg wages manufacturing is mid to low wage, Service sector is at the high end. And burger flippers are in the hospitality industry, generally not considered service sector, and are generally low skilled and young and that is reflected in their lower wage. 

And you cannot talk about funny money and .com or .net then say you want to make cars in Australia. That has been the biggest funny money scam for 30 or more years. Only surviving, and badly, through import tariffs and tax payers money handed over to OS corporations. Surely that is not what you are advocating? Welfare jobs at the cost of industries that have flourished without help?


----------



## DeepState

qldfrog said:


> This is amazing that as a relatively greeny guy, who decided to voluntarily work only a few days a week to enjoy life and has not worked as a salary man for more than 15years->
> i have to be on that side of the debate but i genuinely believe you do not see the point i try to raise;
> my english is not that good (not native) so that does not help




Your language is good enough and, in the opposing, vastly better than my French.

I happen to do this stuff for a living and am exposed to a spectrum of thought which encompasses the all that matters is tangible assets school. No fractional banking.  No fiat money.  Hard assets in the vault. Gold, guns, seed and land. And water purifiers. On it goes.  Cave man, bunker, economics.

For one Cyprus where largely Russian laundered money depositors received a haircut, there was the rest of Europe and the US whose deposits were protected as the GFC unfolded.  Have even Greek depositors taken a haircut?

How about a hard currency like gold?  Please remind me what Executive Order 6102 meant for holders of monetary gold?  Something imposed on them by their own elected officials.  The stuff that can't be printed to oblivion?  How did that compare to the capital levy on the Bank of Cyprus you see fit to raise?

Credit and money could collapse.  It happens most often in war.  In times of war, your land and productive machinery can also get confiscated or destroyed.  Your horde of gold can be claimed as a trophy of war.  There is no safe haven.  The Bretton Woods Agreement was put in place for a reason, only part of which was related to economics.  If you looked more deeply into it, you'd find it was an abomination of the gold standard and was ultimately dismantled when the joke become too large to unwind.  The world did not collapse.  Services continued to be provided.

What matters for money is not hard assets.  It is a system of institutions that protect what it means and its function.  Money serves the populace.  It serves the political economy to meet its needs.  The political economy was not created from the form of money or fractional reserve banking. 

Your base case scenario of end of the world, bankruptcy galore, hair on fire, was faced in the GFC.  The US and European financial systems were technically bankrupt.  To your perspective, the world should have gone back to sharpening spears with rocks.  It didn't.  In a world of credit, there will be credit events.  In the world of gold, you get a whole lot of other problems, before gold banks start getting fractional all over again like clockwork. 

In the world of primary and secondary production and no central banks, you had life expectancy in the 40s if you survived past childhood and peri-natal mortality maybe 50x what it is today....no healthcare services you see.  At least the monetary system was on solid ground.  To you, these were the only ones with real wealth, free of that silly services stuff.  I beg to differ.

When it comes to money, there are much stronger and relevant assets than corn farms, plant and machinery.  If you are not able to see the value of services as a form of wealth creation, then you are certainly not going to see the value of national and global institutions and collective interests.  I may not see what you do because your arguments don't accord with what is actually happening or is otherwise from a novel school of economic thought which is too complex for me and otherwise not encumbered by live data.  We must be looking at different planets.  Given this, there really is no value in pursuing a detailed response to the remaining propositions.    

Thanks for the exchange.


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## sinner

DeepState said:


> Your language is good enough and, in the opposing, vastly better than my French.
> 
> I happen to do this stuff for a living and am exposed to a spectrum of thought which encompasses the all that matters is tangible assets school. No fractional banking.  No fiat money.  Hard assets in the vault. Gold, guns, seed and land. And water purifiers. On it goes.  Cave man, bunker, economics.




What about Freegold (which is none of the above)? 

http://fofoa.blogspot.com.au/2011/01/freegold-foundations.html



> If you looked more deeply into it, you'd find it was an abomination of the gold standard and was ultimately dismantled when the joke become too large to unwind.  The world did not collapse.  Services continued to be provided.




If one has looked deeply into it, surely one has read of and understood the Triffin dilemma and its implications. Did you know Mr Triffin later helped form the European Monetary System? 

https://en.wikipedia.org/wiki/Triffin_dilemma
https://en.wikipedia.org/wiki/Robert_Triffin

Dismantled is a strange way to put it, I would say the US strategically defaulted on obligations to prevent the incessant draining of Treasury gold by US trade creditors and raise the local price of oil in hopes of making local fields more viable. I challenge different interpretations! (can also see the Yamani quote in Flow Addendum link at the bottom of this post).

An examination of the Balance of Payments historical data reveals that the world did not collapse largely because the European and Gulf blocs of Central Banks (marginal net creditors) allowed the US to export inflation via building up huge piles of bonds. The BoJ also joined in around this time and has never really stopped. Objectively, this is structural support for the USD to stop an otherwise large shockwave from disrupting the economy.

And so it was for ~30y until 1999 when the Euro was officially launched. Lucky for the USD, just as the European CB bloc was winding down structural support of the USD, the Chinese stepped up to the plate and were acting as the marginal structural support until the GFC.

Since then the US private sector (one assumes a large portion of which accounted by the Fed) has been forced to take up the slack.  The resulting expansion of the monetary base (which just so happens to be the reference point for the entire global USD system) is apparent for all to observe.

http://fofoa.blogspot.com.au/2011/03/reference-point-revolution.html



> What matters for money is not hard assets.  It is a system of institutions that protect what it means and its function.  Money serves the populace.  It serves the political economy to meet its needs.  The political economy was not created from the form of money or fractional reserve banking.




When you say "what matters for money...", if you are referring to "easy money" then I'd 100% agree with the above. Easy (credit) money is one of the greatest human inventions of all time! It would be utterly foolish (and likely impossible) of us to regress back to a hard money system. 

But the use of easy money as the global reserve asset leads to Triffins dilemma. Hmm...if only there was a monetary system that was created on a basis of understanding this principle 

http://fofoa.blogspot.com.au/2010/11/dilemma.html
http://fofoa.blogspot.com.au/2010/11/dilemma-2-homeless-dollars.html

Acknowledging that that the flow of monetised metal (for the purpose of reserve asset) does in fact matter goes a long way in understanding historical events as far back in time as Roman invasion of Arabia over the flow of spices causing a drain on Empire gold in 24AD, European (mostly British) invasion of China over the flow of silk and tea causing a drain on Empire silver in the 17th and 18th Century causing the First Opium War, the "Nixon Shock" in the early 1970s, the launch of the Euro and many others 

http://fofoa.blogspot.com.au/2010/10/its-flow-stupid.html
http://fofoa.blogspot.com.au/2010/10/flow-addendum.html


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## qldfrog

DeepState said:


> Given this, there really is no value in pursuing a detailed response to the remaining propositions.
> 
> Thanks for the exchange.



yeap, in any case, i am aware of the world we live in, and have to deal with reality so i play the game too.let's close the subject there indeed,
And please carry on with your input and thought i found them quite instructive and this helps me to 'play the game"


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## qldfrog

Trembling Hand said:


> You are just cheery picking a silly example. For starters there is no relationship between decrease in Ford jobs = increase in Macca's job. (if anything my bet is ford workers are the customers of Macca's ) They are two very different demographics who always fill different jobs.
> 
> If you look at industry wide avg wages manufacturing is mid to low wage, Service sector is at the high end. And burger flippers are in the hospitality industry, generally not considered service sector, and are generally low skilled and young and that is reflected in their lower wage.
> 
> And you cannot talk about funny money and .com or .net then say you want to make cars in Australia. That has been the biggest funny money scam for 30 or more years. Only surviving, and badly, through import tariffs and tax payers money handed over to OS corporations. Surely that is not what you are advocating? Welfare jobs at the cost of industries that have flourished without help?



Where did I ever suggest that Australia should keep car manufacturing? 
As to hospitality not being service? this is the essential service industry for me, that and retail: "the girl in the shop " are what service is in number, not the surgeon or QC.
 i worked in a foundry, a factory line, at the bottom of UG coal mine, as well as top of towers of corporate headquarter, i know very well what is the easiest won money.
But let's close this one which started or what productivity definition we should use.


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## qldfrog

interesting entry by wysiwyg
https://www.aussiestockforums.com/forums/showthread.php?t=13317&page=3
I suppose the debate/definition of services can go there if anyone wants to add their views


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## DeepState

Incredible reach, Sinner.



sinner said:


> What about Freegold (which is none of the above)?




I am officially exposed to the concept....  




sinner said:


> If one has looked deeply into it, surely one has read of and understood the Triffin dilemma and its implications. Did you know Mr Triffin later helped form the European Monetary System?



He saw it coming in 1959.  Smart guy!




sinner said:


> Dismantled is a strange way to put it, I would say the US strategically defaulted on obligations to prevent the incessant draining of Treasury gold by US trade creditors and raise the local price of oil in hopes of making local fields more viable. I challenge different interpretations! (can also see the Yamani quote in Flow Addendum link at the bottom of this post).




Would you prefer collapsed?  I figure it was a slow motion pulling apart of the original premise that went for some time.  Perhaps you can anchor that date from the end of the Gold Pool.  Maybe you could argue that the growth in USD claims in the international market grew too large and the process outlined by Triffin could be seen to pre-empt the end of the system.  Triffin's framework outlined why the liquid dollar claim system was inherently more unstable than the Gold standard in pure form [abomination].  The predictable outcome was that the US could not constrain itself when it had such a monetary advantage.  Too much of a good thing and policy errors.

On oil, it was not without precedent that import restrictions were applied.  The Nixon Shock was accompanied with an import surcharge.  If the US wanted to improve the local competitiveness of oil producers, it didn't have to depreciate.  It had other tools.  Some, like limiting exports of oil, were subsequently used.  A depreciation, though, would have this effect.  

A strategic default?  When you cannot make good your pledges, it's not really a choice when the debt is called.  The system was decaying and the financial situation was getting worse rapidly before suspension of convertibility.  It was technically bankrupt (foreign claims exceeded official gold for the US) in about 1968.  The gold run, precipitated by accelerating international circulation of US money, made the situation untenable.  The gig was up when the current account turned negative even as FDI and foreign donations continued. The decay part of Triffin's dilemma bit.  It is true that they could have drained gold to zero and pulled the plug before that.  So it is strategic in the sense that they got to pick a date. That would be the rough equivalent of some South American country making a strategic choice to abandon a USD peg when it basically runs out of reserves.  They don't generally run this stuff to zero.  They don't fight losing battles to the very end when the gig is up.  Perhaps a strategic withdrawal.




sinner said:


> An examination of the Balance of Payments historical data reveals that the world did not collapse largely because the European and Gulf blocs of Central Banks (marginal net creditors) allowed the US to export inflation via building up huge piles of bonds. The BoJ also joined in around this time and has never really stopped. Objectively, this is structural support for the USD to stop an otherwise large shockwave from disrupting the economy.




Leading up to the Nixon Shock (1971) and through to the end of the Smithsonian Agreement (1973), the balance sheets of the foreign Central Banks became stuffed full of US monetary assets.  It was not supposed to be that way.  It was shoved onto balance sheet.  When convertibility ended, free float did not emerge.  It was Dollar Standard.  There continued to be sustained US liquidity internationalisation, accelerating under a erroneous combination of Phillips Curve doctrine and Full Employment policy (not balanced with an inflation target) at the time.

There are always two sides to a ledger.  Were the foreign CBs supporting the USD and allowing the export of US inflation?  Or were they protecting their own exporters by keeping their currencies cheap relative to an overvalued USD.  Heading into the Nixon Shock, inflation in Japan, France, UK and Germany exceeded that of the US.  So it is an odd, but technically plausible, claim to imply that the foreign nations were prepared to absorb excess US inflation and thus bought bonds.  I think another explanation is that they had to absorb bonds because the new exchange rates were still misaligned with the USD being overvalued despite being depreciated post the closure of the gold window.  If the Smithsonian Agreement had worked, and monetary growth in the US were better contained (it was not pulled in), this accumulation of bonds would not have occurred.  It is evident that the foreign powers weren't doing this for fun because the collapse of the Smithsonian Agreement saw a dramatic reduction in the rate of reserve accumulation.




sinner said:


> And so it was for ~30y until 1999 when the Euro was officially launched. Lucky for the USD, just as the European CB bloc was winding down structural support of the USD, the Chinese stepped up to the plate and were acting as the marginal structural support until the GFC.



EZ countries continued to acquire Treasury assets after the Euro was launched.  In substantial volume.  It might be argued that the EZ never wound down structural support.  They continued to be a meaningful proportion of Treasury owners, buying more and more, at an increasing rate.  However, an acceleration of debt issuance was absorbed by Chinese reserve buying, along with other Asia post Currency Crisis Official Reserve build.  After all, the White House was presided over by George W with a strong appetite for deficit spending.  Of course, it could be argued that China and Asia produced a savings glut which forced the US into excess deficit spending and over-investment.  Can't please everyone I guess.






sinner said:


> When you say "what matters for money...", if you are referring to "easy money" then I'd 100% agree with the above. Easy (credit) money is one of the greatest human inventions of all time! It would be utterly foolish (and likely impossible) of us to regress back to a hard money system.
> 
> But the use of easy money as the global reserve asset leads to Triffins dilemma. Hmm...if only there was a monetary system that was created on a basis of understanding this principle



You're a genius, Sinner.  What do you make of the Banco alternative?  




sinner said:


> Acknowledging that that the flow of monetised metal (for the purpose of reserve asset) does in fact matter goes a long way in understanding historical events as far back in time as Roman invasion of Arabia over the flow of spices causing a drain on Empire gold in 24AD, European (mostly British) invasion of China over the flow of silk and tea causing a drain on Empire silver in the 17th and 18th Century causing the First Opium War, the "Nixon Shock" in the early 1970s, the launch of the Euro and many others



Totally amazed yet again.


----------



## sinner

DeepState said:


> You're a genius, Sinner.  What do you make of the Banco alternative?




haha no genius here, just an avid reader of FOFOA.

Just wanted to answer this one quickly, will try and post a longer reply to the rest tomorrow.

From the "Freegold Foundations" post I linked above



> So often in commentaries of this sort that propose a “solution”, the author is strangely obsessed with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot). Their avoidance of any meaningful discussion of the most obvious remedy is almost pathological in the extreme. To be sure, we don’t need to invent any manner of universal reserve currency to fill the role of a unit of account because that role is already served in a fully functional capacity for any given country by its own monetary unit.
> 
> What IS desperately needed, however, is a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. And far from needing to be conjured or created by complex international committees, that asset is already in existence and held in goodly store by central bankers and prudent individuals around the world ”” it’s known as gold. From amid the ruins of a chaotic financial crisis that was brought about by its own complexity, a degree of sanity will prevail, and gold as a freely floating asset will arise in stature as THE important element of global monetary reserves. The floating aspect is the vital evolutionary improvement over all previous structural monetary failures which tried to use a gold standard at a fixed price (i.e., unit of account) perversely joined to the very elastic money supply of any given country’s banking system.






> Totally amazed yet again.




Can't recommend FOFOA enough, his posts are long but worth it (IMHO).


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## DeepState

Thought for the moment: When people talk about the option value of cash, how are you supposed to figure out what that value is?  This type of assessment is needed so you can determine whether it is better just to invest in something else that you think might make you money.

Trigger for thought: Recent El Erian article in FT.


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## sinner

DeepState said:


> Thought for the moment: When people talk about the option value of cash, how are you supposed to figure out what that value is?  This type of assessment is needed so you can determine whether it is better just to invest in something else that you think might make you money.
> 
> Trigger for thought: Recent El Erian article in FT.




If using cash for "option value" (assumed to mean hedging equity volatility) then I would consider it as merely another form of insurance, because after all the return profile will be different depending on the market regime, just like with options.

In bull markets, holding puts or cash will underperform although cash is better than puts as you're not paying volatility premium.

In range markets, holding puts or cash will outperform, but whether puts or cash is better depending largely on the hedging regime implemented.

In bear markets, holding puts or cash will outperform although puts is better than cash as you harvest the volatility premium.

The determinant of the value is largely driven by demand and we can infer from proxies of demand. e.g. the "option value" (again assuming this to mean hedge) of options is well proxied by VIX and the "option value" of cash is well proxied by the inverse of the relative change in price for a broad range of riskier assets.


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## DeepState

sinner said:


> participation.... If you drill into this number, the implications are really much worse. The decline in this number has been driven by the exodus of 16-55 cohort from the workforce, and would look worse if it wasn't for the >55 cohort rejoining the workforce in droves as their retirement plans went out the window (thanks to low 401k returns and negative real returns on savings thanks to ZIRP/QE).




The standard thinking on this goes that the decline was driven partly by demographics and partly because the younger generation chose to go to college for a while.  This is not rebounding to baseline levels that would be anticipated allowing for the demographics argument (despite your comments likely being true as well).  As a result, many in the Fed believe that there is more slack in the labour market than appears the case from the unemployment figures alone.  Wage rises, for example, remain low when the unemployment rate is not too far off what would be regarded as full employment levels.

Then I came across this today.  The WSJ refers to a recent paper in Proceedings of the National Academy of Sciences of the USA  (www.pnas.org).  It was co-authored by Deaton, a winner of the Nobel for Economics this year.

It finds that mortality for middle aged whites is, increasing, breaking a very long trend of declining mortality.  Reasons include suicide, alcohol abuse, chronic liver disease...offsetting declining lung cancer prevalence.  The increase in the rate of mortality for the middle aged from drug and alcohol overdoses jumped past diabetes, liver disease, suicide and lung cancer since 2000.  It is incredible.

Although focused mostly on those with high school level educations in middle age, the pattern is also visible across other education and age demographics.  Hispanics and Blacks continue to see mortality levels declining.  Hence, the rise in mortality is very stark.  Period of this observation is 1999-2013, compared with prior data. No other rich country is showing such stats.

It appears that economic stress may be having very significant impacts on the white population (hollowing out of the middle class would hit this demographic most, I guess).  

It does not look directly related to the GFC in the sense that these patterns appear to break from trend in the early 2000s.  Still.

Notice how the participation rate for Whites drifts lower whilst it is flat to up for Blacks and Hispanics in recent years.




At first pass, this looks like a pointer to the real cost of inequality.


----------



## sinner

DeepState said:


> Thought for the moment: When people talk about the option value of cash, how are you supposed to figure out what that value is?  This type of assessment is needed so you can determine whether it is better just to invest in something else that you think might make you money.
> 
> Trigger for thought: Recent El Erian article in FT.




I also remember Warren Buffett says something about cash being a call option with no strike, no expiration, etc and the premium is calculated as the return on cash minus the return he could get from other assets.


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## DeepState

sinner said:


> I also remember Warren Buffett says something about cash being a call option with no strike, no expiration, etc and the premium is calculated as the return on cash minus the return he could get from other assets.




I should have been clearer, but this was what I was ultimately referring to.

That premium will be known after the event.  It is higher for people with excellent investment skills.  Yet the option value is also higher for those with greater investment skill. What's the trade-off?

I can definitely see the value in the case of illiquid investment and in other situations where good ideas to deploy cash are sporadic and substantive when they come.

I suppose the concept is easy to understand if you think of the world as having a departure point of cash.  Yet Buffett thinks the departure point is pretty much fully invested in stock (at least for his wife's endowment).

:dunno:


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## DeepState

Some thoughts.

30 Sept 2015 [XAO Banter Thread]



DeepState said:


> Yes. I am long biased.  Equity positions have been a maximum of 75% of target exposure over the last year as valuations in the US looked rich.  Positions in Australia were cut by 2/3rds in July and by half in Europe/UK at about the same time.  Currency exposure to the USD buffered the pain, as have bond positions.  Still, there is pain.
> 
> Have recently rebuilt the international equity positions to full weight and remixed currency exposures (less USD and more EUR and JPY..thankfully).
> 
> Where are the balls of steel buyers??? 15%+ Peak to trough.  Big statements when markets are up.  Silence now.




US PAYROLLS

Early this morning the US non-farm payrolls figure for October was released.  It was a strong figure and the expectations for US Fed tightening moved higher.  Along with this, we have seen the USD strengthen vs major currencies, gold weaken (more than by the USD general appreciation would imply), long bond yields in developed markets climb and CDS spreads decline.  A good day.


RISK AVERSION UNWIND

This announcement follows on from a retracement of significant fears in the market that dragged indices down heavily in late August following adverse economic developments in China.  Most notably, these were the Flash Manufacturing PMI, devaluation of the Yuan and wild correction on the equity markets that were not well contained despite a range of ad hoc policy measures and arrests.  Trade data that came out later in the month were not helpful either.  On top of this, Brazil was not doing well. Concern was significant for an EM risk event. Economic and financial risks were downside skewed.  Somewhere in there was increasing concern for the implications of a low oil price for the financial worthiness of related firms and reduced economic activity in the US as a result of lowered exploration and development activity.

Since then, equity markets and other indicators have been much more positive and the fear spike has been materially unwound.  If I were to summarise, it was another fear of China collapse that did not (yet) eventuate.


AUSTRALIAN MONETARY POLICY

I am interested in the outlook for Australian policy rates in the next six months or so, for various reasons.

The RBA has had monetary settings at a record low of 2% for official cash.  It has been ratcheted down as a result of adjustments from non-mining investment and much lower than expected commodity prices. Also, despite business conditions improving a long way since 2013 and now at pre-crisis levels, investment activity remains constrained (outside of mining).  A key question is whether rates are expected to decline further.  

The RBA expectations for GDP are a return to potential growth levels in FY 2017 and pretty healthy in FY 2016.  Inflation is slightly on the low side of the target band and, when the oil impact washes through and tradeables inflation comes though following the depreciation of the AUD, inflation is pretty much in the zone.  Unemployment is expected to decline in a year or so.  Though employment growth will be there, an increase in the participation rate is expected as market conditions improve.  I imagine a measure of re-training might be required and workforce re-tooling is necessary when an economy goes through this magnitude of change.  

This is taking place during the year where the peak effect of declining mining investment is taking place.  Also, there was a slight downgrade of 2015 GDP expectations because of delays in bringing on energy exports that are soon to boost our current account.  A delay in timing, not volume.

On an expectations basis, this is not the sort of thing which requires an interest rate cut.  These assumptions were also built on an assumption of static exchange rates which have declined since the forecasts were cut.  The AUD has weakened since and USD strengthening is expected at the lift-off event.  Lift-off expectations are now looking much more likely in the next six months. Hence, these estimates are now slightly bearish cases.  On top of that, commodity prices are now seen to have upside risk skews.

More on the bull case are expectations of further monetary easing from Japan (although Kuroda said that all was good in the last 24 hours and Abe claims that Japan is escaping deflation).  If this occurs, it would be a strong boost to our exports.  It would be a positive stimulus to Japan's domestic economy (which consumes Australian energy and raw materials) and the impact of monetary policy flows throughout Asia, stimulating theirs.  It will also impact interest rates in the US (Japan is stepping in to buy US Treasuries as China becomes a net seller). Japan, rest of Asia and the US are our largest export destinations.

China cut the RRR twice since the risk spike commenced in earnest and has cut policy rates.  It has plenty of room to keep stimulating but is must be acknowledged that the reserve drain is worrisome.  For some reason that still mystifies me, they defy the hurdles that would befuddle any other major economy in the way in which all this hangs together.  Ultimately, the Yuan is expensive and will be devalued unless there is a major reversal (as opposed to stasis) in the opening of the capital account...freezing money from leaving the country.  If they take the initiative, it will be positively regarded.  If it is reactive, it will be seen as a sign of weakness.  Direct and contagion effects are evident.

In recent comments and observations from Yellen, EM risks have receded a long way.  This aligns with what the market is now pricing elsewhere and what Dep Gov Lowe is now thinking.

The case for a cut in rates exists because the slow wages growth indicates that there may be more slack in the economy that could do with a boost if inflation expectations do not come through.  In other words, they have underwritten inflation.  More slack can emerge if slowing housing price growth, low real wages growth, heightened unemployment, slowing residential construction growth... leads to an increase in the savings rate.  The recent round of variable mortgage rates is unhelpful in this regard, unless you are a stock holder.  If this dynamic takes hold, kiss non-mining business investment good-bye.

But let's think about this for a second.  Is Australia is deep trouble?  Not compared to Japan or Europe.  What about the US?  No, not really.  Yet Australian real rates are zero.  About the same as Europe and Japan.  That's how much stimulus is currently going on.  When seen this way, the US has got to lift the monetary pedal.  The whole question is the pace.  Each time the US lifts rates, it basically implies that Australia has eased from an international markets perspective if at least some of this is taken via exchange rates.

Anyhow, I am a little surprised that there is presently no talk at all of a potential rise in Aust rates in the later part of 2016.  What seems to be factored is a flat line in monetary policy for any mid or upside scenario and a healthy chance of another cut if inflation were to drop to maybe 1.5% and for this to be seem to be a problem.  The chances of that are currently assessed at less than 15% over the next 12 months but pricing is higher than 40%.  Hmmmm.


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## Trembling Hand

DeepState said:


> AUSTRALIAN MONETARY POLICY
> 
> I am interested in the outlook for Australian policy rates in the next six months or so, for various reasons.
> 
> The RBA has had monetary settings at a record low of 2% for official cash.  It has been ratcheted down as a result of adjustments from non-mining investment and much lower than expected commodity prices. Also, despite business conditions improving a long way since 2013 and now at pre-crisis levels, investment activity remains constrained (outside of mining).  A key question is whether rates are expected to decline further.




I would be surprised if investment activity doesn't continue to disappoint for a long time compare to our economy of 5-10-20 years ago. There is little left of the capital intensive manufacturing industries after AUD being stronger for longer. Whats left is niche operations which are not big spenders and the dreaded services which don't require much spending to employ another 100 dudes at desks with a cheap Dell compared to 100 dudes on a production line.


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## qldfrog

Trembling Hand said:


> the dreaded services which don't require much spending to employ another 100 dudes at desks with a cheap Dell compared to 100 dudes on a production line.




But Joke aside I agree with you;
Qld focused:

I have the feeling qld is getting a bit better than it was a year ago job wise, but salaries/rates are down.
This is anecdotal, and i also observe the rate of carpark filling at train stations etc; more traffic;
I also believe we are at the end of a local tradies boom (due to RE boom/renovation;
as i see it, white collars jobs showing sign of life, tradies going down, manufacturing & mining anihilated.

Currency wise, I tend to believe the US will not raise rates next month, nor in next year and may even try to push lower:they might get inventive early next year with another QE style;

i have a substancial interest in USD and am wondering if I should start moving these into other currencies after what has been a good ride for this financial year.
On the other end, a rise next month would be quite nice unless it triggers this feared EM collapse!!!

I also believe that even with a very weak economy in Oz, at some stage the export of LNG added to the coal/IO will bring enough currency to start pushing the AUD higher
Weak local economy but some export might have some effect this way.What do you think? in that context, the RBA might lower its rate mid 2016?
Crazy thoughts?


----------



## Trembling Hand

qldfrog said:


> Currency wise, I tend to believe the US will not raise rates next month, nor in next year and may even try to push lower:they might get inventive early next year with another QE style;
> 
> i have a substancial interest in USD and am wondering if I should start moving these into other currencies after what has been a good ride for this financial year.
> On the other end, a rise next month would be quite nice unless it triggers this feared EM collapse!!!
> 
> I also believe that even with a very weak economy in Oz, at some stage the export of LNG added to the coal/IO will bring enough currency to start pushing the AUD higher
> Weak local economy but some export might have some effect this way.What do you think? in that context, the RBA might lower its rate mid 2016?
> Crazy thoughts?




Yeah I think your idea of more US QE rather than a hike soon is deep in the contrarian corner.


----------



## sinner

Trembling Hand said:


> Yeah I think your idea of more US QE rather than a hike soon is deep in the contrarian corner.




One single tiny rate hike of half of half of half a percent? Maybe.

Nascent trend of slowly raising rates? Actually not possible without significant increases in GDP or commensurate decreases in the Fed balance sheet. I put the probability of balance sheet reduction near 0 ergo also consider rate trend extremely unlikely without strong GDP numbers.

While we are on the topic, can someone explain to me the difference between QE and Federal deficit spending unbacked by fresh Treasury issuance? No? Didn't think so. Their impact on the monetary base is identical!

Maybe no more "QE" but the monetary base will suffer another debasement/expansion in volume, just the same as if Yellen took up QE, one way or another. Every dollar demanded by the ongoing deflation in credit *will* be matched by a shiny new dollar of base money.

One would also note that of the two camps, the "deep contrarian corner" has done a better job of forecasting the direction of rates than has the "deep conformist corner" since the GFC.




Enjoy the credit deflation while it lasts, my , because most will be shocked by what's coming after that.


----------



## Valued

I think the possibility of a fed rate hike is even higher than the market thinks it is right now. Unless the China data is bad (and it's not out yet), in my opinion it's practically guaranteed they would raise rates. Something bad needs to happen at this point for them not to do it.


----------



## qldfrog

Valued said:


> I think the possibility of a fed rate hike is even higher than the market thinks it is right now. Unless the China data is bad (and it's not out yet), in my opinion it's practically guaranteed they would raise rates. Something bad needs to happen at this point for them not to do it.



sure +.25 in december to then walk back in march after whatever pretext..can the US afford to raise without drama, not sure


----------



## Valued

qldfrog said:


> sure +.25 in december to then walk back in march after whatever pretext..can the US afford to raise without drama, not sure




The strength of the US economy is being underestimated by a lot of people. The strength of its inflation is being underestimated significantly too, at least by retail traders. 

The only potential weakness in raising interest rates is the housing market and employment could be a little better, but the strong job growth numbers have eased that concern. US unemployment is higher than the 5% that is being reported. However, they are doing very well compared to everyone else.


----------



## sinner

Valued said:


> The strength of its inflation is being underestimated significantly too, at least by retail traders.




Which measure of inflation are you looking at that tells you that? How are you measuring the inflation estimation of retail traders anyway?




BPP (http://bpp.mit.edu/usa/. in the above chart in orange) seems to track CPI pretty closely, and although the free data is delayed now I doubt the spread between BPP and CPI has widened beyond the spread between PCE and CPI...


----------



## odds-on

sinner said:


> Enjoy the credit deflation while it lasts, my , because most will be shocked by what's coming after that.




Deflationary spiral? Hyperinflation?

Great posts Sinner.


----------



## sinner

odds-on said:


> Deflationary spiral? Hyperinflation?
> 
> Great posts Sinner.




Famous quote from FOA

http://fofoa.blogspot.com.au/2011/04/deflation-or-hyperinflation.html


> "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"


----------



## Valued

sinner said:


> Which measure of inflation are you looking at that tells you that? How are you measuring the inflation estimation of retail traders anyway?
> 
> View attachment 64962
> 
> 
> BPP (http://bpp.mit.edu/usa/. in the above chart in orange) seems to track CPI pretty closely, and although the free data is delayed now I doubt the spread between BPP and CPI has widened beyond the spread between PCE and CPI...
> View attachment 64960




The core inflation rate and/or the trimmed mean inflation rate. They are 1.9% and 1.7% respectively. Most people would be focusing on the inflation rates reported in the media or in the overall inflation rate which was recorded as 0% in September.


----------



## qldfrog

we are in a deflation right now: I agree with Valued, 
but deflation or hyperinflation are both sign of a sick economy; state of mind is the difference, as soon as the psyche starts wondering the "real" value of the dollar/peso/euro, we switch to an hyperinflation move;And I do believe this is what government are actually looking for: only way to get rid of the debt without defaulting whether you are in the US/Europe/Japan
my 2c but the first one: deflation does not eliminate the possibility of the second: high inflation following.


----------



## Valued

I was talking about the US though and my point was that it was not in deflation.

If we are talking about Australia, then it is doing poorly compared to the US. You should look at NZ though. I don't think they realise how bad their economy is right now. NZ is falling apart while their stocks make new highs. Not sure what is going on in that strange little country.


----------



## qldfrog

Valued said:


> I was talking about the US though and my point was that it was not in deflation.
> 
> If we are talking about Australia, then it is doing poorly compared to the US. You should look at NZ though. I don't think they realise how bad their economy is right now. NZ is falling apart while their stocks make new highs. Not sure what is going on in that strange little country.




Thanks Valued, not really aware of NZ, an opportunity to short there  in your opinion?


----------



## Valued

qldfrog said:


> Thanks Valued, not really aware of NZ, an opportunity to short there  in your opinion?




Not for a while. Their central bank will continue to prop up their markets with interest rate cuts I think.


----------



## sinner

Valued said:


> I was talking about the US though and my point was that it was not in deflation.




Both the velocity of money and money multiplier for the US continue to decline, the credit economy is deflating, at least when measured relative to productivity or the monetary base. Examination of the evidence shows both private corporate and domestic households have crash their living standard while the public sector has attempted to take up the slack. So, once again, not really sure what your evidence is.

As for central banks supporting markets with rate cuts, not really sure why people keep bringing this up as if it was an evidence based fact that everyone knows. In reality, markets tanked in 2008 as rates went to all time lows and the Nikkei has been crap for decades despite essentially 0% rates from the BoJ.


----------



## Valued

sinner said:


> Both the velocity of money and money multiplier for the US continue to decline, the credit economy is deflating, at least when measured relative to productivity or the monetary base. Examination of the evidence shows both private corporate and domestic households have crash their living standard while the public sector has attempted to take up the slack. So, once again, not really sure what your evidence is.
> 
> As for central banks supporting markets with rate cuts, not really sure why people keep bringing this up as if it was an evidence based fact that everyone knows. In reality, markets tanked in 2008 as rates went to all time lows and the Nikkei has been crap for decades despite essentially 0% rates from the BoJ.




You are correct on the velocity of money and credit. Living standards are lower but sometimes the economy can do well even if the poor are living in slums, unfortunately a fact of life for the US. If you look at things like retail sales, production, jobs growth and housing, they are doing pretty well (housing isn't as good as what it could be, but it's ok).

Interest rates aren't always effective as a monetary policy tool. They can be in some cases and not in others. Sometimes it's more to do with market reaction to a cut rather than the actual long term fundamentals. I don't think you can point at 2008 and have that as a fair example. Japan is an unusual case too. Interest rate reductions can work if it leads to an expansion of credit (putting aside the problems that will occur from that possibly years later), but it will not work if people are too scared to go get loans despite the fact that they are cheap. It may still prop up the stock market not necessarily on the basis that the fundamentals support it, but more on that companies start paying less interest and that this allows more cash to go towards dividends and share buy backs, which is great if interest rates are low because it offers a substantially better yield.


----------



## sinner

Valued said:


> You are correct on the velocity of money and credit. Living standards are lower but sometimes the economy can do well even if the poor are living in slums, unfortunately a fact of life for the US.




When I say "crash standard of living" I don't mean in reference to any wealth gap, I am referring to the portion of total consumption undertaken by private corporate and domestic sector.



> If you look at things like retail sales, production, jobs growth and housing, they are doing pretty well (housing isn't as good as what it could be, but it's ok).




Lagging macro indicators, the utility they provide to discovering the state of the economy is limited at best. Employment and housing, especially, are at the far end of the lagging scale.

Retail sales have been growing at a slower pace every year since 2009, not sure how that comes up as "doing pretty well", I'd call it a worrying divergence. PMI is barely holding 50.




Meanwhile leading indicators:
* Treasury yields lower
* Credit spreads wider
* Breadth narrowing
* Industrial commodities carted out
* New orders (ex defense) negative YoY
* Inverted backlogs, negative YoY
* Inventories/Sales ratios back to 2001/2008 highs

Anyway. I didn't mean to get into a point-for-point over the US economy, was just looking for some evidence for the claim



> The strength of its inflation is being underestimated significantly too, at least by retail traders.




since I really don't see 

* strength in inflation
* underestimation of strength of inflation

anywhere at all...still don't. You claimed the point was "they're not in deflation" but the metrics used to track indicate that the credit economy is deflating. Next you say the economy is doing "good", well on a relative (i.e. ignoring pre GFC data) and lagging (i.e. looking at employment and housing) basis I guess so, but none of the metrics which have led economic contraction in the past seem to concur. Please provide some evidence to support your claims.


----------



## Valued

The difference is just how we judge the state of the economy. I judge the state of the US economy relative to other major economies and I judge it on lagging indicators relative to previous short term performance over a year . I don't consider the indicators relative to pre GFC, I think you need to judge trends in the economy using lagging indicators relative to recent performance. I only consider month on month performance to establish trends rather than year on year performance. The reason is I don't plan to buy and hold for years. I plan to trade anywhere from a few days up to a few months. 

The main reason I don't judge the economy up against the pre-GFC economy is so I am not comparing an economy that has been recovering from a large financial crisis to the height of the boom prior to the collapse. I think by that metric you would never be happy with the economy until we are at the height of the next boom.


----------



## sinner

Valued said:


> The difference is just how we judge the state of the economy. I judge the state of the US economy relative to other major economies and I judge it on lagging indicators relative to previous short term performance over a year . I don't consider the indicators relative to pre GFC, I think you need to judge trends in the economy using lagging indicators relative to recent performance. I only consider month on month performance to establish trends rather than year on year performance. The reason is I don't plan to buy and hold for years. I plan to trade anywhere from a few days up to a few months.




Fair enough I guess, not really sure about the prospective returns of such a strategy but it's your money 



> The main reason I don't judge the economy up against the pre-GFC economy is so I am not comparing an economy that has been recovering from a large financial crisis to the height of the boom prior to the collapse. I think by that metric you would never be happy with the economy until we are at the height of the next boom.




One would be "happy" merely to see metrics which match the post 1971 non-recession average, let's start there.


----------



## DeepState

Valued said:


> NZ is falling apart while their stocks make new highs. Not sure what is going on in that strange little country.




I was surprised to learn that New Zealand's average wealth per adult is the second highest in the world, behind Switzerland. Based on household assets.  According to Credit Suisse's Global Wealth Report 2015.  Australia came in third.  The US came in fourth.


----------



## Valued

DeepState said:


> I was surprised to learn that New Zealand's average wealth per adult is the second highest in the world, behind Switzerland. Based on household assets.  According to Credit Suisse's Global Wealth Report 2015.  Australia came in third.  The US came in fourth.




That sounds about right. For some reason, and I only read this recently, it's a big cultural thing in NZ to buy property. They love investing in property, so much so they have a housing shortage right now and housing prices are very high (I haven't confirmed the prices, I just read that they were high). Hopefully it doesn't go bust and destroy them, like it did in the US. If that's the case though, it could explain the very high wealth. They also have a lot of natural resources and not a large population.


----------



## DeepState

sinner said:


> One would be "happy" merely to see metrics which match the post 1971 non-recession average, let's start there.




US potential growth is now around 2%.  It is growing faster than that and is expected to continue to do so for the next couple of years.  If growth matched the post 1971 non-recession average, the brakes would probably have to be pulled pretty hard.


----------



## DeepState

Valued said:


> US unemployment is higher than the 5% that is being reported. However, they are doing very well compared to everyone else.




The participation rate has declined since the GFC commenced.  Part of that is due to demographics.  Part of it is due to some sort of cyclical reason.  Around 1% of the participation rate is not satisfactorily explained.  By adding this 1% of the civilian labour force, headline unemployment would move from 5% to 6%.  The Fed is aware that this may be the case and is watching indicators like wages and hours more closely and anecdotal stuff coming out of the Beige Book.

The nature of the US demographic is such that it would take a growth of just 77k jobs per month to hold reported headline unemployment steady.


----------



## DeepState

Valued said:


> I think the possibility of a fed rate hike is even higher than the market thinks it is right now. Unless the China data is bad (and it's not out yet), in my opinion it's practically guaranteed they would raise rates. Something bad needs to happen at this point for them not to do it.




When you have:
+ official unemployment at 5% and dropping fast; 
+ core inflation excluding volatile items doing alright considering commodity inputs are impacting the prices of final goods sold, and where services inflation is right in the zone (see below for goods inflation vs key commodity prices)
+ the price of liquid assets unreasonably tight
+ GDP growing at or in excess of potential growth rates
+ Credit readily available to credit worthy borrowers
+ ...

....it is ridiculous to have a real cash rate of around -2%.




Even if we accept Dalio's argument that we are about to enter into a period of deleverage, something akin to a zero real rate would not tax savers in real terms and allow deleverage to occur as the economy continues to grow.  If we find that productivity growth is lacking as the economy reflates, then rates would likely not reach anything like what the Fed thinks as normal for many years to come.  Still, zero is far too stimulatory for the present circumstances.  To put that into context, the US is kind of running a short end of the curve that would put the ECB at a -2% cash rate without the means to take your money out of the bank and stow it.


----------



## qldfrog

So Oz dollar down by the end of this calendar year Deep State?


----------



## DeepState

qldfrog said:


> So Oz dollar down by the end of this calendar year Deep State?




Presumably you mean vs USD.  I have no signal on that call.


----------



## qldfrog

DeepState said:


> Presumably you mean vs USD.  I have no signal on that call.



yes I did mean vs USD..i understand you believe the fed will rise its rate in dec so I would assume the aud will fall against the USD, and any hint of panic in emerging countries could reinforce the feeling
(yes I know assumption and past history not indicative of future)
I will probably keep my high exposure to usd till february if the fed starts raising, unsure about gold;
Gold in AUD is a strange beast in that context.
My main focus lately is return of capital not return from capital but that is the reflection of my pessimistic nature


----------



## DeepState

qldfrog said:


> yes I did mean vs USD..i understand you believe the fed will rise its rate in dec so I would assume the aud will fall against the USD, and any hint of panic in emerging countries could reinforce the feeling
> (yes I know assumption and past history not indicative of future)
> I will probably keep my high exposure to usd till february if the fed starts raising, unsure about gold;
> Gold in AUD is a strange beast in that context.
> My main focus lately is return of capital not return from capital but that is the reflection of my pessimistic nature




Did I say that I, personally as opposed to market pricing, was expecting a Dec lift-off somewhere?  I don't think I have expressed that view one way or another.


----------



## qldfrog

DeepState said:


> Did I say that I, personally as opposed to market pricing, was expecting a Dec lift-off somewhere?  I don't think I have expressed that view one way or another.



no you did not, but you stated yesterday evening all the reason why "it is ridiculous to have a real cash rate of around -2%." Your points are solids and I just think the fed could raise even if i believe it missed the point a long time ago and may go in reverse early next year .
Note I have never expected you or anyone else to have a crystal ball into the future or give advices
Anyway i shut up and will just keep reading this thread passively


----------



## DeepState

Anyone out there familiar with the current policies for alt energy and all things carbon in Australia?  If you are prepared to share some of your knowledge, it would be great.  Could even organise a conference call if others are interested and/or you are interested in such a thing.  I don't know enough/anything about this ahead of the Paris soire. Come on ASF....


----------



## DeepState

qldfrog said:


> no you did not, but you stated yesterday evening all the reason why "it is ridiculous to have a real cash rate of around -2%." Your points are solids and I just think the fed could raise even if i believe it missed the point a long time ago and may go in reverse early next year .
> Note I have never expected you or anyone else to have a crystal ball into the future or give advices
> Anyway i shut up and will just keep reading this thread passively




I am not as obsessed as printed market opinion is about the precise date of a potential lift-off.  It is my view that the case for lift-off is very strong based on current activity and expectations of those making the decisions.  It is now being explicitly discussed by Fed members as opposed to hints or statements of what must eventually happen.

Please feel free to remain an active thread participant.


----------



## DeepState

sinner said:


> ... can someone explain to me the difference between QE and Federal deficit spending unbacked by fresh Treasury issuance? No? Didn't think so. Their impact on the monetary base is identical!




In one case the spending attached to the monetary expansion is dictated by the private markets.  In the other, it is by the government. Further, in the US, when QE took place, the additional money supply mostly sat on the Fed balance sheet as excess reserves.  Monetary velocity of zero.  The private market chose not to spend the cash.  So we were left with the portfolio effects channel....high prices of liquid assets trying to stimulate real activity.

Nowadays, the big idea of the second is that the CBs looking to ease further might do so via direct asset purchases.  That is, buying the underlying assets like factories and buildings...  Pretty far-fetched in my view.  But these are pretty far-fetched times.


----------



## Valued

Sometimes there is a benefit in watching someone speak. After yellen testified the markets priced in about 20% more chance of a rate hike. Interestingly, Yellen said nothing not already said previously in printed form. When I saw her speak I immediately doubled my exposure on a EUR/USD short. It was the way in which she said it, the words she chose, and the order of those words.


----------



## sinner

DeepState said:


> In one case the spending attached to the monetary expansion is dictated by the private markets.  In the other, it is by the government. Further, in the US, when QE took place, the additional money supply mostly sat on the Fed balance sheet as excess reserves.  Monetary velocity of zero.  The private market chose not to spend the cash.  So we were left with the portfolio effects channel....high prices of liquid assets trying to stimulate real activity.




I will need that explained to me like I'm a 5 year old please. Which case is which? 

As I see it:

* Domestic private sector (corporate + household) consumes from productivity. Deficit financed with debt (mix of local and foreign sectors). 

Essentially domestic private sector resides almost entirely in the credit economy, aside from physical cash which is base money. 

The mechanism of paying me or me paying someone else is nearly always the transfer of bank credits (liability of the bank to the holder to chase down some base money) from one entity to another.

* Government sector consumes from taxes (no productivity). 

However, Government spending mechanism is to credit the provider of goods/services with a bank credit (liability of the bank to pay the provider some base money) and also commensurate increase in bank reserves (liability of the Government to pay the bank). 

This increases the monetary base, any issuance greater than total tax income is literally printing money until the Government issues bonds to cover the deficit, which shrinks the monetary base by a commensurate amount. 

This mechanism is simplest to understand in that the Government does not issue a lump of bonds and then go out and spend the borrowings, rather the Government is consuming real goods and services on a continuous basis and issuing bonds for the deficit as they go.

Net spending greater than tax income + bond issuance is a permanent dilution of the monetary base to pay for real goods and services consumed by Government sector. This is merely an accounting identity, not a conspiracy theory, or a claim to say this is what the USG is currently doing.

To me this is the most important point. In such an event, an "increase in reserves held at the Fed" (read expansion in the volume of and dilution of base money) is *not* so much "unspent" private sector money but actually the nasty hangover of *already spent* Government sector consumption. Such an action undertaken by the CB of most countries, I think we can all agree, would have an immensely inflationary impact on the local currency unit.

* So at least from the interpretation above - feel free to point out where I'm going wrong - how is QE viewed? Well, the Bernanke Fed was swapping debt for base money.

The mechanism is essentially a reversal of Treasury issuance which paid for "already spent" Government consumption. Given the state of the USG Federal deficit relative to their balance of trade deficit, it's worth pointing out that certainly those dollars paid for the consumption of tangible/physical/real goods and services. 

Monetarists seem to argue that there is no difference between the two (so they can be swapped without any problem!), but I would strongly beg to differ. The US monetary base is clearly the current "global monetary reference point" and all of those Eurodollars and foreign reserves held against the US sectors are denominated in the monetary base. The mechanism of QE represents a real dilution in their payment terms identical to net spending unbacked by bond issuance.



> Nowadays, the big idea of the second is that the CBs looking to ease further might do so via direct asset purchases.  That is, buying the underlying assets like factories and buildings...  Pretty far-fetched in my view.  But these are pretty far-fetched times.




Consider the following hypothetical:

The year is 2005 and BigCorp sees nothing but blue skies ahead so they take out a big loan via the corporate bond market to buy a bunch of factories and buildings. The bonds are largely taken up by BigBanks 1 through 10 and held as assets.

Now the year is 2015 and BigCorp is in the doldrums, under a lot of pressure because their blue sky projections didn't pan out thanks to the GFC. They're barely making payments and the bondholders at BigBanks are freaking out. 

That's credit deflation. Bad for the company, bad for the banks, bad for everyone in general. Judging from the metrics, it's approximately where we sit today (in aggregate). Does it make sense that anyone involved in this picture would be lobbying for more deflation? I personally don't think so.

Imagine that next, the Fed comes along and buys all of those problem bonds off the banks and pays with an expansion in the volume of the monetary base. The banks no longer have bad assets on the books, and their books are not exposed to currency inflation risk from such an action (in fact they have an advantage over most other economic actors by being the first to loan that newly printed base money). The real value of the loan to the factory owner is significantly reduced and therefore much easier to repay. Nor does the Fed need to take a factory or building onto its balance sheet  The only people who get screwed in this situation are those who have chosen to defer their consumption by holding USD denominated credit money.

That's hyperinflation. Everyone's happy (except for those saving in the local currency unit). Does it make sense that the US will (has already begun) happily throw the "USD as global reference point" and the USD savers under the bus in the race to meet a giant wall of credit deflation? I personally think so.


----------



## sinner

DeepState said:


> It is now being explicitly discussed by Fed members as opposed to hints or statements of what must eventually happen.




The rate set by the Fed is a function of the size of the monetary base relative to GDP. It is not a matter of jawboning.

Here's someone smarter than me saying it
http://www.cnbc.com/2015/10/25/fed-...balance-sheet-show-no-plan-for-rate-hike.html


> Financial markets thrive on guesswork, partly because they constantly need to create 'events' to trade on.
> 
> But there should be no wild guesswork with regard to the Fed's expected policy changes. Any good Fed-watcher knows that a quick look at Fed's money market operations and at systematic balance sheet actions will show the kind of policy move being prepared.
> 
> ...
> 
> There is nothing that I can see to suggest that the Fed is poised for an interest rate increase. In fact, there is evidence that a mild contraction of monetary creation earlier this year was reversed in June. Since then, the monetary base (the liability side of the Fed's balance sheet) has been expanding. Between the end of June and the middle of October, the Fed's monetary base increased by 3.5 percent.
> 
> Clearly, that is not a sign that the Fed is ready to initiate what is widely known as an interest rate normalization process, or, put more simply, the departure from the current 0-0.25 percent interest rate target. This key policy rate is systematically kept around the middle of that range.






> Dr. Michael Ivanovitch is an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia Business School.




This chart courtesy of John Hussman:
http://www.hussmanfunds.com/wmc/wmc130304.htm


----------



## DeepState

Valued said:


> Sometimes there is a benefit in watching someone speak. After yellen testified the markets priced in about 20% more chance of a rate hike. Interestingly, Yellen said nothing not already said previously in printed form. When I saw her speak I immediately doubled my exposure on a EUR/USD short. It was the way in which she said it, the words she chose, and the order of those words.




??  I am not seeing the change in outlook around the time of the Yellen Testimony to the House, which went for three excruciating hours...you have stamina and very poor sleep hygiene (!!). The odds did improve leading into the speech itself...but didn't do much during or afterwards. It was worth around 5% likelihood before she opened her mouth on the record. I do see a substantial shift of approx. 20% (not sustained in full) following the NFP surprise the next day. I think Euro didn't move much at all in or around the testimony.  It did, however, move in accordance with general USD strength following the NFP surprise. All in all, I would have to ascribe recent USD strength to the NFP surprise for the most part.  If listening to Yellen speak helped you with that position, all's good.


----------



## DeepState

sinner said:


> The rate set by the Fed is a function of the size of the monetary base relative to GDP. It is not a matter of jawboning.
> 
> Here's someone smarter than me saying it
> http://www.cnbc.com/2015/10/25/fed-...balance-sheet-show-no-plan-for-rate-hike.html
> 
> 
> 
> 
> This chart courtesy of John Hussman:
> http://www.hussmanfunds.com/wmc/wmc130304.htm
> View attachment 64987




Love it. 

This obsession with the volume of money is rather dated and are remnants of the pre-Volcker era monetary policy.  For any given level of money supply, there are a wide range of potential levels of output.  Creation of credit occurs within the limits of prudential standards and is affected by the prevailing level of interest rates as determined by the various relevant authorities which leaves a rather large amount of money supply as an endogenous issue.  Sure, you can helicopter drop cash and create inflation with immediate expenditure, or you can increase the balance sheet sizes and watch them sit idle as a lowflation environment remains in place.  Money volume increment via official channels by itself does not drive economic activity. The money multiplier is more an outcome, rather than a strong, direct, economic driver.  Fed officials are also not paid by the word spoken.

When you look through the concept of inflation targeting which has become the most favoured policy target since New Zealand* embarked in it, what matters is inflation expectations measured in the currency of the realm.  The other key objective is full employment (expressed or implied).  When you look at the watch list for the Fed, there are heaps of things which they look for when deciding what to do.  Money volume, beyond looking at the strength and soundness of the financial system and availability of appropriate credit, hardly rates a mention.  What rates a mention, ultimately, is inflation relative to target and GDP relative to target (and their sustainability).  The most widely acknowledged relationship is not the inverse curve per Hussman but the Taylor Rule.

The Hussman relationship is capturing a lot of secular issues and assigning a rather strange/obtuse explanation to it.  Doesn't the Fed set rates and create conditions to determine the money base at the same time?  Given the money base is much more flexible than GDP, it is seriously odd to claim that rates will stay low because the money base is high.  The Fed will raise rates and then, well after that, figure out what it wants to do with the money base.  At present, it does not intend to shrink the balance sheet beyond interest payments for several years.  

* What is it with this place? All Blacks, America's Cup, 2nd highest wealth per adult, Inflation Targeting pioneers, Hakka, Rachel Hunter, Russell Crowe..


----------



## sinner

DeepState said:


> he Fed will raise rates and then, well after that, figure out what it wants to do with the money base.  At present, it does not intend to shrink the balance sheet beyond interest payments for several years.




http://www.colorado.edu/economics/courses/econ2020/section11/section11.html


> It is important to realize that the Fed only directly controls one out of many different interest rates. The Fed has direct leverage over what is known as the Federal Funds rate. *The Fed Funds interest rate is directly linked to the amount of monetary reserves in the banking system. To increase the Fed Funds rate, the Fed will drain reserves from the banking system by selling some of its inventory of government debt to banks. To decrease the Fed Funds rate, the Fed will increase banking system reserves by purchasing some of the government debt present in the banks asset portfolio.* By changing the Fed Funds rate we assume that all other financial interest rates change by a similar magnitude and in the same direction.
> 
> ...
> 
> In a nutshell, this is how Fed policy works. The Fed is always monitoring the economy for undesirable future changes. When the policy committee of the Fed, known as the Federal Open Market Committee *(FOMC) decides that thinks look rough, they will initiate or continue either an expansionary or restrictive monetary policy. With the new policy, the New York branch of the Fed rapidly begins a net purchase or sale of government debt in exchange with various banks in order to change the level of banking reserves and the Fed Funds rate.* Almost immediately, financial markets adjust other interest rates based on Fed policy.




The claim is not that "the Fed can't hike because the balance sheet is big". Nor is the relationship shown by Hussman akin to the Taylor Rule, the latter being a prescription for the way things should be, while the former is merely a record of the way things have played out in reality. But as you can see from the above, it is "like they teach in school" 

The claim here is rather that, given the observed relationship and understanding that the mechanism of transmission between policy and the desired FFR is via changes in the volume of the monetary base (via net exchanges of Government Treasury debt) as a ratio of GDP, speculation about the path of future rates can be inferred by forecasts of monetary base volume and GDP. 

Given that nominal GDP has been consistently below Fed forecasts, and the monetary base has continued to grow we can see why the FOMC has consistently remained steady despite all the talk about (and subsequently crushed trades betting on) hiking rates. 

Those forecasting rate normalisation are implicitly giving a pretty strong forecast of GDP growth or commensurately strong forecast of monetary base reduction.



> At present, it does not intend to shrink the balance sheet beyond interest payments for several years.




Agreed...


----------



## DeepState

sinner said:


> I will need that explained to me like I'm a 5 year old please.




No five year old who has only reached the stage of Piggy-Bank Monetary Economics 101 is going to get this stuff.

Fortunately you seem rather more knowledgeable or are otherwise a prodigy.  Maybe both.





sinner said:


> To me this is the most important point. In such an event, an "increase in reserves held at the Fed" (read expansion in the volume of and dilution of base money) is *not* so much "unspent" private sector money but actually the nasty hangover of *already spent* Government sector consumption. Such an action undertaken by the CB of most countries, I think we can all agree, would have an immensely inflationary impact on the local currency unit.




Depends.  Take a look at Japan.

The sort of thing you are referring to happens in war time when the monetary base is sometimes heavily expanded just to pay for materials and soldiers.  Your history will note that high inflation is the cost for the loser.




sinner said:


> * So at least from the interpretation above - feel free to point out where I'm going wrong - how is QE viewed? Well, the Bernanke Fed was swapping debt for base money.




Pure QE is supposed to be separate from deficit financing.  It is an effort to reduce the rates at the longer ends of the curve and stimulate credit. 

Lower long term yields: Buy long term gov't bonds and other stuff.  Will push rates down and thus - hopefully - stimulate investment activity.

Stimulate Credit: If the banks are impaired and their balance sheets are stock full of crap apart from liquid government securities which can't be loaned or function as currency, if the central bank buys the gov't bonds from them and issues loanable reserves, it is supposed to free up credit for lending purposes - allowing money supply (M1 and higher) to grow.

No matter what the deficit/surplus is, such actions will have such influences.  In the case of the US, other things were going on which meant that the credit easing part did not function.

What you are reasonably concerned for is completely unbridled deficit spending which is financed by the CB.  The concept of independent central banking is supposed to put some distance between the pressures of government and the need to maintain the faith in the currency.  Additionally, I believe that most central banks doing this are compelled to purchase the bonds on the secondary market, meaning market prices.  




sinner said:


> Imagine that next, the Fed comes along and buys all of those problem bonds off the banks and pays with an expansion in the volume of the monetary base. The banks no longer have bad assets on the books, and their books are not exposed to currency inflation risk from such an action (in fact they have an advantage over most other economic actors by being the first to loan that newly printed base money). The real value of the loan to the factory owner is significantly reduced and therefore much easier to repay. Nor does the Fed need to take a factory or building onto its balance sheet  The only people who get screwed in this situation are those who have chosen to defer their consumption by holding USD denominated credit money.
> 
> That's hyperinflation. Everyone's happy (except for those saving in the local currency unit). Does it make sense that the US will (has already begun) happily throw the "USD as global reference point" and the USD savers under the bus in the race to meet a giant wall of credit deflation? I personally think so.




Except that's not what they have been doing.


----------



## DeepState

sinner said:


> http://www.colorado.edu/economics/courses/econ2020/section11/section11.html
> 
> 
> The claim is not that "the Fed can't hike because the balance sheet is big". Nor is the relationship shown by Hussman akin to the Taylor Rule, the latter being a prescription for the way things should be, while the former is merely a record of the way things have played out in reality. But as you can see from the above, it is "like they teach in school"
> 
> The claim here is rather that, given the observed relationship and understanding that the mechanism of transmission between policy and the desired FFR is via changes in the volume of the monetary base (via net exchanges of Government Treasury debt) as a ratio of GDP, speculation about the path of future rates can be inferred by forecasts of monetary base volume and GDP.
> 
> Given that nominal GDP has been consistently below Fed forecasts, and the monetary base has continued to grow we can see why the FOMC has consistently remained steady despite all the talk about (and subsequently crushed trades betting on) hiking rates.
> 
> Those forecasting rate normalisation are implicitly giving a pretty strong forecast of GDP growth or commensurately strong forecast of monetary base reduction.





....which would all be fine if it were actually true.  Except it really doesn't work at the magnitude implied.  Here is a chart showing the movement is the Fed Effective rate for the last 25 years and the movement in Money Base.  The Fed Rate has moved a lot in the past with barely noticeable (I guess there must be some if I was to zoom the graph in 100x or so) coincident movement in the money base.




More recently, since GFC, the money base expanded hugely.  It wasn't to push the Fed rate towards zero.  It was to push the longer end of the curve down and lubricate the credit mechanism.  The Fed could have held the Effective Rate at close to zero without needing to expand the balance sheet to this degree.  Instead, it chose to also reduce the rate at the end of the curve.

There is zero need to forecast a rate of 2% for the Fed rate in two years from now and for it to need a substantive reduction in the money base at the same time.  The Fed guidance says as much. The mechanisms are in place and have been tested.  What will happen to the monetary base in future will depend on a number of things, not least of which is the US Federal deficit and also foreign demand for treasury securities.

It is also interesting that a Taylor rule, which is "a prescription for the way thing should be" makes no mention of the money base.


----------



## craft

DeepState said:


> Love it.
> 
> This obsession with the volume of money is rather dated and are remnants of the pre-Volcker era monetary policy.  For any given level of money supply, there are a wide range of potential levels of output.  Creation of credit occurs within the limits of prudential standards and is affected by the prevailing level of interest rates as determined by the various relevant authorities which leaves a rather large amount of money supply as an endogenous issue.  Sure, you can helicopter drop cash and create inflation with immediate expenditure, or you can increase the balance sheet sizes and watch them sit idle as a lowflation environment remains in place.  Money volume increment via official channels by itself does not drive economic activity. The money multiplier is more an outcome, rather than a strong, direct, economic driver.  Fed officials are also not paid by the word spoken.




This money volume debate has been going on for some time. A couple of my previous posts - which is still how I see it.



craft said:


> This is the full data set for US Money Supply to GDP.
> 
> View attachment 51740
> 
> 
> 
> When demand is outstripping supply, monetary policy works like pulling on a string. When supply outstrips demand it flips to be like pushing on a string.
> 
> Last time the demand/supply balance flipped in 1929 it took up to and including WW2 before the excess supply was absorbed and the liquidity had to be drained.
> 
> Money supply is a symptom not a cause of imbalances in the global economy – and that imbalance is too much supply which is directed at consumer bases without the demographics or productivity to afford it.







https://www.aussiestockforums.com/forums/showthread.php?t=26605&p=765740&viewfull=1#post765740





craft said:


> Currency is just a small part of the money supply.
> 
> Currency is a liability for the Fed. If they purchase *'already existing debts' *then they add to liquidity by enlarging their balance sheet but not to the money supply.  If they add *'new'* assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply. If they printed currency (debt for them) but did not enlarge the balance sheet by recording it as a debt and the corresponding asset owed to it by whoever the money was given too (ie the government) then you would have true inflationary currency printing.
> 
> A lot of what people call running the printing press is not even adding to the money supply it is just providing liquidity _(and transferring default risk to the public)_ The remainder of the feds "printing” is nothing more then equivalent to money creation in the private sector and it is not keeping up with private deleveraging.
> 
> The reality is almost diametrically opposed to the “printing press” myth. It was the run up to the GFC when people should have been talking about the printing press -when it was getting a real work out by the private sector and sovereigns with trades surpluses and pegged currencies.
> 
> The liquidity will only become a problem if an appetite for private borrowings returns and it is not efficiently drained at that time, until then it simply exists as excess reserves.




https://www.aussiestockforums.com/forums/showthread.php?t=24006&p=676965&viewfull=1#post676965


----------



## craft

DeepState said:


> Thought for the moment: When people talk about the option value of cash, how are you supposed to figure out what that value is?  This type of assessment is needed so you can determine whether it is better just to invest in something else that you think might make you money.
> 
> Trigger for thought: Recent El Erian article in FT.




Well I've got nothing to add for this one because it is still the question that I probably feel I have the most underdeveloped answer for. 

Sorry wasted post - just acknowledgement of a an intriguing thought raised.


----------



## sinner

DeepState said:


> Except that's not what they have been doing.




That section was supposed to be a hypothetical demonstration of political expediency. But I do find it strange to claim they haven't been doing this when the Fed bought literally half of all gross MBS issuance in 2014...



DeepState said:


> ....which would all be fine if it were actually true.  Except it really doesn't work at the magnitude implied.




It is true. Again find it a bit strange to hear a claim like this after having it explained by a former Fed economist.



> Clearly, that is not a sign that the Fed is ready to initiate what is widely known as an interest rate normalization process, or, put more simply, the departure from the current 0-0.25 percent interest rate target. This key policy rate is systematically kept around the middle of that range.




When you say it doesn't work at the magnitude implied, I'll point out that there is no implication that there is a one-to-one relationship between the FFR and monetary base. Only that the monetary base is directly linked as the transmission mechanism to the FFR. The relationship as shown in the scatterplot is monetary base as a ratio of GDP. Consider as an example the case of a strongly growing GDP, the ratio of MB to GDP would be naturally falling (i.e. implied raising of rate) and so the Fed must increase the monetary base by a little (commensurate amount) just to stay steady. 

But regardless, just to demonstrate the point (since the rather clear scatterplot does not seem to be sufficient).




I guess you must consider the trends and timing of peaks and troughs here to be mere coincidence?



> More recently, since GFC, the money base expanded hugely.  It wasn't to push the Fed rate towards zero.  It was to push the longer end of the curve down and lubricate the credit mechanism.  The Fed could have held the Effective Rate at close to zero without needing to expand the balance sheet to this degree.  Instead, it chose to also reduce the rate at the end of the curve.




Yes.


----------



## sinner

craft said:


> This money volume debate has been going on for some time. A couple of my previous posts - which is still how I see it.




Find these quotes pretty difficult to understand due to the nomenclature used. Do note that I already tried to share a FOFOA link explaining my view with no response. Yes the posts are long but the discussion cannot be covered in a few short sentences.



> This is the full data set for US Money Supply to GDP.




That is a chart of the St Louis Adjusted Monetary Base to GDP?

Monetary base is not the same as money supply. 

https://en.wikipedia.org/wiki/Monetary_base


> The monetary base should not be confused with the money supply which consists of the total currency circulating in the public plus the non-bank deposits with commercial banks.




Please clarify.

Money Supply/GDP would actually be the inverse of velocity. Most measures of Money Supply (M1, M2, M3) only include the physical currency portion of the monetary base.



> Currency is just a small part of the money supply.




When you say currency here, are you referring to the monetary base? Or to the relatively small portion of base money which is made up by currency?



> Currency is a liability for the Fed.




The monetary base, excluding physical currency, is a liability for the Fed to render physical currency to the holder (commercial banks).

If you're claiming physical currency is a liability of the Fed, what precisely do you think the Fed is liable to the holder for? I actually have a USD handy on my desk, what it says on there:



> THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.




No mention of any liability on the part of the Fed, only a legal proclamation that you can clear debts with it.

and here



> If they add 'new' assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply.




Please clarify what you're referring to here by "liquidity" and "money supply".


----------



## DeepState

sinner said:


> 1. That section was supposed to be a hypothetical demonstration of political expediency. But I do find it strange to claim they haven't been doing this when the Fed bought literally half of all gross MBS issuance in 2014...
> 
> 
> 
> 2. It is true. Again find it a bit strange to hear a claim like this after having it explained by a former Fed economist.
> 
> 
> 
> 3. When you say it doesn't work at the magnitude implied, I'll point out that there is no implication that there is a one-to-one relationship between the FFR and monetary base. Only that the monetary base is directly linked as the transmission mechanism to the FFR. The relationship as shown in the scatterplot is monetary base as a ratio of GDP. Consider as an example the case of a strongly growing GDP, the ratio of MB to GDP would be naturally falling (i.e. implied raising of rate) and so the Fed must increase the monetary base by a little (commensurate amount) just to stay steady.
> 
> 4. But regardless, just to demonstrate the point (since the rather clear scatterplot does not seem to be sufficient).
> 
> View attachment 64999
> 
> 
> I guess you must consider the trends and timing of peaks and troughs here to be mere coincidence?
> 
> 
> 
> Yes.






1. Your comments related to taking junk off the balance sheets of banks and socialising losses.  The Fed does not buy stuff of that nature within its programs.  RMBS securities were purchased.  They were the higher grade stuff which were guaranteed by government-sponsored entities.  No losses were taken.  The same could not be said for Lehman or Bank of America.

2.  “Those forecasting rate normalisation are implicitly giving a pretty strong forecast of GDP growth or commensurately strong forecast of monetary base reduction”.  Perhaps. Could be that this function is that Fed Rate = A + B x (MB/GDP+C)^(-1) + Error, where B is rather close to zero for the horizon of the next couple of years.  In this sense, it could be true.  But I’m stretching here to find some common ground as you seem to imply a rather higher R-squared.

My point is that these two things are not necessarily linked tightly enough to care too much about this when it comes to the lift-off question.  You seem to demand respect of this relationship as if it were physics.  A very viable path for the Fed is to raise official rates to 2% and only then ceasing reinvestment...which will see the balance sheet shrink more materially from that point only.  This is a violation of the Hussman relationship and any implication that a prediction of a Fed Rate rise necessarily comes with some major move in the MB/GDP in order to be consistent.  If it were to occur, this would lie outside of the relationship implied by quite some margin and would seemingly defy what you think should happen. The Hussman relationship and use is basically saying that the monetary policy balance sheet expansion entry and exit of the Great Depression era, and the entry pattern for the most recent GFC episode for the latest expansion has to be the path laid for exit (Fed rate vs MB/GDP). No, it does not.

So, as if to prove the point, the Fed members are forecasting that they will raise rates to around 2% by around Q1 2017 and for there not to be a reduction in the balance sheet size anywhere near the magnitude this seemingly compulsory repeat of history, forwards and backwards, seems to call for.  The Fed has said, after lift-off (as in, not necessarily the very next second) they will consider whether to cease or reduce Treasury reinvestment - almost half of which will take more than five years to roll off if commenced immediately.  They expect to hang on to all their MBS - the great bulk of it is over 10 year maturity. This says nothing of the usual liquidity operations going on in the background. Their nominal GDP forecasts aren’t astronomical either. Somewhat below the post 1971 non-recession average. 

So the very people who set these rates and determine the balance sheet size are violating this relationship which you seem to think is inviolable and which Hussman places weight on.  The Fed thinks rates will get to 2% for almost no change to the MB/GDP ratio. Certainly any change would be far less than implied by this discourse.

The Fed economist can say what he wants about a minor variation in the balance sheet and that the signal from this implies no rate rise coming.  Apparently the Fed voting members think otherwise when, for instance, they state it in public that rates should rise really soon. Given Fed communication is vital for setting expectations, I would rate their jawboning over examination of obtuse stats by a technocrat trying to infer what the Fed is really thinking when they are saying something else and taking what they say very seriously. 

3.  Yep, no probs.


4. The new chart adds a time dimension, which is helpful given that all time periods in monetary history are hardly equally relevant for today’s situation. Except that this chart does not go back as far as Hussman’s chart. This is relevant because most of the dots on Hussman's right hand side come from the Great Depression era. Those relationships have occurred, though there is a bit more going on that a two-axis diagram might suggest#.  I would add that this relationship in Hussman’s chart is technically “spurious” if being regarded as a valid regression as well – which is clearly the implication.  But someone else can jump in to discuss this.  It’s not good science.  

In any case, the implications drawn from them are the issue to hand.

You clearly assert that a move on the Fed rate to 2%, say, must be accompanied by some dramatic reduction in the Monetary Base (and, thus, the MB/GDP ratio…because nominal GDP is not going to do it for you in the next 18 months).

The Fed members do not agree.  I do not agree either.  

Hussman and Sinner think it must be so.  That’s fine.  

# For example, what changed in terms of monetary policy objectives and use of tools around the base of the MB/GDP time series?  It’s rather important to allow for major regime shifts in non-stationary data to avoid drawing incorrect assertions assuming they are stationary.


----------



## DeepState

Been a rough year for global macro hedge funds.

BlackRock closed the Global Ascent product yesterday.  This fund was in the walk-on-water category in prior years.  It joins closures by Fortress, Bain, Renaissance Capital and funds backed by fmr Tiger Hedge Fund founder Julian Robertson.  Huge names.


----------



## DeepState

CALPERS got a bargain for its billions:


----------



## DeepState

DeepState said:


> 1 March 2015
> 
> Quick Take-outs:
> 
> + Downgrade based on lower than forecast Assisted Repro cycles (ARS).  Has every reason to rebound to historical norms unless infertile women have stopped wanting babies and/or men have stopped wanting to try put babies in them. I have no evidence of either.






DeepState said:


> 10 March 2015
> 
> ART is cyclical. It is a 'luxury', unlike pharma or getting so sick you end up in hospital.  They are price sensitive and appear impacted by macro conditions.  For DCF, some allowance for this is probably sensible.






DeepState said:


> 25 Nov 2015
> 
> Adding to the list of curious stats.... I understand that IVF treatment cycles are picking up.  Now that's a sign of confidence in the economy more broadly than just the rarified air of ill-gotten gains.




Today: Yeah baby











DeepState said:


> 18 Feb 2015
> 
> Wife: "yeah, but it can go down as well".




Duly noted sweetheart.


----------



## skc

DeepState said:


> Today: Yeah baby




That's what they say when couples successfully conceive with MVF.

It feels like a no brainer with the industry data at hand... I traded some VRT on the back of the news as well and worked a treat - even though VRT didn't nearly get enough cheering on its own AGM.


----------



## VSntchr

skc said:


> That's what they say when couples successfully conceive with MVF.
> 
> It feels like a no brainer with the industry data at hand... I traded some VRT on the back of the news as well and worked a treat - even though VRT didn't nearly get enough cheering on its own AGM.




So did I, although I was a bit worried with it given that MVF gave a fair bit of weight to the statements around gaining market share, clearly at a loss to VRT. This had me hovering closely and in the end I didn't really maximise the trade. 

Although perhaps an expanding industry pie obviously means share isn't as critical is in something like TV ratings.


----------



## shouldaindex

At some stage medicare funding is likely to be reduced IMO re:IVF.


----------



## DeepState

HNY and greetings from Tokyo.  

A man walks into a hotel lobby in Minato-ku and finds himself seated next to a long term investor.

Man: Konbanwa, Gaijin.  I have infinite funds.  I see you are a long term investor, impervious to drawdowns.

LTI: Indeed.  I set off metal detectors at airports.

Man: Truly impressive.

LTI: So, why are we talking?

Man: Analysis of your trades has shown that you get 60% of your trades right and you have positive expectancy.  That's truly incredible!

LTI: Indeed.  I set off metal detectors at airports. It's a real hassle I tell you.  Much easier to fly private.

Man: Ok then.  I offer you a trade where I will take whatever is in your portfolio.  Don't worry about it, I am a cousin of Kuroda, and we can print as much money is needed to support our pledge to you.  

LTI: What?  

Man: It gets better.  I will match your 60% hit rate.  I will create a coin which flips AWESOME 60% of the time and DRAWDOWN 40% of the time.  Each time AWESOME comes up, I will increase your funds at the time by 90%.

LTI: Awesome.

Man: But, given this is investment, if DRAWDOWN comes up, I am going to take 90% of whatever is in your funds at the time.

LTI: Of course.

Man: So each time you do this, you have your majestic positive expectancy.  You expect to make 0.9 x 0.6 - 0.9 x 0.4 = 18%.  Almost as good as Buffett.

LTI: Yep, I'm about as good as Buffett, so that sounds right.

Man: But, what about those drawdowns, can you take them?

LTI: I invest for the long term.  I set of metal detectors at airports.  Drawdowns don't concern me.

Man: So, if we think of one coin flip as being a month's outcomes, we can do this maybe a couple of hundred times?  Let's say 240?  Twenty years equivalent?  Compounding the entire portfolio each period, just like you would as a long term investor who doesn't need to worry about such things as living off cashflow from the portfolio.

LTI:  You're going to need Kuroda to make good on all the money you will owe me in a few minutes.  You're the dumbest schmuck I have ever come across and, as a rampant capitalist, am duty bound to lead Japan into another round of quantitative easing.  OK.  My funds have been transferred.  Let's roll.  Positive expectancy.  Long term investment horizon.  Impervious to drawdowns.  You are screwed.

Man: (Pours Sake sitting in a hotel lobby at 1:00am Tokyo time). Let's roll.


What happens next?

--- 

PPP basket (Sake, Espresso, Sushi) suggests that YEN is close to parity with AUD.  I have no signal.


----------



## craft

DeepState said:


> HNY and greetings from Tokyo.
> 
> A man walks into a hotel lobby in Minato-ku and finds himself seated next to a long term investor.
> 
> Man: Konbanwa, Gaijin.  I have infinite funds.  I see you are a long term investor, impervious to drawdowns.
> 
> LTI: Indeed.  I set off metal detectors at airports.
> 
> Man: Truly impressive.
> 
> LTI: So, why are we talking?
> 
> Man: Analysis of your trades has shown that you get 60% of your trades right and you have positive expectancy.  That's truly incredible!
> 
> LTI: Indeed.  I set off metal detectors at airports. It's a real hassle I tell you.  Much easier to fly private.
> 
> Man: Ok then.  I offer you a trade where I will take whatever is in your portfolio.  Don't worry about it, I am a cousin of Kuroda, and we can print as much money is needed to support our pledge to you.
> 
> LTI: What?
> 
> Man: It gets better.  I will match your 60% hit rate.  I will create a coin which flips AWESOME 60% of the time and DRAWDOWN 40% of the time.  Each time AWESOME comes up, I will increase your funds at the time by 90%.
> 
> LTI: Awesome.
> 
> Man: But, given this is investment, if DRAWDOWN comes up, I am going to take 90% of whatever is in your funds at the time.
> 
> LTI: Of course.
> 
> Man: So each time you do this, you have your majestic positive expectancy.  You expect to make 0.9 x 0.6 - 0.9 x 0.4 = 18%.  Almost as good as Buffett.
> 
> LTI: Yep, I'm about as good as Buffett, so that sounds right.
> 
> Man: But, what about those drawdowns, can you take them?
> 
> LTI: I invest for the long term.  I set of metal detectors at airports.  Drawdowns don't concern me.
> 
> Man: So, if we think of one coin flip as being a month's outcomes, we can do this maybe a couple of hundred times?  Let's say 240?  Twenty years equivalent?  Compounding the entire portfolio each period, just like you would as a long term investor who doesn't need to worry about such things as living off cashflow from the portfolio.
> 
> LTI:  You're going to need Kuroda to make good on all the money you will owe me in a few minutes.  You're the dumbest schmuck I have ever come across and, as a rampant capitalist, am duty bound to lead Japan into another round of quantitative easing.  OK.  My funds have been transferred.  Let's roll.  Positive expectancy.  Long term investment horizon.  Impervious to drawdowns.  You are screwed.
> 
> Man: (Pours Sake sitting in a hotel lobby at 1:00am Tokyo time). Let's roll.
> 
> 
> What happens next?
> 
> ---
> 
> PPP basket (Sake, Espresso, Sushi) suggests that YEN is close to parity with AUD.  I have no signal.




LTI gets too close to really powerful magnet - but unfortunately the rest of his body is not close enough.

.........

risk of ruin is just about guaranteed


----------



## Ves

craft said:


> risk of ruin is just about guaranteed



At any point if two trades in a row are wrong he has lost 99% of the equity figure at the time.  Correct?


----------



## satanoperca

My first thought was sounds like a good wager for LTI, however how wrong I was.

LTI can never win and will eventually have less than 1 cents left of capital no matter if he gets 6 straight win followed by 4 straight losses or vise versa.

For LTI to win he needs the payout to be no greater than %38 with 20% being the sweet spot.

Going to have a play around with some numbers on win loss ratios, % lost on each trade and % gained on winning trades.

Thanks for brain game TFBD.

Cheers


----------



## cynic

Mathematically the sequence of losses should prove irrelevant to the final outcome as it is the result of a series of multiplications. Provided 60% of the outcomes in the sample are wins then 18% profit will be the net result. This is may be an example of yet another sound theory that is prone to failure when when applied in the real world..


----------



## skyQuake

Think the problem here is win amount and loss amount is dynamic rather than fixed.


----------



## Klogg

cynic said:


> Mathematically the sequence of losses should prove irrelevant to the final outcome as it is the result of a series of multiplications. Provided 60% of the outcomes in the sample are wins then 18% profit will be the net result. This is may be an example of yet another sound theory that is prone to failure when when applied in the real world..




Actually, the theory is even wrong in this case. If you open Excel and actually play out the whole thing, using the probabilities mentioned, the LTI always loses, and by a big margin.

If they were playing for a fixed amount, rather than an amount relative to total capital, this would be different (but not necessarily reflective of an investment strategy).

To be completely honest, I'm not exactly sure how to cleanly represent the actual theory applied, only that the calculation provided is misleading because it uses relative amounts of capital (i.e. _0.9 * 0.6 - 0.9 * 0.4 = 18%_ is actually not representative of the outcome). 
FWIW - the average winnings would be 18%, but this would not be a weighted average, which I believe is where the problem lies...


----------



## satanoperca




----------



## systematic

Man has infinite capital, LTI does not.  Man survives.


----------



## skyQuake

Here's a hint: 

Double or nothing at 50% odds

50% *2.0 + 50%*0.0 = 1.0

However we all know nobody sane keeps playing this!


----------



## craft

With a 60% win rate over 240 occurrences you are as likely as not to hit at least a losing streak of 6.
Loosing 90% of your account 6 times = 10%^6.  So you have an average chance of drawing your account down to 0.0001% of whatever it was prior to the losing streak. (ie $1,000,000 becomes $1)    

It’s a play on percentages. A 90% markdown requires a 1000% mark-up. If the man was offering you 10 fold each time you win to compensate for the 90% when you lose then you would actually have the an 18% expectancy.


----------



## cynic

craft said:


> With a 60% win rate over 240 occurrences you are as likely as not to hit at least a losing streak of 6.
> Loosing 90% of your account 6 times = 10%^6.  So you have an average chance of drawing your account down to 0.0001% of whatever it was prior to the losing streak. (ie $1,000,000 becomes $1)
> 
> It’s a play on percentages. A 90% markdown requires a 1000% mark-up. If the man was offering you 10 fold each time you win to compensate for the 90% when you lose then you would actually have the an 18% expectancy.




Well spotted klogg and craft. It turns out that the trader would lose approximately 99.53% of his capital within the first 10 trades (i.e. 0.1^4 Ã— 1.9 ^ 6)

Raise that to the power of 24 and he will be near enough to flat broke.


----------



## Klogg

craft said:


> With a 60% win rate over 240 occurrences you are as likely as not to hit at least a losing streak of 6.
> Loosing 90% of your account 6 times = 10%^6.  So you have an average chance of drawing your account down to 0.0001% of whatever it was prior to the losing streak. (ie $1,000,000 becomes $1)
> 
> It’s a play on percentages. A 90% markdown requires a 1000% mark-up. If the man was offering you 10 fold each time you win to compensate for the 90% when you lose then you would actually have the an 18% expectancy.




Sorry to ask, but could you please post the math to get to the 18% expectancy? (i.e. how'd you figure out it was 1000%).
I'm failing to figure it out...


----------



## cynic

Klogg said:


> Sorry to ask, but could you please post the math to get to the 18% expectancy? (i.e. how'd you figure out it was 1000%).
> I'm failing to figure it out...



(1 /(1-0.9)) Ã— 100


----------



## cynic

cynic said:


> (1 /(1-0.9)) Ã— 100




However, I  believe the expecta cy to be considerably higher than 18 %. More like 67.8%edit (make that 61.5%) edit (no o  second thoughts I will stick with 67.8 %)


----------



## craft

Klogg said:


> Sorry to ask, but could you please post the math to get to the 18% expectancy? (i.e. how'd you figure out it was 1000%).
> I'm failing to figure it out...




Sorry Klogg you probably can’t make sense of it because it’s wrong – its only 900%. (quick posts on holidays  - not always accurate - actually I'm just make most of this **** up so its probably all wrong)

The old mark-up / margin  calculation.

Start  $100 loose $90 = new capital of $10. Require $90 from $10 to regain position = 90/10 = 900%

Once you compensate for the geometric vs arithmetic effect the expectancy is generated solely by the 60% win rate. 
1x.6 – 1*.4 = 20%

Its an extreme example of something that most should be aware of with their expectancy calculations but ....

Loss in original example on a geometric basis is 10 times bigger than the win. So expectancy that you gonna get in real life is 0.6*.9 – 0.4*9 =NEGATIVE 3.06 (give or take a bourbon or two)


----------



## Klogg

craft said:


> Sorry Klogg you probably can’t make sense of it because it’s wrong – its only 900%. (quick posts on holidays  - not always accurate - actually I'm just make most of this **** up so its probably all wrong)
> 
> The old mark-up / margin  calculation.
> _
> Start  $100 loose $90 = new capital of $10. Require $90 from $10 to regain position = 90/10 = 900%_
> 
> Once you compensate for the geometric vs arithmetic effect the expectancy is generated solely by the 60% win rate.
> 1x.6 – 1*.4 = 20%
> 
> Its an extreme example of something that most should be aware of with their expectancy calculations but ....
> 
> Loss in original example on a geometric basis is 10 times bigger than the win. So expectancy that you gonna get in real life is 0.6*.9 – 0.4*9 =NEGATIVE 3.06 (give or take a bourbon or two)




Thanks craft - I didn't convert the relative to the absolute (line in italics), so was failing to calculate the correct expectancy.

Much appreciated.


----------



## Habakkuk

Klogg, you're closer to the correct answer than craft this time. Remember, he is in holiday mode.

The expectancy in the story is actually POSITIVE 18%.

If these were straightforward even-money bets, the expectancy would be positive 20%.
You bet 100$. You win 100$  60% of the time and you lose 100$  40% of the time.
In the story you only win 90 rather than 100, but you also only lose 90 rather than 100.

Why then does LTI wipe out his capital?

Because he has to bet ALL of his capital every time. The Man says so, and LTI who knows about expectancy but can't apply correct position sizing according to The Ultimate Guide by Van Tharp gets wiped out.

If he could just bet a fraction of his capital 240 times, he would get rich, but he can't. The length of the losing runs don't help, of course, as craft points out, but even if there were never two consecutive losses, he would still wipe out.

DeepState has made up a very clever little story. I like the bit about "almost as good as Buffett", LTI confusing expectancy with annual growth rate.


----------



## Klogg

Habakkuk said:


> Klogg, you're closer to the correct answer than craft this time. Remember, he is in holiday mode.
> 
> The expectancy in the story is actually POSITIVE 18%.




Actually, I'm quite confident craft is correct. Converting to an absolute value is the right way of looking at it I believe.

If you use the 90% value, it's not an even bet each time, so the expectancy is thrown out. The same would occur if you went with a 5% value, but the change in capital wouldn't be so dramatic.


----------



## peter2

The expectancy is as stated and the problem is that LTI is investing too much on each coin toss.

The Kelly Criterion shows the optimum bet size for this proposal is to "invest" no more than 20% on each toss. 

K% = 0.6 - [0.4 / AW/AL] = 0.6 - 0.4 = 0.2 = 20%

In practice the Kelly calculation can produce large draw downs, even using the correct position size, but as LTI sets off metal detectors at airports he will be able to handle that and profit handsomely if he is allowed to invest more wisely.


----------



## barney

craft said:


> - *actually I'm just make most of this **** up so its probably all wrong*)
> 
> (*give or take a bourbon or two*)





LOL .............. now you're speaking a language I can understand 

Good thread DeepS


----------



## craft

peter2 said:


> The expectancy is as stated



 Yep in theory but in real life only if the bet size is the *same dollar* amount each time. As soon as you start talking fractional size of a portfolio for position sizing or any dynamic position size for that matter you better start thinking geometric rather than arithmetic or the expectancy calculation isn't going to tell you diddly squat about real life.  Individual size, and sequence of every win/loss skews the real life expectancy from theory. (as the extreme analogy demonstrates)

Keeping the bet size small will at least stop the misconceptions about expectancy hurting you too much in real life. 

If the LTI was allowed to change the rules and ask for a *constant* bet *size small enough that he would effectively have no chance of ruin* then he could have had a shot at the theoretical 18% expectancy - except 240 occurrences is not enough to mean much given a 60/40 win rate. Position size should be a synthesisation of your acceptable drawdown tolerance based on the *probable* string of losses that can arise given your win rate and the correlation of your positions if you have multiple positions. 


Ps

Habakkuk – You weren’t my high school maths teacher were you?


----------



## satanoperca

Hi,

Been playing with individual position size (1% of capital), portfolio position size, portfolio heat at any time in the market (% amount at risk at anyone time regardless of the number of positions based on stops and an error factor for slippage/gap downs) and win/loss ratio while counting for a large run of loses in a row and size of potential draw down. 

It would be great if anyone could elaborate on how they calculate how much is at risk if there is a wipe out day and stops at hit. What % of capital.

Another question is if the bet was :

LTI had a win loss ratio of 50%, coin toss 
LTI was paid 100% of his capital for each win
The man only 50% of LTI's capital a win

Would LTI be better off?


----------



## craft

peter2 said:


> The expectancy is as stated and the problem is that LTI is investing too much on each coin toss.
> 
> The Kelly Criterion shows the optimum bet size for this proposal is to "invest" no more than 20% on each toss.
> 
> K% = 0.6 - [0.4 / AW/AL] = 0.6 - 0.4 = 0.2 = 20%
> 
> In practice the Kelly calculation can produce large draw downs, even using the correct position size, but as LTI sets off metal detectors at airports he will be able to handle that and profit handsomely if he is allowed to invest more wisely.




If you are talking 20% of cumulative balance that will keep you in the game but the variance in the equity curves are insane, the importance of the 18% theoretical expectancy is absolutely dwarfed by the real world impact of sequence of wins and losses.

4 different random simulations with same variables: 60% win rate; 90%win amount; 90% loss amount; 20% of current balance as bet amount.




Run 1 final balance of $18,009,347 – 62% max drawdown
Run 2 final balance of $1,409,357 – 84% max draw down
Run 3 final balance of $2,896 – 99% max drawdown
Run 4 final balance of $17,873 – 97% max drawdown.

If you are talking fixed dollar amount based on initial account size, 20% is far too high a risk of ruin.




Anyrate enough dribble from me apparently I should be showing more interest in going shopping - yay Joy.


----------



## cynic

satanoperca said:


> Hi,
> 
> Been playing with individual position size (1% of capital), portfolio position size, portfolio heat at any time in the market (% amount at risk at anyone time regardless of the number of positions based on stops and an error factor for slippage/gap downs) and win/loss ratio while counting for a large run of loses in a row and size of potential draw down.
> 
> It would be great if anyone could elaborate on how they calculate how much is at risk if there is a wipe out day and stops at hit. What % of capital.
> 
> Another question is if the bet was :
> 
> LTI had a win loss ratio of 50%, coin toss
> LTI was paid 100% of his capital for each win
> The man only 50% of LTI's capital a win
> 
> Would LTI be better off?




Lti would break even after a typical succession  of coin tosses. I.e. 0.5 X 2 = 1. 

1^n will always equal 1.


----------



## DeepState

.....24 minutes later, the last coin toss is made.  LTI is in too much shock to notice what the outcome was.  After all,  a number next to zero multiplied by 1.9 or 0.1 is still pretty much still next to zero.

LTI: What the deep fried sushi??  I've just toasted my entire portfolio!!!  That's BS, you're farking with me!!! 

Man: My pants are still on, Gaijin.  It is your y-fronts which are stretched over your back, over your face and tucked under your chin.

LTI:  (Muffled) How can this be?  The coins did toss up a 60% hit rate.  The payments were as specified.  The trade by trade outcome has an expectancy of 18%.  Like Buffett.  Dammit, I have read his annual reports and never take more than 5 seconds to conduct a DCF. How can this be??? (shock turning to table thumping)

Man: Not quite so straight forward is it LTI.  

LTI: How did your fiendish sleight of hand work? TELL ME!!

Man: On any given trade, the exected return is 18%.  Compounding these is a whole other thing.  Any positive expectancy has to be great enough to allow for recovery of losses.  The more extreme the potential outcomes, the harder it is to achieve.

LTI: But with positive expectancy and a long term horizon, I should make money and am right to be impervious to drawdowns.

Man: Get this through your head - Apparently not. Do the math. Alternatively, ask someone who can. Apparently there are Australian equity chat sites that have such people. The compound return here was about -21%.  A pretty far cry from the expectancy you have heroicially generated and based so much of your confidence on.  Here, have a sake.  On the house.

LTI: What if I had implemented a stop loss and skipped two rounds or more if I had taken three losses in a row?  What if I waited for a three win set-up to position?

Man: There is no combination of these things that would have changed this outcome except for not taking up the challenge in the first place or effectively sitting out so much of it that there was essentially no play.  These coins have no memory of what the last outcome was.  

LTI: What if I diversified?  What if we ran the coins on two original parts of my portfolio instead?

Man: As it turns out, you aren't the only LTI we've been fuelling our foreign reserves with.  You are the 1000th this month.  Each one ended up like you.  Busted despite 18% expectancy, lots of stop loss and sit out programs, steel body parts.  Some had big accounts, some had small accounts. And everything in between.  Put them all together and you have the equilvant of a buy-hold, diversified, portfolio of stocks with 18% period to period return expectations and return outcomes that we had decribed.  That combined portfolio also went to the BOJ balance sheet.  

LTI: Misery loves company.

Man: Wouldn't know.

LTI: Although somewhat extreme, the set up is kind of like that for the kinds of stocks most talked about on HC.  Other very smart people on an excellent site that I have come across and provide general advice on, ASF, have also made such observations too.  Analysis of the turnover of the commentators who are the most frequent traders and hot and heavy on high-spec stocks like we have been modeling shows they don't last! 

Man: Pure coincidence no doubt.

----

As the sun rises, the man and LTI are still at the bar.

LTI: What if....blah blah

Man: Busted...

..

LTI: (Through bleary eyes) What if I had split my portfolio into 100 equal parts and, at each turn, had 100 of those coins rolled independently. One coin for each portion of the porftfolio. No matter what happened, I would re-divide the portfolio into 100 equal parts and do this again in the subsequent rounds.  What if I had done that for 240 rounds???

Man: LTI, may I call you Joe?  Joe, the BOJ is pleased to stake you for USD $1bn.  Here is a honeypot for your right arm (attractive arm candy arrives).  Out in the world are millions of people who will take the other side of your trade.  Your job is to take them down, but not so fast that newcomers with big eyes are discouraged from arriving in droves to replace the prior generation of hopefuls. Some will really have positive expectancy,  steel body parts, long term investment horizons and perceptions of being impervious to drawdowns.  Dack 'em anyway.

There will also be some who will not take the other side.  Nod with respect.  Also, it's probably a good idea to remember that coins and markets share similarities, but are not the same.


Please feel free to insert observations on money management that may be helpful to readers.


----------



## qldfrog

Thanks DS for your nice lesson in stats, risks and expectancies.Any feeling as tho the market general situation?
While not close yet at the time of this post, Wall Street still going downward, bringing the AUD along.
Oil and gold +- even when seen in AUD.
a needed drawdown or a more profund issue with the debt related to oil (and for Oz gas investment)
Does the "oil debt"and ramifications worries you?; I have no real idea which banks are exposed (here and O/S) and that info looks hard to get: exposure of banks to oil?
Please note that at this price i am actually bullish mid term for oil: I expect serious issues in S.A. coming from within and oil will not stay where it is when RIAD is in flamme, especially as I see probable a conflict with Iran triggered by the royals in S.A. to create internal diversions for their populace when things turn ugly.
Oil at 33$ today just need to go to $50 which is still quite low to create a 50% gain, I can wait 5 years for that and my return would be quite decent overall, so I see my risk more in the actual instrument I use (oil index OOO) 
HAve a nice week end


----------



## DeepState

qldfrog said:


> Thanks DS for your nice lesson in stats, risks and expectancies.Any feeling as tho the market general situation?
> While not close yet at the time of this post, Wall Street still going downward, bringing the AUD along.
> Oil and gold +- even when seen in AUD.
> a needed drawdown or a more profund issue with the debt related to oil (and for Oz gas investment)
> Does the "oil debt"and ramifications worries you?; I have no real idea which banks are exposed (here and O/S) and that info looks hard to get: exposure of banks to oil?
> Please note that at this price i am actually bullish mid term for oil: I expect serious issues in S.A. coming from within and oil will not stay where it is when RIAD is in flamme, especially as I see probable a conflict with Iran triggered by the royals in S.A. to create internal diversions for their populace when things turn ugly.
> Oil at 33$ today just need to go to $50 which is still quite low to create a 50% gain, I can wait 5 years for that and my return would be quite decent overall, so I see my risk more in the actual instrument I use (oil index OOO)
> HAve a nice week end



HNY QF

Not following markets to any great detail at present.  Brain dump:

Economics looks alright in big picture summary terms so this sell-off appears sentiment driven.  Big falls in LatAm accompanying China.  Must be something more to it given the commodities are also moving.  Can't all be a supply side issue for all I am guessing. Risk spreads continue to increase in the debt market with CDS spreads continuing to widen.  Perhaps the equity market is catching up to risk being priced in again.  All fine if that is all that it is and the process is orderly.  Key risk is that financial conditions in EM tighten a lot.  Can't tell if this is going on already on a big scale. No analysis done. Someone out there prob has a Goldman Sachs Financial Conditions index to hand and can share it.

Usual risk aversion trades are going on.  Cannot fully comprehend why China equity tail would wag global dog in a direct sense. Can understand if contagion takes hold. That's hard to predict but you can imply the pricing from movements, sort of, under a bunch of tenuous assumptions.  Too much movement to be consistent with the bond market pricing of risk assets - again on a quick look basis only. Could argue that this is an equity valuation correction which was just looking for an excuse.  That is valid, in my view, for the US.  Craft has outlined the calculations under XAO Bull.  Do this for the US and you get a different answer.  Just BTW, that thread might want to consider the imbalance between the shape of the Australian economy and the earnings in the index before drawing tight outcomes from the analysis and macro settings like GDP/Capita etc.  Need to allow for resource demand not being Aust sourced and additional capital requirements for banks etc. Might already be obvious to them.

Not shifting anything major in my portfolio.  Downside equity moves have been largely offset by bond yields coming in and AUD weakness in my case. Still taking some limited losses given the long bias, but not cutting my holiday short. No movements made on protection levels.  Easy not to be stressed when not looking and frequently inebriated.  Interesting, actually, to compare this to the last round in terms of emotional involvement.  I think there may be optimal alcohol levels for investment.  Not zero.

Major efforts recently are to find an improved departure point for my Australian equity portfolio.  That is, what should my equity portfolio look like if I conducted absolutely zero fundamental analysis or otherwise had no directional view on any stock.  It isn't the index.  

No forecast on oil.  You can forecast it, but the information content is questionable given it is a price between inelastic consumers and suppliers in the near to medium term.  Small changes in the real economy lead to large price movements. 1% supply increase has large consequences. The geopolitical elements are games on top of games.  I am an interested observer.  Interesting that Saudi Aramco might list.  Tells you something about Saudi government finances.  Think they will provide greater transparency to the market and help stamp out any corruption that might or might not exist???    

China devaluation was in line with my earlier statements and expectations given ongoing reserve drain and underlying PPP deflation.   If Europe and Japan can do it, why not peg yourself against them as well and do it too.  Makes it harder for the world to get going....and this is also a reason why developed markets might fall, but there is more to that argument and it is late.

I think we have seen this movie before.  I can't tell if it will have the same ending.


----------



## qldfrog

Appreciated and indeed HNY DS


----------



## DeepState

Was interested in all the recent machinations of the onshore and offshore renminbi markets.  Was curious as to how it all operates given it is clearly seen to be pivotal to stabilising financial markets more broadly and the exchange rate more specifically. Offshore interest rates were absolutely soaring recently as Chinese authorities soaked up the offshore supply to support the currency in the offshore market. In the process it was trying to shake out shorts and limit the arbitrage between the on and offshore rates. It seems like the type of thing that happens when some emerging market economy is running out of reserves and getting into the last gasp of defending its currency.  China probably isn't a good parallel to that.  Maybe.

Research consisted of typing a few terms into Google search and reading the very first article that came up.  "The difference between the confusing onshore and offshore renminbi market" from Business Insider  in 2013

http://www.businessinsider.com.au/difference-between-onshore-and-offshore-renminbi-2013-2

Some phrases of interest:

+ The crucial thing about the offshore renminbi is...free of Beijing's control

+ Borrowing costs are much cheaper in the CNH bond market

+ The expectation that the renminbi would appreciate has been a key factor driving demand for CNH

How things change.


----------



## DeepState

FT reports that we are at peak gold supply for the current cycle.


----------



## sinner

DeepState said:


> FT reports that we are at peak gold supply for the current cycle.




So much mining capacity (not just for gold, I guess) has been brought online during the commodity boom, as you well know it requires a lot of capital investment and relatively long lead times for that capacity to come online. So I guess it is hardly surprising we are at peak supply.

I think the peak will fall off rapidly as projects get mothballed, especially if there is financial sector contagion "we can't find your only-just viable gold mine because we are liquidating twenty completely unviable CSG and tight oil projects".

I guess I am one of only a few on the forum who even consider it interesting that we are at "peak gold supply" from mining and yet the inventory of physical gold has been drained from the bullion banking system (of which LBMA and GLD make up easily to two largest reserves) nonstop for 4 years. What does it mean when we are at "peak gold supply" and they still need to drain LBMA to meet demand?




I can already hear the clackety-clack of people replying (don't bother, this is a one off visit) "but, sinner, the inventory drain is merely because the price of gold went down!"...um...I guess that is why SLV is still carrying the same ~10,000 tons it has been carrying since 2011 when the USD price of an ounce of silver was ~$50 and now its ~$13.


----------



## DeepState

I learned tonight that you trade more speculatively when hungry than when feeling satiated.  (During dinner with an expert on obesity of all things - though neither of us could be said to be carrying any extra)

Evolutionarily, when you are needing nourishment in a big way, I suppose it would be better to take risk to get a kill rather than die of 'risk-free' starvation.  This effect is visible in the kinds of gambles that people choose to take when hungry.

FYI:

http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0011090

I suppose it is important to keep in a good state of internal equilibrium when investing/trading.  Staying glued to a screen without adequate attention to basic needs is hazardous to your wealth and health.


----------



## qldfrog

Thanks DS, a good rational excuse for that additional chocolate bar! 
But it makes sense: hunger (both physical or wealth) is not a good advisor; 
see how people under financial stress are the ones often making the riskiest investment and losing the lot;
Some people may then wonder cause or consequence:
 Are you under financial stress because you make stupid riskier financial decisions in the first place?
In any case, more lasagna for me tonight..maybe


----------



## DeepState

The BoJ recently announced a foray into NIRP, Negative Interest Rate Policy.  This follows the actions of other central banks, notably the ECB but also including Denmark and Sweden.

In April 2013, Kuroda (Bank of Japan Governor) introduced the so called QQE. A major monetary stimulus which was, proportionately, more significant than those of the ECB and Fed.  At the time, the BoJ expected that a 'virtuous cycle' would emerge which would lift inflation back to 2% per annum (all items excluding food) in "about two years".  This was designed to shake off the deflationary mindset which has beset Japan for over a decade.

The target date has been pushed out further with time despite increasingly aggressive actions.  Most recently, the expectation is for the inflation rate to reach the target level in the "first half of 2017"...but only if oil prices rise moderately from here.  Interesting that the BoJ has to take a punt on the future of oil prices to find a way to meet their targets.  Clearly a stretch argument, albeit plausible.


In more recent times, the ECB has indicated that more stimulus seems to be called for.  The tightening bias in the BoE has been withdrawn.  The US market is pricing in a single tightening in 2016 of 0.25%, relative to the Fed member expectations for four tightening steps in 2016.

Is it looking like monetary stimulus has run its course?  Or is this some temporary thing caused by the fall in oil and slowing in the emerging markets...partly caused by a fall in oil revenue?

The monetary authorities have largely been the prime force holding up the economy and keeping financial burdens in check.  Enormous faith has been placed in them.  What if it isn't justified?  Alternatively, what if it is justified, but they've now exhausted their credible tool set*?   Yet the markets continue to react as if there is still juice in this strategy.  Hmmm.


* More stuff like buying direct assets, financing infrastructure directly etc. have been proposed....can you imagine the RBA building, say, the East-West Link in Melbourne?? That's the sort of thing being discussed. Never say never I guess.


----------



## So_Cynical

sinner said:


> I guess *I am one of only a few on the forum* who even consider it interesting that we are at "peak gold supply" from mining and yet the inventory of physical gold has been drained from the bullion banking system (of which LBMA and GLD make up easily to two largest reserves) nonstop for 4 years.




One of the few, peak Gold and yet the POG holds up, i've been on the peak gold band wagon for a while.


----------



## DeepState

What portfolio should you hold if you want a basic exposure to the Australian market as a source of equity risk premium?  

The benchmark indices are arbitrary in the sense that a large bank is held at large weight simply because it is big.  Had a major buyer come in and taken a strategic chunk, reducing the float available in the bank, free-float adjusted exposures would fall.  Nothing changed in the operating environment. The benchmark indices are an indication of aggregate holdings available to public investors who do not take strategic chunks of companies.  It will produce returns better than the average of such investors due to the presence of frictions.  An odds on strategy to be above the money-weighted average of investors is simply not to try to beat the rest. Add tax considerations to this and, depending on the rate and whether you are a trader/investor, these frictions become very meaningful, although a few percent can seem trivial to many on this site...it isn't over time and considerably raises the bar to argue against a pure index approach. Nonetheless, is there a better starting point?

Risk parity is a concept which was brought into popularity by Ray Dalio of Bridgewater Associates, the world's largest hedge fund manager.  The idea has evolved to, kinda sorta, build a portfolio whose main components had equal risk contributions (proportion of overall volatility). This was a set and forget technique which required no further judgment about the future performance other than volatility and correlations.  That is, no specific return forecasts are made.  Dalio's idea was to apply this to a trust for his family after he had passed away...hence no forward looking judgment on returns, beyond estimation of risk.  

By doing this, the portfolio is well balanced in terms of risk contributions.  Each stock in the portfolio contributes the same amount to the volatility of the portfolio.  Risk parity. This takes into account volatilities and correlations, which have been demonstrated to be much more stable in estimation than for return forecasts for such things.

If all banks are essentially the same, adding another bank to the portfolio will see the exposures redistributed amongst all the banks, not an addition to the overall weight.  That seems pretty sensible.  

In other words, the risk parity portfolio does the best it can with the stocks available to build a widely diversified portfolio.  One whose exposures are as widely spread as possible given risk estimates.  The very diversified nature of the portfolio helps to protect against estimation errors.  It takes into account things like a bank's performance tends to be rather similar to the environment for discretionary consumer behaviour.

Based on data to late last year, the risk parity portfolio for Australian equities vs the ASX 200 index had the following GICS exposures (I have broken up Financials into finer definitions given their dominance in the Australian market): 





It has much less exposure to banks, preferring to spread the exposure more towards consumer discretionary stocks and other cyclical sectors (eg. IT and Industrials). The more stable nature of healthcare stocks (in general) sees them being given more weight.  Interestingly, the exposure to materials remains fairly in line.  I think it is clear that this portfolio is more diverse and possibly a more sensible way to gain exposure to the Australian market components.

The portfolio spreads its exposures differently from simply equally weighting the components.  However, the broad exposures do produce a significant bias away from the largest companies.  Although the exposure to small capitalisation companies is much larger than for the index, the diversification produced by this portfolio reduces the overall expected volatility relative to the index.  By dramatically reducing the exposure to large capitalisation stocks, company specific blow-ups are less impactful and pretty much no company specific event is going to hurt that much. 

I believe this concept is a useful consideration in determining a suitable departure point for a portfolio.  The expected range of performance of this portfolio relative to the index is +/-2.6% on a 1-std devn basis (ie. within this range two-thirds of the time over a year).  This means that variation in physical exposure via the use of index futures is viable.  There are also some rebalancing benefits which can be expected. If you think that all stocks in the index are expected to have the same geometric return (if you started them all at $1, they will just wiggle around like dust in the air, which has a small breeze, as the prices evolve. None is particularly destined to shoot away to either extreme), the RP portfolio is expected to produce about 1.4%per annum more from rebalancing effects (it won't get this due to frictions, but an edge will remain).


----------



## skc

DeepState said:


> The monetary authorities have largely been the prime force holding up the economy and keeping financial burdens in check.  Enormous faith has been placed in them.  What if it isn't justified?  Alternatively, what if it is justified, but they've now exhausted their credible tool set*?   Yet the markets continue to react as if there is still juice in this strategy.  Hmmm.




What is most interesting to me is that, few people acknowledge the fact that, economics is only an emerging area of study/science. Economics only really received much prominence since the great depression in the 30's... so while it's a field of some 80-90 years old, it's also a field that has a very slow feedback loop and is the subject of so many external factors. So we barely know which, if any, of the economic theories are correct and able to stand the test of time.

Most of the actions by Central Banks these days are untested. They have not been done before and they certainly have not been proven to work in the current economic environment (whatever that means in terms of our demographics, stage of technological advancement and stage of the natural resources). It will have unintended consequences and it may work for a while until some equilibrium is tipped somewhere else in the system. 

I personally have zero faith in the action of monetary authorities. If they achieve what they set out to achieve, it could be pure fluke as much as anything else.  It is truely a bit scary that billions of people's livelihood are being determined / influenced by a bunch of people in Central Banks based on untested theories.

Strange times we live in.


----------



## sinner

DeepState said:


> Risk parity is a concept which was brought into popularity by Ray Dalio of Bridgewater Associates, the world's largest hedge fund manager.  The idea has evolved to, kinda sorta, build a portfolio whose main components had equal risk contributions (proportion of overall volatility).




Regardless, here is the counterveiling view from Warren Buffett, the world's most successful fund manager (as measured by longevity weighted returns):


> Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments — far riskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. *Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.* Popular formulas that equate the two terms lead students, investors and CEOs astray.
> 
> ...
> 
> It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors — say, investment banks — whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.
> 
> For the great majority of investors, however, who can — and should — invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.



(from http://www.berkshirehathaway.com/letters/2014ltr.pdf)

There are 3 major categories of risk:
1. Systemic risk.
2. Systematic risk
3. Idiosyncratic risk

My  is only to point out that neither the approach of Berkshire or Bridgewater evaluate and cover all three, although I would submit that Berkshire comes closer than Bridgewater. Even funds like Talebs Empirica that went to great pains to ensure their counterparties would be able to pay on vol explosions, always placed their feet squarely on a foundation that "cash is king". Concepts like a major reserve currency crisis were simply not included in their assumption set.

Disclaimer: Submitted as someone who tracks volatility across different stocks and asset classes and believes it to be a useful quantitative tool for investment decisions.


----------



## craft

DeepState said:


> What portfolio should you hold if you want a basic exposure to the Australian market as a source of equity risk premium?
> 
> The benchmark indices are arbitrary in the sense that a large bank is held at large weight simply because it is big.  Had a major buyer come in and taken a strategic chunk, reducing the float available in the bank, free-float adjusted exposures would fall.  Nothing changed in the operating environment. The benchmark indices are an indication of aggregate holdings available to public investors who do not take strategic chunks of companies.  It will produce returns better than the average of such investors due to the presence of frictions.  An odds on strategy to be above the money-weighted average of investors is simply not to try to beat the rest. Add tax considerations to this and, depending on the rate and whether you are a trader/investor, these frictions become very meaningful, although a few percent can seem trivial to many on this site...it isn't over time and considerably raises the bar to argue against a pure index approach. Nonetheless, is there a better starting point?
> 
> Risk parity is a concept which was brought into popularity by Ray Dalio of Bridgewater Associates, the world's largest hedge fund manager.  The idea has evolved to, kinda sorta, build a portfolio whose main components had equal risk contributions (proportion of overall volatility). This was a set and forget technique which required no further judgment about the future performance other than volatility and correlations.  That is, no specific return forecasts are made.  Dalio's idea was to apply this to a trust for his family after he had passed away...hence no forward looking judgment on returns, beyond estimation of risk.
> 
> By doing this, the portfolio is well balanced in terms of risk contributions.  Each stock in the portfolio contributes the same amount to the volatility of the portfolio.  Risk parity. This takes into account volatilities and correlations, which have been demonstrated to be much more stable in estimation than for return forecasts for such things.
> 
> If all banks are essentially the same, adding another bank to the portfolio will see the exposures redistributed amongst all the banks, not an addition to the overall weight.  That seems pretty sensible.
> 
> In other words, the risk parity portfolio does the best it can with the stocks available to build a widely diversified portfolio.  One whose exposures are as widely spread as possible given risk estimates.  The very diversified nature of the portfolio helps to protect against estimation errors.  It takes into account things like a bank's performance tends to be rather similar to the environment for discretionary consumer behaviour.
> 
> Based on data to late last year, the risk parity portfolio for Australian equities vs the ASX 200 index had the following GICS exposures (I have broken up Financials into finer definitions given their dominance in the Australian market):
> 
> 
> View attachment 65719
> 
> 
> It has much less exposure to banks, preferring to spread the exposure more towards consumer discretionary stocks and other cyclical sectors (eg. IT and Industrials). The more stable nature of healthcare stocks (in general) sees them being given more weight.  Interestingly, the exposure to materials remains fairly in line.  I think it is clear that this portfolio is more diverse and possibly a more sensible way to gain exposure to the Australian market components.
> 
> The portfolio spreads its exposures differently from simply equally weighting the components.  However, the broad exposures do produce a significant bias away from the largest companies.  Although the exposure to small capitalisation companies is much larger than for the index, the diversification produced by this portfolio reduces the overall expected volatility relative to the index.  By dramatically reducing the exposure to large capitalisation stocks, company specific blow-ups are less impactful and pretty much no company specific event is going to hurt that much.
> 
> I believe this concept is a useful consideration in determining a suitable departure point for a portfolio.  The expected range of performance of this portfolio relative to the index is +/-2.6% on a 1-std devn basis (ie. within this range two-thirds of the time over a year).  This means that variation in physical exposure via the use of index futures is viable.  There are also some rebalancing benefits which can be expected. If you think that all stocks in the index are expected to have the same geometric return (if you started them all at $1, they will just wiggle around like dust in the air, which has a small breeze, as the prices evolve. None is particularly destined to shoot away to either extreme), the RP portfolio is expected to produce about 1.4%per annum more from rebalancing effects (it won't get this due to frictions, but an edge will remain).




Unless volatility has some utility as a 'true & thorough' measure of risk is it any better then straight equal weight? Seems like you have to settle the volatility = risk debate before you can really decide if quantitative risk parity is right for you.

I'm all for risk parity within my portfolio but the risk assessment is perception/judgement based- I'm not smart enough to be able to code and quantify risk.


----------



## sinner

craft said:


> Unless volatility has some utility as a 'true & thorough' measure of risk is it any better then straight equal weight? Seems like you have to settle the volatility = risk debate before you can really decide if quantitative risk parity is right for you.
> 
> I'm all for risk parity within my portfolio but the risk assessment is perception/judgement based- I'm not smart enough to be able to code and quantify risk.




It depends on the desired goal to be achieved but the work of Eric Falkeinstein is pretty convincing in this regard, 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1103404

This is just a snippet of table 6.1 (PDF version of the paper available for free at the link above) but you can see it ranks quite well as a standalone quantitative measure amongst a universe of stocks in predicting bankruptcy (high vol firms more likely to go bankrupt) compared to much more complex measures.



Falkenstein is no longer blogging but the pages of his "Falkenblog" will provide an enlightening read about some properties of volatility and whatnot.

Most modern corporate bankruptcy models at least include vols as an input.


----------



## DeepState

Risk Parity

Thanks for your considered expansions.

Volatility is a statistical construct as a measure of risk.  It has nice maths properties which help to make them popular and give some sensation that investment is sort of like physics. False comfort there.  It's not the kind of risk which matters ultimately (having insufficient funds to meet your objectives/live adequately) in investment.  It is just a proxy.

As a proxy, it is very likely to be better than the alternative of assuming that all stocks are equally risky (Buffett definition).  It is not perfect. There will be exceptions here and there.  Some ultra-speculative stock might be a 10x.  In retrospect it wasn't dangerous or speculative at all....

Some super-safe investment, like AAA tranches of CDO securities in 2008, turned out not to be so safe. 

The shortcomings of these proxies mean that we should not push models which rely on such constructs. One good thing about RP is that it is fairly robust to errors in estimation.

If you've got an excellent way to estimating risk per Buffett (including systemic risk to boot), you should definitely use that instead.  Buffet is clearly a genius.  However, even Buffett prefers an equity index fund for his wife when he passes on.  Risk Parity is probably more sensible than that given the arguments made by Dalio.  RP is a departure point for me (actually, there is a modifier which draws on - can you believe it - Falkenstein's PhD dissertation).  If I knew nothing else but prices or easily extracted fundamentals, what could I calculate in a minute to create a reasonable portfolio of equity securities? RP would do alright, in my view.


----------



## sinner

DeepState said:


> Some super-safe investment, like AAA tranches of CDO securities in 2008, turned out not to be so safe.




As a contextual note, this was certainly captured by volatility measures for those paying attention to timeseries published by MarkIt and others:



(h/t Atlanta Fed)

As you can see constraining the above timeseries by volatility would have been significantly less damaging to overall equity than relying on either S&P or Moody ratings. Of course, at the time, nobody paid any heed whatsoever to those paying attention and we were largely dismissed as quacks (try being the son of a macroeconomics professor and convincing your father that S&P rated AAA is dog****) 



> can you believe it - Falkenstein's PhD dissertation




hehe! As his work is quite compelling I can absolutely believe  ...consider sending the man an email to let him know his work has had impact, as he has always had a bit of a chip on his shoulder about not receiving recognition/achieving impact.



> what could I calculate in a minute to create a reasonable portfolio of equity securities? RP would do alright, in my view.




Certainly when it comes to selecting assets within an asset class (e.g. ASX stocks, or US credit) volatility seems to be a more robust measure than selecting *across* asset classes, as Buffett noted of less volatile currency based assets vs more volatile equity based assets. I am not sure that mechanism is fully explained, at least I certainly haven't witnessed any satisfying explanation.


----------



## qldfrog

you mentioned it in the initial question but are you not afraid the imbalance in the asx would make some of your diversification more like a bet on small cap stocks?
look at IT stocks in Australia or even retail, the picture would be so different in Europe or the US but no apple/IBM, ford/GM here, there is a stranglehold of the few big 10 or so and then not much and the risks on these smaller caps becomes separated from their respective fields.
I do not know much there but the Aussie market may not be the best place for such strategy?


----------



## DeepState

qldfrog said:


> you mentioned it in the initial question but are you not afraid the imbalance in the asx would make some of your diversification more like a bet on small cap stocks?
> look at IT stocks in Australia or even retail, the picture would be so different in Europe or the US but no apple/IBM, ford/GM here, there is a stranglehold of the few big 10 or so and then not much and the risks on these smaller caps becomes separated from their respective fields.
> I do not know much there but the Aussie market may not be the best place for such strategy?




The ASX 200 is so concentrated into the top 20 stocks and those top twenty stocks are, in turn, so concentrated into a small number of drivers that it might be better to say that the index is a massive large cap tilt away from something sensible and representative of a balanced equity market exposure.

Having said this, I referenced Falkenstein previously.  There is something to be said about not tilting into heaps of high spec companies, even if the diversification maths works out.

The ASX is over-concentrated and has a source of earnings which do not represent something which I could call representative of an economy which I participate in.  This is partly addressed via RP.  However, RP brings exposures to other things which need to be contained.  These may include aversion to the kinds of things you are possibly referring to above.


----------



## sinner

qldfrog said:


> you mentioned it in the initial question but are you not afraid the imbalance in the asx would make some of your diversification more like a bet on small cap stocks?




The answer to your question is not clear cut, it depends entirely on a variety of factors, such as lookback period, rebalancing frequency and date, maximum allocation (e.g. using leverage or not), and long only vs long/short. Most risk parity models are examining not just vols but also in conjunction with correlation, so a lot of crap gets filtered out as low utility in diversification sense.

FWIW Bridgewater Allweather is long only, while Bridgewater Pure Alpha is running a long/short book (both at 200% allocation IIRC).

It's been a while since I looked, but from memory most smalls are more volatile and higher pairwise correlation than larges on the ASX, probably some exceptions like Dominos.


----------



## systematic

Ad-hoc comments:

I like the Buffett quote.  Learned the same from David Dreman a long time ago and still agree with it.  I like Buffett's, "I'd much rather earn a lumpy 15% than a smooth 12%" 
I'm a little more tempered now.  I'm almost financial planner like (a moral one!) in the way I like to consider that it really depends on people's goals; what they want to acheive.  Smooth returns (Buffett's, 12%) might be someone's goal.  Avoiding excessive drawdown's might be someone's goal.  Without the motivation of running a fund (with the goal of high returns), if I had a certain amount of money, as an individual investor, my goals would probably change too.

On the portfolio thing, equal weight is just fine by me (or the 1/N system for the cool nerds).  Just haven't seen anything else in the academic papers to inspire otherwise.  An agnostic equal weight just does a good job.

Back to the question though, I'm a little confused.  DS, you initially asked, '"What portfolio should you hold if you want a basic exposure to the Australian market as a source of equity risk premium?"  Without considering why or whether one should want an exposure to the Aussie market...a simple cap weighted index will do the job.  It will do just that - give you a basic exposure to the Australian market.  Comments about the Aussie market being top heavy are irrelevant, as the characteristics of the market, whatever they are, are what they are (if that makes sense).  If the Australian market is top heavy, it's top heavy...and a decision to have a basic exposure to _that_ market will (and should) reflect that.  An exposure to Australian industry or the Australian economy or whatever might be a different matter.  But this is about an exposure to the listed equity market in Australia.  If someone is asking me for a basic exposure to Australian public stocks, I'd have to answer something along the lines of, 'you can't get much more basic exposure to the market than something like a cap weighted asx300 or somesuch index' 
Going with an equal weight index is simply going to give you a non-size weighted exposure to the market, and would be just as fine.  At the end of the day, there's not going to be a massive difference, anyway.

Anyway - just random thoughts really.  I'm finding this thought piece (is that what you call a thread within a thread?) quite interesting.  Keep the posts coming, everyone.


----------



## DeepState

systematic said:


> 1. On the portfolio thing, equal weight is just fine by me (or the 1/N system for the cool nerds).  Just haven't seen anything else in the academic papers to inspire otherwise.  An agnostic equal weight just does a good job.
> 
> 
> --
> 
> 
> 2. Back to the question though, I'm a little confused.  DS, you initially asked, '"What portfolio should you hold if you want a basic exposure to the Australian market as a source of equity risk premium?"  Without considering why or whether one should want an exposure to the Aussie market...a simple cap weighted index will do the job.  It will do just that - give you a basic exposure to the Australian market.  Comments about the Aussie market being top heavy are irrelevant, as the characteristics of the market, whatever they are, are what they are (if that makes sense).  If the Australian market is top heavy, it's top heavy...and a decision to have a basic exposure to _that_ market will (and should) reflect that.  An exposure to Australian industry or the Australian economy or whatever might be a different matter.  But this is about an exposure to the listed equity market in Australia.  If someone is asking me for a basic exposure to Australian public stocks, I'd have to answer something along the lines of, 'you can't get much more basic exposure to the market than something like a cap weighted asx300 or somesuch index'
> 
> Going with an equal weight index is simply going to give you a non-size weighted exposure to the market, and would be just as fine.  At the end of the day, there's not going to be a massive difference, anyway.




Thanks for your observations.

1.  1/N has beaten the relevant cap-weighted index in just about every jurisdiction over meaningful time periods - except for Australia (last I looked).  Really weird exception when you see it.  Need to ask yourself why that might be the case in Australia.... 

2.  I have not expressed this accurately.  You are quite right in terms of questioning the consistency of what I wrote.  It is not consistent.

I meant to say that I seek a broad exposure to the equity risk premium available from stocks listed on the ASX.  Though not strictly expressed, I also wish for this to be somewhat more balanced than exposures to banking and resources profits being some large figure as I am not a major consumer of these services.  There is a concept of trying to get a broad exposure to the economy with half an eye on the nature of consumption.

Risk Parity helps to achieve this by spreading risk around.  It is an advancement on equally weighting because it adjusts this concept for differences in risk/vol and makes allowance for correlations.  It is essentially a quant version of equally weighted.  Equal risk weighting.  It's not a big step to take and, for me, not altogether too controversial. 

You are right in that it is not a massive difference. The tracking error between an equally weighted index and the index is estimated at 3.2% [ie. on 2/3rds of rolling 1 year periods, the performance of the index and an equally weighted portfolio is likely to be +/- 3.2%].


---

As for papers, a good place to start is Clarke, DeSilva and Thorley (2013), "Risk Parity, ...", Journal of Portfolio Management, Spring 2013.  These guys were the pioneers in implementing low-volatility portfolios.  Key chart is below.




Focus on the 'X's as these are the geometric returns.  RP is just a more sensible version of EW.  The computation takes a fraction of a heartbeat, so the cost is negligible. They are both clearly superior to the index (at least over this time period and universe - US market).  In the case of RP, this benefit was obtained with only about 1% more risk/vol.


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## DeepState

What happens when:

The actions of central banks are intended to support financial markets (to the point of bubble creation) in order to stimulate the real economy [tick]

The economy does not fire-up anywhere near as much as hoped [tick]

More stimulus is added [tick]

The economy does not fire-up anywhere near as much as hoped [tick]

More stimulus is added [tick]

The economy does not fire-up anywhere near as much as expected [tick]

Strong evidence emerges that China is slowing and the CCP limits of control are laid bare in the form of the stock market gyrations and capital account drain (despite a supposedly closed capital account)...imagine how confident we should be about their ability to handle a mark-to-market on their debt [tick]

China sneezes and the world catches a cold [tick]

CB Governors say we will do whatever it takes to keep things flowing and there is no limit to their tools or willingness to use it [tick]

Yet they or other members of their decision committees (or other places like the RBA) are saying that monetary policy has reached is useful limits and further stimulus is likely to be a riskier path to take going forward due to the formation of asset bubbles and the concern this causes to the economy. [tick]

And Japan goes negative...pushing out the date of when it thinks that things will be alright again to a timeline that says they haven't taken a step forward since all this began [tick]

It's markets rally and currency drops as hoped...[tick]

....but this is no longer sustained as in previous jumps...[tick]

...and the price of gold quietly sneaks up...[tick]

...and the price for credit keeps rising...to levels approximating the days when the EU was fragmenting and Whatever It Takes was doing the rounds.   [tick]


....and the cracks in the belief that these huge props to the state the world can do the job widen enough...

Where is this tipping point?

I do not like what I am seeing. The Emperor is looking less well dressed. Can an economy really function when direct investment is undertaken by government and/or the central banks and investment returns are so low that private citizens won't bother saving much as there is no benefit to it?  Because that it the natural limit of where all this monetary support goes.

This is not a prediction of the end of the financial system etc.  However it is incredible how much rides on the belief that the CB actions will bear fruit.  And for that to happen, a key requirement is that the belief is sustained.  Yet the evidence is increasing that the belief may be unjustified.  

I am waiting for the day when the governors of the major CBs are on some stage with Lagarde holding hands in a show of solidarity like Paulson, Geithner, Bernanke...did in the midst of the GFC.  For them, they had a full war chest and bazookas.  This time around, the bazookas have been fired. If that stage show happens, it's likely a sell this time around.


----------



## sinner

DeepState said:


> What happens when:




Hi DS,

All I could think while reading your checklist was "well, actually, what has changed?".

Things aren't simply rolling over from good to bad. Much more simply, cracks are re-appearing in the wall that we have papered over repeatedly since I was just a kid, exactly as they are want to do when the underlying problems are not addressed.



> If that stage show happens, it's likely a sell this time around.




Merely looking to the recent past for direction may confuse one into suboptimal choices. In the next crisis, being an owner of corporate capital might be a much better option than going to cash. A (nominal) price crash is not always the inevitable outcome.

Statement A:


> CB Governors say we will do whatever it takes to keep things flowing and there is no limit to their tools or willingness to use it




Statement B:


> Yet they or other members of their decision committees (or other places like the RBA) are saying that monetary policy has reached is useful limits and further stimulus is likely to be a riskier path to take going forward due to the formation of asset bubbles and the concern this causes to the economy.




Prices heading towards the top right quadrant of the chart doesn't necessarily imply a bubble. If real value of currency is declining then all you are seeing in such a chart is the effect of dilution. In that light, statement A is far more congruent with statement B than might appear at first glance. FWIW I definitely believe the CB Governors when they make statement A.



> This is not a prediction of the end of the financial system etc.




Nor does such a prediction make sense unless one truly believes that the global credit economy will subject itself to a global deflation. I for one think the opposite outcome makes much more sense and with higher probability (as I'm sure you've gathered by now . 

The financial system will of course be saved as one of humanities greatest inventions, at the expense of something relatively unimportant: the currency unit.

Please forgive in advance the long snippet pasted below (from http://fofoa.blogspot.com.au/2011/04/deflation-or-hyperinflation.html)



> Rick Ackerman's somewhat-myopic focus is on home mortgages as the lynch pin that will keep this worthless, symbolic token valuable while you toil on the chain-gang working off your debt of worthless tokens. So let's take a look at the larger picture to gauge the strength of this pin and the stress it must endure.
> 
> Total US mortgage debt is a little over $14 trillion. That number includes you and your neighbors. Of that $14 trillion, about $6 trillion sits on the balance sheets of banks and $9 trillion has been packaged and sold to savers like pension funds. Of that $9 trillion held by savers, about $5 trillion is guaranteed by the US government.
> 
> So here's Rick's lynchpin that's going to keep all of you indebted homeowners honest: $14 trillion - $5 trillion guaranteed = $9 trillion. And that $9 trillion lynchpin is so powerful because it is held by politically connected and powerful banksters and pension funds, or so they say. Now in a minute I'll tell you why these two groups would rather have all that debt printed and the cash handed to them than to watch even 20% of you default on your mortgages. But first, let's step back and take a wider look at what might be exerting shear stress on this supposed lynch pin.
> 
> Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government's unfunded liabilities (which definitely apply shear stress to the dollar's lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough "goods and services" (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.
> 
> So in real terms, that is, in terms of the dollar's purchasing power as it stands today, it would take, let's see… $168T/($14T produced - $14.5T consumed)= x years… hmm… somehow it's going to take us negative 336 years to deliver those promised dollars at today's purchasing power. Remember I said this debt would be "worked off" in the past, without the use of a time machine I might add? Well here you go””past surplus labor foolishly stored in dollars and dollar financial instruments and their derivatives will be tendered. Of course the deflationists want you to know that we will be forced to reduce our consumption to below our production in order to pay those off. And once again, they are correct, though not in the way they think.
> 
> Reducing consumption means reducing your standard of living. Some call it austerity. But with forced austerity also comes the competition to avoid reducing your standard of living. And herein lies the inevitability of US dollar hyperinflation.
> 
> You see, those Power Elites that Rick thinks are going to support the dollar and its $169 trillion burden (excluding derivatives) simply to make sure you'll work off your $9 trillion dollar mortgage at today's purchasing power are the same ones that will resist personal austerity measures the most. And as all good deflationists know, you simply cannot resist the irresistible without breaking something. And what they will ultimately break in their competition to maintain lifestyle is the value of the dollar, which will actually break quite easily due to the mountainous (think: landslide) shear stress applied to it right now.
> 
> Now let's go back to those "banksters" that, along with the politically powerful pension funds, are part of the Power Elite that are going to keep the dollar strong enough so that your mortgage isn't hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the dollar's debt problem, that is still sitting on the balance sheet of banks, yet gradually being absorbed and/or guaranteed by the Fed and/or the US government.
> 
> This is simple logic: Do you think they'd rather offload that debt onto the Fed's book in exchange for full cash value? Or would they prefer to hold onto those notes while you struggle to pay them off in symbolic tokens over the next 25 years? How about this: Is it better for the health of the bank to take possession of the houses (and then have to sell them) that roughly 20% of the troubled homeowners are walking away from? A 2009 jingle mail study showed that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. That represents roughly a 10% hit to the asset side of the banks' balance sheets. Yet the banks' liabilities (deposits created when the loans were originated) remain, fully insured by the FDIC which has no money.
> 
> Through the magic of commercial bank double-entry bookkeeping, the banks' balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token dollars. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate. So supporting deflation would be, to a bank, like suffering a masochism fetish.
> 
> Rick thinks the banks will defend their assets by keeping the dollar strong. But that only keeps their liabilities that much harder to meet while the effects of deflation tend to shrink their assets making it even harder still. Ignoring the dollar for a moment, and the flaw in Myers' dictum, what happens to a bank's balance sheet if all of the loans are defaulted at the same time? Or if the asset value of all of their collateral collapsed at the same time? It would have precisely the same impact. So would a mixture of the two. The banks have and are experiencing precisely this type of squeeze. How has their "guardian angel" the Fed responded so far?
> 
> Rick Ackerman's view of the banks' incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank's balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation.


----------



## sinner

Swedroe summarising some new findings on volatility/beta/risk in light of skew

http://www.etf.com/sections/etf-industry-perspective/swedroe-when-risk-doesnt-lead-return?nopaging=1



> The bottom line is that we now have a significant body of evidence that investor preference for positive skewness results in poor risk-adjusted returns. Those disciplined investors who accept the negative skewness associated with higher-returning assets can build more efficient portfolios.


----------



## DeepState

sinner said:


> Swedroe summarising some new findings on volatility/beta/risk in light of skew
> 
> http://www.etf.com/sections/etf-industry-perspective/swedroe-when-risk-doesnt-lead-return?nopaging=1




Similar arguments relating to the premium for bearing neg skew are made for carry, momentum, value.  An earlier study comparing the difference between upside and downside beta (a measure of skew informed by historical outcomes vs implied vol in this study) showed a premium as well.  

To me it suggests that risk premia exposure might be spread away from equity and debt into factor exposures with rewarded risks in light of low return expectations.


----------



## fraa

DeepState said:


> Similar arguments relating to the premium for bearing neg skew are made for carry, momentum, value.  An earlier study comparing the difference between upside and downside beta (a measure of skew informed by historical outcomes vs implied vol in this study) showed a premium as well.
> 
> To me it suggests that risk premia exposure might be spread away from equity and debt into factor exposures with rewarded risks in light of low return expectations.




I am a noob, but there are now many factor based etfs springing up like mushrooms. Smart Beta marketing is also popular. 

I believe that factor exist as the underlying "limits to arbitrage" logic and observed transient nature makes sense, but would this not be a crowded trade at this time ?


----------



## DeepState

fraa said:


> I am a noob, but there are now many factor based etfs springing up like mushrooms. Smart Beta marketing is also popular.
> 
> I believe that factor exist as the underlying "limits to arbitrage" logic and observed transient nature makes sense, but would this not be a crowded trade at this time ?




The rise of ETFs has been huge.  The factor betas have commonality despite differing definitions.  I think it is reasonable to imagine that the trades are crowded as flows to and from ETFs by institutions can create/destroy units.  I suppose the risk of such an event depends on the extent to which the capital in the factor ETFs is regarded as permanent as opposed to a flow of capital.

As these simple factor betas grow in AUM, new opportunities are created...


----------



## DeepState

The market is increasingly pricing a significant credit event, possibly via disorderly deleveraging (default or retrenchment).

Key question: Can China's banks withstand the impact of a Yuan devaluation of about 10% (via various channels).


----------



## sinner

IMHO most trades are not as crowded as most people assume.

For every "investment philosophy" $ there is almost always someone else who thinks they can outperform by doing the opposite. 

*At all timescales.*

I prefer the perspective provided by this blogpost, nothing new here as you can see if you'll read it. After reading, for those familiar with many different investment philosophies, styles and strategies, you will see they all approx fit into one of those categories (after you follow all assumptions to their logical conclusions).

https://cssanalytics.wordpress.com/...et-allocation-lessons-from-perold-and-sharpe/


----------



## sinner

DeepState said:


> The market is increasingly pricing a significant credit event, possibly via disorderly deleveraging (default or retrenchment).
> 
> Key question: Can China's banks withstand the impact of a Yuan devaluation of about 10% (via various channels).




Not an expert on the topic so would need the following question answered: are the Chinese banks exposed to currency risk (e.g. short yuan for long dollars)? As per the FOFOA quote I pasted above:



> Through the magic of commercial bank double-entry bookkeeping, the banks' balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token yuan. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate.




Sans currency risk, devaluation should be balance sheet positive...


----------



## DeepState

sinner said:


> Not an expert on the topic so would need the following question answered: are the Chinese banks exposed to currency risk (e.g. short yuan for long dollars)? As per the FOFOA quote I pasted above:
> 
> 
> 
> Sans currency risk, devaluation should be balance sheet positive...




The banks hedge their FX exposure.  Their clients often do not.  The banks will see this on their balance sheet as default. A devaluation will see rapid capital outflow initially which will require a monetary response to prevent outright asset and consumer deflation which will trigger a second round.  Whether a monetary response to this will be successful is unknown. What I do know is that the CCP and Co could not control the stock market and have not been able to stop their capital account leaking by deca-billions each month.  Much research suggests that credit events are preceded by rapid credit growth and asset price inflation.  All of the pieces exist for the market to rightfully be concerned.  If China falls, EM is next, and Europe comes after that.


----------



## fraa

Thanks Sinner ! Great paper (I just read the original). Unlike other papers that are often variations on a theme, this one lays out an elegant truth. Love it.

Had a thought reading the paper - the Vanguard/Boglehead market cap passive investing framework rests upon 2 pillars

1. For non market average return, someone must lose for someone to win. Casual investors should take market avg returns as wins are not certain for most (power law ?) so it is not worth it.
2. Market cap weighting means EVERYONE can hold the passive investing portfolio, so it is unique in that the trade cannot be crowded.

Putting aside that many passive investors do not hold the proper global market portfolio (exhibiting both home bias in the equity index etc), the balancing process used is constant mix with a concave payoff. As laid out in the paper, not everyone can adopt a concave payoff (only buy and hold...) and as more adopt a concave payoff, it becomes more costly to implement...

Have been reading up on Boglehead style passive investing to see where the "Gotcha" is as I am looking to invest a decent sum - for the framework to hold, all participants must straight Buy and Hold the Global Market portfolio. But few, if any passive investors actually do this - many do not invest in international equities (home bias) and all deviate from the FI/Equity split of the Global Market Portfolio as they perform asset allocation based on their risk appetite (ie age), which then requires an annual a constant split rebalance process that has a non-market neutral concave payoff...

Does this means pillar 2 above does not actually hold, the market can become unbalanced and passive investing can become "crowded" ? 

Given the ever increasing inflows into passive investing and the death of active management, will this mean a potentially major market distortion will be introduced over time ? What form will the distortion take ?

Or am I missing something ?

Also Sinner, any other recommendations for other papers illustrating similar "truths" in the market ? Would love to get ahold of your reading list.

ps sorry for hijacking your thread DS, started this post with only vague thoughts and it kinda grew from there.



sinner said:


> IMHO most trades are not as crowded as most people assume.
> 
> For every "investment philosophy" $ there is almost always someone else who thinks they can outperform by doing the opposite.
> 
> *At all timescales.*
> 
> I prefer the perspective provided by this blogpost, nothing new here as you can see if you'll read it. After reading, for those familiar with many different investment philosophies, styles and strategies, you will see they all approx fit into one of those categories (after you follow all assumptions to their logical conclusions).
> 
> https://cssanalytics.wordpress.com/...et-allocation-lessons-from-perold-and-sharpe/


----------



## sinner

fraa said:


> Does this means pillar 2 above does not actually hold, the market can become unbalanced and passive investing can become "crowded" ?




Almost every form of investment strategy has the *potential* to become crowded. See overvalued markets/single names (if valuation was a constraint then markets/single names would never become overvalued). Also google the term "hedge fund hotel" or "quant meltdown 2007".

However worth noting again that most strategies are less crowded than commonly assumed, especially assumptions from the counterparty who believes the opposite strategy is foolish and crowded. Fundamental investors think momentum is crowded because anyone can implement. Momentum investors think fundies do nothing but catch all the falling knives. Active investors think passive is so crowded. And so on...



> Given the ever increasing inflows into passive investing and the death of active management




I disagree that active management is dying (Pershing has an AUM of what? 18 billion? Just 1 fund. Berkshire is running >300 billion market cap...), and plenty of money "outflows" from passive investing every time there is a 5, 10, 20, 50% drawdown in passive indices as investors sell at inopportune moments.



> Also Sinner, any other recommendations for other papers illustrating similar "truths" in the market ? Would love to get ahold of your reading list.




I like this http://www.hussmanfunds.com/wmc/wmc140414.htm but others seem to disagree/less enthusiastic. The only contention I have is that it assumes "constant dollars", i.e. no major change in real value of the unit of account.

My list is long, I have pasted plenty of links, feel free to go through my posts.


----------



## DeepState

fraa said:


> ps sorry for hijacking your thread DS, started this post with only vague thoughts and it kinda grew from there.




More please.


----------



## mcgrath111

Hi Deepstate,

Really appreciate your insights! - While many of your concepts go over my head (The detail you go into is impressive!) really interesting to read none the less.

Some quick questions: 

1) You've previously mentioned having an investing checklist (although you said you're not checklist orientated), I feel at my current stage I need some form of checklist to influence my decisions. I.e. Yesterday I bought SPO on literally a whim. While only a small amount I feel that I need something to making me accountable. 

2) How do I go about designing an investing strategy? Everyone seems to throw ideas and opinions around, however I feel that you're one of the few people who are truly immersed in the industry. 

Apologies if this is below your level of expertise and guidance; I just feel lost...While I'm looking at learning, perhaps at my current state, I'd be better of investing in an ETF?

Feel free to delete if this derails your thread.
(I'm currently a graduate accountant - who has a moderate understanding of finance).

Many Thanks,


----------



## DeepState

Question:

Jane Doe is 57 yrs on a disability pension (non-taxed income).  Total asset position is $350k. $100k in Super from prior employer. Already being drawn down. $250k inheritance forthcoming. No other sources of income.

Given tax rates and prospective investment returns, my understanding is that she would be indifferent between housing the inheritance within a super environment or outside of it.  Please confirm/deny.

Thanks.


----------



## DeepState

mcgrath111 said:


> Hi Deepstate,
> 
> Really appreciate your insights! - While many of your concepts go over my head (The detail you go into is impressive!) really interesting to read none the less.
> 
> Some quick questions:
> 
> 1) You've previously mentioned having an investing checklist (although you said you're not checklist orientated), I feel at my current stage I need some form of checklist to influence my decisions. I.e. Yesterday I bought SPO on literally a whim. While only a small amount I feel that I need something to making me accountable.
> 
> 2) How do I go about designing an investing strategy? Everyone seems to throw ideas and opinions around, however I feel that you're one of the few people who are truly immersed in the industry.
> 
> Apologies if this is below your level of expertise and guidance; I just feel lost...While I'm looking at learning, perhaps at my current state, I'd be better of investing in an ETF?
> 
> Feel free to delete if this derails your thread.
> (I'm currently a graduate accountant - who has a moderate understanding of finance).
> 
> Many Thanks,




Shall respond in pieces.  I also need the answers to some of the questions you've posed.  

Checklists:

Checklists are plentiful.  If you want the super detailed micro-eco one, then "Security Analysis" by Graham and Dodd is the tome. It will take you through each and every micro item on the accounts and what you need to watch out for and how to normalise it.  It's likely too detailed to be read as a whole and utilised in that way.  It would be a useful reference for major items.  

More practically, I think that the Porter Competitive Analysis framework (It was "five forces" when first released. Then people added value.  I have no idea how many forces it has grown to now, but some recent finance or management grad can please jump in) is useful to help structure thinking about an industry. You can do pretty well by following that up with the Value Chain concept and see how various things connect.  Buffett's biggest focus in business analysis.  Understanding how a business works, what drives it and how much and how well it can guide its own destiny.  Porter's stuff will help you with that.  Porter is pretty much compulsory for industry and company analysis.

The following may be useful for more general checks on your own thinking: Farnham Street Latticework of Mental Models https://www.farnamstreetblog.com/mental-models/   basically a list of ways to think and list of ways we stuff up. 

Underlying the checklist push is a book by Atul Gawande called "The Checklist Manifesto".  If it's good enough for pilots and brain surgeons, it might be worth considering for investments too. 

I think they are ways to make the best of what we've got.


----------



## sinner

> I feel at my current stage I need some form of checklist to influence my decisions. I.e. Yesterday I bought SPO on literally a whim.




Item #1: Do not buy any names on impulse.
Item #2: Sell all names you bought on impulse.*

*not financial advice, only hypothetical checklist.



DeepState said:


> Shall respond in pieces.  I also need the answers to some of the questions you've posed.
> 
> Checklists:




The book "Quantitative Value" has an entire chapter on checklists and the book ends in a comprehensive checklist. Worth a read .

Here is a free, simpler checklist from Aleph Blog (http://alephblog.com/) that I pulled into my notes long ago, it is valid IMHO.



> How should you approach value investing from a purely quantitative standpoint?  Easy:
> Screen out stocks that have relatively high accruals
> Avoid companies that may go bankrupt
> Margin of safety: choose companies with strong balance sheets and profits
> Look for long-term strength in profits.
> Buy them cheap.
> Buy when informed investors are buying.




Each of those lines can be broken out into its own topic of learning. Google:

* Accrual Anomaly
* Altman Z/Ohlson O/Falkenstein DefProb/Shumway bankruptcy
* Warren Buffet "moats", profitability anomaly, and other similar terms
* Understand the difference between geometric and arithmetic avgs
* Value investing
* Insider trading

However. Given your post, I would suggest as usual to save your money outside the market until you're significantly more well read. It'll still be here once you are.


----------



## mcgrath111

Greatly Appreciate the advice Deepstate & Sinner.

From when I was at uni a couple years back I think Porter was at 7 haha, although I never really thought of using it as a way of picking a potential stock shorlist / indicator to use.

Tonight I've had a glimpse into the references you've provided and it looks like I have a ton of reading ahead of me; but I'll need to put in the hours to one day be in similar shoes to yourselves. 

I guess the biggest factor of not being actively invested is the matter of losing out, which I believe DS covered earlier. The market being down 17% ytd in my mind is ringing BUY,BUY,BUY! but in reality signals could be pointing the other way & I'm merely buying stocks off a low p/e alone.

Once again, many thanks for the advice, I think I'll start on Ben G's security analysis book and pose a question to you gents once in a while.

Cheers,


----------



## fraa

A thought of someone who is only slightly ahead of you on the road - its odd that you are displaying FOMO (fear of missing out) as FOMO is usually at market tops.

Maybe you are a contrarian at heart ? 



mcgrath111 said:


> Greatly Appreciate the advice Deepstate & Sinner.
> 
> From when I was at uni a couple years back I think Porter was at 7 haha, although I never really thought of using it as a way of picking a potential stock shorlist / indicator to use.
> 
> Tonight I've had a glimpse into the references you've provided and it looks like I have a ton of reading ahead of me; but I'll need to put in the hours to one day be in similar shoes to yourselves.
> 
> I guess the biggest factor of not being actively invested is the matter of losing out, which I believe DS covered earlier. The market being down 17% ytd in my mind is ringing BUY,BUY,BUY! but in reality signals could be pointing the other way & I'm merely buying stocks off a low p/e alone.
> 
> Once again, many thanks for the advice, I think I'll start on Ben G's security analysis book and pose a question to you gents once in a while.
> 
> Cheers,


----------



## DeepState

mcgrath111 said:


> Hi Deepstate,
> 
> Yesterday I bought SPO on literally a whim. While only a small amount I feel that I need something to making me accountable.






sinner said:


> Item #1: Do not buy any names on impulse.
> Item #2: Sell all names you bought on impulse.*




I think that just jumping in with small assets that keep you interested but is not going to hurt you badly if it goes to zero is a reasonable, if superficially irresponsible, way to start.  In theory, we should figure out what's going on before doing something.  That's certainly useful for things where bad outcomes are really bad or fatal. In practice, for the most part, we don't do much until we have something at risk.  So, a good way to begin is by watching what happens to SPO and trying to make sense of it as best you can.

Running SIM is nothing like running money.  A backtest is sterile until you trade it and learn why you've just fooled yourself. Studying cases is fun, with all that retrospective stuff that seems so obvious in hindsight. In order to know how you will react when losing money...you have to actually lose money.

I think investment is a considerably experience based learning activity.  If there is one thing I could suggest it would be to create some sort of loop where you:
1. make a guess/estimate of what you think will happen (direction, magnitude movement, relationship, volume, CB action etc...)
2. Observe what happens
3. Figure out why you're wrong...yet again
4. Try to improve your understanding.
5. Repeat ad infinitum

The people who do the above most effectively are the winners and grinners.  It is so in many fields.  Investment is made harder because the links between cause and effect are so tenuous and often unstable.  It makes it hard to learn from feedback.  One of the things to consider is that there is a considerable portion of stock price movements whose causes are best explained by "more buyers than sellers" or the reverse as the case may be.


+ I bought my first stock when I was around 10.  Let's say there was not a lot of analysis to it when I bought Mount Isa Mines after it had a massive tear.  Toasted a good portion of my savings, and that of my brother's (8 years) who bought on similar rationale, created from gifts and odd jobs in the form of forced labour.  Both of us went on to have rather successful investment careers.


----------



## artist

DeepState said:


> Underlying the checklist push is a book by Atul Gawande called "The Checklist Manifesto".  If it's good enough for pilots and brain surgeons, *it might be worth considering for investments too.*




Gawande does cover the relevance of the checklist to finance, investing and management on pp 162-173 of his book which you cited.


----------



## sinner

DeepState said:


> 1. make a guess/estimate of what you think will happen (direction, magnitude movement, relationship, volume, CB action etc...)
> 2. Observe what happens
> 3. Figure out why you're wrong...yet again
> 4. Try to improve your understanding.
> 5. Repeat ad infinitum




Estimate that I re-watch this 10 minute Feynman snippet at least once a week.


(h/t John Hempton from Bronte Capital mentioning it re Epistemology on his blog)


----------



## fraa

Learning through a feedback cycle works for shorter term trading, but what happens when your time horizon is longer (e.g. Buffet style value investing - when your timeframe is "forever" ?). 

i.e. I learn all I can, calculate IV for a business, then buy and hold its stock - when/how do I know I stuffed up the IV calculation or read the financials wrong ? If holding time frame is on the order of years to give the stock time to get to your IV, you dont get many cycles of learning/data to refine your own criteria/metrics.

That is the bigger I am having struggling with - I used to punt a bit with options and short term stock trades, but now I have a much more significant sum to invest for the longer term and I am struggling to figure out a process/framework to manage that. Routine DCA passive indexing is the obvious candidate here, but has no feedback learning cycle at all as you take the mkt avg - this will be my fallback but I wonder if there is something more.

Any advice appreciated as this seems to be something missing from the longer term value investing books like Dodd etc (unless I someone missed a chapter or something).


----------



## sinner

fraa said:


> Learning through a feedback cycle works for shorter term trading, but what happens when your time horizon is longer (e.g. Buffet style value investing - when your timeframe is "forever" ?).




I wouldn't call Buffett style "value", but rather more simply "fundamental".

As craft likes to say, the feedback is provided by the annual reports of the companies you invest in. If the business is good in the next years report then continue, if not then not. You are not buying an holding forever, you are buying and holding as long as the annual reports are showing what you want to see.



> i.e. I learn all I can, calculate IV for a business, then buy and hold its stock - when/how do I know I stuffed up the IV calculation or read the financials wrong ? If holding time frame is on the order of years to give the stock time to get to your IV, you dont get many cycles of learning/data to refine your own criteria/metrics.




This is a different, more quantitative style and the feedback must be enforced explicitly. Take (one of) the classic Graham value system (not proponent just example):



> An earnings-to-price yield at least twice the AAA bond rate
> Dividend yield of at least 2/3 the AAA bond yield
> Total debt less than book value
> Current ratio great than 2
> Buy stuff that doesn't have a lot of debt--only buy stocks that have common equity / total assets over 50%
> *Sell if a stock moves 50%+
> Sell if a stock has been in the portfolio for 2 years*


----------



## sinner

DeepState said:


> The banks hedge their FX exposure.  Their clients often do not.  The banks will see this on their balance sheet as default. A devaluation will see rapid capital outflow initially which will require a monetary response to prevent outright asset and consumer deflation which will trigger a second round.  Whether a monetary response to this will be successful is unknown. What I do know is that the CCP and Co could not control the stock market and have not been able to stop their capital account leaking by deca-billions each month.  Much research suggests that credit events are preceded by rapid credit growth and asset price inflation.  All of the pieces exist for the market to rightfully be concerned.  If China falls, EM is next, and Europe comes after that.




Thx.

FWIW, I think Michael Pettis is the only China commentator worth listening to. On consideration of your reply and trying to think for myself I went and re-read his most recent blogpost which is still relatively fresh. There is too much wisdom for me to choose a decent snippet for pasting, I'll just leave a link and single sentence

http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-reforms-help-china/


> Contrary to some of the muttering out there, I don’t think Beijing is planning competitive devaluations in order to strengthen the tradable goods sector, in the hopes that surging exports will revive growth.


----------



## fraa

Thanks Sinner

Re: Pettis, also listen to the FT alphaville podcast here

http://ftalphaville.ft.com/2016/02/...-the-us-election-and-conservative-talk-radio/

Gives a brief summery to his views on common questions he gets asked about China.



sinner said:


> Thx.
> 
> FWIW, I think Michael Pettis is the only China commentator worth listening to. On consideration of your reply and trying to think for myself I went and re-read his most recent blogpost which is still relatively fresh. There is too much wisdom for me to choose a decent snippet for pasting, I'll just leave a link and single sentence
> 
> http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-reforms-help-china/


----------



## DeepState

sinner said:


> Thx.
> 
> FWIW, I think Michael Pettis is the only China commentator worth listening to. On consideration of your reply and trying to think for myself I went and re-read his most recent blogpost which is still relatively fresh. There is too much wisdom for me to choose a decent snippet for pasting, I'll just leave a link and single sentence
> 
> http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-reforms-help-china/




I'll add another couple from this excellent dude.

"China’s most serious problem is “the relentless accumulation of debt”, and economic conditions will continue to deteriorate until Beijing directly addresses the debt."

"I think the real reason for the recent RMB weakness lies elsewhere. Beijing is trying to boost
domestic liquidity in the hopes that this will generate stronger domestic demand, but
expanding liquidity fuels capital outflows, and these put downward pressure on the
currency, while increasing PBoC concerns about the monetary impact of money leaving the
economy which, as an article (https://next.ft.com/content/ae4dee44-bf34-11e5-9fdb-
87b8d15baec2) in last week’s FT argues, might be worse than we think."

This devaluation concern is not about trade based capital outflow. China is running a trade and Current Account surplus. It is the capital account which is causing the strain.  There is strain because there is a heap of debt which has been applied to a heap of rubbish.  As a result, foreign capital doesn't want to come in and local capital wants to get out.  To fight it and keep the domestic economy afloat, reserves are being drained.  In around 12 months, this will reach the bounds of IMF reserve recommendations for China's situation.

Despite de/revaluations against the USD, the Yuan has not shifted much at all on a trade weighted basis.  This is not about trade.  The Yuan will be devalued.  The key questions are what that means for their debt market and credit mechanism.  

---

Deutsche Bank now showing credit distress.
EU Peripheral debt blowing out.


----------



## DeepState

fraa said:


> Learning through a feedback cycle works for shorter term trading, but what happens when your time horizon is longer (e.g. Buffet style value investing - when your timeframe is "forever" ?).
> 
> i.e. I learn all I can, calculate IV for a business, then buy and hold its stock - when/how do I know I stuffed up the IV calculation or read the financials wrong ? If holding time frame is on the order of years to give the stock time to get to your IV, you dont get many cycles of learning/data to refine your own criteria/metrics.
> 
> That is the bigger I am having struggling with - I used to punt a bit with options and short term stock trades, but now I have a much more significant sum to invest for the longer term and I am struggling to figure out a process/framework to manage that. Routine DCA passive indexing is the obvious candidate here, but has no feedback learning cycle at all as you take the mkt avg - this will be my fallback but I wonder if there is something more.
> 
> Any advice appreciated as this seems to be something missing from the longer term value investing books like Dodd etc (unless I someone missed a chapter or something).




Tough question.

If you are doing fundamental analysis, I suppose that you are trying to see if your expectations are being met at the fundamental level.  Relationships between company outcomes and external developments can be tested. Ability to sustain profitability can be tested etc.

If you think that prices should follow fundamentals in a certain way, then this can be observed as well.

Although any individual holding might last for a decade and thus provide a weak feedback mechanism, you can also learn from stocks you do not hold.  That gives you a vast set of potential data from which you can test your ideas and beliefs.  These guys follow a stack more companies than they invest in.

Framework:

Step 1: Figure out your maximum loss tolerance.  It will be a (real?) dollar amount over a time frame.
Step 2: Ask what you really really "know" about investment return forecasting. Halve it. And, maybe, again.
Step 3: Ask what instruments you have as investment opportunities that you are prepared to use.

Other steps to follow...


----------



## CanOz

DS, apparently the big trade has been short the EU banks, but aside from DB, the China syndrome and junk bonds related to oil in the US, do you think there are other shoes to drop?


----------



## systematic

This post really doesn't warrant its own thread as it's just a one off thought - not going anywhere with it...plus here seems appropriate as factor investing / smart beta etc is discussed in this thread etc. 
DS - please let me know if this is not appropriate to your thread and a mod can perhaps delete or move to its own etc.

In the back of my mind I'd been meaning to take a look at this for a while now.  The idea is simply, "what does the initial universe look like if you 'cut out the crap?'"

So...not looking for value, quality etc to help us find good stocks (which is what I do in my own investing).  Simply looking to cut out the worst of the worst.

All I did was:
- start with a 500 stock universe (a basic market cap floor, a few clean ups, and then top 500 by liquidity)

- take a bunch of common stuff (basic value ratios, quality, momentum...nothing interesting...think price to book, price to earnings, accruals, Piotroski, 6 month price return, price volatility, ROIC etc etc...nothing unusual...maybe about 20 in all - roughly).

- My inclination would be to group the various measures by factor (i.e. a value factor, a quality factor etc), as that's how I role.  But initially I didn't want to do that.  I wanted to use all the measures individually.

- Delete just the worst decile (50 stocks, or thereabouts, depending on the measure) on all the measures.  i.e. If a stock in the 500 stock universe was in the 'worst' 50 stocks under ANY individual measure of ANY particular factor...it's out.  

We're simply coming up with a list where the individual stock isn't amongst the WORST as measured by any individual characteristic.  It doesn't have to be 'good' on anything.  And, we're using deciles (50 stocks) - we're not deleting as many as we would if we were cutting out the worst quartile etc.  We're just cutting out the theoretical / hypothetical 'short' trades if we were doing that on each measure etc.

So - out of 500 stocks...how many do you think we're left with?


----------



## sinner

CanOz said:


> DS, apparently the big trade has been short the EU banks, but aside from DB, the China syndrome and junk bonds related to oil in the US, do you think there are other shoes to drop?




Here are some more shoes from William White who has a pretty hefty CV:


> chairman of the Economic and Development Review Committee at the OECD in Paris. Prior to that, Dr. White held a number of senior positions with the Bank for International Settlements (“BIS”), including Head of the Monetary and Economic Department, where he had overall responsibility for the department's output of research, data and information services, and was a member of the Executive Committee which manages the BIS. He retired from the BIS on 30 June 2008.




http://www.zerohedge.com/news/2016-...s-oecd-chair-warns-our-entire-system-unstable


> Three, everywhere you look it seems to me you can see a potential trigger. You look at China and it’s slowing, although nobody knows by how much because nobody believes the data. But things like railway transport and electricity use suggest China is slowing a lot. Unfortunately, if you look closely at the data, the conversion of the economy from investment to consumption is not really happening and the old growth model built on debt is coming to the end of its useful life. As well, you have problems in emerging markets and commodity producers – Brazil, Russia, oil regions – where associated fiscal difficulties could lead to greater social and political problems  than might be expected in the advanced economies. In Japan, I think Abenomics is not working and will in fact backfire – raising prices when the typical salaryman hasn’t seen a salary increase in two decades equals a cut in real terms, meaning he will hunker down. For its part, Europe has a daunting list of problems – the Russian thing, the migration thing, the peripheral thing, the debt thing, and the absence of adequate political institutions to deal efficiently with all these problems. Even in the US people are talking about problematic student loans, low investment rates and the rising likelihood of recession.


----------



## sinner

systematic said:


> maybe about 20 in all - roughly).
> 
> - My inclination would be to group the various measures by factor (i.e. a value factor, a quality factor etc), as that's how I role.  But initially I didn't want to do that.  I wanted to use all the measures individually.
> 
> So - out of 500 stocks...how many do you think we're left with?




um, doesn't it totally depend if you group or use individuallyand the precise sequence in which you order the removals? Why not just tell us what you did and what was left...


----------



## systematic

sinner said:


> um, doesn't it totally depend if you group or use individuallyand the precise sequence in which you order the removals?




No, because I did all of them separately.  i.e. Obtain the worst on price to book, then (on the whole group again) obtain the worst on accruals etc...and then removed all of those stocks (whether they appeared once or twenty times).



sinner said:


> Why not just tell us what you did and what was left...




Wasn't meant to be a tease or make something big out of it...I was about to end my post with the answer when I suddenly wondered if anyone else thought like I did - so I asked the question first.  No biggie.

Given the way I constructed it, and we're only using deciles, I was surprised to see as many 323 stocks eliminated from the group (of 503, actually) stocks.  Leaving 180.
Using deciles is being pretty lenient so I didn't expect to see 2 out of 3 stocks eliminated under this scenario.


----------



## sinner

systematic said:


> Given the way I constructed it, and we're only using deciles, I was surprised to see as many 323 stocks eliminated from the group (of 503, actually) stocks.  Leaving 180.
> Using deciles is being pretty lenient so I didn't expect to see 2 out of 3 stocks eliminated under this scenario.




I was curious to see how easy it would be to end up with ~180.

So I went to the finviz screener and selected for any US stock with market cap over 10 billion, which is about ~550 names.

Filtering on some very simple criteria, much less stringent than yours, yields a similar number, ~190:



(h/t finviz.com)

PS: Adding a requirement of 6 month return > 0 whittles it down to just 46 names.


----------



## CanOz

sinner said:


> Here are some more shoes from William White who has a pretty hefty CV:
> 
> 
> http://www.zerohedge.com/news/2016-...s-oecd-chair-warns-our-entire-system-unstable




Thanks Sinner, appreciated.

Does anyone know what level of deposits are insured in Aussie banks ?


----------



## CanOz

CanOz said:


> Thanks Sinner, appreciated.
> 
> Does anyone know what level of deposits are insured in Aussie banks ?




The info on the net seems a little old...


----------



## sinner

CanOz said:


> Thanks Sinner, appreciated.
> 
> Does anyone know what level of deposits are insured in Aussie banks ?




It's $250k, http://www.apra.gov.au/CrossIndustry/Documents/APRA-FCS-FAQ-ADI.pdf

But obviously worth noting that it's only a *nominal* guarantee, the Government doesn't have actual funding to back all those deposits, they will be printing up fresh base money to make good on any such guarantees in the event of trouble. Just like FDIC in the US which has $25 billion in reserves while there are $9,000+ billion in deposits.

It's purely a psychological stop gap to avoid panic rushing for the doors with all the banks and their Tier 1 capital ratios of <15c/$, in the event the guarantee is necessary to be activated, those dollars will be essentially worthless. Now that is a guarantee you can "take to the bank"


----------



## systematic

sinner said:


> I was curious to see how easy it would be to end up with ~180.
> 
> So I went to the finviz screener and selected for any US stock with market cap over 10 billion, which is about ~550 names.
> 
> Filtering on some very simple criteria, much less stringent than yours, yields a similar number, ~190:
> 
> View attachment 65851
> 
> (h/t finviz.com)
> 
> PS: Adding a requirement of 6 month return > 0 whittles it down to just 46 names.




A slightly different test but similar results...the similarity is interesting.  Thanks for doing that!  Seems to often happen; a similar percentage of stocks will qualify under different scenarios across different markets.  I can't remember off the top of my head, but I've looked at stuff before where I'll end up with (say) 30 out of 3000 US stocks and 5 out of 500 ASX stocks or some similar percentage.


----------



## sinner

sinner said:


> It's $250k, http://www.apra.gov.au/CrossIndustry/Documents/APRA-FCS-FAQ-ADI.pdf




Oh yeah, also the deposits must be in one of the following instos:

http://www.apra.gov.au/adi/Pages/adilist.aspx

Don't put money into St George or BankWest expecting a guarantee


----------



## DeepState

sinner said:


> Oh yeah, also the deposits must be in one of the following instos:
> 
> http://www.apra.gov.au/adi/Pages/adilist.aspx
> 
> Don't put money into St George or BankWest expecting a guarantee




I think you are guaranteed if you have savings with St George or BankWest as they are sub-brands of WBC and CBA which are ADIs.  There is a 'one-bank' concept which applies.  So you will only receive the guarantee over the aggregate of your deposits with the one ADI even if your deposits are with different sub-brands within the ADI.


----------



## shouldaindex

Anyone have an opinion on Deutsche Bank or Glencore?

Seems whichever way they go, the world will follow.


----------



## DeepState

shouldaindex said:


> Anyone have an opinion on Deutsche Bank or Glencore?
> 
> Seems whichever way they go, the world will follow.




Had a quick look at DBK-DE

Market is pricing nearly 10% of the loan book wiped out over and above provisions. 

Do some math with fingers in the air:
- Loan book has LVR of 70%
- Assets halve in value
- 50% of loans go into outright default.
This is the scenario which creates such an outcome.  It's incredibly extreme short of a systemic event which also takes down its investments on balance sheet. Or it might be an allowance for outright misrepresentation of the books...which seems less likely to be extreme following relatively recent banking reviews heading into the ECB becoming the EU regulator.  Balance sheet P&L is passed through the income statement.  

There is further buffer between that and senior credit bail in via Tier 1 eligible capital and some Tier 2.  The Cocos (Tier 1, Contingent Convertible) are where the heat is at present.  I suspect that the losses on these are causing short selling and CDS spikes to hedge it.  Neg Gamma in action rather than outright fundamental.

At this time, it does not appear that DB would be a source for acute systemic credit risk concern.  It is a risk for the CoCo holders and I think their hedging activity is pulling the markets away and making an outcome more fait accompli.  The Q4 2015 result was tainted by weak outcomes in trading style businesses.  The prior quarter saw a major writedown.  If you don't perpetuate these, things are alright.

Second order considerations are where the CoCos get converted.  This may make funding conditions tighter and impact bank profits further.  The ECB can respond to assist with this.

DB needs to raise more capital in general.  I do not know the quality of its investment book, but it is marked to market for the accounts.  It should be alright...if you think government bonds are actually riskless and the book is properly hedged.


----------



## DeepState

CanOz said:


> DS, apparently the big trade has been short the EU banks, but aside from DB, the China syndrome and junk bonds related to oil in the US, do you think there are other shoes to drop?




Notice how so much of this has credit at the heart of it as the key threshold issue.  In the GFC, shoes were dropping all over the place as the credit markets did all sorts of weird things.  Even the people in the middle of it didn't know what would happen in a few hours hence.  Further to your questions about deposit insurance, I recall seriously wondering whether my at call deposits were at risk in the middle of the GFC. We took out extra cash because you couldn't know if the ATMs would be shut (as happened in Greece). When credit stops suddenly in a highly levered environment, my extensive experience in investment leads me to confidently predict that it would not be good for growth.

If any of these break, it sets of downstream effects whose complexity is pretty much impossible to map and maintain.  All the shoes are tied together.  They drop together.  Sinner's post provides a comprehensive list of the stuff I am concerned about...although the migration issue seems to have less immediate concern for credit markets.


----------



## fraa

I thought one big one is uncertainty over future CB response/role - the strong market response to BOJ negative rates was a big ? over CB efficacy. I think there is big uncertainty over what the CBs will do next and what the market will do in return. What some point down the line the CBs go coordinated and more drastic (perceived to be all in?) and the market doesnt respond in kind ? If global CBs all lose credibility (as a group) - then what ?

Is there even a precedent or playbook for something like this ?

I am not a market historian (too much reading on my plate at present) so I am not sure.


----------



## DeepState

fraa said:


> I thought one big one is uncertainty over future CB response/role - the strong market response to BOJ negative rates was a big ? over CB efficacy. I think there is big uncertainty over what the CBs will do next and what the market will do in return. What some point down the line the CBs go coordinated and more drastic (perceived to be all in?) and the market doesnt respond in kind ? If global CBs all lose credibility (as a group) - then what ?
> 
> Is there even a precedent or playbook for something like this ?
> 
> I am not a market historian (too much reading on my plate at present) so I am not sure.




Yes.  I agree.  

Here's my scenario.  It's just a guess and essentially a fictional future-history plot line:

China devalues the yuan twice by 5% as it cannot sustain the reserve drain and cannot stop capital flight.
PBOC drops RRR and does other targeted lending to keep things going.
But...it doesn't work.  Credit slows, asset prices can not be sustained and China does weird stuff without necessarily having to completely go into the abyss.
Lower Yuan means lower prices exports to the RoW at a time when disinflation could do without it.
Asian based exporters find their economies drained of some exports. 
Oil takes another leg down as China is the second biggest consumer.  EM oil exporters go broke and there is an EM crisis that requires IMF intervention.  EM's sell off and this sets off credit issues because of EM debt and also because lower EM growth means lower DM growth.
CBs cut and print....but the market doesn't respond.  In Japan's case, it did the complete opposite.
Financial conditions tighten.
A nascent recovery is squashed.  We have a recession where monetary policy is ineffective.  Where fiscal balance sheets are already stretched.  Even at 0 real rates, there is an aversion to increasing debt levels.  We move to a free market.  A free market would not trade where we are.
Micro economic reform is called for again and again.  Not much happens.  What does happen is slow to take effect.
Meanwhile, debt levels climb again and the European periphery (let alone Italy and France) does weird stuff.


Then it depends on how disorderly it becomes.  We are in the world of animal spirits.  Markets can create fait accompli outcomes.  
I would have thought that endless QE was supposed to lead to the abandonment of a currency and price inflation.  In today's world, you don't see that.  Japan tells you how extreme this can get and still function.
Who knows?


----------



## fraa

Here is an article to put some flesh on your point about CBs cutting

http://ftalphaville.ft.com/2016/02/11/2153029/how-negative-is-negative-try-4-5-per-cent-negative/

Good discussion, based on the few existing European -ve rate experiences, on how far the CBs expect they can take it down without adverse effects (in their view anyway). 




DeepState said:


> Yes.  I agree.
> 
> Here's my scenario.  It's just a guess and essentially a fictional future-history plot line:
> 
> China devalues the yuan twice by 5% as it cannot sustain the reserve drain and cannot stop capital flight.
> PBOC drops RRR and does other targeted lending to keep things going.
> But...it doesn't work.  Credit slows, asset prices can not be sustained and China does weird stuff without necessarily having to completely go into the abyss.
> Lower Yuan means lower prices exports to the RoW at a time when disinflation could do without it.
> Asian based exporters find their economies drained of some exports.
> Oil takes another leg down as China is the second biggest consumer.  EM oil exporters go broke and there is an EM crisis that requires IMF intervention.  EM's sell off and this sets off credit issues because of EM debt and also because lower EM growth means lower DM growth.
> CBs cut and print....but the market doesn't respond.  In Japan's case, it did the complete opposite.
> Financial conditions tighten.
> A nascent recovery is squashed.  We have a recession where monetary policy is ineffective.  Where fiscal balance sheets are already stretched.  Even at 0 real rates, there is an aversion to increasing debt levels.  We move to a free market.  A free market would not trade where we are.
> Micro economic reform is called for again and again.  Not much happens.  What does happen is slow to take effect.
> Meanwhile, debt levels climb again and the European periphery (let alone Italy and France) does weird stuff.
> 
> 
> Then it depends on how disorderly it becomes.  We are in the world of animal spirits.  Markets can create fait accompli outcomes.
> I would have thought that endless QE was supposed to lead to the abandonment of a currency and price inflation.  In today's world, you don't see that.  Japan tells you how extreme this can get and still function.
> Who knows?


----------



## DeepState

One of the key questions in front of the Fed...and the rest of the world market...is the extent of tension in the labour market.  Unemployment and underemployment have all come down a lot.  The official unemployment rate is not far off what is regarded as full employment.  However, there is thought to be a store of people who would return to work, but are not registered as being part of the workforce.  An examination of participation rate data suggests this figure might be around an additional 1% of adult population.

I was looking in to real wage growth today, amongst other things.  I came across something interesting.  When the jobs market started to heal, jobs growth occurred in retail and food & hospitality.  Former middle income workers became waiters and retail shop assistants to make ends meet.  Other than that, there has been growth in health care.  Most other job types decreased or stayed pretty flat.

One great sign that things are turning around is that people are chucking in their jobs with greater frequency in food & hospitality.  The quit rate is very nearly back to pre-GFC levels again.  This suggests that these people are seeing better prospects elsewhere.  Wage tension is returning.


----------



## sinner

I spotted this today and thought a few observers here would find it interesting:

http://wolfstreet.com/2016/02/17/junk-rated-companies-biggest-refinancing-cliff-moodys/

Summarising some research from Moodys over the last yearish.



> That “refinancing cliff” is going to be the biggest, steepest ever, after the greatest credit bubble in US history when companies took on record amounts of debt, and it comes at the worst possible time, warned Moody’s in its annual report.




Everyone agrees there is too much debt. The disagreement is that over how it will play out. The majority consensus seems to be that of credit deflation, while those who feel that the debt will necessarily be written off in one form or another are in the minority.


----------



## DeepState

Iron Ore

Two of the most heavily shorted stocks in the market are FMG and WOR.  Looks like a major short squeeze was in play in the last couple of days.


----------



## DeepState

The ECB announcement reaction is akin to the weak BoJ outcome (Equities drop and currency rises). Gold is rising. The lower bound for the short end has been reached. Innovative elements include adding investment grade corps to the eligible monetary purchases and targeted lending initiatives. Big question: is lack of economic activity the result of credit being priced too high in real terms (Secular Stagnation) or because there is no/limited demand for credit at any price (Debt Overhang)? It is worse for the EZ because there is no way the EZ can launch fiscal stimulus to offset a weak monetary response or monetise debt (helicopter money).  Central banks are running out of room. The ECB looks spent. On a broad read, the market is positioning accordingly.

The Draghi Put is being replaced with the Yellen Call.


----------



## Ves

DS,

What are your thoughts on infrastructure?   Do you think it is a separate "asset class" in terms of an investment strategy?   Do you account for it separately in your investment strategy,  and if so, do you have any thoughts for exposure for retail investors?

I understand that options are quite limited in Australia, as it's either government owned,  or held by a number of managed funds or private equity.   Access to a very wide range of assets would seem to be either impossible,  or too expensive,  for a small investor IMO,  which is probably why most Australian investment literature doesn't mention it.


----------



## DeepState

Ves said:


> DS,
> 
> What are your thoughts on infrastructure?   Do you think it is a separate "asset class" in terms of an investment strategy?   Do you account for it separately in your investment strategy,  and if so, do you have any thoughts for exposure for retail investors?
> 
> I understand that options are quite limited in Australia, as it's either government owned,  or held by a number of managed funds or private equity.   Access to a very wide range of assets would seem to be either impossible,  or too expensive,  for a small investor IMO,  which is probably why most Australian investment literature doesn't mention it.




Hi Ves, hope all's good.

Infrastructure is treated as a separate asset class by Insto investors.  Separate management teams, different characteristics (revenue risk sharing, illiquid, sovereign risks etc).  Furthermore, broken into debt and equity components.  Some will be specific on whether to invest in greenfield or brownfield.  Some insto asset owners will directly invest into individual assets.  Others will appoint third party asset managers.

The consensus view is that the absolute price of trophy assets is bid far too high, but the buyers use liability matching arguments to justify it (large Canadian Defined Benefit Plans, for example) or strategic reasons (Port of Darwin).  There are still opportunities in mid range assets on a case by case basis.

There are listed infrastructure funds and unlisted ones also which are available to retail investors.  

Could be considered as an alternative to bonds, albeit with more credit risk of a different kind.


----------



## fraa

Delayed reaction doesnt look that way today and reaction is very positive. 

http://macro-man.blogspot.co.id/2016/03/the-aftermath.html

risk on in most things.




DeepState said:


> The ECB announcement reaction is akin to the weak BoJ outcome (Equities drop and currency rises). Gold is rising. The lower bound for the short end has been reached. Innovative elements include adding investment grade corps to the eligible monetary purchases and targeted lending initiatives. Big question: is lack of economic activity the result of credit being priced too high in real terms (Secular Stagnation) or because there is no/limited demand for credit at any price (Debt Overhang)? It is worse for the EZ because there is no way the EZ can launch fiscal stimulus to offset a weak monetary response or monetise debt (helicopter money).  Central banks are running out of room. The ECB looks spent. On a broad read, the market is positioning accordingly.
> 
> The Draghi Put is being replaced with the Yellen Call.


----------



## qldfrog

fraa said:


> Delayed reaction doesnt look that way today and reaction is very positive.
> 
> http://macro-man.blogspot.co.id/2016/03/the-aftermath.html
> 
> risk on in most things.



And the AUD  is jumping higher as a result:
All is good again.
I still can only see this as a good opportunity to buy more USD before the next change of mind.I really really believe the world economy is in a pretty sick state.Where is my finances Noah's ark ?


----------



## fraa

qldfrog said:


> And the AUD  is jumping higher as a result:
> All is good again.
> I still can only see this as a good opportunity to buy more USD before the next change of mind.I really really believe the world economy is in a pretty sick state.Where is my finances Noah's ark ?




Hahhahahah... Dont take this guy seriously, but since you are looking for the Ark...

http://ibankcoin.com/flyblog/2016/02/29/markets-disappoint-the-ark-floats/

I believe the Ark's license plate has "TLT" on it


----------



## DeepState

fraa said:


> Delayed reaction doesnt look that way today and reaction is very positive.
> 
> http://macro-man.blogspot.co.id/2016/03/the-aftermath.html
> 
> risk on in most things.




Very cool that you are interested in this stuff.  Macro Man is very reasoned on the whole.

The ECB announcement had surprisingly positive and negative points. On the positive side was an expansion of the quantity of asset purchases. The market had expected this to be extended to E70bn per month, instead it was moved to $80bn per month.  In addition, the qualifying assets were expanded to include investment grade bonds for Euro Area 'established' non financial corporations.  There was also an extension and an increase in potency of the Targeted Long Term Refinancing Operations via incentives that could see the lending rate get as low as -0.4% per annum.  Paid to lend.  Please note that these target loans to non financial corporations and residents except for property purchases.

The Deposit rate was cut to -0.4% as expected.  But the other main rates were shaved a tiny bit.

A negative was that the Asset Purchase Program was not extended, possibly a trade off with the higher monthly spend.

The market reaction was initially positive, but this was quickly erased and reversed when Draghi essentially agreed with an increasingly common view that negative interest rate policy was not having the expected outcome due to the rates not being passed to depositors.  The instrument is basically exhausted.

The Euro sold off.  Equities initially fell.  This initial reaction is important.  It marks a very sharp contrast to the general pattern of financial market developments following previous stimulatory announcements.  Until an underwhelming reaction to the last ECB stimulus efforts late in 2015, and the complete opposite-to-desired outcome from the BoJ cut very recently, these had been strongly positive.  Now, we have three of the most recent monetary policy stimulus efforts unable to generate heat and light.  In addition, we have the Fed with risk towards holding for a very long time but wanting to tighten.  Stimulus and efforts to remove stimulus, are failing.  When the CBs have been the only thing going for the period since the GFC took hold (apart from bail-outs, of course), this is an important development.

You say risk-on everywhere yesterday.  Yes, it looks that way, but it is important to look underneath it.  Also, I should be careful not to assign too much to the following observations. 

+ Yesterday saw a rally in financials and energy.  Financials trailed energy.  Energy is the greatest threat to the solvency of banks at present.  That link should be evident.  There were inventory figures which boosted the outlook for energy.  This was not the work of the ECB.
+ The expanded TLTRO program does not extend to offshore lending.  It is extremely tenuous to argue that any stimulus to EA lending arising from TLTRO would flow through to the likes of JP Morgan.  US Treasuries sold off when EZ bonds came in. 
+ The net gain in EZ equities vs rest of world is not special in any way.  Compare this to the QQE program outcome in Japan and what had been achievable by the Fed and ECB previously.  The ECB did not impress equity investors in European markets.

The prior TLTRO program helped to stop bank lending from declining further, but there has been negligible movement in the stock of lending via the bank channel.  This latest program is more powerful, but you have to ask whether the extent of lending will truly increase that much when:
+ the liquidity holdings of the major banks is so large relative to the loan books
+ the loan books have a lot of property asset loans
+ disintermediated credit for large and medium sized corporates has already grown heaps.

The returns now available from bank liquidity holdings will reduce at the same time as bank deposit rates with the ECB are lower which can't be passed on.  Not good.  The banks remain over-levered.  Remember Deutsche recently.  In order to loan, these guys have to issue stock.  They have been reluctant to do so.  This looks like some degree of pushing on string going on with the TLTRO.

Buying investment grade corporate debt does very little to help with disintermediated credit to the small business.  This is the capital starved and high employment generating sector of the economy.  IG corporate is able to source credit already, dropping the borrowing costs a bit will definitely help, but will cause distortions as well and, strangely, will encourage some sub-investment grade corporates to deleverage as they shrink their way to higher profits.  

The Euro strengthened and the US Treasury, Australian Treasury and UK Treasury securities all saw their bonds sell off.  EZ bonds came in.  Growth is expected to bleed from the EZ.

On the whole, this picture is one of where monetary firepower in the ECB is clearly losing potency.  It is interesting that Vice President of the ECB, Constancio, was just expressing concern that it is not a good idea to voice such a view when monetary policy is the only thing going...it'll be alright if we don't talk about it.

His comments introduce my final closing points.  The EZ is not like other sovereign states with their own central banks.  It cannot simple engage in a spend and monetise (helicopter money) routine.  Further, due to austerity and EA agreements about deficit limitations, it cannot expand sovereign balance sheets strongly even as yields go to zero.  It has less going for it than Japan in this regard.

Monetary policy in the EZ could be reaching its limits.  If so, it doesn't mean crash and burn necessarily.  It means finally accepting that it will be in a very protracted period of low growth. Maybe it will ignite a round of productivity enhancing activity, but the voters are looking increasingly to unconventional outcomes.  The ECB/Draghi Put is less solid.  Meanwhile, Yellen is intent to tighten policy at any reasonable opportunity...the Yellen Call.  This latest outcome is a bear signal for your suite of considerations.


----------



## McLovin

Great summary, DS. Thanks.


----------



## fraa

Hi Ds I know very litle, but I read his blog not because of his calls, but because the issues raised and discussed in the comments have a habit of becoming market issues down the line.

Will take some time to read your post in detail when I am not on the run. 

ps read polemics blog called polemics paine (He was the previous incarnation of macro man). He is expecting risk on (I linked the wrong blog entry).


----------



## fraa

Hi DS - I am a noob so I cannot contribute anything meaningful to the "known unknowns" (below), but hope I can reply with a mismash of the more "bullish" views (no point if I just agreed with you right ?).

My brain dump.

1. ECB is abandoning using the EUR FX rate as a transmission mechanism to stroke demand. Hence going forward, no more negative rate cuts and by extension ECB no longer focused on weaker EUR.  2 main impacts. 

1.1 Impact of negative rates on bank NIMs (i.e. re profits) has been negligible up to now (I think ? I read prior comparions using Sweden as a yard stick on how much ECB go could negative and they came up figure much higher then now). Market fear was around how deep potential negative rates could get. ECB has removed this fear.

1.2 Currency war - Market fears around devaluation i.e. to race to the bottom. CBs so far (except Fed) have engaged in currency devaluation.  ECB has said (jawboned ?) no more EUR devaluation. So another fear has been removed (if you take ECB at face value).

I wonder if at the G20 the ECB, FED, BOC and BOJ had a few words and realized that the currency war at this point was MAD (pun intended) and had some informal agreement going forward. BOJ and FED next week will be interesting.

2. ECB LTRO I read was around assisting in 1.1 (i.e. alleviating impact of existing negative rate on euro bank NIMs). This is my first "known unknown" - not sure if this is pure signaling or has a concrete impact. 

3. ECB will now refocus efforts targeting domestic credit creation directly (i.e. IG purchases). This is my second "known unknown" - I have no idea if this will work. I think your view is that this is likely to be ineffectual (others have shared this view). 

But I think this also has signalling value - there was been a view that CBs are now out of bullets (firmed up by the BOJ epic fail recently). But with ECB heading down a new road (i.e. no longer focusing on using FX as transmission mechanism), this does give the "out of bullets" view pause as this is a new direction. 

While an personal assessment that ECB efforts are ineffectual could be made, there is still doubt whether the market agrees (or how long it takes until it comes around - i.e. 2nd order thinking). Until there is an objective definitive signal that these measures are ineffectual - I think its prudent to keep an open mind and remove the air of doom/inevitibility that has hovered around CB efforts.

4. Re market reactions. During the 1st day when Euro stocks fell and EUR strengthened, oil/commods and other general risk on flags (i.e. AUD) hardly budged. Thats y I didnt think it was a general risk off and was just a change of market regime (particularly around the EUR). If there was a gentleman's agreement around the CBs (i.e. 1.2) then FX correlations going forward will change (algo impact ?).

I wonder what could be a catalyst that takes us down again. I think the market "expects" something to break (hightened reactions to the CoCo issue etc) but nothing has so far and we have bounced back up. Sentiment wise overall is bearish (BoAML funds report has very high levels of cash - fat pitch blog does regular weekly blog entries about it) so if on a longer term basis the bear case fails to materialise and sentiment shifts to bull, cash will move back into equities and we could get a strong rally. Considering that the prior rally up we have not had euphoria, I wonder if this recovery from a bear phase will provide that euphoria. 

Its all about timeframes I guess - CBs could be out of bullets and ECBs efforts prove ineffectual, but we could get a rally that gives the euphoria, and down the line ECB efforts fail and then down we go.... But this is all spinning wishful narratives at this point which confirms my biases so I will stop now


----------



## Ves

DeepState said:


> Hi Ves, hope all's good.
> 
> Infrastructure is treated as a separate asset class by Insto investors.  Separate management teams, different characteristics (revenue risk sharing, illiquid, sovereign risks etc).  Furthermore, broken into debt and equity components.  Some will be specific on whether to invest in greenfield or brownfield.  Some insto asset owners will directly invest into individual assets.  Others will appoint third party asset managers.
> 
> The consensus view is that the absolute price of trophy assets is bid far too high, but the buyers use liability matching arguments to justify it (large Canadian Defined Benefit Plans, for example) or strategic reasons (Port of Darwin).  There are still opportunities in mid range assets on a case by case basis.
> 
> There are listed infrastructure funds and unlisted ones also which are available to retail investors.
> 
> Could be considered as an alternative to bonds, albeit with more credit risk of a different kind.



Thanks mate.  That's helpful.

From a quick look at the listed ASX infrastructure companies (APA,  SKI, AST and the NZ power companies) I tend to agree that better assets are priced fairly high at the moment.   Which makes sense given your comments re alternative to bonds. The trade seems to be perceived as leveraged low-risk beta.  

It appears there isn't really a diversified "passive" investment approach for these types of assets,  unless you want to pay in excess of 1.2-1.5% annual management fees (some times more,   no thanks). I'm thinking that's a bit rich for assets that probably won't earn more than 7-8%pa over the cycle.


----------



## DeepState

Saudi Aramco to IPO.  Saudi Arabia is taking too much pain for this low oil rice to be sustained.  Unless they are going to reduce Lamborghini purchases they have an incentive to increase the price of oil.  They will strategically cripple themselves trying to keep Iran down unless they can do a lot of work on the expenditure side.


----------



## DeepState

Interactive Brokers keeps coming up as the go-to on-line broker of choice.  I am not presently a client and am reticent given its offerings are an order of magnitude cheaper than the alternatives. Why would this be?

What am I missing?  Are they trading off client protections in some way?


----------



## qldfrog

DeepState said:


> Interactive Brokers keeps coming up as the go-to on-line broker of choice.  I am not presently a client and am reticent given its offerings are an order of magnitude cheaper than the alternatives. Why would this be?
> 
> What am I missing?  Are they trading off client protections in some way?




Do you actually own the shares you purchase and where is your cash 'stored"?
these are the questions i would ask;
How have you been?
Been a while since the last posts.All good?


----------



## Wysiwyg

DeepState said:


> Saudi Arabia is taking too much pain for this low oil rice to be sustained.  Unless they are going to reduce Lamborghini purchases they have an incentive to increase the price of oil.  They will strategically cripple themselves trying to keep Iran down unless they can do a lot of work on the expenditure side.



Just an observation ..... With production costs less than 10 bucks per barrel, the lower market price would have meant less considerable profit but a worry probably not. The rig count in U.S. has more than halved in a year indicating which country has been feeling the pinch. I think the Middle East mob know they have the market cornered and how demand fluctuates. Information for general viewing provided below.


----------



## So_Cynical

DeepState said:


> Saudi Aramco to IPO.




Hell of a time to IPO anything conventional energy.



DeepState said:


> Interactive Brokers keeps coming up as the go-to on-line broker of choice.
> 
> What am I missing?  Are they trading off client protections in some way?




You don't own the shares they do, that's the big difference.


----------



## skc

DeepState said:


> Interactive Brokers keeps coming up as the go-to on-line broker of choice.  I am not presently a client and am reticent given its offerings are an order of magnitude cheaper than the alternatives. Why would this be?
> 
> What am I missing?  Are they trading off client protections in some way?




Alternatives in terms of Australian brokers? Perhaps that says something about the local offerings as necessarily anything wrong with Interactive Brokers? Look at the Big 4 offering in say FX rates vs other online alternatives and I would guess the differences are even more stark. 

The biggest problem I have with Interactive Brokers is that the assets are held in Street Name. This may have implications for asset recovery should Interactive Broker goes belly up. If you have a team of international lawyers and accountants able to go through all the fine prints in the PDS, the FDIC policies etc etc and give you the all clear... then that's great. But I don't rate my ability to understand these things that highly. 

This risk however is mitigated by the fact that Interactive Brokers are public listed. It is quite rare to see a company goes straight from trading normally to bankruptcy without at least one financial report indicating major problems. Dick Smith is the only one I can think of but it at least have had a trading update. 

The question comes down to whether you can easily liquidate your holdings with IB when the $hit hit the fan and withdraw your capital. 

I also find IB's report makes local taxation reporting a bit trickier. E.g. they don't recognise that the tax year for trust distributions are determined by the record date and not the payment date. So that's a manual process you need to perform. Again, your team of international taxation experts may make this problem irreverent.


----------



## DeepState

So_Cynical said:


> You don't own the shares they do, that's the big difference.




IB offers CFDs as well as normal holdings (over which they offer the opportunity to stock lend to them in exchange for collateral). You cannot lend shares you hold an exposure via CFDs, so I figure that you own the shares if you are buying them through IB as you would if you were doing so via CommSec or Westpac etc.  I have not been able to identify how these assets are held in trust away from IB's balance sheet.  In Australia, it's via CHESS and is thus bankruptcy remote from the broker.  Their Australian Financial Services Guide mentions assets held in custody for clients....which means the clients own them.

So, I still don't understand why the brokerage is so low.  It is so even for futures trading, for which IG also seems to be acting as agent.

Even if these assets are held on IG's balance sheet and you happen to access them via swap/cfd, it's the same for other CFD providers.  So why are they cheaper again?


I don't understand.


----------



## DeepState

skc said:


> The biggest problem I have with Interactive Brokers is that the assets are held in Street Name.




What does 'held in Street Name' mean?

I think you mean that the securities are held by a nominee custody company.  That's standard practice for Custody.  For example, National Australia Bank has a custody company called National Nominees.  XYZ institution has a fund manager who trades and the securities are booked to that nominee on behalf of the client.  It's like owning shares through your family trust.  NAB can fall over, but your assets remain your assets.

Source of all truth: https://en.wikipedia.org/wiki/Custodian_bank


----------



## DeepState

skc said:


> Alternatives in terms of Australian brokers? Perhaps that says something about the local offerings as necessarily anything wrong with Interactive Brokers? Look at the Big 4 offering in say FX rates vs other online alternatives and I would guess the differences are even more stark.




It appears to be so even against offshore on-line brokerages.  They should be able to replicate the business model, so it's a puzzle to me.


----------



## McLovin

DeepState said:


> What does 'held in Street Name' mean?




The broker owns the shares. I've never understood how that really works, presumably there are protections somewhere along the line to stop a rogue broker using your shares as security for his holiday home in the Hamptons.


----------



## DeepState

qldfrog said:


> Do you actually own the shares you purchase and where is your cash 'stored"?
> these are the questions i would ask;
> How have you been?
> Been a while since the last posts.All good?




Cash held on trust for clients and invested all over the place in repos and US Government.  Looks high quality, but then senior debt is only rated BBB+ and seems a thin layer.

The shares seem to be held in a custody bank in 'Street Name' as per SKC.

All good thanks.  Been focusing on currency lately and taken a while to develop a strategy which I have had in mind for years, makes sense to me, and is sustainably implemented.  That and other stuff.  Hope all's good with you.


----------



## DeepState

McLovin said:


> The broker owns the shares. I've never understood how that really works, presumably there are protections somewhere along the line to stop a rogue broker using your shares as security for his holiday home in the Hamptons.




It is exactly this issue which was my immediate suspicion.  IB could be cheap because it is lending your stock out and generating a heap of income which it keeps for itself.  Hence you are exchanging cheap brokerage etc, for credit risk.

Except...on review, it looks like the assets are held in a nominee custodian in trust, whether in an associated company or not.  And, they don't seem to lend your stock out unless you let them.  Westpac On-line is the same, yet they can't come close to the brokerage levels, for example.

There just has to be something that explains this gap and I'm not comfortable with not knowing.  Maybe they have the most super-efficient platform or something.  Whatever.  What is it?


----------



## McLovin

DeepState said:


> It is exactly this issue which was my immediate suspicion.  IB could be cheap because it is lending your stock out and generating a heap of income which it keeps for itself.  Hence you are exchanging cheap brokerage etc, for credit risk.
> 
> Except...on review, it looks like the assets are held in a nominee custodian in trust, whether in an associated company or not.  And, they don't seem to lend your stock out unless you let them.  Westpac On-line is the same, yet they can't come close to the brokerage levels, for example.
> 
> There just has to be something that explains this gap and I'm not comfortable with not knowing.  Maybe they have the most super-efficient platform or something.  Whatever.  What is it?




On first sweep it looks like they've got a pretty big margin lending biz.



> As of December 31, 2015 and December 31, 2014, approximately $17.0 billion and $17.1 billion, respectively, of customer margin loans were outstanding.




They don't pay seem to pay anything on deposits for most currencies, so even with their bargain basement margin lending rates they're making a very nice margin. I guess you need to decide if you're being adequately compensated for that risk.


----------



## skc

DeepState said:


> It is exactly this issue which was my immediate suspicion.  IB could be cheap because it is lending your stock out and generating a heap of income which it keeps for itself.  Hence you are exchanging cheap brokerage etc, for credit risk.
> 
> Except...on review, it looks like the assets are held in a nominee custodian in trust, whether in an associated company or not.  And, they don't seem to lend your stock out unless you let them.  Westpac On-line is the same, yet they can't come close to the brokerage levels, for example.
> 
> There just has to be something that explains this gap and I'm not comfortable with not knowing.  Maybe they have the most super-efficient platform or something.  Whatever.  What is it?




I think all these stuff about counterparty risk will really be tested when a broker goes belly up. I went through MF Global and I am not at all interested in counterparty risk if I could avoid it.

Here are 2 articles on the stuff that happens behind the scene in MF Global that I doubt most customers were aware of.. and MF Global was for some reason one of the 8 treasury dealers (or whatever it was called).

http://www.zerohedge.com/contribute...t-2b-and-central-bank-couldnt-see-bankruptcy-

http://rogermontgomery.com/hyper-what/

Australian clients of MF Global eventually got the majority of money back. CFD clients got ~95% but it took 2 years (~50% after 1 year). And this is within Australia locally.


----------



## kid hustlr

DS are you stil around?

Would love to hear your thoughts on the current outlook. This whole concept of negative yield bonds has me confused - I don't understand why anyone would buy negative yielding paper - is the economy in that much trouble?

If it is, what do we do? Does negative interest rates infer gold is now a positive carry instrument?


----------



## DeepState

kid hustlr said:


> DS are you stil around?
> 
> Would love to hear your thoughts on the current outlook. This whole concept of negative yield bonds has me confused - I don't understand why anyone would buy negative yielding paper - is the economy in that much trouble?
> 
> If it is, what do we do? Does negative interest rates infer gold is now a positive carry instrument?




Hi KH

I am still around.  Just a whole lot less voluminous and doing some investment-related things which are taking up a lot of time lately.

Negative yields are something I thought was impossible to sustain.  Up until this era, they occurred for very short periods during major banking crises. What do I know?

We now have over USD 10tr of issued bonds trading with negative yields.  Most of this is government, some of it is corporate. 

I'm with you.  What a ridiculous concept to be paid to borrow.  Why would anyone lend on that basis?

Yet, here are some of the reasons:
- The returns on other assets are worse (eg. you might think that equities, property etc. will record poor risk adjusted returns)
- Holding cash is more expensive (you need to guard it, stop it from rotting, insure it...)
- Inflation will be very low or even negative, giving acceptable real returns, even if low by historical standards
- risk weights on government bonds are zero for major banks and this encourages them to hold liquidity here are they try to repair their balance sheets slowly
- it is the result of deliberate distortion by central banks to make asset prices so high that, eventually, investors move to invest in real production like building new factories or otherwise encourage companies which are already doing this to expand further.
- government debt growth is now slower than it had been and reducing as a share of GDP.  For high quality credit, it means that supply is not growing as fast as demand.  This pushes yields down.  This argument is offset by decumulation of reserves in China and Saudi Arabia.

However, it's not all working as might have been hoped although it probably would have been much worse without this support.  Movement to the real economy has not been progressing as much as might have been hoped.

There are at least two key reasons which have been put forward for this:
1. The world is so awash with debt that key components of the economy just won't take on any more debt.
2. Things look so ridiculous that people use cash as an asset.  Normally, cash is used for transactional purposes for the most part.  In this world, people don't want to invest because it all looks so silly.  Thus they hold cash (and other near cash stuff).

Gold is now positive, relative, carry.

The economy appears to be recovering in terms of employment, GDP and less so on inflation although this figure is positive for the most part.  Central Banks are very uptight on the inflation figures because the Keynesian beliefs they hold dear suggest that people will not spend enough if they think inflation is low or will go negative.  Yet much of the reason behind low inflation is due to commodity prices or things like steel.  Outside of that, it looks mostly ok.

There is so much which is weird. The most obvious implication is that the risk premium for holding long dated bonds is probably not sufficient to justify holding much of them (I own no foreign government bonds).  Further, if bonds blow out, equity won't survive so well (I have protection in place and risk budget the exposure to equities quite tightly).  There are other things which become relatively more interesting to consider for an investor.  These are known as alternative betas.  I have been adding these to my arrangements and have one or two more to go.


----------



## kid hustlr

Great as always DS and I feel I'm now at a point where I actually understand most of what you are saying.

Why I like your posts is that you have an economic understanding but you've clearly run money. Its the run money part I like.

So I'll keep digging.

As I stand back and I think well I can't buy bonds, and equities risk/reward don't look great - where do I turn to put my (small) hard earned? Australian property looks as bad as bonds to me also so the options become scarce quickly.

Perhaps some buy+hold equities? Perhaps some alternate options you suggest and I agree good mean reversion or momentum type strategies would (should?) outperform buy+hold. I'm still left with plenty to allocate though.

Gold is an option for some of it but what's the best way to play them? Etf's? Stocks? The XGD is up crazy numbers in the past year can I jump on now?

Seems to me I have two options:
1. I'm stuck running a standard 60/40 with some strategy exposure on the equity side and oveepriced bonds just hoping the past is the future and the strategies hold up - this feels wrong.

2. I keep some in equities put some under the mattress and the rest in gold and hope the world falls over - this also feels wrong.

Don't mean to clog your thread but conceptually it just seems super difficult right now to build a plan. Happy for this post to be moved should it not fit the theme of thread or I'm the only one thinking these things.  

Regardless please do post more, Im sure I'm not the only one thinking that!


----------



## DeepState

kid hustlr said:


> Great as always DS and I feel I'm now at a point where I actually understand most of what you are saying.
> 
> Why I like your posts is that you have an economic understanding but you've clearly run money. Its the run money part I like.
> 
> So I'll keep digging.
> 
> As I stand back and I think well I can't buy bonds, and equities risk/reward don't look great - where do I turn to put my (small) hard earned? Australian property looks as bad as bonds to me also so the options become scarce quickly.
> 
> Perhaps some buy+hold equities? Perhaps some alternate options you suggest and I agree good mean reversion or momentum type strategies would (should?) outperform buy+hold. I'm still left with plenty to allocate though.
> 
> Gold is an option for some of it but what's the best way to play them? Etf's? Stocks? The XGD is up crazy numbers in the past year can I jump on now?
> 
> Seems to me I have two options:
> 1. I'm stuck running a standard 60/40 with some strategy exposure on the equity side and oveepriced bonds just hoping the past is the future and the strategies hold up - this feels wrong.
> 
> 2. I keep some in equities put some under the mattress and the rest in gold and hope the world falls over - this also feels wrong.
> 
> Don't mean to clog your thread but conceptually it just seems super difficult right now to build a plan. Happy for this post to be moved should it not fit the theme of thread or I'm the only one thinking these things.
> 
> Regardless please do post more, Im sure I'm not the only one thinking that!




It's been a real struggle for me as well.  I am so struck by how hard it is to generate a real return now.  My hopes/plans(?) for investment returns are remarkably modest.  Yet even they seem precarious.

I feel that I know this much when forming a plan:

1. No matter what you hope to earn, the governing factors are knowing what you cannot afford to lose and making sure that this does not occur.

2. There is a difference between solvency risk and risk tolerance.  Solvency is actually not being able to have enough money in the long run.  Risk tolerance is the ability to survive the journey.  Both are important and necessary to consider.  

3. The belief that we can discern what assets will go up or down in the next three years, say, is already a big statement. Trying to rank their relative merits or make even more finessed predictions that equities will to 7.5% and emerging markets will do 8.2% seem quite tenuous to me....despite widespread currency.  Yes, I did this.  Still do.

4. Entering the markets on the basis that you are smarter than the rest is a big statement.  I'd rather position on things where I have some form of natural advantage for the heavy lifting.  Trading is not something I do for a living.  It clearly works for others. Yet others may need to trade in order to have any chance of meeting their goals as more passive premia will assure insolvency.  Nothing to lose.  

5. If you don't know what is going to happen for sure and you have a bunch of ideas that seem sensible and are willing to back, then put them together in a way which meets 2. in the best possible way.  Although not to the taste of many, I am very heavily diversified, not in just what I own, but in the way that I hold them.  When you look into that, what you find are really a small number of ideas that drive the whole show.  Maybe six in my case.  Equity risk premium, for example, is one idea that I am happy to expose myself to.  That idea is expressed via exposures to many thousands of stocks (I hold around 80 Australian shares directly and overseas developed and emerging markets shares largely via ETFs).

Gold.  If you don't think you'll actually need the physical asset in your hands, then a Gold Receipt might be worth considering. PMGOLD, for example.  Means you don't have to buy a safe, insure it...  If you want to secure a production profit against that then gold companies are essentially a real option on the price of gold.  You do need to value them.  Gold miners perform in a very strange way so their evaluation can be challenging.  There are risks in any choice you could make.  I own some gold via PMGOLD.  It is a small holding of a couple of percent which I see as an alternative to holding exposures to fiat currencies in part.  In other words, I see gold as a currency (and also a hedge in extreme situations) and think it has a place in a way which is similar to saying that I have exposure to JPY and think that is reasonable too.

This thread has no defined topic so please feel free to express your views and invite comment from myself or others who may be passing by.


----------



## Triathlete

DeepState said:


> It's been a real struggle for me as well.  I am so struck by how hard it is to generate a real return now.  My hopes/plans(?) for investment returns are remarkably modest.  Yet even they seem precarious.
> 
> I feel that I know this much when forming a plan:
> 
> 1. No matter what you hope to earn, the governing factors are knowing what you cannot afford to lose and making sure that this does not occur.
> 
> That idea is expressed via exposures to many thousands of stocks (*I hold around 80 Australian shares directly *and overseas developed and emerging markets shares largely via ETFs).
> 
> 
> This thread has no defined topic so please feel free to express your views and invite comment from myself or others who may be passing by.




Hi DS,

         I would be interested to know how you go about keeping on *top of your 80 Direct Australian share holdings*. Seems like a lot of work.

What is your average hold time with your holdings?

Do you base your decisions on Fundamentals, Technicals or a combination of both??

I would also be interested in knowing with these holding over the last say 12-18 months how many went up in price, sideways and down in price.

What type of return are you aiming for on average???

Cheers 
Triathlete


----------



## DeepState

Triathlete said:


> Hi DS,
> 
> I would be interested to know how you go about keeping on *top of your 80 Direct Australian share holdings*. Seems like a lot of work.
> 
> What is your average hold time with your holdings?
> 
> Do you base your decisions on Fundamentals, Technicals or a combination of both??
> 
> I would also be interested in knowing with these holding over the last say 12-18 months how many went up in price, sideways and down in price.
> 
> What type of return are you aiming for on average???
> 
> Cheers
> Triathlete




Most of the positioning is motivated by a systematic approach.  It is an implementation of simple smart beta concepts and also the mispricing of franking credits.  The portfolio is risk managed based on fundamentals like industry membership and also statistical properties.  Other measures are observed. There is a fair bit going on.  In terms of technicals, there is no crossing of MA lines, VWA, EWs etc. motivating any position.  However, I do care about the historical pattern of returns in other ways and also for risk management.  Even with the systematic approach as a base, nothing hits the market unless I am satisfied that the idea makes sense given what it is trying to achieve. In some cases, like MVF-AU, I will deep dive and any insights here are blended into the portfolio in a way which treats these insights as if they were another systematic source of return.  Rebalancing occurs every month of two, whenever I get around to it.  It's not that sensitive to this.  Around 50 lines will trade each time, not all of which are complete closures or fresh opens.

What I do is not completely straight-forward. Given your questions are about the AEQ component, I suppose I could say that my concern is performance vs ASX 200 in this part and that it beats cash in general.  Runs with a tracking error of 3% per annum.  Aim to get about 2-3% per annum outperformance. Holding period is about a year. All going fine.  Don't really know the stock level hit rate.  Not something I watch.  I'm interested in the strategy hit rate, which is doing just fine.  The net exposure to Australian shares as an asset class represents around 10% of the risk (variance) in my portfolio.  I figure that the market will go up and, when pressed, will offer up an expectation of maybe 5%-9% per annum as a multi-decade total (pre franking) return.  These figures are based off concepts along the lines which Craft has mentioned elsewhere and are used elsewhere in the industry for long range 'prediction'.


----------



## Triathlete

DeepState said:


> Most of the positioning is motivated by a systematic approach.  It is an implementation of simple smart beta concepts and also the mispricing of franking credits.  The portfolio is risk managed based on fundamentals like industry membership and also statistical properties.  Other measures are observed. There is a fair bit going on.  In terms of technicals, there is no crossing of MA lines, VWA, EWs etc. motivating any position.  However, I do care about the historical pattern of returns in other ways and also for risk management.  Even with the systematic approach as a base, nothing hits the market unless I am satisfied that the idea makes sense given what it is trying to achieve. In some cases, like MVF-AU, I will deep dive and any insights here are blended into the portfolio in a way which treats these insights as if they were another systematic source of return.  Rebalancing occurs every month of two, whenever I get around to it.  It's not that sensitive to this.  Around 50 lines will trade each time, not all of which are complete closures or fresh opens.
> 
> What I do is not completely straight-forward. Given your questions are about the AEQ component, I suppose I could say that my concern is performance vs ASX 200 in this part and that it beats cash in general.  Runs with a tracking error of 3% per annum.  Aim to get about 2-3% per annum outperformance. Holding period is about a year. All going fine.  Don't really know the stock level hit rate.  Not something I watch.  I'm interested in the strategy hit rate, which is doing just fine.  The net exposure to Australian shares as an asset class represents around 10% of the risk (variance) in my portfolio.  I figure that the market will go up and, when pressed, will offer up an expectation of maybe 5%-9% per annum as a multi-decade total (pre franking) return.  These figures are based off concepts along the lines which Craft has mentioned elsewhere and are used elsewhere in the industry for long range 'prediction'.




Thanks DS,

I am actually not sure what you mean by "mispricing of franking credits" are you able to explain this part??
when you talk about "2-3% outperformance" you mean above the return of the ASX200 over the same timeline.??

Thanks again

Cheers
Triathlete


----------



## qldfrog

As always , very interesting, one area I am most concerned about is currency risk
Thanks for this exchange triatlete/DS,
With the AUD between 1.06 and  0.69 USD in the last few years, I believe the return I could expect from the share market are less significant and may not be worth the risk as opposed to currency swings;
I keep some exposure to teh market but probably the lowest i have ever had in the last 5/8 years
So my issue is : I have already lost more than 30% of my RE and firm assets in Australia vs the USD, could a similar think happen again?
 74c to 55c/60c for teh AUD does not seem far reached, and in that case my cash position in AUD (aka my bank account, my RE are not safe)
So I try to diversify, have some gold and USD as an edge, I wonder also about getting some yen as some see it limited in the current race to the bottom of currencies
Lastly inflation: this is the elephant in the room, the ONLY way most of the western world government can avoid debt default; who am i to think I can oppose the obvious reserve banks target?
Cash, gold are so the obvious answer: I do not really care if I trade risk against safety and lower yield;
Return of capital before capital returns.
It does not sounds right, comes at a wrong time in my investment life but the economic environment does not seem right either: waiting for the helicopter money phase to come next.
Crazy? Too pessimistic (a natural trait  for me)?


----------



## DeepState

Triathlete said:


> Thanks DS,
> 
> I am actually not sure what you mean by "mispricing of franking credits" are you able to explain this part??
> when you talk about "2-3% outperformance" you mean above the return of the ASX200 over the same timeline.??
> 
> Thanks again
> 
> Cheers
> Triathlete




Franking credits are tax benefits payable to (most, but not all) Australian domiciled investors.  Overseas investors don't enjoy the full benefit of these.  Further, some market participants like market makers don't get to benefit from them either.  As a result, there is a difference in the value of them which accrues to different participants in the market.  Perhaps mispricing is the wrong term.  Perhaps it would have been better for me to say that some market participants do not price franking and this offers an opportunity for those who do.  A good chunk of the Australian equity market is also managed by fund managers who are generally measured on the basis of pre-tax returns. All things equal, Australian tax payers who benefit from franking should tilt towards stocks which pay franked dividends.

Outperformance does refer to a result relative to the ASX 200 Accumulation Index over any common timeline.


----------



## skc

Triathlete said:


> I would be interested to know how you go about keeping on *top of your 80 Direct Australian share holdings*. Seems like a lot of work.




Not when you have a team of 8 FTE working in your family office...



Triathlete said:


> I am actually not sure what you mean by "mispricing of franking credits" are you able to explain this part??






DeepState said:


> A good chunk of the Australian equity market is also managed by fund managers who are generally measured on the basis of pre-tax returns. All things equal, Australian tax payers who benefit from franking should tilt towards stocks which pay franked dividends.




I remember reading some academic research paper has shown that, on ex-div date, most companies share price fall by the amount of the dividend paid (all else being equal), rather than by the amount of grossed up dividend (which is dividend + franking credits). This has been the case after the introduction of the 45-day rule. You can certainly observe these in ex-div of popular fully franked income stock like TLS and banks.

Every now and then you get trading opportunities around these. Like takeovers and off market buybacks with large "franked special dividend" components and arb some mispriced franking credits (or if you could get international borrow on shorts... you can short the stock if it priced in franking).


----------



## Triathlete

skc said:


> Not when you have a team of 8 FTE working in your family office...
> 
> I remember reading some academic research paper has shown that, on ex-div date, most companies share price fall by the amount of the dividend paid (all else being equal), rather than by the amount of grossed up dividend (which is dividend + franking credits). This has been the case after the introduction of the 45-day rule. You can certainly observe these in ex-div of popular fully franked income stock like TLS and banks.
> 
> Every now and then you get trading opportunities around these. Like takeovers and off market buybacks with large "franked special dividend" components and arb some mispriced franking credits (or if you could get international borrow on shorts... you can short the stock if it priced in franking).




Thanks D/S and SKC


----------



## DeepState

In Brexit, apparently the UK would be clearly the biggest loser as its total trade with Europe would be affected.  In Europe, each country's total trade with the UK is much smaller as a proportion of their individual economies.  So...why, might you think, are we seeing this (FTSE revisiting recent pre-Brexit highs, Euro STOXX 50 not close to regaining these)?


----------



## kid hustlr

DeepState said:


> In Brexit, apparently the UK would be clearly the biggest loser as its total trade with Europe would be affected.  In Europe, each country's total trade with the UK is much smaller as a proportion of their individual economies.  So...why, might you think, are we seeing this (FTSE revisiting recent pre-Brexit highs, Euro STOXX 50 not close to regaining these)?
> 
> View attachment 67278




DS,

Have you seen the FTSE 100 vs the FSTE 250 over last week? Very different story I believe - I saw a chart of it midweek - I'll try to dig it up.

The theory was the FTSE 100 is extremely export heavy - benefiting from the lower GDP compared to the 250 which is more heavily linked to the domestic economy


----------



## DeepState

kid hustlr said:


> DS,
> 
> Have you seen the FTSE 100 vs the FSTE 250 over last week? Very different story I believe - I saw a chart of it midweek - I'll try to dig it up.
> 
> The theory was the FTSE 100 is extremely export heavy - benefiting from the lower GDP compared to the 250 which is more heavily linked to the domestic economy







The FTSE 250 has not recovered relative to pre-Brexit levels as well as the FTSE 100.  However, a materially weakened GBP vs Euro would go some way to explaining the difference vs Euro STOXX 50....but not all.


----------



## DeepState

Minority or slim majority government. Fractured senate with 'ferals' still holding balance of power.  

I would have thought:

Less likelihood of microeconomic reform.  More uncertainty which will impede investment.  Less foreign investment into productive assets.  All sorts of BS compromises and targeted interests. Harder to react to things from the government/fiscal side.

One consequence:

Yet more weight given/shoved-on-to the RBA to do what needs to be done.


----------



## skc

Swiss bond yields now negative out to 50 years

https://next.ft.com/content/2ae4237a-2d3e-33dd-b9e0-120c4a93a29c



> Swiss government bond yields all the way out to 50-year maturities have now all turned negative, as the global bond rally powers ahead amid deep economic uncertainty.




It's crazy to think that anyone can predict anything in finance out 50 years... yet somehow someone thought it's a good idea to pay the Swiss government almost 12 bps to lock up the money for 50 years.

50 freaking years


----------



## DeepState

Japan 20yr bonds also went negative.  For a country whose debt load is basically nearly impossible to pay without unbearable austerity.

BoE Financial Stability Report is kind of sobering.  Over-priced property assets.  Current account deficit.  Heavy private sector leverage.  Wow...sound familiar?  Responding as per the Chinese do with the Required Reserve Ratio manipulations.  Cutting the counter-cyclical buffer and freeing up credit supply...except I thought credit was in fairly ready supply in the UK?  Carney is more concerned for lack of demand.

The EU is really facing a credibility moment.  Italian bank sovereign re-capitalisation.  Fines on fiscal excesses for Portugal and Spain for breach of Stability and Growth Pact agreements.

The CHF bond market and the rest are pricing in emergency measures for decades.  That, or the money sitting there losing real value prefers that to buying seriously overpriced assets whose forward looking returns are worse in their view.

When intermediated credit creation is being limited by regulators, lack of capital, broken balance sheets... on and on..

Gold is running.... head for the hills.


----------



## Value Hunter

I think certain institutional investors (perhaps pension funds, insurance companies, charitable organizations or banks, etc) are buying these negative yielding bonds are perhaps doing so because their hands are tied in various ways. 

Perhaps their mandates dictate they must hold a certain percentage of government bonds or that they must hold debt above a certain level credit rating. Also they may need something highly liquid due to the huge sums of money involved, hence the buying of German Bunds or Japanese Government Bonds. Perhaps they prefer this to U.S. government debt which has a positive yield because they don't want the U.S. dollar exposure and its expensive to hedge (or they don't want the long-term counter-party risk). I don't know I am just speculating here. It is my gut feeling that institutions buying these negative yielding bonds are not buying it because its a good investment (obviously). Also it would be interesting to know how much of these bonds are being bought/monetized by central banks?


----------



## DeepState

Value Hunter said:


> I think certain institutional investors (perhaps pension funds, insurance companies, charitable organizations or banks, etc) are buying these negative yielding bonds are perhaps doing so because their hands are tied in various ways.
> 
> Perhaps their mandates dictate they must hold a certain percentage of government bonds or that they must hold debt above a certain level credit rating. Also they may need something highly liquid due to the huge sums of money involved, hence the buying of German Bunds or Japanese Government Bonds. Perhaps they prefer this to U.S. government debt which has a positive yield because they don't want the U.S. dollar exposure and its expensive to hedge (or they don't want the long-term counter-party risk). I don't know I am just speculating here. It is my gut feeling that institutions buying these negative yielding bonds are not buying it because its a good investment (obviously). Also it would be interesting to know how much of these bonds are being bought/monetized by central banks?






Asset-liability matching: when an entity like a life insurer or pension fund has liabilities which are cashflows yet to occur, these are estimated and discounted by actuaries.  As interest rates decline, the value of these liabilities increases in a present value sense.  To the extent that there is a mismatch between the interest rate sensitivity of the assets and the liabilities, the surplus position of these entities comes under increasing stress as yields fall.  As their solvency becomes increasingly threatened they have to move to match the assets and liabilities more accurately...by buying bonds as they become ever more expensive...making them more expensive.  To that end, their hands are somewhat bound and considerations move away from buying cheap assets to hedging out risk that can't be borne.

Banks are big holders. Particularly in the case of Europe and Japan, their profitability is being eroded by lower net interest margins available from maturity transformation.  This is supposed to encourage them to lend.  However, the weak capital position of many European banks does not really allow them to do so.  Bit of a bind there.  But UK banks are different.  

The SNB does not hold much Swiss Bonds on its balance sheet. Less than 1% of the SNB assets are held in CHF Bonds.  CHF is held in the foreign reserves of other central banks.  Maybe there has been rebalancing away from other currencies into CHF bonds?  You can find these things if you are motivated.

The BoJ will, by contrast, own virtually all of the available JGBs if they keep up the rate of purchases for another decade.  I think they own around 20% of issuance at the moment.


----------



## CanOz

Deepstate, should we all go out and buy bonds and gold? Seems a no brainer, must a be a crowded trade by now though?


----------



## kid hustlr

That was great Can.


----------



## Value Hunter

DeepState said:


> As interest rates decline, the value of these liabilities increases in a present value sense.




While I understand the mathematics of DCF calculations where a lower discount rate leads to a higher valuation that seems like an absurd accounting methodology to use because we are talking about a liability is not an asset. 

When you are talking about liabilities if interest rates go down you are paying less interest on your debt for variable rate products. Obviously a debt which has a lower interest rate payable is less of a burden/liability than a higher interest rate debt of the same amount all things being equal. As for fixed rate debts, while theoretically the value of the liability may rise if you want to buy out the debt (e.g. if it is a bond) at current market value you must pay above par, in reality does this actual happen for pension funds? If you own a a five year government bond paying 2% interest p.a. and interest rates rise and the price and value of your bond drops, if you hold the bond to maturity assuming no defaults occur your return will be 2% p.a. irrespective of what the bond price does in the interim. The reverse is also true, if you are borrowing and interest rates drop and the market value of the debt goes up, if you pay out the debt at maturity/par then the theoretical increase in the value of the liability does not affect you. 

It seems like distorted accounting/logic to say that if interest rates drop a debtor is worse off, with the specific exception being a situation where they are forced to buy back/pay out the debt above par.

I just can't get my head around the concept that declining interest rates are bad for a borrower/debtor (unless for some reason you must buy out the debt at market value above par). Do home home owners with a fixed interest rate mortgage panic when interest rates go down because the the net present value of the liability increased? That is absurd, if anything they will be happy that if rates stay low when their fixed rate expires they can rollover onto a lower variable rate. As for those with a variable rate mortgage they will be happy to paying a lower interest rate today.


----------



## DeepState

Value Hunter said:


> While I understand the mathematics of DCF calculations where a lower discount rate leads to a higher valuation that seems like an absurd accounting methodology to use because we are talking about a liability is not an asset.




A liability is a negative asset.  It would be quite inconsistent to allow assets to be valued via DCF and absolve liabilities from the same.  The value of a liability is essentially the value that the debtor would need to pay to someone else to take the liabilities off the books.  It is a perfect mirror to the asset value which is the value the same entity would need to receive in order to take that asset off the books. [Ignoring considerations like market frictions, strategic matters, etc.]




Value Hunter said:


> When you are talking about liabilities if interest rates go down you are paying less interest on your debt for variable rate products. Obviously a debt which has a lower interest rate payable is less of a burden/liability than a higher interest rate debt of the same amount all things being equal. As for fixed rate debts, while theoretically the value of the liability may rise if you want to buy out the debt (e.g. if it is a bond) at current market value you must pay above par, in reality does this actual happen for pension funds? If you own a a five year government bond paying 2% interest p.a. and interest rates rise and the price and value of your bond drops, if you hold the bond to maturity assuming no defaults occur your return will be 2% p.a. irrespective of what the bond price does in the interim. The reverse is also true, if you are borrowing and interest rates drop and the market value of the debt goes up, if you pay out the debt at maturity/par then the theoretical increase in the value of the liability does not affect you.




Liabilities for defined benefit pensions and insurance companies are not variable rate products.  If interest rates fall, their present value rises.  This is unlike a floating rate security whose duration is essentially zero.

The argument about mark to market holdings is used for banks around the place where "hold to maturity assets" are maintained at book value unless impaired.  However, the market looks straight through this chicanery when doing sum of the parts valuations.

The only time when, for the sake of determining solvency, that not marking to market results in a fair representation of what happens is when the assets used to support the claims and liabilities/claims are perfectly matched.  If so, interest rate movements do not impact surplus.  Still the prices at which you could sell or buy the values on balance sheet are not a true and fair representation of the state of the insurance company, for example.  Leverage calculations would be off, as just one example.

If interest rates move, the value of the bonds with duration moves.  If the assets and liabilities are not perfectly cashflow matched, this has an impact on their solvency.  If so, it needs to be represented.  Even if you will get 2% on the bond if held to maturity, that 2% may not be sufficient to meet liabilities whose value has increased by more (assuming the duration of pension payments, for example, vastly exceed those of most bonds).  By not marking to market, all that is happening in deferring the recognition that solvency has been weakened.

Solvency is changed whether or not the bond was trading above/below par before then, or at acquisition.  All that matters is the valuation.  Typically, superannuation funds trade their bonds in anticipation of interest rate moves, relative value arguments, and changes to the liability structure.



Value Hunter said:


> It seems like distorted accounting/logic to say that if interest rates drop a debtor is worse off, with the specific exception being a situation where they are forced to buy back/pay out the debt above par.




Whether a debtor is better off or worse off for a particular situation depends on their wider circumstances.  An over-funded pension fund might benefit from the same event that an under-funded pension fund finds detrimental.  However, given many pensions are underfunded in an actuarial sense, we see these types of effects.




Value Hunter said:


> I just can't get my head around the concept that declining interest rates are bad for a borrower/debtor (unless for some reason you must buy out the debt at market value above par). Do home home owners with a fixed interest rate mortgage panic when interest rates go down because the the net present value of the liability increased? That is absurd, if anything they will be happy that if rates stay low when their fixed rate expires they can rollover onto a lower variable rate. As for those with a variable rate mortgage they will be happy to paying a lower interest rate today.




Home owners are usually on variable rates.  They will benefit is rates go down immediately.

Home owners who are on fixed rates will end up paying more than they could have.  The present value of these represents an increase in the present value of their mortgage payments.  Whether or not they choose to panic is up to them.


Perhaps a review of the accounts of QBE to see what occurs for general insurance liabilities and Challenger to see how they treat the life insurance liabilities may be helpful.  The Australian Public Sector Superannuation Funds (CSS/PSS) would be instructive in relation to actuarial treatment of defined benefit funds.

In Australia, Australian Accounting Standard AAS 25 is relevant.

In each case, liabilities which represent the present value of future payments whose value does not vary with movements in interest rates, as might a floating rate note, are discounted by actuarial methods for presentation to the accounts and for solvency reasons under governing legislation (overseen by APRA).

Where the interest rate sensitivity of the liabilities is greater than those of the assets, a fall in interest rates across the curve will result in an increase in value of the assets, but less so than the liabilities being discounted.  This will reduce surplus.  It makes it less certain that assets will be able to cover liabilities.  It is an accurate economic depiction of what is going on.  If surplus is being eroded, this will further reduce capacity for mismatch risk.  It leads to purchase of more 'risk free' bonds as mismatch is reduced where possible.  

I can empathise that this all seems weird.  It took me some time to come to grips with it. For my sins, I used to run these calculations once upon a time.

FT Article for interest:
	

		
			
		

		
	

View attachment Interest rate rise would fix pensions crisis — FT.pdf


----------



## DeepState

CanOz said:


> Deepstate, should we all go out and buy bonds and gold? Seems a no brainer, must a be a crowded trade by now though?




Gosh that was a good review.  I really liked his linking QE to asset inflation in financial centers.  Right there, we can see how monetary policy flowed not to the populace, but to a somewhat narrow demographic.

There's heaps to consider.  I hold some gold because I do not fully trust fiat money and am happy to hold some of my 'offshore' currency exposure in the form of gold.  This position has served well in my portfolio as a stabiliser.

As for bonds.  I am currently undecided.  "It's complicated."


----------



## DeepState

With a strong voting outcome for the LDP in Japan, event risk is high.  Abe appears to have his mandate.  The last effort at monetary easing was scoffed at.  The IMF is saying double down.


----------



## DeepState

So we'll have another female Prime Minister in the UK shortly.  Well done Theresa May.  

She made several statements on accepting her nomination.  If she can get these through, it would be a filip for progress towards a stronger society.  

Economically, one statement stood out for me.  She raised the prospect of government backed infrastructure funding/bonds.  What an excellent idea.  At pretty much zero real rates, any project which creates even the smallest return on capital and escalates with inflation, as infrastructure asset receipts tend to do, will produce a positive NPV.  By being government backed, these bonds will enjoy an umbrella of the government yield curve for financing, with some adjustments for liquidity, although I'd expect them to be repo eligible as well.

Infrastructure spending has large economic multiplier effects.  By financing them off balance sheet, the UK government avoids a ballooning federal debt, whilst stimulating productivity enhancing projects which will generate long term productivity growth whilst, at the same time, bringing corporate activity back into a higher gear in the nearer term. 

In all, this is seen to be a key way to drag us out of a sluggish growth environment.  It has been called for my the IMF, Krugman, Summers and even Bernanke has pointed it out as a way forward to bring economies out of their current funk.


----------



## Triathlete

DeepState said:


> As for bonds.  I am currently undecided.  "It's complicated."




Hi D/S, Do you have a view on corporate bonds???


----------



## DeepState

Triathlete said:


> Hi D/S, Do you have a view on corporate bonds???




I own some and am looking at increasing exposure to the asset category.


----------



## DeepState

Have been working on FX in the last couple of months, seeing if any of my stuff transfers to that world.  Trading commenced 3 May.  Developed Market pairs.  Nice start so far.  15 closed trades with one still open.  +72%.  A Minwa-like outcome.   No wonder he wants to switch to FX.

Scaling up my position sizes progressively.  At the moment, I still regard this as in the proving grounds and in the lab so am not full scale.


----------



## qldfrog

well done DS


----------



## DeepState

Reading the new Margin Trading Customer Agreement from IG Markets.  Crikey, if the font were any smaller I'd have to enlarge it on a photo copier.


----------



## minwa

DeepState said:


> Reading the new Margin Trading Customer Agreement from IG Markets.  Crikey, if the font were any smaller I'd have to enlarge it on a photo copier.




Lol I'm sure they sneak in using some technical language that basically allows them to close down your position if margined over and in negative territory, which easily happens when the spread goes super wide during volatile events while they are the market maker and price giver and that they can take the other side of your position without hedging themselves.


----------



## cynic

minwa said:


> Lol I'm sure they sneak in using some technical language that basically allows them to close down your position if margined over and in negative territory, which easily happens when the spread goes super wide during volatile events while they are the market maker and price giver and that they can take the other side of your position without hedging themselves.




If memory serves correctly, the clauses covering those things, to which you allude, used to appear within their dozens of pages PDS in reasonable sized font.

However, whilst typing this post, I have noticed that in their more recent version, they've managed to compress their PDS down to approximately 21 pages, albeit with a much smaller font than the PDS versions I perused about a decade ago.

I suspect that these changes are in response to ASIC and/or FOS criticism regarding the voluminous nature of their customer agreement documentation in years gone by.


----------



## skc

skc said:


> Swiss bond yields now negative out to 50 years




There's little doubt that institutions are buying negatively yielding bonds for capital gains... but this is the first time I've seen it actually getting mentioned in the press.

http://www.afr.com/markets/market-d...d-bonds-to-make-capital-gains-20160721-gqb029

I am really baffled about how this can be sustained... as long as there's money flowing in, the party can continue? 

It's hard to see this not end badly at some stage within my lifetime... makes me feel like hoarding tin food and go take a survival course with Bear Grylls.


----------



## qldfrog

Deep State,
i hope you do not mind me "hijacking" yopur thread:
I found teh following quite interesting:
http://www.brisbanetimes.com.au/business/the-economy/deutsche-bank-sees-world-economy-investment-reversing-for-the-next-35-years-20160909-grdacy.html
with a few more details on:
http://www.zerohedge.com/news/2016-09-08/global-demographic-shift


----------



## DeepState

qldfrog said:


> Deep State,
> i hope you do not mind me "hijacking" yopur thread:
> I found teh following quite interesting:
> http://www.brisbanetimes.com.au/business/the-economy/deutsche-bank-sees-world-economy-investment-reversing-for-the-next-35-years-20160909-grdacy.html
> with a few more details on:
> http://www.zerohedge.com/news/2016-09-08/global-demographic-shift




Unless we find a way to lift productivity way way up from current levels, the financial markets look set for a nasty time.  The benefits of such gains need to spread out more evenly if there is to be a recovery in demand and good prospects for security in private debt.   

It is felt by some that low productivity is arising from mis-reporting of quality improvements.  That is, the Pokemon you are buying today is 10x better than it was 5 years ago despite it selling for the same price.  That's a 10x real GDP growth from Pokemon.  With the service/knowledge economy being such a large part of GDP, how to you measure the growth in value from a better trimmed beard?  Yes, markets rise and fall on these determinations.  Maybe the ABS, BEA, etc. are under-reporting the qualifty gains of Pokemon and beard trimming and all is actually much better than currently thought?

"And in financial news tonight, real beard trimming quality gains have pushed the June qtr GDP figure to 1.5%..."

It is very hard to find a reliable way to secure a real return right now.


----------



## qldfrog

DeepState said:


> "And in financial news tonight, real beard trimming quality gains have pushed the June qtr GDP figure to 1.5%..."
> 
> It is very hard to find a reliable way to secure a real return right now.



Can not agree more and when last quarter GDP figures are moved from recession to best of type as the result of more taxpayer money going into a new medecine listed on the PBS and an helicopter program (Hardware O/S purchase, not the throwing money out of the window type, actually not that different  ) , this is craziness at its best.Yet it was all 25y wo recession pop the champagne celebration; in the middle of this, what do you do?
Protection of assets, cash, gold and real estate purchase this month (overvalued but hard to be confiscated);
currency protection as well, but I am in the belief the USD will start going down vs other currencies (not necessarily against the AUD) in the coming years and not that easy to by swiss Franc or remini.
This waiting game has been going on for too long..


----------



## DeepState

*Bank of Japan Yield Curve Target Strategy and revised inflation ambitions:* 

The BoJ decides that they will target yields at the long end explicitly rather than rely only on quantitative measures.  Ultimately, they actually want the yield, so this sort of makes sense.  Interesting that the money base is now >80% of nominal GDP, vs Europe and US of around 20%.  That's an indiction of how much monetary stimulus has gone on in Japan.  It is enormous.

...and yet they still can't generate (sufficient) inflation, nor the expectation for generating inflation - which is the key thing they look for.  In some move that I don't quite comprehend, when the public doesn't believe a commitment that they will return inflation to 2% pa over some magic timeframe that keeps extending, they decide to respond with a firmer commitment not just to meet this target they have not been able to meet, but to deliberately overshoot it and keep it that way.  

The rough equivalent might be something like:

Whilst gradually losing the title fight, having declared at the end of each round that he will knock Mayweather out within the coming two rounds, Pacquaio goes on to declare... "I'm not just going to knock out Mayweather in two rounds, but going to knock him clean out of the ring!" as if that's going to scare Mayweather into submission.  

One for the WTF file.


---

*US Dollar Funding*

The BoJ, RBA and BIS have recently made mention of tightening offshore US dollar funding conditions.  Interestingly to me, at least, was that this is the result of plans anounced last year, due for implementation shortly, that US money market funds can freeze redemptions.  It is causing a flight of capital away from these funds into government bond funds.  As a result, financing of US corporate debt is becomming more difficult to secure.


----------



## DeepState

The prospect of justice for this travesty brings happiness today:




Scumbag.  That's a fact, not an opinion.


----------



## mcgrath111

Hey Deepstate,

Like to know your thoughts behind the big rally in the FTSE at the moment, while the DOW and ASX seems to be quite stagnant as of late.

Is it directly related to the pound devaluation due to the brexit?


Thanks,
Mike


----------



## DeepState

mcgrath111 said:


> Hey Deepstate,
> 
> Like to know your thoughts behind the big rally in the FTSE at the moment, while the DOW and ASX seems to be quite stagnant as of late.
> 
> Is it directly related to the pound devaluation due to the brexit?
> 
> 
> Thanks,
> Mike




Hi Mike, it's mostly the result of currency translation.  The attached may be more illuminating. FTSE is compared to Euro Stoxx, both denominated in Euro. Pound devaluation more genrally since Brexit relates to economic uncertainty and also reduced economic growth outlook.  In the last day or two, it looks like fat finger or flash crash was the cause of the spike.  Hollande's words were no more informative than a whole lot of eminent and important people's before that.

Best

DS


----------



## DeepState

The movement in the GBP and Gilt interest rates have been significant lately.  They are reminiscent of a deterioration in credit quality.  The markets (at least the bond and FX markets) are moving in a way which is consistent with an increasing concern for solvency.

See the divergence in yields and currency exchange rate in recent periods:




Carney was recently quoted as saying that the BoE is happy to see higher than target inflation to see the impending rise of unemployment through.  Apparently this was not well received?? The policy statement is pretty much in line with those of the US Fed and BoJ.  The banks are out of policy room with inflation so low and credit to huge.  They need to generate inflation to handle this threat.  If they could, central banks would probably be happy with inflation back at around 3-4% per annum with a stable outlook.

Perhaps the moves are best seen in the light of a market reaction to a very credible central bank policy adjustment.  Long bonds would move higher as future rates would need to be higher to contain a surge in inflation.  The currency would decline on the basis of PPP (inflation parity) arguments.  This move is in contrast to the weak reactions to many other banks recently.  Whatever it takes...


----------



## mcgrath111

Hi DS,

Appreciate the previous reply.

On the note of GBP and on one end being seen as 'cheap' / given there is higher risk associated at the moment. However should one's investment portfolio have exposure to various currencies? such as GBP

If yes to the above: For the ordinary investor would exposure come through the likes of 'Betafunds GBP ETF' or through 'Physical' purchase of the currency in the likes of a broker torfx type?


Thanks,
Mike


----------



## DeepState

mcgrath111 said:


> Hi DS,
> 
> Appreciate the previous reply.
> 
> On the note of GBP and on one end being seen as 'cheap' / given there is higher risk associated at the moment. However should one's investment portfolio have exposure to various currencies? such as GBP
> 
> If yes to the above: For the ordinary investor would exposure come through the likes of 'Betafunds GBP ETF' or through 'Physical' purchase of the currency in the likes of a broker torfx type?
> 
> 
> Thanks,
> Mike




Welcome Mike.  Appreciate the interest.

For an Australian investor, there is likely to be some benefit from holding offshore currency exposures.  This is especially so right now when bond yields are so low and can offer only limited protection in the event of a weak  economic scenario.

In the event of a global slowdown, in general, commodity demand tends to go down.  It is usually the result of a slump in demand from elsewhere.  The terms of trade decline...and the AUD tends to fall.  Hence foreign currency tends to offer a form of loose insurance against weak equity markets.

In terms of the foreign currency basket composition, you could have developed market only or include EM as well:  
- Developed markets tend not to be commodity oriented outside of Canada.  Hence, commodity weakness arising from weak global demand has a good chance of leading to some buffering from AUD depreciation. 
- EM currency exposure can provide help despite their generally similar exposure to commodities.  The AUD actually performs like an EM currency at crucial times.  The EM currency basket is useful when you are trying to hedge against a localised weak economy for reasons that do not affect commodity prices.

The mix of EM and DM is pretty much tweaking.  In general, most insto investors would have around 85% of their foreign currency exposure in some mix of DM and the balance in EM.  In general, these arise from natural holdings in offshore equities and they have some semblance of a cap weighted index for the most part.

As you have outlined, there are many ways to obtain foreign currency exposure.  ALl of the ones you have outlined are possible.  What you select is specific to your situation.  In general, for simple investment arrangements where global equity exposures are no greater than 25% of total, it would suffice to buy some ETF that invests wither in global bonds on an unhedged basis or global equities on an unhedged basis. That's the simplest method.

As to buying a specific GBP currency investment becuase of a belief that there will be an appreciation of that currency against AUD, the most direct way would be you use a CFD provider or via a series of futures contracts (or crosses).  It would be very inefficient to convert AUD Cash to GBP Cash for a retail investor...excuse me if you are a whale. 

Hope that helps, Mike.

Always nice to hear from you.

DS


----------



## InsvestoBoy

DeepState said:


> As to buying a specific GBP currency investment becuase of a belief that there will be an appreciation of that currency against AUD, the most direct way would be you use a CFD provider or via a series of futures contracts (or crosses).  It would be very inefficient to convert AUD Cash to GBP Cash for a retail investor...excuse me if you are a whale.




Unless you are seeking leverage, long GBPAUD is suboptimal as you'd be paying carry, whereas if you buy the GBP ETF listed on the ASX, you pay no carry and while it costs to hold because the interest (0.15% trailing) is lower than the management fee (0.45%), it still costs less than carry.


----------



## DeepState

InsvestoBoy said:


> Unless you are seeking leverage, long GBPAUD is suboptimal as you'd be paying carry, whereas if you buy the GBP ETF listed on the ASX, you pay no carry and while it costs to hold because the interest (0.15% trailing) is lower than the management fee (0.45%), it still costs less than carry.




Hi InsvestoBoy.  Thanks for your observations.

Payment or receipt of carry depends on the relative interest rates between the two currencies involved in an exchange pair.  At present, the interest rates in the Australian inter-bank market exceed those available on the GBP inter-bank market.  As such, a long position in AUDGBP via CFD will result in negative swap points....payments even if the actual exchange rate does not move.  If you are able to do this via futures, there is virtually no other cost to think about.  If via CFD, then there are administrative charges build in to the tom-next spreads used to determine the payments/receipts for interest rate differences.

The GBP ETF is, for all intents, a bank account in AUD and a forward contract from AUD to GBP over the whole notional.  AUD cash plus an AUDGBP forward is the same as GBP cash holdings in the absence of credit risk.  Carry is still being paid, but just not reported in the same way...and then there is the 0.45% management fee...on top of brokerage and spread to transact in the ETF, which is larger than the spreads generally available on the derivatives markets.

If you do not require leverage, and have a chunk of AUD in the bank that you may want to swtich to GBP exposure, your choices become:

1. Sell AUD and buy GBP, then place that into a GBP interest bearing account
2. Sell AUD and buy GBP ETF
3. Hold AUD and buy AUDGBP overlay derivative

If operating in the size that enables the use of futures or, even, OTC, then option 1 or 3 will be the most efficient implementation.  If very small, then option 2 is the only choice.  Each option is essentially identical with variations only for admin fees and trading expenses.

In each case, carry will be paid, in effect. It's just a question of accounting as to how it is reported.


----------



## DeepState

*Observations on Global Trade *

The volume of trade has been associated with the health of the world economy.  Since late 2014, the volume of global trade has declined and this has caused concern about the outlook for the world’s economy and financial stability.

The following chart compares the real World GDP with the index on the volume of global trade.  A link is certainly evident.  




In the decade leading in to the GFC, world trade grew faster than GDP.  Since the GFC, trade volume has not grown as fast as the world economy.    Since late 2014 it has declined. 

Over the long term, trade has generally grown 1.5 times faster than world GDP, but in recent years has slipped towards equivalent growth.  If the recent WTO forecast for 2016 trade growth of only 1.7% holds, it will be the first time in 15 years that trade growth has fallen below that of world GDP. 

The rapid expansion of trade volumes in the 2000-2008 era was partly caused by more benign economic conditions which led to increased investment.  This led to much plant and machinery being built, whose parts are drawn from many parts of the world.  Value chains became more disintermediated with a specialization in production increasingly evident in Asia. Less sophisticated product which used to be built largely in China became more sophisticated product whose value chain was increasingly dispersed across Asia.  

Merchandise exports from China grew very significantly and helped develop their large foreign reserves.  US imports from China ballooned and US domestic manufacturing was hampered, causing much distress amongst manufacturing employees.

So world trade has been growing at a slower rate since the GFC and has been outright declining since 2014.  Should we be concerned?  

Well…slightly.

Part of the reason why trade has declined certainly is related to low demand.  One of the features of the economy since the GFC has been the difficulty of stimulating the private sector to invest again.  As a result, materials required to facilitate this are not flowing around.  Hence low trade is a symptom of weak demand (relative to capacity) and business confidence.  

Prior excess investment into production capacity is one reason why lowlation remains such a broad feature.  Trade helps to spread this around between countries to some extent.  It also means that, whilst many seem to feel safe that China’s authorities are currently keeping the economy floating via stimulus into areas of excess production, that very same stimulus is pushing deflation across its borders to the rest of the world.  Watch this flashpoint.  It is a form of competitive devaluation.

A value chain being divided further into smaller, more specialized, chunks adds value progressively, but the incremental return for increasing division.  Hence the extent to which GDP might grow from increased trade will progressively decline.  As a result, the impetus to increase the length of supply chains, which increases trade volumes, would also naturally decline.  

World economic growth is increasingly sourced from services.  Growth in these areas does not require much growth in trade. The delivery of nursing care in a country, for example, does not lead to world trade volumes increasing much.  Growth in the digital economy and e-commerce may also have a role.  Hence, the link between trade and GDP may be decreasing in relevance over time.

Trade volumes can largely be seen as an outcome of aggregate economic activity and the changing composition of it.  Trade is weak because the economy is weak and changing in its composition towards services.  Weak trade does not lead to a weak economy beyond the embedded beliefs that it creates – we fear trade will be weak and this makes it so.  Just because.  

What is most concerning for world trade is the rise in nationalism and populism which is clearly evident on the political landscape, particularly in Europe and the US.  The US Presidential election has highlighted that there is hostility to major trade deals which are coming closer to fruition. This is on both sides of politics.  Reduction in trade frictions has helped release value from specialization over time and contributed to trade volume growth.  If this is halted or reversed, world trade becomes a driver of GDP as barriers to trade make production less efficient.  Historically, the US was very strident in seeking to break open markets and force open trade on others.  How times do change.

Only days ago, the leaders of the International Monetary Fund, World Trade Organisation and World Bank Group expressed concern about the anti-global trade sentiment, and the potential for a downward spiral of low growth and protectionism.  More recently, the Wallonia region of Belgium has managed to thwart the finalization of the EU-Canada free trade agreement, citing concerns about the impact on European farmers and the excessive power being granted to global corporate interests.  Momentum appears to be building.

Populism may harm trade which then harms the broader economy.  Looking further behind that, we find that populism is arising because – in significant part – the rise of world trade helped create economic gains which were concentrated into the hands of a very small proportion of the populace.  Many who did not participate in these gains endured hardship as the economies underwent significant transformation.  Whilst trade may have helped with equality between nations, the day to day lives of people are more driven by what happens within nations.  

Once again, we find inequality as a source of material risk hidden beneath concerning, yet sterile, economic aggregates.  When talking about trade as a means to discern an outlook for GDP, we really should be talking about populism instead.

Though I won’t expand here, the date that trade volumes started to peak out seems to correlate well with a distinct change to the behavior of the currency markets.

Comments/questions welcome.

DS


----------



## InsvestoBoy

DeepState said:


> The GBP ETF is, for all intents, a bank account in AUD and a forward contract from AUD to GBP over the whole notional.  AUD cash plus an AUDGBP forward is the same as GBP cash holdings in the absence of credit risk.  Carry is still being paid, but just not reported in the same way...and then there is the 0.45% management fee...on top of brokerage and spread to transact in the ETF, which is larger than the spreads generally available on the derivatives markets.




Well, looks like the BetaShares GBP ETF no longer exists, but in any case this is not factual, the ETF was against an account that held GBP in a GBP denominated bank account and paid out distributions from interest on that account accordingly.


----------



## DeepState

InsvestoBoy said:


> Well, looks like the BetaShares GBP ETF no longer exists, but in any case this is not factual, the ETF was against an account that held GBP in a GBP denominated bank account and paid out distributions from interest on that account accordingly.







I think you might find that it does exist right now.

Also, please check whether AUD held in deposit at BBSW rates plus AUDGBP forward is an arbitrage relationship to GBP held at LIBOR priced in AUD.  I think you'll find that they are.  The form of POU-ASX is, as you allude, a GBP deposit.  The movement in its vaue to an Australian based investor would be matched by an equivalent AUD deposit with AUDGBP forwards rolling at the same deposit maturities. These forwards, if effectively overnight CFD style contracts, comewith swap points explicitly listed due to carry.  Hence, carry is being paid in whatever form you choose to obtain the GBP exposure.  It's just an accounting format.  Sorry if this was not clear previously.


----------



## qldfrog

InsvestoBoy said:


> Well, looks like the BetaShares GBP ETF no longer exists, but in any case this is not factual, the ETF was against an account that held GBP in a GBP denominated bank account and paid out distributions from interest on that account accordingly.



indeed POU as asx code, have been using it for a while, relatively narrow buy/sell gap, happy so far with the tool, good eofy tax report for us in Oz.


----------



## DeepState

*Observations on the Australian Labour Force
*

One of the things I have observed over recent times is the increasing number of people I know who have left traditional full-time employment in favour of part-time employment.  For some it was by choice, for others it was by circumstance.

The RBA recent looked in to this issue for Australia.  It turns out that almost all the job creation since the mining boom ended and significant stimulus kicked in has been via part-time jobs.  There has been virtually no full-time job creation in the last four years:




This increase in the proportion of workers who are part time has occured across goods, business services and household services.  The overall increase in part-time labour is exacerbated by things like there being less jobs for male workers who used to work in full time factory or mining jobs and more jobs created in “household services”.  These are industries like health, recreation, arts and hospitality.  These fields where women traditionally dominate in employment terms.

The sisters are doing it for themselves.  But increasingly on a part-time basis.

Part time female employment has grown rapidly whilst full time male employment has stagnated.  The casualisation of the workforce has impacted workers of either gender. 

Whilst unemployment has declined, the proportion of underemployed has moved up.  Many who have found jobs are not working as much as they would like.  Employers are deliberately using part-time labour to add flexibility to the workforce.

It appears that wage pressure remains lower than might be thought from an observation of the unemployment rate declining from the post mining-boom peaks.  Weak wage growth is probably the key reason the RBA would seek to cut rates further now.  Their projections suggest that CPI will be at the low end of their target in two years.  I can understand that the market has a bias to another cut.


----------



## tech/a

With unfair dismissal laws
Paid parental leave
Redundancy pay
Over time rates
Stacks of public holidays
4 and 5 weeks leave with loading


Casual/Part time staff make sense.

What I find unusual is casual staff want their jobs
And work harder to keep them than the full time workers.
My experience shows complacency is rife .


----------



## DeepState

Another democracy moves towards autocracy.  Politics by strongman is returning.


----------



## skyQuake

DeepState said:


> Another democracy moves towards autocracy.  Politics by strongman is returning.
> 
> View attachment 68739




Just phase II of his master plan... AQG has a goldmine in turkey if anyone wants to take a punt on whether its going to get nationalized


----------



## mcgrath111

Hey DS,

What are your financial thoughts on the outcome on the U.S election. Have the result has significantly changed your economic forecasts and the way your portfolio is structured? - particularly in regards to Australian and US equities.

From what I can see at the moment, whether it be a Brexit or an unlikely leader in Trump; initially the markets fall significantly, however few things can stop an almost instantaneous 'relief rally'; yet using the schiller PE model as a rough gauge, equities appear expensive and increasingly risky. (Not fear mongering just yet)

Your insight is always appreciated. 

Thanks!


----------



## DeepState

*Thoughts on Trump Presidency
*

Boarded a plane last week as the results indictated a tighter race than anticipated.  Got off the plane to find that Trump had won.  The world was still spinning.  As was my head.  Wisdom of crowds?  Could be.

The markets were falling sharply as the likelihood of a Trump win increased.  When it became certain, they climbed sharply.  Fear of capital flight from the US from a Trump Presidency turned into a draw of capital from emerging markets due to positive reassessment for the US economy and capital markets.

The wild swings may presage our immediate future.  Conventional predispositions being turned on their heads in short order.

Trump is pro-isolationism, economic nationalist, fiscal expansionist, transactional deal maker. At least, that's what The Donald has said.  

From a US perspective, reducing immigrant labour, raising barriers to trade, lifting infrastructure spending, reducing taxes...all point to higher inflation and EPS growth in the nearer term.  This is why equity markets have climbed, yields have risen and inflation expectations have risen.  Capital has flowed inwards, particularly from emerging markets.  These factors have taken precedence over the increase in political risk and concerns that this would result in reduced confidence from corporates and households.  Two sides of the same coin, pick your perspective.  Either would be justifiable.

The US is actually in a reasonable position to undertake a fiscal expansion in the near term.  If is invests the outcomes in high production assets, this would be a positive move.  Reduced corporate tax rates may actually bring more capital back in to the US.  Higher trade barriers may create demand for machinery and equipment.  All of this is great for near term growth.  If insufficient to improve the ability to pay for the debt incurred, that's not so flash.

It is arguable that the EU and Japan have been hitching a ride to the US economy in the last few years as they have continued on the QE route.  China is accused of doing something similar via excessive capital investment and dumping.  If this is regarded unfavourably, then Trump is doing what is a reasonable reaction to it.  Given monetary policy accomodation is no longer desired, the thing to do is to hand it over to fiscal stimulus for the moment.  In order to hang on to the benefits in the initial period, you raise the walls to stop capital from flowing out.  It can work for a while, although the longer term outcomes are less sanguine...but that's up to a decade away.

Geopolitically, this is very concerning.  A mandate to smash the system has been awarded to Trump.  Add that with Xi's ascention to the level of Zhiang, Putin, Japan's increased militarism....you end up not wanting to live in the South China Sea and wondering if we have ordered enough submarines.  Then we learn that Donald's advisers have told Turnbull that the Navy will be strengthened in the Pacific.  Trump has suggested that Japan and Korea carry more of the weight for their own defence, even pointing to the possibility that they develop their own nuclear deterence.  Madness.  

Anyway, there will be a gap between the election rhetoric and outcomes.  Obama's legacy will be unwound to some degree.

I am waiting to see who he appoints to his Executive.  In here will be strong clues as to whether he is a total nutcase, or just acting like one.  An election process is presumably less complicated than running the world's largest economy in a complex world.  He had three campaign managers.  He has had to fire his first choice for the Transition team.  He has appointed his kids and son-in-law to key executive positions in this Team.  I suppose JFK did appoint his brother to a key position...he learned from the Bay of Pigs.

The Pig has arrived in Washington.  Let's see if it can fly.


----------



## skc

DeepState said:


> I am waiting to see who he appoints to his Executive.  In here will be strong clues as to whether he is a total nutcase, or just acting like one.  An election process is presumably less complicated than running the world's largest economy in a complex world.  He had three campaign managers.  He has had to fire his first choice for the Transition team.  He has appointed his kids and son-in-law to key executive positions in this Team.  I suppose JFK did appoint his brother to a key position...he learned from the Bay of Pigs.
> 
> The Pig has arrived in Washington.  Let's see if it can fly.




I think this article was quite interesting.

http://www.independent.co.uk/news/w...guage-president-president-elect-a7412186.html



> My read is that he has learned something he didn't know before. It's a tentative hand position," Ms Wood said. “Trump holds his own hands as he begins speaking which is an indication he needs to comfort himself.”




I can imagine Trump kind of regretting what he's got himself into. It's one thing to run a campaign, send a few crazy tweets and watch the reactions. It's also easy to insult certain groups of people without actually having to face them and bear the consequence. He could have been a happy-go-lucky idiot billionaire... but now he's definitely lost a lot of that carefree-ness. 

Get ready for a period when a random tweet from Trump could put specific markets in a tailspin... yes all traders should follow Trump if they aren't already.


----------



## McLovin

skc said:


> I think this article was quite interesting.
> 
> http://www.independent.co.uk/news/w...guage-president-president-elect-a7412186.html




Interesting. I remember watching that press conference and thinking Trump had his chest closed and looked scared.





skc said:


> I can imagine Trump kind of regretting what he's got himself into. It's one thing to run a campaign, send a few crazy tweets and watch the reactions. It's also easy to insult certain groups of people without actually having to face them and bear the consequence. He could have been a happy-go-lucky idiot billionaire... but now he's definitely lost a lot of that carefree-ness.
> 
> Get ready for a period when a random tweet from Trump could put specific markets in a tailspin... yes all traders should follow Trump if they aren't already.




No doubt. Trump saw it as a challenge to win and prove he's not a loser. That's why the "Trump Pivot" is in full motion now and he's reversing so many statements he made.

He'll still have a pretty big business empire, you'd expect him to act with self-interest in that regard.


----------



## mcgrath111

D/S

I always enjoy reading your input, so thought I would bump.

Any thoughts around OPEC, changes within the EU? Current rally in the DOW?


Mike,


----------



## DeepState

mcgrath111 said:


> D/S
> 
> I always enjoy reading your input, so thought I would bump.
> 
> Any thoughts around OPEC, changes within the EU? Current rally in the DOW?
> 
> 
> Mike,




Hi Mike

These are just observations.  Have not done a pile of work into them.

*OPEC:* In collective interests to do so, but tragedy of the commons type setup.  Who knows, but the mood is to tighten supply.  Iran will be facing pressure from a Trump presidency in terms of winding back the embargo.  Good for inflation and this, and food, were the primary reasons why headline inflation were declining.  Central bankers had noted that long term inflation expectations seemed to be overly driven by shorter term movements in energy, so perhaps this will now reverse.  If the fiscal, Keynesian, theories are correct, it implies that demand will kick in and some sort of virtuous circle will develop of the type that Japan so clearly craves.  

Although rising oil prices are a form of wealth transfer between producers and consumers, the inflation expectations element can mean that growth is stimulated by higher oil prices.


*EU: *Government in Italy remains unworkable but Austria rejects a far-right president.  Merkl is making allowance for the issues with (muslim) immigration that have caught the public ire.  At the moment, the issue which is front of mind for me is the recapitalisation of Monte Dei Paschi.  Will all the work on the Single Supervisory Mechanism and aversion to government bailouts be trashed at the first real challenge?  

ECB taper is reasonable in the circumstances.

*Dow Rally (and interest rate rises):* This is on the back of increased growth expectations and also inflation expectations.  Trump oriented.  I think it is remarkable that this is going on when details are so scant and the gap between statement and reality are so wide...even for a reality TV star.  Threats of protectionism and the promise of stimulus from tax breaks (particularly impt for corporate earnings growth expectations), together with increased job creation all point to a period of higher activity and inflation.  

Is it justifiable?  It's not entirely unreasonable, but the market is clearly choosing to price in the tax cuts quite well at least.  Analyst estimates are not showing much change for 2017 or 2018 at present.  

Just wants to go up...  And interest rates with it.  The sell of in bonds has been consequential.  AUD 10yr at 2.8% is still virtually no premium to inflation expected.  Bonds remain very expensive despite this, and are trading around levels seen only a year ago.  Japanese bonds have not moved, which highlights the extent to which it is a local market captive.


----------



## mcgrath111

Thanks for that D/S

I was particularly unaware of how Monte dei Pashi fitted into the mix.


----------



## DeepState

One of the largest developments in financial markets in recent times has been the rise of ETFs.  Though not necessarily passive in nature, the great majority of these are not alpha products.  Their underlying index construction may be a broad market, like Russell 2000, or industry focused like S&P500 Financials, or something like High yielding Franked stocks on the ASX.  What they generally do not have is a team of analysts pouring over financials to figure our whether a stock is rich or cheap - for the most part.

So, what happens to the markets as it becomes increasingly held by ETF and passive funds?


----------



## kid hustlr

Interesting point DS - what does happen? My stabs:

- Higher correlations across markets (both domestically and internationally)?
- Thinner markets as funds aren't looking for value but rather just executing in a passive nature?
- Active managers outperform as passive and herd style investing create opportunities?

Must be heaps of others


----------



## DeepState

mcgrath111 said:


> Thanks for that D/S
> 
> I was particularly unaware of how Monte dei Pashi fitted into the mix.




OPEC is to oil what the EZ members are to banking and competition policy.  The individual members stand to collectively benefit if they can maintain collective discipline, but their direct interests keep pulling this potential apart.  Italy is pulling out another sovereign rescue and underwriting retail investor losses.  So soon after all the fanfare of a Single Supervisory Mechanism and banking stress tests had been undertaken.  It will also result in a deficit level for Italy which exceeds the allowable thresholds before punitive action is supposed to be taken.

Greece is neglecting agreements again.

Naturally, the Germans are calling foul. 

It's really strange to me that so many things are happening now that spooked tha heck out of markets in recent years and seem to be totally ignored as the market marches upwards in the wake of a Trump election - which itself had been thought to be a disaster for markets.  These matters include:

Chinese reserve drain;
US rates rises drawing capital from emerging markets;
Greece refinancing;
Warships in the Spratley region;
China excessive leverage;
Weak European banks;
Russian incursions in to the West (lately by cyber);

add to list according to your satisfaction...


----------



## kid hustlr

kid hustlr said:


> Interesting point DS - what does happen? My stabs:
> 
> - Higher correlations across markets (both domestically and internationally)?
> - Thinner markets as funds aren't looking for value but rather just executing in a passive nature?
> - Active managers outperform as passive and herd style investing create opportunities?
> 
> Must be heaps of others




http://www.philosophicaleconomics.com/2016/05/passive/

A quick google removes the argument about outperformance


----------



## DeepState

kid hustlr said:


> http://www.philosophicaleconomics.com/2016/05/passive/
> 
> A quick google removes the argument about outperformance




Interesting article.  Thanks.

I'm not very sure what will happen.  I think it will depend a lot on what kind of ETFs take share, the drivers for this and what happens to the nature of the remaining market for active management.  What happens to the algo traders will also have a material impact.

Here's what my guess is:  

Increasingly, investors will move from active managers to ETFs.   In doing so, their desire for market timing is not actually diminished terribly much.  They just take these active decisions out of the hands of active managers and place them in to the hands of private advisors and ETF houses rather than take a set and forget approach.

F/As, like anyone else, like more fees to less.  They will find a way to do so under the guise of doing their clients a favour.  Whilst many ETFs will be broad market index based, many will be style oriented in some fashion.

In general, movement in to and out of these styles will be trend like.  But trends will more likely occur in baskets and less so for individual stocks as these are caused more by active investors who are stock picking.

All sorts of interesting liquidity pressures take place in this world.  It swings in favour to systematic investors attuned to these things.  Whilst greater opportunities for stock selectors may exist, they may also have to wait longer for their perceived mispricings to come to fruition making profitability possibly worse than currently is the case, especially so if the remaining active managers remain peer aware.  Even outside of ETFs, the general trend is for many mandates to be increasingly barbelled.  More assets are made index aware with low deviation from peers and indices.  A smaller proportion is souped up in some way.

Overall, I like it as a trend right now.  I like where I am personally positioned.  Relatively small aum and capable of implementing the kinds of trades which profit from trend implementation of baskets.  Blunt herd behaviour is returning, I think.


----------



## DeepState

Review on Technical Trading in FX: "Is it still beating the FX Market?"

This working paper is to be published in the Journal of International Economics.  The corresponding author is a smart guy.  A technically oriented trader forwarded it to me for interest.  It certainly carries a provocative heading ..  still beating??


When you get in to the guts of it, the authors do as follows:

Look at at technical rules pertaining to momentum, support/resistance, channel and breakout. 

By varying the usual parameters, they generate over 21k different rules.  Yes... 21k. These are run over a long history of currency pairs vs the USD.

Knowing that ramming this through will generate around 1k rules that will work, they take solid efforts to avoid overfitting of the data by some clever methods to reduce the indicence of false positives.

They conclude that a currency pair can be predicted by a technical rules if at least one of these rules is shown to produce a statistically valid result (value added via timing over and above a buy-hold alternative, inclusive of interest rate differentials).

About a third of developed market currency pairs have predictability which leads them to conclude that the FX market can be beaten by technical trading.  I suppose they do need a catchy headline to get a publication. 

Whilst a small handful of the 21k trading rules did report a positive statistical outcome (eg. 4 of 21,195 rules tried produced a result which was significant at the 10% level), the odds of choosing the right rule from this subset is hardly an endorsement of pursuing this approach.

Even with this most generous interpretation of "beat market", none of these rules succeeds in developed market prediction since 1992.  I suppose this may be why we find a plethora of increasingly complex rules being applied...it is required to find something which looks decent in the last 25 years on a backtest.

The case for emerging markets is more promising.  There appears to be more support of technical trading rules there.  Even still, the outcomes are not the sort of thing to encourage a dive in to these markets using these methods.

---

The headline caught my attention.  The details do not endorse the initial reaction.

Despite a clear bias to finding rules that work in this paper, it appears that the longtitudinal class of technical trading has not been successful in a way which would be encouraging to a trader.  This is in line with my prior understanding in relation to finding rules to apply on individual currency pairs.

For those seeking to make money, that leaves finding different kinds of approaches to the baseline methods...all 21k of them...which actually make sense and have a chance of extracting profit ongoing.

Very simple stuff actually does work well in FX. It's just different from this stuff and has attaching rationale which, in my view, is more convincing.  Of course, highly parameterised approaches can be forced to work as well.... 

I also use price based approaches in my methods.  So this is not to say that matters other than fundamentals have no value in my view.  However, the basic methods and their 21k cousins don't seem to cut it...even when the authors are trying to force an outcome in that direction.


----------



## DeepState

GBP Flash Crash Report released by BIS.  FT Article attached.

This stuff makes putting stops on very expensive in this market....or could represent a great opportunity for a reversion trader who keeps very close track on the market and is happy to trade with discretion.


----------



## Valued

DeepState said:


> Review on Technical Trading in FX: "Is it still beating the FX Market?"
> .




It seems easier to learn some macroeconomics to be honest. You could jump from system to system trying to find the one that works and chasing the holy grail but it seems a bit farfetched for an individual. Sorry guys, you might have to learn about bond yields and interest rates (boring stuff, I know).


----------



## DeepState

Word of the day:
“kakistocracy”: government of the least-qualified. (From the FT, in relation to the Trump Administation, in case that wasn't clear)


----------



## skc

DeepState said:


> One of the largest developments in financial markets in recent times has been the rise of ETFs.  Though not necessarily passive in nature, the great majority of these are not alpha products.  Their underlying index construction may be a broad market, like Russell 2000, or industry focused like S&P500 Financials, or something like High yielding Franked stocks on the ASX.  What they generally do not have is a team of analysts pouring over financials to figure our whether a stock is rich or cheap - for the most part.
> 
> So, what happens to the markets as it becomes increasingly held by ETF and passive funds?




Here's a view on ETF that I agree with.


> Perhaps the most distinctive point he makes at least that finance geeks will appreciate is what he says is the irony that investors now "have gotten excited about market-hugging index funds and exchange traded funds (ETFs) that mimic various market or sector indices."
> 
> He says he sees big trouble ahead in this area or at least the potential for investors in individual stocks to profit.
> 
> "One of the perverse effects of increased indexing and ETF activity is that it will tend to 'lock in' today's relative valuations between securities," Klarman wrote.
> 
> "When money flows into an index fund or index-related ETF, the manager generally buys into the securities in an index in proportion to their current market capitalisation (often to the capitalisation of only their public float, which interestingly adds a layer of distortion, disfavouring companies with large insider, strategic, or state ownership)," he wrote. "Thus today's high-multiple companies are likely to also be tomorrow's, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings."
> 
> 
> Read more: http://www.afr.com/markets/a-quiet-...ghs-in-on-trump-20170207-gu7frk#ixzz4XzvOdxsp
> Follow us: @FinancialReview on Twitter | financialreview on Facebook




ETF is dump money, and retail money is dump money. The growth of ETF is dump money squared. Forget about market fundamentals... dominance of ETF equals dominance of flow over substance. I just can't see that being a great development.


----------



## Value Hunter

I think what you guys are saying is only partially true. Even if we take an extreme example and say that 90% of investors used index funds instead of managed funds or individual stock picking, corporations and private equity act as a backstop. 

For example if a stock stays greatly undervalued for an extended period of time, the company might do a share-buyback, the founding shareholders and or management team might decide to take it private again through a takeover bid or private equity or one of their competitors might do a takeover bid. Any of these things are likely to result in the share price rising.

The converse is also true. If a company's share persist being greatly overvalued for an extended period of time, the company may issue shares (e.g. rights issue) to acquire other listed or private competitors that are trading at a lower p.e. multiple. This would then increase the supply of shares and may cause the p.e. ratio to normalize somewhat over time. Also if a company's (or sectors) shares trade on a high p.e. multiple for an extended period of time new floats of similar companies will come to the market looking to cash in on investor enthusiasm. The greater choice of similar types of companies will diffuse the demand somewhat and over time cause p.e. or p.b. ratios to normalize.


----------



## skc

skc said:


> ETF is *dumb* money, and retail money is *dumb* money. The growth of ETF is *dumb* money squared. Forget about market fundamentals... dominance of ETF equals dominance of flow over substance. I just can't see that being a great development.




Dumb, not dump 



Value Hunter said:


> I think what you guys are saying is only partially true. Even if we take an extreme example and say that 90% of investors used index funds instead of managed funds or individual stock picking, corporations and private equity act as a backstop.




What you have described is the way how it's supposed to work. However, for that to happen, the clout between the different perspectives / proponents has to be somewhat comparable. If the ETF's are indeed punching with 90% of the money, the remaining 10% will struggle to make a dent against the weight of money directed by the ETF. That is the concern imo.


----------



## skyQuake

I reckon it'll be self correcting. If too much money flows into passive funds, the active players can start playing games. 
Buy up any old thing and get it over the index eligibility criteria and sell to forced demand.

Alternatively borrow from the very same index funds (who all compete to lend out stock to boost their returns) and short the crap out of a good profitable co till it falls out of the index (eg. SGH ) and buy back cheap stock!


----------



## skc

skyQuake said:


> I reckon it'll be self correcting. If too much money flows into passive funds, the active players can start playing games.
> Buy up any old thing and get it over the index eligibility criteria and sell to forced demand.




I am pretty sure they already do that.... something like 1PG comes to mind.


----------



## Trembling Hand

skc said:


> I am pretty sure *they *




They! Ha as in you two!!


----------



## DeepState

*The Trumput: Some Perspectives*

Donald Trump appears to have underwritten the equity market.  Promises of tax cuts, deregulation, protectionism and infrastructure development have set the markets alight and given breathe to the animal spirits.  It can’t last….so goes the usual instinct.




The S&P has climbed relentlessly since his surprise election, producing a return of over 10% since the election in early November.  Too much too soon?

As Seth Klarman, the legend of Baupost Capital, said in his recent letter to investors, “Trump is high volatility”.  And yet, the VIX is trading as if market volatility has been solved.  The Trump Put is in place.  If he manages to unwind the Volcker Rule, it really might be that the US public purse will once again serve as a backstop to the banks, who remain too big to fail. Meanwhile, the market is running on what appears to be highly productive Tweetpower.

Perhaps the market is complacent?  Yet, take a look at the longer term trend line for the equity market since the GFC.  Nothing really special in the most recent period…just a bit of catch-up from a lull between late 2014 and early 2016 when Fed support was being unwound in terms of quantitative measures and companies were no longer generating earnings growth via buy-backs en masse and cash accumulation on balance sheets levelled off.  There were also various issues with China, oil, concerns about global growth as well of course. Just the usual swings and roundabouts of markets washing out?




Additionally, the reflation trade is definitely being priced in to expectations.  The SP500 earnings in this chart relate to the forecast over the coming 12 months.  The yield of 10 year bonds is also shown, along with the forward looking PE ratio.




Maybe the rally is actually reasonable? It’s not like forward looking PE ratios are so elevated relative to where they were for much of 2015/16 or, indeed what would have been reasonable in much of the 2000s were interest rates a little lower..and there is heaps of spare capacity to bump up profits without a stack of capex.

Suddenly it’s not exactly obvious to me that this rally is nuts and must be reversed in the blink of a stray Tweet.  The economic outlooks around the world are being revised upwards for the first time in a long time.  In light of expectations, this looks alright.

However, is it truly plausible that President Trump can engender such confidence and for this confidence to be fulfilled? $USD 2tr in capitalisation gains on the S&P500 alone, let alone the flow through to other markets? That’s more than the Australian economic output for 18 months.  Are we worth so little that alternative facts can create more value that nearly $25million Australians create in 18 months?

Maybe this is a form of collective madness or a game of chicken.

Professor Read Montague of Virginia Tech gave an interesting public lecture late last year at University of Melbourne.  He was talking to this paper:




People will create bubbles in markets seeking to outperform each other in a zero sum game where the ending value is known to be a dud.  As Professor Read notes, eventually those who made the most money seem to wake up to themselves [activation of Anterior Insula Cortex] and the show ends.

Hmmm.


----------



## DeepState

Australian Employment figures were released today.  The data points to a continued move towards slightly more hours of work spread over even more people...hollowing out the full time worker even further.  There was a minor decrease in the participation rate which hints at worker disillusion.  

The decline in unemployment rate headline by 0.1% to 5.7% s.a. should not be read as an improvement in the labour situation.  The details suggest weak wage pressure remains in place for now.


----------



## DeepState

The value which investment managers add to the world's security is demonstrated by today's Trump item of interest (from NYT):




If only this were actually a freakin' joke.


----------



## Trembling Hand

DeepState said:


> Donald Trump appears to have underwritten the equity market.  Promises of tax cuts, deregulation, protectionism and infrastructure development have set the markets alight and given breathe to the animal spirits.  It can’t last….so goes the usual instinct.




Hmmm how easy is it gonna happen? 

http://www.politico.com/story/2017/02/paul-ryan-tax-reform-republicans-235117


----------



## DeepState

Once upon a time in a galaxy far far way:

1025 Jedi Knight wannabes came to the Mount (market), hoping to become a Jedi Knight (Goldman Prop Trader).
Each also wanted to double or quadruple their money at least.
Each had one coin.

The Master Said..."each one of you pair up with another"
"Fight until submission!"
"Only the victor shall proceed!"

Now, each Jedi wannabe was a perfect clone of another...so it was merely luck which decided the outcome of a physical contest like this. Each had equally matched sword skills (Amibroker code etc.).  A waft of breeze or a speck of dust determined the outcome.

The vanquished handed their coin to the victor...(zero sum game)

Each fight was epic, lasting a 1000 hours of light sabre swashbuckling (according to the mythical records).
Thankfully, these were LEDs and emitted little by way of CO2 relative to earlier models.

512 Jedi managed to double their money.

"Pair up and fight until submission!"
Another 1000 hours pass.

256 Jedi quadrupled their money.

On it goes until one last Jedi stands on the Mount.  1024 coins in her purse (Winner, best Stats available, Zero drawdown). 10,000 hours of experience accumulated (Must be an expert).

Which Jedi wannabe did the Master choose to train? Why?


----------



## tech/a

The one that wasn't paired


----------



## DeepState

Good one...and why?


----------



## Habakkuk

DeepState said:


> Good one...and why?




Could it be because the winner of the contest picked up 10,000 hours' worth of bad trading habits, assuming the win was due to luck alone.

The 1025th Jedi, the non-participant,  can still be taught to trade properly by the Master.

Or maybe that the ego of the winner would get in the way of good trading. If you've just won against 1023 others, you might well feel indestructible.


----------



## peter2

This one is un-scarred by any battle, yet knows the battle is tough and very few survive. 
This one has seen the importance of luck and realises that it's not enough. 
This one is prepared for the hard work required in order to learn the skills of battle.

The master sees a properly motivated blank canvas.


----------



## Trembling Hand

Actually. The master may be a good Jedi but he is crap at talent identification......


----------



## DeepState

peter2 said:


> This one is un-scarred by any battle, yet knows the battle is tough and very few survive.
> This one has seen the importance of luck and realises that it's not enough.
> This one is prepared for the hard work required in order to learn the skills of battle.
> 
> The master sees a properly motivated blank canvas.




Of course this is all made up, but my perspective was:

The one who sat out was the rare one who could step aside from the context of battle, whose outcome she knew was just luck.

She showed the ability to avoid a stupid game where no skill was involved but where the chances of success were only 1/1024 and the chances of failure were the balance.

If the Master were truly a Master, she too would be unswayed by the triumphant outcomes, knowing that deliberate practice at throwing coins does not make you an expert at producing an outcome which is desired in terms of directional positioning.  There was always going to be a winner.  Despite the victory, and all the superficial confirmations that an exhibition of skill took place, this winner should not be celebrated despite the fame and spoils of victory.

If the Master were truly a Master, the patient Jedi wannabe knows that the Master would see that the Jedi wannabe had self control, despite experiencing the same desire for wealth and fame, and an ability to assess edge and odds.  No one else had this.  However, these are basic requirements to become a Jedi Master.  For the Master to make another choice, she would simply assure failure.  It's only a question of when.

Of course, the one who sat out might have just missed out randomly.  So it's hard to tell..... Even so, there is a non-zero chance that the one who sat out meant to...so selecting this Jedi wannabe remains the best choice the Master could make if one apprentice is to be selected.


----------



## peter2

Thanks for that. 
My perspective was looking at the individual after the battles and speculating on what that person may have learned to be a better candidate for the Master.

Your perspective was on the individual's motivations before the battles commenced. I'd overlooked that perspective. 

There's bound to be an appropriate Sun Tzu quote for this.


----------



## tech/a

1025 had no choice they simply had no one to pair with

You've all been fooled by randomness.

Dumb luck for both


----------



## skc

DeepState said:


> If the Master were truly a Master, the patient Jedi wannabe knows that the Master would see that the Jedi wannabe had self control, despite experiencing the same desire for wealth and fame, and an ability to assess edge and odds.




I am confused. Weren't they all clones?


----------



## DeepState

skc said:


> I am confused. Weren't they all clones?



Physically identical in ability.
Choices made differed.  

Apparently we have the ability to freely choose our actions...
Otherwise our entire justice system operates on the incorrect basis that crime is a choice which can be met with some form of punishment as a response.
Otherwise the big fella up there would know what our actions were from before time began and thus our destiny is sealed from before we were born and thus Eve could not be blamed for her actions and all those subsequently.  Except, apparently, she is to blame and...
Otherwise Gattaca's by-line "There is no gene for the human spirit" would be cast in to doubt.

If any of the above were incorrect, and Laplacian pre-determination is the rule that governs the universe, then this conversation doesn't really matter because our destiny is already made....yet, according to Sarah Conner, "There is no fate but what we make".  She has seen the future....


----------



## skc

DeepState said:


> If the Master were truly a Master, the patient Jedi wannabe knows that the Master would see that the Jedi wannabe had self control, despite experiencing the same desire for wealth and fame, and an *ability to assess edge and odds*.  No one else had this.






DeepState said:


> Physically identical in ability.
> Choices made differed.




Ability to assess edge and odds - definitely not a physical ability so I guess it's a mental ability. So clones have different mental ability then. That's fine. I have not studied clones in detail so I am OK with that definition.

However...given the above.. How do we know that the winning 1/1024 Jedi:
- didn't have a higher mental ability (as we've established above that mental abilities can be different among clones) and used that as an edge to win all his/her battles? It may involve general human traits like courage, determination, cunningness, adaptability, attention to detail etc etc, to more Jedi specific dimensions. 

And, how do we know that the 1025th Jedi Wannabe:
- wasn't just lucky (as Teah/a said) because he/she stood in some obscure corner and didn't get pair up by chance?
- wasn't actually a coward and deliberately ran away from the contest?


And lastly:
- When a Jedi's force allows movement of physical objects, choking someone's throat or shooting lightning from the fingertips using the mind alone... where does physical ability ends and mental ability begins for a Jedi?

Perhaps the Master should just walk into the room, and declared "The force is strong in this one" and made his/her decision then and there??

May the force be with you


----------



## skc

skc said:


> Perhaps the Master should just walk into the room, and declared "The force is strong in this one" and made his/her decision then and there??




A quick Google search proved that it was indeed what the Jedi Master end up doing.


----------



## skyQuake

This reminds me of an apocryphal story:



> A mathematician and an engineer are presented with the following scenario:
> "I have a fair coin that has landed Heads on the last 99 flips. What is the probability that the 100th flip is also Heads?"
> The mathematician easily answers that the odds are 50% as such are the ironclad laws of probability.
> The engineer gives a look and incredulity and answers:
> "Mate that is no fair coin, the bloody thing must be weighted!"




I would totally hire the 1/1024 Jedi. And maybe forwardtest by sending him/her to the casino first.


----------



## DeepState




----------



## DeepState

skc said:


> Ability to assess edge and odds - definitely not a physical ability so I guess it's a mental ability. So clones have different mental ability then. That's fine. I have not studied clones in detail so I am OK with that definition.




I have studied clones for 10,000 hours, I am therefore an an expert on clones.  This is the way clones are.



skc said:


> However...given the above.. How do we know that the winning 1/1024 Jedi:
> - didn't have a higher mental ability (as we've established above that mental abilities can be different among clones) and used that as an edge to win all his/her battles? It may involve general human traits like courage, determination, cunningness, adaptability, attention to detail etc etc, to more Jedi specific dimensions.




Because the Jedi Wannabes were selected from an extensive list of clones, each of which was pitted against the other to assure quality control of the batch in terms of sword craft.  This was six-sigma certified and the batch was such that the differences in direct conflict ability, however obtained, were so minute that the skills were within the margin of a dust particle in full combat conditions.

This allowed me to issue a PDS, which was cleared by APRA and the Nevada Athletic Commission , with the phrase:
"each Jedi wannabe was a perfect clone of another...so it was merely luck which decided the outcome of a physical contest like this. Each had equally matched sword skills (Amibroker code etc.). A waft of breeze or a speck of dust determined the outcome."




skc said:


> And, how do we know that the 1025th Jedi Wannabe:
> - wasn't just lucky (as Teah/a said) because he/she stood in some obscure corner and didn't get pair up by chance?
> - wasn't actually a coward and deliberately ran away from the contest?




The response to Peter2, in revealing the deep rationale, did include:

"Of course, the one who sat out might have just missed out randomly. So it's hard to tell..... Even so, there is a non-zero chance that the one who sat out meant to...so selecting this Jedi wannabe remains the best choice the Master could make if one apprentice is to be selected."

As for cowardice, is it cowardly to avoid a battle with no edge?  Or is it a good judgment?



skc said:


> And lastly:
> - When a Jedi's force allows movement of physical objects, choking someone's throat or shooting lightning from the fingertips using the mind alone... where does physical ability ends and mental ability begins for a Jedi?



Luke Skywalker could not move objects before training by Obe Wan.  By Episode 7, the Star Wars franchise had gone downmarket and Rey ccould do all sorts of funky Jedi stuff via innate ability.  That was just special effects and not the real deal.  Episode 7 is a fictional representation, unlike Episode 4 which was legit.



skc said:


> Perhaps the Master should just walk into the room, and declared "The force is strong in this one" and made his/her decision then and there??
> 
> May the force be with you



Actually, you've got me there.  The Master demonstrated one of the key traits of combat.  She possessed an information advantage.  There is no law against inside knowledge in Jedi land.


----------



## skc

DeepState said:


> I have studied clones for 10,000 hours, I am therefore an an expert on clones.  This is the way clones are.




No debate here. Anyone disagreeing with that must be a Startrek fan.



DeepState said:


> This allowed me to issue a PDS, which was cleared by APRA and the Nevada Athletic Commission , with the phrase:
> "each Jedi wannabe was a perfect clone of another...so it was merely luck which decided the outcome of a physical contest like this. Each had equally matched sword skills (Amibroker code etc.). A waft of breeze or a speck of dust determined the outcome."




I don't know. I tend to think dust particle movements are actually non-random... it's like the random walk theory - whilst the share price chart may appear random, there are reasons underlying such movements and there exists abilities to predict such movements better than random. Some might even control such movements. Few Jedi can master them... but I can't rule out that the 1/1024 Jedi Wannabe didn't move speck of dusts in his favour during the grueling duels.



DeepState said:


> As for cowardice, is it cowardly to avoid a battle with no edge?  Or is it a good judgment?




It's a poor judgement even on the premise that there is no edge. It was most definitely a gamble on what the Jedi Master might do in reaction to his non-participation and non-compliance to the rules. It was also a gamble that the Jedi Master would violate his own rule so soon after 1023 Jedi Wannabes had died in vain. So no I don't think battle avoidance can be categorically viewed as a positive.

Also worth noting is that, it's quite silly of the Jedi Master to hold such a contest knowing that 1). There was an odd number of contestants and 2). The actual contest method (if indeed there is no physical edge possible) would serve no real purpose aside from meaningless deaths. This leads me to believe that, the Jedi Master is not a real Jedi Master at all. He probably doesn't even use a light saber... Or he's only ever backtested his light saber skills in a demo galaxy. If I was a Jedi Wannabe, I'd ask for Jedi Council audited duelling record to verify his credentials.



DeepState said:


> Luke Skywalker could not move objects before training by Obe Wan.  By Episode 7, the Star Wars franchise had gone downmarket and Rey ccould do all sorts of funky Jedi stuff via innate ability.  That was just special effects and not the real deal.  Episode 7 is a fictional representation, unlike Episode 4 which was legit.




I had always thought that! Episode 7 was showed in 72 fps which is clearly a product of computer generated graphics. Whereas you can just feel the actual physical texture of the death star in Episode 4. You just can't fake reactions like that.



In Episode 7, the death star v3 was supposedly much bigger, yet we saw virtually no reaction among the rebels.



DeepState said:


> Actually, you've got me there.  The Master demonstrated one of the key traits of combat.  She possessed an information advantage.  There is no law against inside knowledge in Jedi land.




Inside, all knowledge can only be.


----------



## Gringotts Bank

imo, the winner is never random.  Midi-chlorian count* determines the winner in spite of edge and the appearance of randomness and chaos. Such a phenomenon wouldn't deny the existence of an edge - like having a bigger light sabre than everyone else - but might work as an invisible 'Force'*.

*Lucas' fictional representations have lots of parallels in eastern religions and martial arts.


----------



## Gringotts Bank

Having said that, I rely on having an edge.  

Who thinks the turtle trader experiment was a random outcome (same rules, different profits)?  There must be a way to determine such things.


----------



## DeepState

Gringotts Bank said:


> Having said that, I rely on having an edge.
> 
> Who thinks the turtle trader experiment was a random outcome (same rules, different profits)?  There must be a way to determine such things.



Did the turtle trade formulation get published?  If it did, what were the roll forward results?

If a stack of people work off a single formula, and get it right, it doesn't matter whether it was only 5 people or 50 in the experiment.  It was only one formula.  Was the formula successful in a way which makes sense?  

I imagine there are quite a lot of people who think their magic is so awesome that a protege can take it over and do really well.  How come there are so few legends?


----------



## Gringotts Bank

DeepState said:


> Did the turtle trade formulation get published?  If it did, what were the roll forward results?
> 
> If a stack of people work off a single formula, and get it right, it doesn't matter whether it was only 5 people or 50 in the experiment.  It was only one formula.  Was the formula successful in a way which makes sense?
> 
> I imagine there are quite a lot of people who think their magic is so awesome that a protege can take it over and do really well.  How come there are so few legends?




I don't know if the rules were published.  The point is that a bunch of people with the exact same trading rules had different results.  This means that there are forces at play which determine outcomes which are beyond edge.  For this example it doesn't matter if the edge was profitable or not.  They were given instructions to follow the rules because the understanding was that it would be profitable.

I'm assuming the reason for different results was related to reasons such as discipline, early profit taking, holding losers etc.  It proves that even of you have an edge, you may not win.  Fear and greed will make you second guess the rules to your detriment most likely.


----------



## skc

DeepState said:


> Did the turtle trade formulation get published?  If it did, what were the roll forward results?
> 
> If a stack of people work off a single formula, and get it right, it doesn't matter whether it was only 5 people or 50 in the experiment.  It was only one formula.  Was the formula successful in a way which makes sense?




Here's a site claiming to have the original turtle rule. I cannot verify that claim one was or another. But I am sure you can very easily forward test (I think it was first published around 2003) the rules on the instruments they are designed to trade.
http://www.tradingblox.com/originalturtles/system.htm


----------



## tech/a

I've got it I'll have to find it if you can't or really want it.
I know Radge has it.


----------



## DeepState

Gringotts Bank said:


> even of you have an edge, you may not win.  Fear and greed will make you second guess the rules to your detriment most likely.



Pretty much agree with that entirely.

An edge is a statistical tilt.  That's it.  If implementation uses this tilt and adds noise, then the signal is generally diluted.  However, if the fiddling represents genuine improvements, then you clearly improve probable outcomes. 

With the same underlying edge, the propensity to cut position sizes after losses and add to them after gains actually diminishes the size of the edge.  Depending on how large that scaling is, the hedge erodes at differing rates.  This effect is pretty large and materially lifts likelihood of a permanent stop-out.


----------



## systematic

The file has changed a little in format, but the rules seem the same as when I read them eons ago.  
Rules

Most people know the turtle rules as shorter-term channel breakouts.  Apart from fleshing out the details to make it a complete trading system; there really wasn't much to it.

I am really stretching my memory here (and no doubt have some really interesting old files on the drive somewhere) - having lost all interest in this type of thing - but the Turtles did get the benefit of right place, right time.  That's not a disparaging statement.  Being in the right place at the right time is what can make a legend - nothing to sneeze at!  However, yes - the system _in its exact form_ degraded after that.

But that's to be expected with any shorter-term trading system; an edge in that arena is a moving target, keeping your local quant in a job.


----------



## Gringotts Bank

DeepState said:


> With the same underlying edge, the propensity to cut position sizes after losses and add to them after gains actually diminishes the size of the edge.




That depends on trade sequence and win rate%.  But I take your point - if the turtle participants used their own discretion for position sizing, that will also affect profit.  But I imagine they would have been given strict rules for this also.


----------



## Portfoliobuilder

Gringotts Bank said:


> That depends on trade sequence and win rate%.  But I take your point - if the turtle participants used their own discretion for position sizing, that will also affect profit.  But I imagine they would have been given strict rules for this also.




The Turtles, a very well known thoroughly dissected set of rules with money management as the most important element. Endless interviews with the originators and the students (two sets) have been published.  The rules were clear and the same for all.  Different students were able to follow the rules and others were hesitant. Those who followed the rules were successful and given larger amounts to trade.  Several went on to long successful careers managing hedge funds with billions of dollars in assets. The futures markets of 1983 probably had fewer quantitative types, so relatively simple trend strategies could generate large profits.

The moral that I take from the story, find algorithms/strategies that work, follow your systems rules and do not try to override them with your own opinions.


----------



## DeepState

From FT this morning.  I did not know the SNB was accumulating foreign reserves at this rate after breaking the peg in Jan 2015.


----------



## qldfrog

DeepState said:


> From FT this morning.  I did not know the SNB was accumulating foreign reserves at this rate after breaking the peg in Jan 2015.
> 
> 
> 
> 
> 
> 
> 
> 
> 
> View attachment 70247



Interesting fact but why?
Does the article specifies which currencies???


----------



## DeepState

qldfrog said:


> Interesting fact but why?
> Does the article specifies which currencies???



No, but the SNB holds a basket that roughly mirrors the degree of activity in the FX market.  About 80% of it is in USD and EUR.  This reserve accumulation comes after the SNB said it just couldn't sustain the peg due to the rate of reserve accumulation required....and yet here we are.


----------



## qldfrog

DeepState said:


> No, but the SNB holds a basket that roughly mirrors the degree of activity in the FX market.  About 80% of it is in USD and EUR.  This reserve accumulation comes after the SNB said it just couldn't sustain the peg due to the rate of reserve accumulation required....and yet here we are.



hum, do you think the SNB is getting readdy for a Euro crisis, after let's say a LePen victory [hardly possible in my (french born) opinion : not so much by the absence of French willing to have her elected but more by the demographics in term of ethnic backgrounds after 40 decades of "assimilation" and unrestricted immigration; the native are not numerous enough anymore]; but voting is not compulsory so surprise might happen


----------



## DeepState

Hi.  Hope you can help.

I trade futures.  I can access these via a futures broker (like Macquarie) or via a CFD provider (like IG).

I am interested in ensuring that my operational and credit risks are contained.  These are not compensated.  They may seem esoteric risks, but I assure you they are not.

In the case of Macquarie, all client assets deposited with them for initial and variation margins are pooled.  That means my assets are essentially available to bail out the clearing house and Macquarie in the event a bunch of them are in arrears.  I can't assess the risk as I don't know how strong the credit quality of their clients is and how all the risks are distributed.  I am certainly not paid to take this risk.

In the case of IG, they have what looks to be strong client protections, yet their OTC spreads are whatever they want them to be.  For the most part, these are kept competitive vs other CFD providers.  However, there is nothing stopping them from nearly withdrawing from markets and triggering stops and auto close all over the place at levels which are not representative.  You can take large, crystallised, losses at such times and wonder why you bottom ticked at levels outside those of the underlying market...only to be referred to the PDS where is says they can do this.

These don't feel like good choices.

Most CFD providers do not provide client protections as strong as IG does (they also pool assets and allow the broker to use these assets for their own credit support).

Does anyone know of a futures broker that offers decent client protections?  Ie. my deposit account is untouched by the actions of others?


----------



## Gringotts Bank

DeepState said:


> In the case of IG, they have what looks to be strong client protections, yet their OTC spreads are whatever they want them to be.  For the most part, these are kept competitive vs other CFD providers.  However, there is nothing stopping them from nearly withdrawing from markets and triggering stops and auto close all over the place at levels which are not representative.  You can take large, crystallised, losses at such times and wonder why you bottom ticked at levels outside those of the underlying market...only to be referred to the PDS where is says they can do this.




Trading on a bigger time frame fixes this issue, so long as you're happy to leave positions open without a stop (or a wide stop).  With systems, daily timeframes tend to work better anyway, so worth considering maybe.


----------



## DeepState

Gringotts Bank said:


> Trading on a bigger time frame fixes this issue, so long as you're happy to leave positions open without a stop (or a wide stop).  With systems, daily timeframes tend to work better anyway, so worth considering maybe.



Thanks GB.  I am functioning on timeframes of weeks to months.  The sort of stuff I am concerned about is that I set really wide stops or am otherwise only partially funded (which means they will stop me out at some level) and they basically pull markets via widening them from the normal level to nearly 100% wide and then "no market".  I have seen currency spreads wobble all over the place and fairly wide spreads get hit because the underlying market makers are pulling back just when you need them to be there.

What I want is a futures broker with decent client money protections....surely there has to be one out there.


----------



## DeepState

The above is from the CMC PDS, for example.  In english, it says "We reserve the right to set a price at which you will execute a stop or auto-stop, if you are not fully funded (and if you were, would you trade CFDs?), and impose losses upon you that exceed the value of assets that you have with us.  We can do this whenever we want because you have signed with us."

How does such an industry exist?


----------



## Trembling Hand

Have a look at the US based futures Brokers. They have protections that you will never get in Oz.

http://www.sipc.org/


----------



## skc

DeepState said:


> In the case of Macquarie, all client assets deposited with them for initial and variation margins are pooled.  That means my assets are essentially available to bail out the clearing house and Macquarie in the event a bunch of them are in arrears.  I can't assess the risk as I don't know how strong the credit quality of their clients is and how all the risks are distributed.  I am certainly not paid to take this risk.




This issue with pooled client funds... doesn't it applies only when the whole of Macquarie is in trouble? It'd be quite rare for MQG to ask other clients to take a haircut because some of them couldn't pay up. Chances are the bank itself will incur bad debt but clients would be made whole by funds from other parts of the institution.

Obviously MQG being a large listed entity should at least allow you to monitor the situation



DeepState said:


> In the case of IG, they have what looks to be strong client protections, yet their OTC spreads are whatever they want them to be.  For the most part, these are kept competitive vs other CFD providers.  However, there is nothing stopping them from nearly withdrawing from markets and triggering stops and auto close all over the place at levels which are not representative.  You can take large, crystallised, losses at such times and wonder why you bottom ticked at levels outside those of the underlying market...only to be referred to the PDS where is says they can do this.




One way would be to hold enough capital in the CFD account to avoid margin calls in all possible conditions, even when the market is "withdrawn" by the CFD provide. To manage your risk, you will need a second account where you can have your stop order. If the stop is executed, you can then square up the 2 accounts when markets return to more normal conditions. Obviously this negates the benefits of leverage and exposes yourself to increased counterparty risks.


----------



## DeepState

Trembling Hand said:


> Have a look at the US based futures Brokers. They have protections that you will never get in Oz.
> 
> http://www.sipc.org/



Thanks.  That's a nice safety net and would offer protection against fraud in cases like BBY and MF Global.


----------



## Trembling Hand

DeepState said:


> Thanks.  That's a nice safety net and would offer protection against fraud in cases like BBY and MF Global.



Yeah ask anyone that had an account with Aus MF Global compared to US MF Global. Think US got their funds back in a few days. Aus customers got screwed around big time and lucky to get what they did in the end.


----------



## DeepState

skc said:


> This issue with pooled client funds... doesn't it applies only when the whole of Macquarie is in trouble? It'd be quite rare for MQG to ask other clients to take a haircut because some of them couldn't pay up. Chances are the bank itself will incur bad debt but clients would be made whole by funds from other parts of the institution.
> 
> Obviously MQG being a large listed entity should at least allow you to monitor the situation




Thanks.  It is quite possible for MQG to remain standing but for some hedge fund client to take on more losses than they have assets in total.  If the liquidation value of the hedge fund is insufficient to make up for the losses incurred beyond the deposits, the other assets in the trust accounts (ie. my money) is available for use to settle vs the clearing house.  If I was the other side of their trade and made a fortune, those mark to market gains can be held by the clearing house to offset obligations from Macquarie to settle the other side....

This is the most common arrangement amongst futures brokers.  I can't believe it when I read it.  This industry remains one of dictum meum pactum ("My word is my bond."  which is a saying I really like, unless your bond is a CDO-squared piece of dig shot)





skc said:


> One way would be to hold enough capital in the CFD account to avoid margin calls in all possible conditions, even when the market is "withdrawn" by the CFD provide. To manage your risk, you will need a second account where you can have your stop order. If the stop is executed, you can then square up the 2 accounts when markets return to more normal conditions. Obviously this negates the benefits of leverage and exposes yourself to increased counterparty risks.




Turns out IG has fixed maximum spreads on almost all of their index products. I didn't know that. That's a solid innovation that actually helps contain execution risk and allays concern for the things I was worried about.  I am not sure if this kind of innovation is a feature of other CFD platforms.

[I am not an employee etc. of IG]


----------



## DeepState

USD: Post #Trump, all news was good news - except for #fakenews that a weak dollar policy might have been in store to counter the other master manipulators.

More recently, any news is bad news for the USD.

ECB conference call had basically nothing in it except for a reporter's question which led to a statement that the issue of TLTROs (special lending facilities) weren't discussed by the Members.  So, the lack of discussing something was seen to be a reason for the Euro to rally around 1% vs USD.

NFP last week was a strong beat.  Sell the USD.

FOMC raises rates and confirms the outlook, making it clear that the 2% inflation target is there.  Dots move up.  Sell USD.


----------



## Trembling Hand

Here is an interesting one.



Workers in the US so confidant they are walking away from jobs like its 2001....

wait how'd that work out?


----------



## skc

Trembling Hand said:


> Here is an interesting one.
> 
> Workers in the US so confidant they are walking away from jobs like its 2001....
> 
> wait how'd that work out?




Where are they going? Start up's? Trading bitcoin?


----------



## Trembling Hand

skc said:


> Where are they going?



I guess the main thing is that I think this is raw data so more people in employment the higher the number who at any time are quitting?? So unless its shown against the amount in work it is really just tracking employment . But,


skc said:


> Start up's? Trading bitcoin?




Most def they are trading bitcoins. Easiest way to riches and if ya not onto it you'll be going the way of a production line worker, blacksmith, print jurno and non-AI Trader.


----------



## McLovin

Trembling Hand said:


> Here is an interesting one.
> View attachment 70371
> 
> 
> Workers in the US so confidant they are walking away from jobs like its 2001....
> 
> wait how'd that work out?




Baby boomers retiring?


----------



## skc

Trembling Hand said:


> I guess the main thing is that I think this is raw data so more people in employment the higher the number who at any time are quitting?? So unless its shown against the amount in work it is really just tracking employment .




It looks like the number of confident quitters doubled from ~2010. You wouldn't think the number of people employed has doubled since that time as well.

So as a percentage of the employed it would still have gone up a fair bit.



Trembling Hand said:


> Most def they are trading bitcoins. Easiest way to riches and if ya not onto it you'll be going the way of a production line worker, blacksmith, print jurno and non-AI Trader.




I am pretty sure they've proved that bitcoin itself was created by an AI with the sole purpose of keeping those in the matrix feeling rich.



McLovin said:


> Baby boomers retiring?




No idea how these stats are compiled, but you'd hope quitting and retiring are recorded differently.


----------



## McLovin

skc said:


> No idea how these stats are compiled, but you'd hope quitting and retiring are recorded differently.




Yes, you are right



> Separations.  The separations level is the total number of employment
> terminations occurring at any time during the reference month, and is
> reported by type of separation—quits, layoffs and discharges, and
> other separations. (Some respondents are only able to report total
> separations.) The quits count includes voluntary separations by
> employees (except for retirements, which are reported as other
> separations).




https://www.bls.gov/news.release/jolts.tn.htm


----------



## DeepState

The above are the JOLTS Quit rates for large (sub) industry classifications which tend to have higher turnover.  My analysis of the underlying suggests that they really aren't moving elsewhere.  These industries are actually increasing employment.  In other words, it looks as if people are chucking in their jobs at one place to work at a higher paying (or otherwise better) alternative within the same industry as more opportunities present themselves and greater choice is available.

The relationship between the Quits peak of 2001 and the subsequent economic outcome was probably affected by a couple of planes flying into buildings although JOLTS Quits is definitely a stat you would consider when looking for signs of overconfidence.  Yellen is looking to the JOLTS Quits to help gauge the degree of tension in the labour market, for example.

In order to make sense of the current observed levels it is helpful to consider that there would be a heap of people who have been stuck in jobs they have hated for years and are now moving on.  In my view, a reading of 2.2 now is less a sign of overconfidence than a reading of 2.2 back in the early 2000s because of the backdrop leading in to those figures.


----------



## DeepState

Does anyone have a good source of 'Event' information like "OPEC Meeting" or "French Presidential Election" in the kind of format you'd easily find for economic calendars?  Citigroup produces something, but it's a bit messy.


----------



## skc

DeepState said:


> Does anyone have a good source of 'Event' information like "OPEC Meeting" or "French Presidential Election" in the kind of format you'd easily find for economic calendars?  Citigroup produces something, but it's a bit messy.




This one from bloomberg has most of the bigger things, which is sourced from the second link. I don't know if it has political events however.
https://www.bloomberg.com/markets/economic-calendar
http://www.econoday.com/


----------



## DeepState

Ves said:


> There’s probably two main issues here that I’d like to bring up.  (As an aside, it probably goes without saying that this applies to any industry, it just happens that the finance industry is extremely topical and arguably very dominant in the world today).
> 
> The first, as we’ve both touched on, is to what extent and scope the finance industry should be allowed to operate.
> 
> What is its function to be:  is it there to support other industries, that is, to help facilitate the transactions between corporations or individuals, and to assist in storing their wealth?  Obviously, this function should entitle it to some profit on the capital or labour it has invested if we are indeed within a system of capitalism.
> 
> However, one must ask,  as you also have, how far should this be allowed to go?
> 
> Should it also be permitted to go further than this and have an entirely new role in its own right with the sole objective of creating more value (wealth/money) for itself?
> 
> Secondly how profitable should the finance industry be (both in terms of return on capital and also in magnitude in comparison to the economy as a whole).
> 
> For both of these questions a good example is participation in financial markets by big players in the finance industry.  I do accept that this is a grey area, because as you said, some of this participation is assist with managing risk, storing wealth or transactional purposes. However, in other cases, the sole purpose is to create profit, and in turn these actions create new risk (for instance by use of massive leverage), and because of the massive size of the finance industry as a whole, this risk has consequences that go well beyond the industry itself.
> 
> It's hard to make a decent argument as to why this should be allowed to occur, given the inherent systematic risks (as you said, the GFC was close to causing the ‘Great Depression’ all over again).
> 
> Obviously the cost to society is massive. It’s hard to find risks created by other industries that are anywhere near the same magnitude.
> 
> If I was an alien looking down on earth, this would be a strange concept to witness, men creating money out of nothing but more money!  And for what end?  It’s really hard for me, as an outsider to the finance industry, to see what benefit this has to the rest of society. As you eloquently say below they don’t produce a single widget. Nothing but numbers on a screen, formerly figures on pieces of paper.
> 
> By default a lot of the discussion around this, but not limited to just this facet, has to do with how much ‘surplus value’ is created and how this is distributed in society (whether it’s to the capital owners, paid in government as taxes for re-distribution, to stakeholders such as employers etc.).
> 
> There obviously needs to be a trade-off between the risks created (to society at large) and the benefits shared. But how can these be measured?  Certainly not objectively!  How do you make someone accept something when they will just argue it’s not objective?
> 
> A lot of people are upset because they, whether rightly or wrongly,  although they can see a large quantum of profits created by risk taking activities in the finance industry, there is a perceived lack of consequences to the individuals involved when it all goes wrong and these risks become reality.
> 
> We don’t tax corporations (of any kind) or individuals on the basis of the risks that they create for society at large, but only on the basis of profit.  This is a pretty hard discussion, and it’s really hard to have, because everything in capitalism is predominately measured on a monetary basis.  So it’s hard to quantify said risks because a) probability isn’t objective, b) you don’t know the costs of actions until risks become actual outcomes and c) even then there are unidentifiable costs, including those that are non-monetary (emotional, psychological). God help us with this discussion,  the carbon tax / climate change debate is a really good example of how this works in practice.
> 
> As for society as a whole you make some prescient points, especially on the culture of greed, and the fact that this creates a society that can be separated into winners and losers.
> 
> (As an aside I actually like the word ‘desire’ better than ‘greed.’  But beware that itself opens a can of worms: what is desire?  What causes it? The individual or an ‘Other’ amongst other deeply philosophic concerns)
> 
> Therefore I agree, the finance industry is a microcosm of society as a whole and alone it isn’t the only issue and maybe not the biggest,  but the problem is as I think we’ve both kind of said,  it’s magnitude is way out of whack, so it’s a pretty obvious one for which to take aim towards.
> 
> We could have a massive discussion around this. There is no end to where it could go.




Certain monopolies are regulated.  Their profitability is set with reference to things like CAPM.  They provide a vital service to the community and the government is concerned that private wealth does not extract an excessive rent from doing so.

Should finance be such an industry?  In some ways the banks are subject to this.  By increasing the capital requirements and setting capital adequacy factors to different kinds of loans and assets, their profitability and riskiness is contained.  In the pre-GFC period, the degree of leverage permitted was clearly too much.  Today, that figure is vastly lower.  However, that is only one kind of leverage and many more types can be created which circumvent this.

One way to do so is via derivatives whose treatment is varied.  The GFC was made much more complex due to the way that the entities were related...via a web of synthetic CDS and other things.  One way to protect against that is to treat OTC derivatives in a similar way to ET derivatives...keep collateral and have central clearing house.  And there are moves in that direction.

If something becomes too big to fail, all sorts of weird incentives take place which puts everyone at greater risk but makes the people doing it very rich.  The antidote is... to shrink things so that nothing is to big to fail.  There is still much work to be done here.  The implicit cost to society for bearing this risk has been estimated and the idea is to either pass it back to the bank or shrink the bank such that the wider society is not bearing the cost for keeping the thing running.

There's heaps more stuff, but hopefully you see that there have been significant steps towards addressing the matters you have raised but keeping the industry very much a capitalist driven one albeit with more safety rails now than before.

I think one matter which has not been raised is that of regulatory arbitrage.  Bottom line, finance pays very well and it attracts very clever people who have strong incentives to make money.  They outgun the regulators every day of the week.  It's almost like trying to regulate the internet or tech companies.  Good luck.

We do need much stronger governance at banks.  We do need excessive compensation to be reigned in.  We need fund managers to hold management heavily accountable rather than just sell the stock.  We need the fund manager clients to actually invest in a way which rewards this.  There is a whole chain and society gets what it gives.

Are the profits to finance out of step with the actual production?  I would argue that farmers play a very important role.  Without food, we die.  Yet they mostly get paid poorly.  Engineers build bridges and no movement of goods could occur without transport....paid like crap.  Financiers create loans and securities, and trade them...some get paid boatloads.  Fair?

Doesn't seem like it on face value until you ask yourself whether this is some closed shop union.  Absolutely not.  Entry into very high paying jobs in finance, management consulting etc. is heavily democratised.  No one cares if you are half Russian/Chinese (it's actually a positive in quant) with green eyes, etc, and 4'8" with parents from Tejekastan. If you are smart, work your arse off, can find a way to get stuff done in chaos...you will be hired and your will be promoted rapidly if you can make the firm a boat load of money....or set up your own firm.  Period.  The old school tie is long gone.  You'd think that this would eventually equilibrate the value chain to what it should be.

To set up a fund manager takes virtually no capital.  I can build one in a week.  So can heaps of others.  Yet the fees remain high because people are prepared to pay it.  No one forces them to.  Why do investment bankers get paid tens of millions for advisory fees in M&A, most of which actually destroy value?

The capitalist system is supposed to figure out who gets what on the basis of who has the best bargaining power.  So, if you think that the spoils to finance are out of step, we should ask why people pay for the service at that level, because it most definitely is not some form of unregulated monopoly.


----------



## Ves

Thanks heaps for your insights into the regulatory changes, DS.

Your comments about the 'regulatory arbitrage' seem pretty important to me.  It's a bit of an arms race in that respect.  It really highlights that no matter what regulations or laws are introduced there will always be someone who is clever enough to find a loop-hole.  The regulators are like a dog chasing its tail in that respect.  When a problem/issue is a cultural thing it's very hard to introduce laws to stop it.

I tried to have a think of how you could make the finance industry (banks in particular) subsidise the (or maybe a better term is self-insure) the systematic risks that they create on a society wide level.  There's ideas like 'bail-out funds.'   But the costs of catastrophic failure are probably so large globally that any tax or levy on the banks profits would not come any where near covering this amount any time soon. It also punishes those banks who take less risks and unless you can come up with a reliable way of measuring the cost of said risk (good luck) then it's obviously not going to be implemented.

Whlist there is collaboration on a Global level between governments,  I assume that certain regions/jurisdictions also don't agree on all of the finer details.

Another hurdle seems to be that there the fate of Governments (ie. rightly or wrongly, they get measured by how the economy performs) is entwined with the performance of the finance industry because of its large size.  Whilst I can see that governments around the world are actively trying to reduce systematic risk,  it would appear (not sure if I'm correct here) that they can only pull so many strings before the economy is materially impacted. Obviously at the moment we are already in a 'low growth' environment which makes it harder still. I assume that the finance industry also has a lot of lobbying power and the power to make large political donations as well. I imagine things like these make it much harder to fix the problems in the finance industry in the most efficient and quickest manner.


----------



## DeepState

What should we do in portfolios to make allowance for an increasing risk of conflict with North Korea and disputes in the South China Sea?  

US vs China hot war still seems far away (China force projection probably isn't sufficient to support naval warfare too far away from its shores against a strong foe).  

The North Korea situation requires intervention.  Trump, like Bush, will want to show strength and leave a legacy.  I think the risk of conflict is >30% within his first term, at a guess.


----------



## qldfrog

DeepState said:


> What should we do in portfolios to make allowance for an increasing risk of conflict with North Korea and disputes in the South China Sea?
> 
> US vs China hot war still seems far away (China force projection probably isn't sufficient to support naval warfare too far away from its shores against a strong foe).
> 
> The North Korea situation requires intervention.  Trump, like Bush, will want to show strength and leave a legacy.  I think the risk of conflict is >30% within his first term, at a guess.



30% for one of the above, that is pretty high!! And I thought I was pessimistic, at least, with Trump and not Clinton in power, we should avoid a US vs Russia conflict that the lady was so keen to trigger


----------



## DeepState

There is a fair chunk of voodoo amongst the trading community in relation to finding supposedly amazing relationships that can be exploited for profits.  One such statement was made by a prominent coach who charges money and has a large international following (paraphrasing):

"The probability of the Open of the EURUSD at the start of the week being covered in the trading period Tues - Fri is 78% over the last two years.  Imagine if you knew that probability when you open your trade and ask yourself what that might mean for your profits."

The implication was that this was an amazing relationship.  That a 78% hit rate is a sure way to profits and there is a seasonal element to it (start of the week creates gaps that get filled).

Sound familiar?

---

So I looked at the results over a five year period, because that adds more statistical significance.  I did not try any other time period.  Here are the results:




Monday does show higher likelihood of crossing the open again in the next four days.  76.2% in this sample and close to the figure claimed by the trainer.  Interestingly, the other days all show 70%+ likelihood of crossing the open as well in the subsequent four days.

There is nothing special about 70%+ likelihoods.  This is a skewed strategy, limited profits, pretty massive drawdowns if not crossed by end of the 'reversion' period.  Hit rate is given primacy over expectancy.

Also, whilst Monday does show a higher rate of reversion to the rest of the week and gives rise to the Monday effect, the extent of this is well within statistical bounds on large data sets.  It's just the type of thing that a trader who can operate Excel will mine the crap out of OHLC price data and find....and then trumpet with emphasis.

Worse still, the gap size being filled for Mondays is narrower than for the rest of the week, making the claims even more dubious.

---

There is much that is said by well followed people which is simply factually incorrect even if they actually believe it.  I can understand that many aspiring traders have virtually no hope of distinguishing between utter crap, crap which was thought to be truth and the stuff which actually makes money.  These statements, which make easy money seem so accessible under a veneer of solid analysis given by a guy who worked in some hedge fund or on some desk in London, creates false hopes and real losses.  But the hope generates revenue.


----------



## Trembling Hand

DeepState said:


> There is a fair chunk of voodoo amongst the trading community in relation to finding supposedly amazing relationships that can be exploited for profits.



DS I don't know what context the above stat was stated but you may have taken the purpose incorrectly.

I use stats from daily/hourly/whatever data as a way of framing my understanding of likely range. It's not to find a direct edge rather to temper expectations and sometimes restrict trades or strangely expand the balls deep trade.

When I look at other people's posting of T/A based trades if they have targets and stops I rarely look at the "T/A pattern" I look at the likelihood of what type of event are they going to need just to get that type of range in their stated timeframe. A surprising amount of the time it doesn't pass the positive possibility filter. If you are trading short term the biggest bitch is regime shift on an intraday level. You are pretty much trading different markets from hour to hour. 

As an example, Monday morning markets open down with something of a surprising gap down and in the first hour keep on pushing down on larger that normal first hour of week volume (I know that because I've checked what is avg is in excel ) But the question is what next? Do I go balls deep on a short as it retests the days low? Do I look for a short on the next lower high? After all the old the trend is ya friend - trade with the higher timeframe trend- insert whatever BS trading truisms ya want. Or do I have in the back of my head stats on Monday gaps that state we are likely to cross back over the gap sometime this week? With that stat I'm likely to start to think..... Ok we are bearish but that's probably it as far as range extension unless this regime is going to accelerate, and if so what is that actually going to look like, where are the stops, is the volume going to increase, are the locals getting swamped by the macro crowd turning up, blah blah. I start to look forward rather than expect the last hour will carry on to infinity(or zero).

There is rarely a go long/short here and close at here because these are the stats. It's about framing my bias.


----------



## DeepState

Trembling Hand said:


> DS I don't know what context the above stat was stated but you may have taken the purpose incorrectly.




Hi T/H

The context was as follows:

A chart showing daily candles for EURUSD was shown:


The Mondays are marked with 'x'.

He comments on how unlikely it seems for Monday gaps to be filled on some occasions.

He says, directly quoting this time:

"...79% of the time, taking data over two years, or 105 occurrences, the market will revisit the Monday Open price at some point later that week after the Monday candle has finished forming."

He goes on to examine the likelihood of gap fills on each of the following week days.  He asks his subscribers to consider "marking the Close level on Monday and considering it in light of the knowledge of the odds that this level will be hit during the rest of the week."  Importantly, there is no discussion about the asymmetry of outcomes for pursuing this kind of idea.

"I've already found something very interesting in my own trading."

"Start thinking about that when you are in a position, or about to take one, and see if it improves your bottom line."

To me, he is highlighting probability of gap fill and implying, pretty clearly, positioning on that basis is supposed to do good things for you.

My contention is that the seemingly high rate of gap closure is the result of noise and that there is no big deal about Monday gap closure vs rest of week.  The statements are technically correct, offered in a way which is supposed to be a meaningful input to improve trading outcomes, yet not actually value additive when examined further.

This is a consistent set of behaviours in trader talk: find an interesting relationship, highlight money making examples which seem plausible and meaningful to an untrained eye....no edge under further examination.  Offer courses, collect fees.


----------



## Trembling Hand

DeepState said:


> The statements are technically correct, offered in a way which is supposed to be a meaningful input to improve trading outcomes, yet not actually value additive when examined further.
> 
> This is a consistent set of behaviours in trader talk:




Yep I'm with you 100% * infinity on that.


----------



## skc

An article on why it is hard for active stock picking to beat the index.

http://www.afr.com/markets/why-highly-paid-fund-managers-struggle-to-beat-the-index-20170410-gvhmel



> Heaton, Polson, and Witte distill the statistical argument into a straightforward five-page paper that uses a simple illustration, adapted here to a bag of poker chips: Say you have five poker chips, four worth $10 and one worth $100. The five chips have an average value of $28, but what if you reach into the bag and pull out two chips over and over? That's roughly how mutual funds approach stocks, with managers picking portfolios that are subsets of the broader group.
> 
> The problem is, the majority of selections will fail to snag the $100 chip. Mathematically, there is an average value of $56 across the 10 two-chip combinations-the problem is, 6 of 10 times you'll grab a pair with a sum of $20. The same thing happens with stocks chosen from a benchmark. Only a few managers will own the biggies, relegating the rest of the industry to mediocrity-or worse.


----------



## DeepState

Gold!  Washington University offers a course on 'Calling bull**** in the Age of Big Data'

http://callingbullshit.org/syllabus.html

Note: I am not saying that all of it is bull****. It's not.


----------



## OmegaTrader

skc said:


> An article on why it is hard for active stock picking to beat the index.
> 
> http://www.afr.com/markets/why-highly-paid-fund-managers-struggle-to-beat-the-index-20170410-gvhmel




What is the antidote? That is is the question.


----------



## skyQuake

DeepState said:


> Gold!  Washington University offers a course on 'Calling bull**** in the Age of Big Data'
> 
> http://callingbullshit.org/syllabus.html
> 
> Note: I am not saying that all of it is bull****. It's not.
> 
> View attachment 70669




This can't be real... Can it?

I prefer my courses to cost $4,999.95 and run for 3 days on the Gold Coast


----------



## DeepState

OmegaTrader said:


> What is the antidote? That is is the question.



ETFs and Quantitative Investments, according to BLK.

Or, they need to be paid even higher to increase motivation to outperform.


----------



## DeepState

Wow.  Didn't quite realise that you can be retrospectively fired nowadays.


*Wells Fargo board slams former CEO Stumpf and Tolstedt, claws back millions in pay*

http://www.cnbc.com/2017/04/10/well...illions.html?__source=newsletter|breakingnews

You could be retrospectively fired from the day you started at work, I suppose.  That's an interesting way to boost margins...


----------



## skyQuake

DeepState said:


> Wow.  Didn't quite realise that you can be retrospectively fired nowadays.
> 
> 
> *Wells Fargo board slams former CEO Stumpf and Tolstedt, claws back millions in pay*
> 
> http://www.cnbc.com/2017/04/10/well...illions.html?__source=newsletter|breakingnews
> 
> You could be retrospectively fired from the day you started at work, I suppose.  That's an interesting way to boost margins...




Work 40 years for a company then retire. Get retroactively terminated from day 1 because you padded your resume...

Better transfer everything into company/trust/wife/dog's name


----------



## OmegaTrader

DeepState said:


> ETFs and Quantitative Investments, according to BLK.
> 
> Or, they need to be paid even higher to increase motivation to outperform.




My limited view is to go around the market, if that makes sense. Everyone is so caught up in stock picking that they forget that there are other strategies out there. You don't have to pick stocks and hold them.

The permutations of assets available and strategies are almost endless. But having the expertise, time and resources to use them to get a better risk return outcome is another story.

Commodities, forex, property, derivatives, shorter time frames. These are all different games. But still need to beat the market return risk profile after tax, transaction, and time/labour costs. Otherwise just take it easy and work 9-5 buy top 20-30 + small caps  and massage a little as you go.

my two cents


----------



## DeepState

OmegaTrader said:


> My limited view is to go around the market
> 
> The permutations of assets available and strategies are almost endless.
> 
> Commodities, forex, property, derivatives, shorter time frames.
> 
> my two cents




for another two cents...please expand....


----------



## OmegaTrader

DeepState said:


> for another two cents...please expand....



??? 
I don't understand.


----------



## DeepState

OmegaTrader said:


> ???
> I don't understand.



You talk of going around the market and permutations on other assets.  This sounds to me like alternative beta and various kinds of arbitrage.  If that is what you meant, I was wondering if you might wish to expand on those thoughts.

Thanks.


----------



## OmegaTrader

DeepState said:


> You talk of going around the market and permutations on other assets.  This sounds to me like alternative beta and various kinds of arbitrage.  If that is what you meant, I was wondering if you might wish to expand on those thoughts.
> 
> Thanks.




 I think investors are starting to realise that alot of fund managers aren't beating the market through stock selection for a number of reasons-fees, size/scale,incentives, transaction, tax etc etc. The two responses to that have been index investing at a low cost and changing the strategy. People can now invest in 'the market' and gain alternative investments through hedge-funds etc.

I think entrepreneurial people have always know that the stock market is only another asset class and that there are other opportunities out there. The 'self made'people I have met generally invest in property usually developing and business etc as well. They may not be quant types but they understand there need to be meat on the bone.

Now people love to here fancy quant strategies, long/short is thrown around alot and so is quantitative. How many people really understand what these mean. Further to that how many people understand the assumptions behind the numbers.

The issue  has started from academia who said that if you can't beat the market then you might as well passively invest. But the thing is, who said you have to invest in the market? Passive investing doesn't always work in every country for shares and property, Australia has just been very lucky. 

Financial advisers are also programmed in this mantra after going to university. If passive investing stops working and property stops what will people do then??? Bank interest?? Then the blame game will start.

All of these beta and alpha catchwords are simply a way for academic to realise that it is possible to beat the market risk return profile and catching up in that sense.

As for specific strategies well.... 

There is alot out there but the numbers need to be crunched. I can't answer that. 

Someone like howard bandy would know the ballpark abnormal returns and ins/outs of the quant strategies.



I think going on a shorter time frame will part of the equation. Once a strategy is optimised as best given the information, then gearing/ position sizing is taken out of the picture. Complexity, speed and liquidity when then provide some further abnormal returns.

The first bandwagon was value investing then it went to technical analysis now to quants. Complexity has increased dramatically. Will those opportunities continue? what will be next?  

To answer my question, I think the antidote is *IF you can't beat the market, become the market or go around it* 


 my .652719 cents


----------



## DeepState

OmegaTrader said:


> 1. I think entrepreneurial people have always know that the stock market is only another asset class and that there are other opportunities out there.
> 
> 2. Now people love to here fancy quant strategies, long/short is thrown around alot and so is quantitative. How many people really understand what these mean. Further to that how many people understand the assumptions behind the numbers.
> 
> 3. The issue  has started from academia who said that if you can't beat the market then you might as well passively invest. But the thing is, who said you have to invest in the market? Passive investing doesn't always work in every country for shares and property, Australia has just been very lucky.
> 
> Financial advisers are also programmed in this mantra after going to university. If passive investing stops working and property stops what will people do then??? Bank interest?? Then the blame game will start.
> 
> 4. I think going on a shorter time frame will part of the equation. Once a strategy is optimised as best given the information, then gearing/ position sizing is taken out of the picture. Complexity, speed and liquidity when then provide some further abnormal returns.
> 
> The first bandwagon was value investing then it went to technical analysis now to quants. Complexity has increased dramatically. Will those opportunities continue? what will be next?
> 
> 5. To answer my question, I think the antidote is *IF you can't beat the market, become the market or go around it*
> 
> 
> my .652719 cents




1. There is a strong equity culture in the Australian investment setting.  It is strongly a hindsight bias and, like property, will be tested to destruction call for re-assessment.  The 70/30 Equity/Bonds portfolio is an accident waiting to happen.  The major funds move in to private equity and infrastructure to add further diversificaiton as well as property.  So much of this is interest rate and credit driven and we have been in an amazing period of time since 1993 for that.  It is competely unsustainable.

2. It takes a quant to catch a quant tightly.  But the quant stuff is happening and influential whether an investor is aware of it or not.  The tools are powerful and can help make better decisions.  But, if you don't know how to launch a rocket, it's probably best to hire someone who does.

3. Academia believes in efficient markets and/or behavioural bias anomalies for the most part, with some microstructure stuff in there as well.  Financial advisers moved most client assets in to active funds, so I'm not sure where you are coming from.  Now, with an increased movement to ETFs, all that is happening is that financial planners are taking up more of the value chain by migrating asset allocation to themselves.  Active management is still happening, it's just in a different part of the chain than before.  There are exceptions, but there probably aren't many super-long term set and forget auto-rebalance to strategy models out there.

4. I think that playing judo with the titans in the market has legs.  But, you aren't the only one thinking that and it isn't clear to me that inefficiencies caused by excess size in various aspects of the investment process are all that easy to exploit.

Besides moving to shorter time frames (for what?), I think there is merit in considering other types of things where you are rewarded for risk bearing.  A passive equity investment is really a reward for bearing equity risk.  I had thought you might have been in to these, but it appears not.

5. I think that is a good way to think about the investment task.  I would add...avoid it entirely, or twist it...as an option.  Twist it means doing things like buying "value" stocks and selling "non-value" stocks against it.  That's classic "smart beta" and produces an outcome for risk bearing of a different kind to straight equity investments.


----------



## DeepState

The IMF has recently released some of the technical chapters of the World Economic Outlook April 2017 round.  One of these relates to the decline of labour share of incomes.  That basically means that, of the money made from customers by an enterprise, workers are generally getting less of it.  No doubt this is something you are aware of.

Some things I learned:

The clear winners are high-skilled employees who are hard to replace in globalisation, but take increasingly monopolised profits.  These new-rich also have heaps of capital and borrow money which is used to invest in things which reduces the demand for certain types of jobs...moving profit further to them and away from middle to lower skills.

Labour share is not, in and of itself, a great indicator of economic health.  It has to be considered with productivity.  However, there is clearly a social cost for large changes that increase inequality.

The middle-skilled employees and emerging markets have been most 'hurt' by globalisation - which is classified as GVC (Global Value Chain) participation.  Jobs move to where the most money can be made by an hour of work.  In China, the reduced labour share is probably coming from huge increases in profits from certain industries rather than declining wages.  However, this shows up as declining share in China as well as the country where labour is being made less required by a shift of jobs.

For the lesser skilled, they moved from jobs they had to really **** jobs within the same industry, but it doesn't seem to be technology driven.  Essentially, more cr@p jobs got created when the middle jobs were moved around.  Hello Mr Trump.

We should definitely look beyond the headline of labour share and go in to the compositional causes including the rise in overall profit arising from this.

Although technology, surprisingly to me, is not named as a key reason for declining labour share, the ability to build new plant and equipment in countries better suited to use it is clearly a feature.  This is driven by cost of capital - interest rates.

As interest rates rise, inequality and labour share should revert on the basis that it is harder to invest and labour becomes more competitive vs capital in that environment.  Also, it occurs because profits will decline.  Highly levered rich folk will be drawn back towards the fold.  Rich folk with savings might be pretty happy depending on what they own.

I have no ideas about raising productivity beyond infrastructure and microeconomic reform, both of a loose hand-wave variety.  The ideal situation from my perspective (with an equality bias) is those with **** jobs to become more productive in some way and hang on to those additional profits.  Unionisation?...Maybe of the German variety?


----------



## DeepState

Was just walking around Auckland Harbour this morning and explaining to #1 kid that, in the mid-1950s or so, the names on all the buildings were generally the companies which built things. If you had 'Motors' in the name, that was cool. Looking up at the names of the buildings now, we see the great majority are financial services firms: The major accounting firms each have buildings you can see from one spot.  Then there are the diversified financial services firms: AMP, Citi. And the pure insurers.  A couple of telcos have their names on buldings.  Very few buildings, apart from hotels, had naming rights to other industries.  That's in Auckland, not exactly the center of the financial universe.

In the future, when I'm hopefully taking #1 grandkid around, my guess is that the names on buldings will include more from the entertainment and health sciences conglomerates.


----------



## OmegaTrader

DeepState said:


> 1. There is a strong equity culture in the Australian investment setting.  It is strongly a hindsight bias and, like property, will be tested to destruction call for re-assessment.  The 70/30 Equity/Bonds portfolio is an accident waiting to happen.  The major funds move in to private equity and infrastructure to add further diversificaiton as well as property.  So much of this is interest rate and credit driven and we have been in an amazing period of time since 1993 for that.  It is competely unsustainable.
> 
> 2. It takes a quant to catch a quant tightly.  But the quant stuff is happening and influential whether an investor is aware of it or not.  The tools are powerful and can help make better decisions.  But, if you don't know how to launch a rocket, it's probably best to hire someone who does.
> 
> 3. Academia believes in efficient markets and/or behavioural bias anomalies for the most part, with some microstructure stuff in there as well.  Financial advisers moved most client assets in to active funds, so I'm not sure where you are coming from.  Now, with an increased movement to ETFs, all that is happening is that financial planners are taking up more of the value chain by migrating asset allocation to themselves.  Active management is still happening, it's just in a different part of the chain than before.  There are exceptions, but there probably aren't many super-long term set and forget auto-rebalance to strategy models out there.
> 
> 4. I think that playing judo with the titans in the market has legs.  But, you aren't the only one thinking that and it isn't clear to me that inefficiencies caused by excess size in various aspects of the investment process are all that easy to exploit.
> 
> Besides moving to shorter time frames (for what?), I think there is merit in considering other types of things where you are rewarded for risk bearing.  A passive equity investment is really a reward for bearing equity risk.  I had thought you might have been in to these, but it appears not.
> 
> 5. I think that is a good way to think about the investment task.  I would add...avoid it entirely, or twist it...as an option.  Twist it means doing things like buying "value" stocks and selling "non-value" stocks against it.  That's classic "smart beta" and produces an outcome for risk bearing of a different kind to straight equity investments.




1 & 3) I agree, in my opinion the problem is the concentration into property and equities. Financial advisory says this put money into a etf or mainstream fund. The fund probably isn't beating the market but is probably tracking the index because of the  size and conservative nature anyway. So he person ends up tracking the market. If the market and property go.. blood in the streets,* IF* of course being the operative word.

4) On the shorter time frames, say a simple fundamental investor finds an opportunity every 2-3 years. He invests the majority of the capital every 2-3 years and the income he gets is retained  until he can find bargains again. What if he lived in a supercharged market and he found bargains every month, which then came back to intrinsic value in 2-3 months. Would he make more money???

This is what I was trying to convey.

If you want to increase returns. What can you do?

-Improve the accuracy of the strategy- More complexity/understanding/resources

-Improve speed- Better access to opportunities/first mover advantage/more opportunities available

Improve Liquidity- Being a smaller player/moving to the green pastures etc

Increase volatility- Up until a point. But then you have to decrease position size invested until it becomes fractional and then this will be limiting as position size gets very small

Gearing- Has a cost and once  again like volatility can't be done to infinity. The cost first has to be overcome returns> cost of gearing, then you have the volatility problem again.

Shorter time frame: It's like my example. It's very hard to explain succinctly. But if two strategies are identical in every way apart from the fact that one is on a shorter time frame, in general the shorter time frame will win because there will be more bets in a given year and therefore a higher return as the bets compound and more capital is invested in the same comparison time frame. I am assuming it is more of a fractional based system then sit and hold. That is the best my limited brain can put it.


Diversify: I won't open Pandoras box there.



> A passive equity investment is really a reward for bearing equity risk.  I had thought you might have been in to these, but it appears not.




Mind is like a sponge, we put what we are thinking into the scenario.

That way you thought I was way smarter than I was :S



enough from me.


----------



## Trembling Hand

DeepState said:


> Was just walking around Auckland Harbour this morning and explaining to #1 kid that
> 
> In the future, when I'm hopefully taking #1 grandkid around




What do your other kids think of you giving them a lower ranking??


----------



## Gringotts Bank

I've been thinking how the themes and concepts in Orwell's _'1984' _are coming to be.

eg. Orwell's 2+2=5 as 'fake news'.  Fake news has been shown to be many times more powerful and influential than the real thing.  BS stories have huge click rates among the plebs and Twits.

Doublespeak = political correctness.  There's also 'lifestyle correctness'.  Are you living the lifestyle that the media says you should live? 

Psychological manipulation by huge corporations such as Microsoft, Facebook, Google and Amazon and media outlets.

http://www.sparknotes.com/lit/1984/themes.html


----------



## DeepState

Trembling Hand said:


> What do your other kids think of you giving them a lower ranking??



As you know, I am the lowest ranked slice in the capital stack in my family.  The slightest bit of distress and I'm eliminated. Kid #2 is government guaranteed by comparison. Hehe. Hope easter was good to you.


----------



## DeepState

Gringotts Bank said:


> I've been thinking how the themes and concepts in Orwell's _'1984' _are coming to be.
> 
> eg. Orwell's 2+2=5 as 'fake news'.  Fake news has been shown to be many times more powerful and influential than the real thing.  BS stories have huge click rates among the plebs and Twits.
> 
> Doublespeak = political correctness.  There's also 'lifestyle correctness'.  Are you living the lifestyle that the media says you should live?
> 
> Psychological manipulation by huge corporations such as Microsoft, Facebook, Google and Amazon and media outlets.
> 
> http://www.sparknotes.com/lit/1984/themes.html




Had a 'conversation' with my father-in-law this afternoon at the airport where he expressed his sense that Trump was a good guy who will learn on the job. He recommended I read "Making America Great Again". Two sons-in-law (me be being one) went bananas and had to be calmed by respective spouses as onlookers turned their heads to stare.

Nonetheless, trying to get an objective viewpoint and consider the other perspective, I duly bought and read the book. I am speechless.  The guy is a raving narcissistic lunatic with no concept of truth or decency and an utter opportunist. I suppose that really is presidential material.

Meanwhile, we hear reports that the military are briefing their counterparts in the UK about the Korean situation.  They are confident the intel and abilities are such that they can wipe out the missile threats with high confidence because they can account for all the warheads and their locations.  I have this feint memory in my my about something 15 years ago, but I just can't place it.  Perhaps we can argue that whilst Nth Korea does yet have an ICBM, they had the capability to produce one and that's enough to waltz on in with the 7th fleet.

Abe will get what he wants by acting militaristic which will shore up the votes and possibly help with inflation, maybe. Cleverly, Trump is pushing China to taking real action, with an alternative being their own refugee crisis.  If there is hot conflict, who knows what the North actually has to respond with.  I don't suppose you go from launching a pile of missiles as a show of force in Syria and move to restraint after ordering an attack fleet in to the region.  My concern is that these actions have a strange way of creating complicated outcomes.  On the other hand, perhaps we'll see a Berlin Wall moment in Korea and Trump will gain a mantle even more significant than Reagan did.

Mr Kum Jong Un, "Tear down this DMZ".  My goodness, maybe my father-in-law might be right.  This might just be one of those Catch-22 situations where you have to be nuts to actually succeed.

This really was a very special event.  Always gets a chill out of me:


----------



## Gringotts Bank

DeepState said:


> The guy is a raving narcissistic lunatic with no concept of truth or decency and an utter opportunist. [/MEDIA]




I'd much prefer that lunatic (Trump, the devil you know) than NK's or China's lunatics in top spot.  It's absolutely essential for the stability of the World that the US stays in the dominant position.


----------



## McLovin

DeepState said:


> Nonetheless, trying to get an objective viewpoint and consider the other perspective, I duly bought and read the book. I am speechless.  The guy is a raving narcissistic lunatic with no concept of truth or decency and an utter opportunist. I suppose that really is presidential material.




He's been dragged pretty quickly back to the mainstream. Perhaps he's realising he's out of his depth (yes I realise the irony of such a statement). I guess he's realising the world isn't binary, and politics and diplomacy involves a few more working parts than deal or no deal.

IMO, what happens wrt NK in the next few months, it will be something along the lines of the Cuban missile crisis. NK gets assurance the US will not invade and in return China reigns in NK. As an aside, what's the lifespan of a carrier group if things got really hot? I'm guessing ten or so minutes.


----------



## qldfrog

McLovin said:


> IMO, what happens wrt NK in the next few months, it will be something along the lines of the Cuban missile crisis. NK gets assurance the US will not invade and in return China reigns in NK. As an aside, what's the lifespan of a carrier group if things got really hot? I'm guessing ten or so minutes.



Agree, I believe China will openly take charge there, and they may even be behind the rocket failure;
pity the NK rocket scientists being tortured right now...


----------



## McLovin

qldfrog said:


> pity the NK rocket scientists being tortured right now...




Unlikely. They don't have enough to spare. If the DPRK was a genuine contender they wouldn't have spent 10 years trying to get a fairly simple bit of rocketry going. Those Taepodongs were supposed to be the game changer for them, but they've amounted to nothing and they still have NFI on how to strap something useful on the end of a missile. Self-evidently they are missing a Wernher Von Braun.


----------



## Gringotts Bank

*http://www.news.com.au/finance/work...a/news-story/76bc26365c9cb3922d1ac088686a4b53*

"If those in charge of our society - politicians, corporate executives, and owners of press and television - can dominate our ideas, they will be secure in their power. They will not need soldiers patrolling the streets. We will control ourselves". -- Howard Zinn, historian and author


----------



## qldfrog

McLovin said:


> Unlikely. They don't have enough to spare. If the DPRK was a genuine contender they wouldn't have spent 10 years trying to get a fairly simple bit of rocketry going. Those Taepodongs were supposed to be the game changer for them, but they've amounted to nothing and they still have NFI on how to strap something useful on the end of a missile. Self-evidently they are missing a Wernher Von Braun.



so some good news at last for the NK rocket scientists?


----------



## qldfrog

Gringotts Bank said:


> *http://www.news.com.au/finance/work...a/news-story/76bc26365c9cb3922d1ac088686a4b53*
> 
> "If those in charge of our society - politicians, corporate executives, and owners of press and television - can dominate our ideas, they will be secure in their power. They will not need soldiers patrolling the streets. We will control ourselves". -- Howard Zinn, historian and author



funny how I share this quote and scary how facts match theory when seen under that light.1984 should be , can I say should have been? universal mandatory reading.
Instead we got Koran or reality TV shows and our current world is the result.
I obviously bring in quite a few shortcuts there but..
Are we not now getting out of the original target of this thread? DS, up to you to bring us back in line.
Anyone thinking that Theresa May is preparing the way to can Brexit with the coming election?


----------



## DeepState

IMF Key risk scenario from a Trump Expansionary Fiscal Policy:

1. Spends more money to stimulate economy.
2. Mostly goes on consumption stuff, not on supply side enhancements.
3. Inflation gets lifted more than expected.
4. Interest rates rise faster than anticipated.
5. US Fiscal position deteriorates because of higher interest burden.
6. Long bonds rise as term premium normalises due to fiscal risks, USD climbs as a result
7. Finances of EM countries are stressed....

EM Growth suffers
EM loans get stressed....yadda yadda


----------



## DeepState

EDGE: Can you point out what yours is?

1. If I were to ask what your reason is to believe that you can take money out of the market, what would it be?

2. If I then asked, are you in a position to show proof of this, could you?

3. Whatever your response to 2. above, are you able to say who you are taking these returns from? [Not the name of the person, but a general set of market participants of some kind...like other tech traders or large retail investors and the like]


----------



## qldfrog

DeepState said:


> EDGE: Can you point out what yours is?
> 
> 1. If I were to ask what your reason is to believe that you can take money out of the market, what would it be?
> 
> 2. If I then asked, are you in a position to show proof of this, could you?
> 
> 3. Whatever your response to 2. above, are you able to say who you are taking these returns from? [Not the name of the person, but a general set of market participants of some kind...like other tech traders or large retail investors and the like]



Thanks DS, highly personal answer here:
1. I have no edge, and the market is a wild beast  not based on facts; I am an engineer by trade not a psychiatrist and i like numbers and facts; I have learnt my lessons..took a while and lost a lot
I started this year viewing my position on the market as an insurance premium: I am negative so invest some money that way: if a crash occurs, my real estate assets(Home, IP) and income will go down but counter balanced by gold/negative goes up shares
I also get a bit of cashflow in via some hybrids/bond dividends but i do not pretend having any edge there
2 I can show how I go screwed time and time again when i was "right" into macro conditions/events such as Trump victory and lost ultimately.
A recent example:
I put a negative (short $22 option on BHP) a little more than a month ago which expired -> 100% loss, yet I have no doubt that the billions lost here in qld after the cyclone , in Chile with the copper mine strike, and the fall of Iron Ore/Petrol will hit them hard...but people/market is slow
There is still no export of metcoal to talk of as of today, yet hardly anyone care...And BHP shares are still around 24AUD mark
So no edge.....Wish I had, and better timing.A lot of money out of the market now or moved in bonds/other investments


----------



## DeepState

As might have been expected, Trump's election by the disenfrachised white guy who used to have a good job and the 'Nasdaq Mums' (yes, it's a real demographic) has opened the chicken coop to the fox.

The latest tax proposals will just make the rich a whole lot richer.  The efforts to hose down ObamaCare was going to leave a lot of vulnerable people without care.  

Fortunately, the swamp, which has yet to be drained, is proving more difficult to overcome than he might have imagined.  NAFTA is now fine and China is not a currency manipulator. This puts the Border Adjustment Tax in jeopardy. ObamaCare stays in place for now.  The Laffer Curve arguments that the Federal Deficit coming from huge tax cuts will be repaid by an improbable boost to activity will be challenged by the various committees which review budget proposals.

Trump, if left to his own devices, would lead to more loss and more pain for many of those non-traditional Republican voters who voted for him.  The practices that have lead to much frustration that many Americans feel towards Washington may well be the defence that these people may well be grateful for when looking in the rear view mirror.  

It's incredible how these things twist around.


----------



## OmegaTrader

DeepState said:


> IMF Key risk scenario from a Trump Expansionary Fiscal Policy:
> 
> 1. Spends more money to stimulate economy.
> 2. Mostly goes on consumption stuff, not on supply side enhancements.
> 3. Inflation gets lifted more than expected.
> 4. Interest rates rise faster than anticipated.
> *5. US Fiscal position deteriorates because of higher interest burden.*
> 6. Long bonds rise as term premium normalises due to fiscal risks, USD climbs as a result
> 7. Finances of EM countries are stressed....
> 
> EM Growth suffers
> EM loans get stressed....yadda yadda




It is a fait accompli that debt will increase. The real long term question is how the deleveraging goes.

I remember reading a book from the 1980s/1990s stating this.. But the debt is still going and going.

Eventually someone will go in the sovereign debt space.


The options of tax, inflation printing and forgiving debt will all hurt immensely.

Organic growth by technology and reforms is a long term and slow process.

I don't know what the US expenditure is comprised of however

Looking at Australia Ask this simple question.

*What is the largest expense to the Australian budget?*

http://www.abc.net.au/news/2016-05-...ng/breakdown/2017/social-security-and-welfare 

1) Welfare
*
What is the largest subset of this expenditure??*

????????

Uninformed people say  aboriginals, dole bludgers.

NO

People don't always like this answer....

*Look for yourself to see the truth.*

The truth is justified by social conventions and people usually strategic methods to get the middle class welfare and the health benefits associated with that.

Aus has to be careful not to end up like other countries such as the US.


----------



## DeepState

OmegaTrader said:


> Eventually someone will go in the sovereign debt space.




Of the major nations: Japan is right up there, with France and Italy not too far behind.




OmegaTrader said:


> *What is the largest expense to the Australian budget?*
> 
> http://www.abc.net.au/news/2016-05-...ng/breakdown/2017/social-security-and-welfare
> 
> 1) Welfare
> *
> What is the largest subset of this expenditure??*
> 
> ????????
> 
> Uninformed people say  aboriginals, dole bludgers.
> 
> NO
> 
> People don't always like this answer....
> 
> *Look for yourself to see the truth.*
> 
> The truth is justified by social conventions and people usually strategic methods to get the middle class welfare and the health benefits associated with that.




Not quite sure what you are intimating, but here is the info:




With the Welfare part further expressed as:


----------



## OmegaTrader

DeepState said:


> Of the major nations: Japan is right up there, with France and Italy not too far behind.
> 
> 
> 
> 
> Not quite sure what you are intimating, but here is the info:
> 
> View attachment 70887
> 
> 
> With the Welfare part further expressed as:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> View attachment 70888




Largest = welfare




Largest= Assistance to the aged


Read between the lines.......


----------



## DeepState

OmegaTrader said:


> Largest = welfare
> 
> View attachment 70892
> 
> 
> Largest= Assistance to the aged
> 
> 
> Read between the lines.......




Yeah, so...is that some sort of shocking revelation that social welfare in the form of aged pensions and related support, together with healthcare (which is disproportionately utilised by the very young and very much by the old as well), happen to be the biggest budget items and projected to grow for quite some time, and rather rapidly (see below), as the Western populations age and dependency ratios rise?

It's like this everywhere, so I am having a hard time reading between the lines to find something which is shocking.

Is there widespread fraud of 52 year olds falsifying their ID to appear as 60 year olds to get a pension?

Are there many people getting themselves a third parent to boost household income?

Whereas it may appear that government is increasingly captured by big business and the rich, creating a plutarchy, perhaps government is increasingly held hostage by old timers in a form of of a politically organised geriatarchy - The Geezers and Wheezers' Party?  Instead of Robin Hood - stealing from the rich to give to the poor, or oligarchy - stealing from the poor and giving it to the rich...we have geriatarchy - stealing from the young to give to the old?  These bloody baby boomers...  and then defaulting on the next generation after propping up asset prices, leaving a wake of deflation and scorching the environment.  That's after they've departed from economy???

Clearly the lines are too narrowly spaced for me to read-between.  Would you mind actually stating what you have in mind?


----------



## qldfrog

DeepState said:


> Instead of Robin Hood - stealing from the rich to give to the poor, or oligarchy - stealing from the poor and giving it to the rich...we have geriatarchy - stealing from the young to give to the old?
> View attachment 70898



An interesting fact not mentioned much obviously on our PC medias: in France, the people voting the most for the FN (far right party) are the youths!
While retirees and public servants enjoy indecent income levels and live happily in their villas away from the public estates housing sipping Beaujolais while praising the merits of migrations and blaming the  evils of liberalism/FN/Trump/etc:
The below 30's have no jobs with 30% unemployment, no future, a national debt reaching for the roof and actually have to live with the great opportunities migration brings in the housing estates like crime, assaults and racism/sexism/discrimation.
I am afraid here as well we have this focus on the retirees sacrificing our future for short term electoral gain.Sad but common in the west and demography will not help


----------



## OmegaTrader

DeepState said:


> Yeah, so...is that some sort of shocking revelation that social welfare in the form of aged pensions and related support, together with healthcare (which is disproportionately utilised by the very young and very much by the old as well), happen to be the biggest budget items and projected to grow for quite some time, and rather rapidly (see below), as the Western populations age and dependency ratios rise?
> 
> It's like this everywhere, so I am having a hard time reading between the lines to find something which is shocking.
> 
> Is there widespread fraud of 52 year olds falsifying their ID to appear as 60 year olds to get a pension?
> 
> Are there many people getting themselves a third parent to boost household income?
> 
> Whereas it may appear that government is increasingly captured by big business and the rich, creating a plutarchy, perhaps government is increasingly held hostage by old timers in a form of of a politically organised geriatarchy - The Geezers and Wheezers' Party?  Instead of Robin Hood - stealing from the rich to give to the poor, or oligarchy - stealing from the poor and giving it to the rich...we have geriatarchy - stealing from the young to give to the old?  These bloody baby boomers...  and then defaulting on the next generation after propping up asset prices, leaving a wake of deflation and scorching the environment.  That's after they've departed from economy???
> 
> Clearly the lines are too narrowly spaced for me to read-between.  Would you mind actually stating what you have in mind?
> 
> View attachment 70898





The basis of the argument is the accumulation of sovereign debt in Australia. I don't deny that there is corruption and a sense of the boy's club mentality, this is pervasive throughout all organisations that get in power and dominate society. Especially the burden of tax falling to income because of silly bugger played by companies and the current taxation structure.

I will present facts and let you decide if the current state of affairs is sustainable given taxation expectation in Australia, it is impossible to argue with qualitative points and entrenched social beliefs.

I could give dozens and dozens of colloquial examples of the entrenched social and financial entitlement and how people legally and strategically use the system. But that would not convince. The steps by the government are small and in the right direction but not catching up with the costs.

Below are some of the benefits pensioners get

1)  A person can give away assets 5 years before pension age and pay no gift tax
2) A persons main house is exempt from an asset test. e a person can have a $1million, 2 million or even $20 million dollar house and still get a pension
3) A person can have $250,000 - $375,00 (couple) in assets and still get a full pension
4) The assets eventually will be passed tax free to children/ inheritance 
5) All capital gains on the main residence house will be tax free
6) Pensioners will get practically free medical which is at exorbitant prices due to the medical cartel monopoly 
7) A person can practically spend all of the retirement superannuation upon retirement age and then claim a pension

Please comment if you feel these points are incorrect and if not how/where the money will come from to continue to fund these benefits to people who have such levels of wealth.

We have to accept reality to change it. The current spending is unsustainable.

Back to qldfrog which explains part of the situation.



> I am afraid here as well we have this focus on the retirees sacrificing our future for short term electoral gain.Sad but common in the west and demography will not help


----------



## DeepState

OK. Thanks (to both OT and QF).  Just needed to know that you had in mind an 'unreasonable' favouring of the older generation as something of an unspoken, secret, injustice.  It's not a secret.  So why does it happen?

Your facts are not disputed from my perspective.  These are indeed the benefits which accrue to the pensioners.  Is it unreasonable?

There is no way for governments to fund the cost of healthcare and support for the aged if steps are not taken to correct the trajectory.  That's not a secret.  Health and welfare for the aged are always the biggest features of western federal budgets and the cause of the projections looking so dire.  It is accepted.  That is why I am puzzled that this issue, in these recent exchanges, are expressed as some sort of revelation that must not be said.  

So, what should happen in your view?  Should the elderly be starved? Forced to move in to cramped government hostels?  Put in to work-for-the-pension schemes? Made to walk up stairs instead of get pushed on wheel-chairs?

Is it your contention that those who are asset rich but income poor should be means-tested for pension entitlements?  I think that is a reasonable perspective.  However,  Australia has always placed a very high value on the sanctity of the personal home which is why it is exempt from tax and pension assets considerations.  It is a shared value of our society.  It is widely accepted that we should not have to move out of our homes when aged.  The young will eventually become the old.  So we all have an eye to our future as well when considering how to share the burden.  

The sanctity of the home is not unique to Australia.  Take a look at the US.  In Australia, our mortgages are not tax deductible, for a start.

If assets are moved to alternative arrangements to reduce income in an illegitimate way, that's an issue.  But this sort of thing goes on in all sorts of places.  The tax transfers happening within superannuation.  Negative gearing. Family trusts. Dividend imputation. Capital gains tax relief.....all involve transfers of some kind, particularly to the asset rich...and those who just retired tend to have the most assets on average.

So...what to do?

+ Encourage own savings.  Compulsory Superannuation 1980s via Paul Keating and Hawke.  Genius move.
+ Discourage pension reliance.  It you are on a full pension, it's not a great life.  Escalate below inflation to allow structural adjustment.
+ Delay retirement age
+ Introduce some element of asset testing
+ Limit public health care services to bare essentials and encourage private healthcare and insurance
+...

Notice how many of these are already in place or in train.


----------



## OmegaTrader

DeepState said:


> OK. Thanks (to both OT and QF).  Just needed to know that you had in mind an 'unreasonable' favouring of the older generation as something of an unspoken, secret, injustice.  It's not a secret.  So why does it happen?
> 
> Your facts are not disputed from my perspective.  These are indeed the benefits which accrue to the pensioners.  Is it unreasonable?
> 
> There is no way for governments to fund the cost of healthcare and support for the aged if steps are not taken to correct the trajectory.  That's not a secret.  Health and welfare for the aged are always the biggest features of western federal budgets and the cause of the projections looking so dire.  It is accepted.  That is why I am puzzled that this issue, in these recent exchanges, are expressed as some sort of revelation that must not be said.
> 
> So, what should happen in your view?  Should the elderly be starved? Forced to move in to cramped government hostels?  Put in to work-for-the-pension schemes? Made to walk up stairs instead of get pushed on wheel-chairs?
> 
> Is it your contention that those who are asset rich but income poor should be means-tested for pension entitlements?  I think that is a reasonable perspective.  However,  Australia has always placed a very high value on the sanctity of the personal home which is why it is exempt from tax and pension assets considerations.  It is a shared value of our society.  It is widely accepted that we should not have to move out of our homes when aged.  The young will eventually become the old.  So we all have an eye to our future as well when considering how to share the burden.
> 
> The sanctity of the home is not unique to Australia.  Take a look at the US.  In Australia, our mortgages are not tax deductible, for a start.
> 
> If assets are moved to alternative arrangements to reduce income in an illegitimate way, that's an issue.  But this sort of thing goes on in all sorts of places.  The tax transfers happening within superannuation.  Negative gearing. Family trusts. Dividend imputation. Capital gains tax relief.....all involve transfers of some kind, particularly to the asset rich...and those who just retired tend to have the most assets on average.
> 
> So...what to do?
> 
> + Encourage own savings.  Compulsory Superannuation 1980s via Paul Keating and Hawke.  Genius move.
> + Discourage pension reliance.  It you are on a full pension, it's not a great life.  Escalate below inflation to allow structural adjustment.
> + Delay retirement age
> + Introduce some element of asset testing
> + Limit public health care services to bare essentials and encourage private healthcare and insurance
> +...
> 
> Notice how many of these are already in place or in train.




Most people in the street do not understand the issue. The budget issue is not politicians or labor or liberal or this or that. It is middle class welfare and people getting money they do not need. Boom time cannot occur perpetually.

Almost every person I talk to immediately attacks me on a personal level. They almost always use personal attacks. I will recall a conversation I had recently, verbatim of course. The mindset is pervasive amongst almost all generations young and old from my experience in talking about the issue.

Other person: Oh the budget is so bad -it is the government spending

Me: I agree the budget is getting worse. Do you realise what the largest expenditure?

Other person: Welfare and all of these bludgers and politicians. 

Me: Yes welfare is the largest expenditure. Do you realise what the largest welfare expenditure is ?

Other person: Young people and the unemployed bludgers

Me: No the largest expense is pensioners

Other person: Waits... thinks about it. But they have worked all their life

Me: Standard point about main residence loop holes,gifting, tax concession and savings

Other person: Your a terrible person etc etc poor old people are struggling. Continued personal attacks.

I am glad you agree with some of the points I am making.

No one wants to tackle the issue that is destroying the budget. Middle class welfare.
The issue with gov spending is hardly ever income, most of the time it is spending.

Unfortunately even you have resorted to these qualitative arguments which I cannot argue against.



> So, what should happen in your view?  Should the elderly be starved? Forced to move in to cramped government hostels?  Put in to work-for-the-pension schemes? Made to walk up stairs instead of get pushed on wheel-chairs?




The issue is about Middle class welfare, not people who have suffered a bad life, that is the outlier in Australia. A person with wealth should not be getting benefits full stop.

Legal tax transfers do not make it sustainable or reasonable. I reject that argument because it is legal and I can do it then therefore I should. 

1) main residence not exempt or value limited
2) Stop gifting / tax gifting
3) Main residence not tax exempt
4) Super can't all be spent and then pension claimed
5) Wealth should be investigated to stop money disappearing before pension age
6) Assets limited further
7) Introduction of competition  and regulation to help market failure and gouging  in the medical sector


Remember the pension is a benefit meant for people who are struggling not people who have strategically placed the money by spending, gifting or in the main residence. People should support themselves not be having decent estates given tax free to their children.

If it is not stopped the buck will keep getting passed. We have to live in reality. Later generations will get hit because of the greed on people who already have money.

I am really disappointed in how selfish people are being by legally gaming the government.


----------



## DeepState

OmegaTrader said:


> Most people in the street do not understand the issue. The budget issue is not politicians or labor or liberal or this or that. It is middle class welfare and people getting money they do not need. Boom time cannot occur perpetually.




I see that the perspective is that pensions are to be used as a societal safety net only.




OmegaTrader said:


> No one wants to tackle the issue that is destroying the budget. Middle class welfare.
> The issue with gov spending is hardly ever income, most of the time it is spending.




This is because the tax base is shrinking and the parts of society which require benefits are increasing.  This is leading to a structural budget deficit acceleration.  It gets worse just by standing still on the legislative front.  What is happening to cause this is not some structural increase in the real value of pensions.  It is primarily due to demographics.

Our budget is hardly being destroyed.  The worst situation at the moment is the loss of the AAA rating.  Hardly diabolical.  Australia has many strategic 'assets' available to it.  Bankruptcy of the nation is just hyperbole.




OmegaTrader said:


> Unfortunately even you have resorted to these qualitative arguments which I cannot argue against.




I am primarily a numbers guy and can read the balance sheet of the nation as you can.  Nonetheless, I am aware that the numbers are a reflection of decisions taken and help to inform decisions.  Those decisions reflect values.  Your values, in relation to pensions is to see them as a safety net only, reserved for those most in need.

Australia and many other parts of the world see pensions as safety nets but also the benefits of societal dividends.  We can have a situation in China where your safety net is your kids and that's about it.  Or, on the other hand, Finland, where you will receive a universal income no questions asked, no matter how much you have.  It is a choice and it reflects societal values.

I'd like to be between China and Finland.  Closer to Finland.



OmegaTrader said:


> The issue is about Middle class welfare, not people who have suffered a bad life, that is the outlier in Australia. A person with wealth should not be getting benefits full stop.




A person with wealth probably paid a heck of a lot of income tax to accumulate that wealth.  However, we are at the juncture of addressing dire needs on one hand and provision of a societal dividend.  My perspective is that both ends are reasonable, but a societal choice based on its values.



OmegaTrader said:


> Legal tax transfers do not make it sustainable or reasonable. I reject that argument because it is legal and I can do it then therefore I should.




My point was to highlight that transfers happen all over the place.  There are always niches which are exploited.  This is why the most reliable taxes are those on consumption and land.  In this way, pensioners with extra assets or income are paying more tax than than others in their age cohort who are not in the same position.  Land tax and council rates on a $2m property is not to be sneezed at vs a small unit.

I do not condone tax evasion, but have zero problem with tax minimisation within the law.  Tax is not a principals based thing.  It is a formula.  In many regardss it is like determining the rules to manage the international order where all sorts of values come together to decide major international issues.  Rules based is the way.  "Even though the rules say that OT should pay $150k in tax this year, I feel that OT should pay $200k in tax this year"....no.




OmegaTrader said:


> Remember the pension is a benefit meant for people who are struggling not people who have strategically placed the money by spending, gifting or in the main residence. People should support themselves not be having decent estates given tax free to their children.




That statement reflects your values....it is not an error to pay a pension to anyone.




OmegaTrader said:


> If it is not stopped the buck will keep getting passed. We have to live in reality. Later generations will get hit because of the greed on people who already have money.



Japan, with Gross Debt to GDP of 220%+ and a rapidly shrinking population, has an interest rate of zero.  What cost would you be referring to?  Government debt is very different to corporate debt.


----------



## OmegaTrader

DeepState said:


> I see that the perspective is that pensions are to be used as a societal safety net only.
> 
> 
> 
> 
> This is because the tax base is shrinking and the parts of society which require benefits are increasing.  This is leading to a structural budget deficit acceleration.  It gets worse just by standing still on the legislative front.  What is happening to cause this is not some structural increase in the real value of pensions.  It is primarily due to demographics.
> 
> Our budget is hardly being destroyed.  The worst situation at the moment is the loss of the AAA rating.  Hardly diabolical.  Australia has many strategic 'assets' available to it.  Bankruptcy of the nation is just hyperbole.
> 
> 
> 
> 
> I am primarily a numbers guy and can read the balance sheet of the nation as you can.  Nonetheless, I am aware that the numbers are a reflection of decisions taken and help to inform decisions.  Those decisions reflect values.  Your values, in relation to pensions is to see them as a safety net only, reserved for those most in need.
> 
> Australia and many other parts of the world see pensions as safety nets but also the benefits of societal dividends.  We can have a situation in China where your safety net is your kids and that's about it.  Or, on the other hand, Finland, where you will receive a universal income no questions asked, no matter how much you have.  It is a choice and it reflects societal values.
> 
> 
> 
> A person with wealth probably paid a heck of a lot of income tax to accumulate that wealth.  However, we are at the juncture of addressing dire needs on one hand and provision of a societal dividend.  My perspective is that both ends are reasonable, but a societal choice based on its values.
> 
> 
> 
> My point was to highlight that transfers happen all over the place.  There are always niches which are exploited.  This is why the most reliable taxes are those on consumption and land.  I do not condone tax evasion, but have zero problem with tax minimisation within the law.
> 
> 
> 
> 
> That statement reflects your values....it is not an error to pay a pension to anyone.
> 
> 
> 
> Japan, with Gross Debt to GDP of 220%+ and a rapidly shrinking population, has an interest rate of zero.  What cost would you be referring to?




One final hooray before I stop ranting.

Demographics is only part of the picture, expectations of entitlement are larger than expectations of taxation. We have immigration to help solve the population growth gap unlike japan etc.


You can't have both. This is not only pensions but family benefits as well. 

Morally it is bankrupt to say along as it is within the law.  That is why the budget is stuffed, hammered by overseas legal company loopholes and capital gains and then sliced on the other side by legal welfare loopholes. Boom time is over, organic growth cannot keep pace.

In 10 years time at this rate the debt will continue to be exponential(growth).

The decisions make keep people happy in the short but they are not sustainable in the long term.

If they are not sustainable then they need to be changed.

I do not have faith.


----------



## DeepState

OmegaTrader said:


> One final hooray before I stop ranting.
> 
> Demographics is only part of the picture, expectations of entitlement are larger than expectations of taxation. We have immigration to help solve the population growth gap unlike japan etc.
> 
> 
> You can't have both. This is not only pensions but family benefits as well.
> 
> Morally it is bankrupt to say along as it is within the law.  That is why the budget is stuffed, hammered by overseas legal company loopholes and capital gains and then sliced on the other side by legal welfare loopholes. Boom time is over, organic growth cannot keep pace.
> 
> In 10 years time at this rate the debt will continue to be exponential(growth).
> 
> The decisions make keep people happy in the short but they are not sustainable in the long term.
> 
> If they are not sustainable then they need to be changed.
> 
> I do not have faith.



I don't see you as ranting.  This is an informed position.

I think the expectations of entitlement are being wound back.  Just today, we have another clamp down on Centrelink.  Earlier, we saw cuts to welfare post election.  Superannuation savings are enormous and continue to grow.  These are expected to reduce the strain on the aged pension.

I think it is very healthy that matters as you have raised are actively debated.  I think your position is reasonable.  The assets test, I think, is a hole.

For government debt, what matters is not 10 years, but 50-100 years or more.  If it can roll the debt to a time when it can pay it down, like when the dependency ratios flatten and the population is larger (which is not even in 50 years), things get better again as the structural elements balance out.  Yes, it will be easier if the tax burden is lower.  Once again a Generational Transfer values decision and something the government explicitly considers.

I am intrigued by your perspective on the morality of tax.  Nothing stops you from paying more to the government than is requested.  Particularly given you feel that the income side is not being addressed and it is something that we should morally address on behalf of future generations.  Extra tax now will help future generations....please give generously!  Together with the morality of expenditure, you seem to consider the federal budget as a moral issue.  Maybe it is within a single family....move it to the levels of councils, states, nations...and that gets murky when the various shades of morality decide that their view is the only moral one.

I think that governments and democracy are not set up well to tackle long range problems that require near term sacrifice.  It is an issue.  What we need is a generation of Keating, Kennett and Lee Kwan Yew coming through in succession for the next 20 years to show strong leadership with long range perspectives.


----------



## OmegaTrader

DeepState said:


> I am intrigued by your perspective on the morality of tax.  Nothing stops you from paying more to the government than is requested.  Particularly given you feel that the income side is not being addressed and it is something that we should morally address on behalf of future generations.  Extra tax now will help future generations....please give generously!  .




I think we all know deep down what is right and wrong. 

ahahha
Can you give me a job reference, then I can start donating !!!


----------



## DeepState

OmegaTrader said:


> I think we all know deep down what is right and wrong.
> 
> ahahha
> Can you give me a job reference, then I can start donating !!!





I know that the concept of "know" is very tenuous indeed.  What is 'right' is also very tenuous.  You have your morals.  Good.  Do that as long is at doesn't cross mine.

From your closing comment, I get the impression that you might be at the earlier part of your career and understandably looking for a reduced tax impost and some respite post-baby boom wake.  Your generation suffers the most.  You are totally cactus, actually.  

You need more than a job reference.  You need a Cougar.  I won't question the morality of that pathway.


----------



## DeepState

RBA Gov Lowe made a speech today about the housing market.  

The consensus opinion on housing goes as follows:
- Borrowed too much
- Houses too expensive
- Going to break our banks
- Got to stop this

Lowe offered a different view:
- House prices aren't doing anything particularly odd.
- Supply will increase and help level out prices.
- Increased level of borrowing are just choices
- These choices don't look like they are unstable for the most part.  They stick.
- Much of the increase in debt levels is concentrated in the hands of the wealthy, who can hack it.  The average figures make things look much worse than they are
- APRA bank stress tests indicate that the banking system will survive very bad property markets.  Solvency of the banks is not an issue.

Basically, housing is not seen to be a really serious risk to the economy.  It's hard to know what the right price is for houses and the RBA has no targets in mind to say that Price to Household Income should be X.

Of greater concern for Lowe (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending if interest rates should rise.

All up, this speech made it clear that the RBA will not attempt to raise rates to fend off asset inflation.  They don't even see it as a problem.  They have indicated that, if they raise rates, it will be very very gentle because consumers are now far more interest rate sensitive than before.  

As housing supply grows and various things happen to slow the foreign demand, acceleration of borrowing will become more limited and these things balance out.

Overall, this was a dovish speech.  It puts talk of remediation of loan growth via interest rate hikes into perspective...and the bottom drawer for now.


----------



## Skate

DeepState said:


> RBA Gov Lowe made a speech today about the housing market.
> 
> The consensus opinion on housing goes as follows:
> - Borrowed too much
> - Houses too expensive
> - Going to break our banks
> - Got to stop this
> 
> Lowe offered a different view:
> - House prices aren't doing anything particularly odd.
> - Supply will increase and help level out prices.
> - Increased level of borrowing are just choices
> - These choices don't look like they are unstable for the most part.  They stick.
> - Much of the increase in debt levels is concentrated in the hands of the wealthy, who can hack it.  The average figures make things look much worse than they are
> - APRA bank stress tests indicate that the banking system will survive very bad property markets.  Solvency of the banks is not an issue.
> 
> Basically, housing is not seen to be a really serious risk to the economy.  It's hard to know what the right price is for houses and the RBA has no targets in mind to say that Price to Household Income should be X.
> 
> Of greater concern for Lowe (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending if interest rates should rise.
> 
> All up, this speech made it clear that the RBA will not attempt to raise rates to fend off asset inflation.  They don't even see it as a problem.  They have indicated that, if they raise rates, it will be very very gentle because consumers are now far more interest rate sensitive than before.
> 
> As housing supply grows and various things happen to slow the foreign demand, acceleration of borrowing will become more limited and these things balance out.
> 
> Overall, this was a dovish speech.  It puts talk of remediation of loan growth via interest rate hikes into perspective...and the bottom drawer for now.




Hi DeepState

You nailed his speech perfectly -- but -- I would change one of your your sentences slightly to reflect Lowe's comments more accurately:

[Of greater concern for] *Lowe's major concern* *(who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending *[if] *when interest rates* [should] *rise.*


----------



## skc

DeepState said:


> Of greater concern for Lowe (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending if interest rates should rise.




Why do central banks around the world care about inflation? Is it because they want to make sure that the cost of living is being kept under control for the general public?

If that is the case, why doesn't/shouldn't house price form part of input to the calculation of inflation? Being unable to afford a house is as bad as being unable to afford food or petrol or electricity.


----------



## Trembling Hand

Lowe is sending a signal to the Government that the housing affordability problem is their problem, not his. He is disowning the need to be the fixer and placing it very fairly at the foot of the people who frigged it up in the first place...  neg gear, discount capital gains, no capital gains, low supply, first home owners subsidy etc

Smart


----------



## craft

skc said:


> Why do central banks around the world care about inflation? Is it because they want to make sure that the cost of living is being kept under control for the general public?
> 
> If that is the case, why doesn't/shouldn't house price form part of input to the calculation of inflation? Being unable to afford a house is as bad as being unable to afford food or petrol or electricity.




The cost of consuming housing in the form of rent, maintenance etc is included in the CPI to something like the tune of 20%+ of the basket. They don't care about house prices as part of Inflation targeting because a house is treated as a stock(asset) not a flow(consumption).  As far as the Inflation targeting is concerned it is ambivalent to what level the rent / buy cost benefit analysis takes prices of the asset to clear the market.

It's only as/if house prices impact on rents that that the central bank will feel the need to get involved with it's interest rate tools - until then increases in the house to rent ratio is somebody else's problem and I bet the bank hopes somebody else does fix it before they have to and hopefully in a way that avoids them having to get the mop out.

There is a train of thought that says the market is pretty bad at pricing assets sometimes and that asset inflation targeting should also exist to improve economic stability (I guess sort of what you are implying)  - For all its faults and bubbles I hope it stays the way it is with the central banks role not to target asset levels but to mop up asset pricing busts when they occur with lender of last resort liquidity, because what's the alternative? Politicians/bureaucrats  setting asset prices.


----------



## DeepState

Skate said:


> Hi DeepState
> 
> You nailed his speech perfectly -- but -- I would change one of your your sentences slightly to reflect Lowe's comments more accurately:
> 
> [Of greater concern for] *Lowe's major concern* *(who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending *[if] *when interest rates* [should] *rise.*



Thank you for improving the accuracy of this statement, Skate. Cheers.


----------



## DeepState

skc said:


> Why do central banks around the world care about inflation? Is it because they want to make sure that the cost of living is being kept under control for the general public?
> 
> If that is the case, why doesn't/shouldn't house price form part of input to the calculation of inflation? Being unable to afford a house is as bad as being unable to afford food or petrol or electricity.



I have come across this argument twice this week and it can't be a coincidence.  I tend to reside within Craft's statements.  However, some very smart people (you being one) have suggested otherwise.  Some monetary thinkers line up very strongly with you.  Austrians make the same argument.


----------



## craft

The blue line is corresponding quarter increase of the housing component of CPI.

The way they calculate housing costs for CPI excludes changes in land value, existing house price changes and mortgage interest. But it does include price changes to build/renovate or rent as per the relevant populations.

The orange line is the selected living cost index for employee housing costs which pick up costs more like how you might think about home owners costs in real life with mortgage interest on both land and existing dwelling purchase being the measure of consumption cost rather than the change in price to buy new or renovate. Rent is still the cost for the  non-owner population.  Housing costs are much more sensitive to mortgage interest rates on this index - but its not much use to the RBA in setting interest rates for consumption because its reflexive to interest rates.


----------



## DeepState

High rise appt approvals down a whopping 50% m/m in latest Aust Housing approvals release.


----------



## Gringotts Bank

DeepState said:


> High rise appt approvals down a whopping 50% m/m in latest Aust Housing approvals release.




50%?  Must be enormous oversupply.  If Chinese investors start selling it's going to create a nasty bear market.


----------



## skc

DeepState said:


> I have come across this argument twice this week and it can't be a coincidence.  I tend to reside within Craft's statements.  However, some very smart people (you being one) have suggested otherwise.  Some monetary thinkers line up very strongly with you.  Austrians make the same argument.




Perhaps it is a coincidence. It's not my original thought... I read something about it and thought it had some merit. Craft's explanation that CPI already has a component for housing expense shows how uninformed I am. And base on this new information (to me), I don't think I will advocate the inclusion of house price in CPI.

I guess there is no inherent right answer in how CPI should be determined... or indeed what should be a central bank's mandate. Should the mandate include the avoidance of bubbles? My guess is it shouldn't, for the simple reason that they wouldn't do a particular good job at it.


----------



## DeepState

Does the strong re-election of Rouhani change the politics of the M-E re:Israel and oil?


----------



## Value Hunter

DeepState said:


> Certain monopolies are regulated.  Their profitability is set with reference to things like CAPM.  They provide a vital service to the community and the government is concerned that private wealth does not extract an excessive rent from doing so.
> 
> Should finance be such an industry?  In some ways the banks are subject to this.  By increasing the capital requirements and setting capital adequacy factors to different kinds of loans and assets, their profitability and riskiness is contained.  In the pre-GFC period, the degree of leverage permitted was clearly too much.  Today, that figure is vastly lower.  However, that is only one kind of leverage and many more types can be created which circumvent this.
> 
> One way to do so is via derivatives whose treatment is varied.  The GFC was made much more complex due to the way that the entities were related...via a web of synthetic CDS and other things.  One way to protect against that is to treat OTC derivatives in a similar way to ET derivatives...keep collateral and have central clearing house.  And there are moves in that direction.
> 
> If something becomes too big to fail, all sorts of weird incentives take place which puts everyone at greater risk but makes the people doing it very rich.  The antidote is... to shrink things so that nothing is to big to fail.  There is still much work to be done here.  The implicit cost to society for bearing this risk has been estimated and the idea is to either pass it back to the bank or shrink the bank such that the wider society is not bearing the cost for keeping the thing running.
> 
> There's heaps more stuff, but hopefully you see that there have been significant steps towards addressing the matters you have raised but keeping the industry very much a capitalist driven one albeit with more safety rails now than before.
> 
> I think one matter which has not been raised is that of regulatory arbitrage.  Bottom line, finance pays very well and it attracts very clever people who have strong incentives to make money.  They outgun the regulators every day of the week.  It's almost like trying to regulate the internet or tech companies.  Good luck.
> 
> We do need much stronger governance at banks.  We do need excessive compensation to be reigned in.  We need fund managers to hold management heavily accountable rather than just sell the stock.  We need the fund manager clients to actually invest in a way which rewards this.  There is a whole chain and society gets what it gives.
> 
> Are the profits to finance out of step with the actual production?  I would argue that farmers play a very important role.  Without food, we die.  Yet they mostly get paid poorly.  Engineers build bridges and no movement of goods could occur without transport....paid like crap.  Financiers create loans and securities, and trade them...some get paid boatloads.  Fair?
> 
> Doesn't seem like it on face value until you ask yourself whether this is some closed shop union.  Absolutely not.  Entry into very high paying jobs in finance, management consulting etc. is heavily democratised.  No one cares if you are half Russian/Chinese (it's actually a positive in quant) with green eyes, etc, and 4'8" with parents from Tejekastan. If you are smart, work your arse off, can find a way to get stuff done in chaos...you will be hired and your will be promoted rapidly if you can make the firm a boat load of money....or set up your own firm.  Period.  The old school tie is long gone.  You'd think that this would eventually equilibrate the value chain to what it should be.
> 
> To set up a fund manager takes virtually no capital.  I can build one in a week.  So can heaps of others.  Yet the fees remain high because people are prepared to pay it.  No one forces them to.  Why do investment bankers get paid tens of millions for advisory fees in M&A, most of which actually destroy value?
> 
> The capitalist system is supposed to figure out who gets what on the basis of who has the best bargaining power.  So, if you think that the spoils to finance are out of step, we should ask why people pay for the service at that level, because it most definitely is not some form of unregulated monopoly.




Deepstate we all know that funds management is not a "free market". The fact that huge amounts compulsory superannuation flow into the funds management sector skews things greatly. 

People who don't have the capital or knack to set up and operate a self managed super fund will be forced to use an industry or retail fund and get gouged on fees (at least on a look-through basis). 

Also some employers even force employees to invest in a certain super fund because of an enterprise bargaining agreement with the union or some other such agreement (e.g. Bunnings employees must have their super payments paid to REST super). Yes technically the employee could then after rollover the money constantly to a super fund of their choice but that is a headache that many people with modest balances do not want to go through. 

This is in addition to the fact that financial repression caused by the RBA and the government and banks all working hand in hand pressures people to invest in riskier assets when they lack the knowledge or correct attitude to do so. 

Real term deposit (or savings account) rates after deducting inflation and a tax rate that a typical investor would pay are arguably negative. So while technically these people do have a "choice" the choice is between a small guaranteed loss or investing in riskier assets in the hope of earning a return. Arguably under a more "free market" system with a hard currency, higher interest rates and lower tax rates, real after tax interest rates would likely be higher and people would be able to earn a real return by investing in term deposits and would not need to invest in stocks or property, etc.


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## craft

Value Hunter said:


> Real term deposit (or savings account) rates after deducting inflation and a tax rate that a typical investor would pay are arguably negative. So while technically these people do have a "choice" the choice is between a small guaranteed loss or investing in riskier assets in the hope of earning a return. Arguably under a more "free market" system with a hard currency, higher interest rates and lower tax rates, real after tax interest rates would likely be higher and people would be able to earn a real return by investing in term deposits and would not need to invest in stocks or property, etc.




Why should their be a positive risk free rate? Is there a moral or economic reason that money should make more money for nothing? If anything there are good fairness and resource sustainability reasons why it shouldn't.


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## Value Hunter

Yes Craft there are moral and economic reasons that money should make money "for nothing". The reason being is that it is not actually risk free and it is not doing nothing, it is lending the money to the bank. If you put your cash in a storage vault (i.e. doing nothing) you earn no return/interest. If you lend your money to the bank a.k.a. savings account then there are always the risks of: bank failures, bail in's, sovereign defaults, capital controls, currency devaluations, changes to the tax system, changes to government guarantees on deposits, etc. In addition to this a positive real interest rate encourages higher savings rates in the economy. If people were rewarded for saving they would probably do it more. Are you saying that an economy with a high savings rate is in no way superior to an economy with a low savings rate? In addition to this do people not deserve a reward for delaying or foregoing consumption? Which is not an easy thing to do. Without enough people willing to delay consumption our current capitalist system would not exist.

I have had the chance to travel to countries in South America where cultural attitudes are different and people and many businesses even for the most part live for the day and do not worry about the future or invest in the future. Let me tell you it ain't good for the economy or society in general.

In addition high savings rates among the local population means that local banks need less offshore/wholesale funding (at least as a percentage of their funding requirements). This is good for banking system stability.

Another argument is that if savings accounts gave decent returns less people would be property speculators and house prices might be somewhat lower/more affordable then they are today. Also stock prices would be lower, meaning that long-term investors like you and I could buy shares cheaper.


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## Value Hunter

Besides you could argue (leaving aside for a minute the argument that in the current system loans create deposits) that *in a* *healthy/ideal financial system* when you deposit (i.e. lend money to) money in the bank that the bank will then on lend that money for mostly productive purposes (I realize the reality is currently different in our modern fractional reserve casino system) thus enriching society in aggregate.

However 90% plus of residential property investment is just people buying existing properties which adds nothing to housing stock or to the productive capacity of the nation. The same for the stock market where 90% plus of share market investments are to buy shares on the secondary market as opposed to participating in IPOs or capital raisings. While the money does provide liquidity to the market, most of the money adds nothing to the productive capacity of society. Therefore I flip your premise on its head and argue that the people "doing nothing" are the stock market and property market investors. The people "doing something" are the savers (owners of savings accounts and term deposits) and small business owners.


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## craft

Value Hunter said:


> Yes Craft there are moral and economic reasons that money should make money "for nothing". The reason being is that it is not actually risk free and it is not doing nothing, it is lending the money to the bank. If you put your cash in a storage vault (i.e. doing nothing) you earn no return/interest. If you lend your money to the bank a.k.a. savings account then there are always the risks of: bank failures, bail in's, sovereign defaults, capital controls, currency devaluations, changes to the tax system, changes to government guarantees on deposits, etc. In addition to this a positive real interest rate encourages higher savings rates in the economy. If people were rewarded for saving they would probably do it more. Are you saying that an economy with a high savings rate is in no way superior to an economy with a low savings rate? In addition to this do people not deserve a reward for delaying or foregoing consumption? Which is not an easy thing to do. Without enough people willing to delay consumption our current capitalist system would not exist.
> 
> I have had the chance to travel to countries in South America where cultural attitudes are different and people and many businesses even for the most part live for the day and do not worry about the future or invest in the future. Let me tell you it ain't good for the economy or society in general.
> 
> In addition high savings rates among the local population means that local banks need less offshore/wholesale funding (at least as a percentage of their funding requirements). This is good for banking system stability.
> 
> Another argument is that if savings accounts gave decent returns less people would be property speculators and house prices might be somewhat lower/more affordable then they are today. Also stock prices would be lower, meaning that long-term investors like you and I could buy shares cheaper.



An economy needs Investment. Savings just facilitates those without capital being able to make investments and those with money but without ideas or risk appetite, to be able to transfer their money through an intermediary.  I don’t think this latter group really deserves much return especially if the deposits are gov’t guaranteed.

The economy should be more productive and probably more equitable the more returns are attributable to how money is used in the future rather than money for nothing via a risk free rate on money that has been accumulated in the past.


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## Value Hunter

Craft you actually did not fully address my points. Firstly deposits are only government guaranteed up to $250,000 so those with many millions of dollars in savings accounts (there is only so many banks to spread the money to) will not be guaranteed. For example high net worth individuals and companies of a certain size fall into this category.

Secondly there is no guarantee that in a financial crisis the government will be able to honour that promise without destroying the value of the currency. The guarantee is more of a confidence trick than a mathematically viable proposition. If the big four banks in Australia rack up huge record losses the size of the government balance sheet is insufficient to absorb those losses without extreme money printing by the RBA or other emergency measures.

Do you think that the majority of stock market investors who just buy shares on the secondary market or the majority of property investors who buy existing houses are being more productive and are entitled to a higher return than savers?

Please stop using the term risk free rate. Despite it being a commonly used term in finance, there is no such thing as a risk free investment.

Also does not the act of delaying consumption deserve a reward in and of itself separate to the risk factor?

For example in todays environment you could argue for a 5 year term deposit 7% would be fair compensation. For a middle income earner lets say 2% would go to tax leaving 5%. 3% (a reasonable projection) would be to cover inflation. That would leave a 2% real return as a reward to compensate for the combination of delayed gratification and the small risk factor involved.


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## craft

Value Hunter said:


> Also does not the act of delaying consumption deserve a reward in and of itself separate to the risk factor?



 In my opinion, No(inflation compensation at most) . As for addressing the rest to your liking, I can't be bothered having the debate.


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## Value Hunter

I thought my arguments were well articulated and reasonable, but i can understand if you don't wish to address them because of the time and effort it would involve.


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## craft

Value Hunter said:


> I thought my arguments were well articulated and reasonable, but i can understand if you don't wish to address them because of the time and effort it would involve.



Nothing wrong with your posts - I have moved a bit out there compared to conventional thinking - Don't really want to go to the efforts that would be required to fully explain where I'm at. Maybe I would discuss further if I saw some posts that sort of resinated but not interested in a debate.


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## Value Hunter

I would be interested to eventually hear from Deepstate about my previous posts explaining that fund managers operate in a market with a captive audience and that is a major reason they can charge high fees.


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## DeepState

Value Hunter said:


> I would be interested to eventually hear from Deepstate about my previous posts explaining that fund managers operate in a market with a captive audience and that is a major reason they can charge high fees.



Fund managers exist to manage funds.  Were there no funds to manage, there would not be fund managers.

Compulsory super does create a savings pool.  Given the task of investment may not be the way many people want to spend their time, it makes sense to outsource.  The vast superannuation funds are essentially conduits to make this as easy as possible.  There are a host of others competing heavily for similar things in the SMSF and non-super arena.  These entities allow self management of assets or various degrees of outsourcing.  At each step, fees are paid.

To the extent that legislation creates the savings pool, a captive audience is created.  More fees than would otherwise have flowed to money managers are transferred.  True.

Money managers compete heavily.  It is an industry with very low barriers to entry and many boutiques are started with two guys in a room with one Bloomberg between them.  Further, as is evidenced by the strong growth of ETFs, where fees on vanilla product are measured in a handful of bps, price competition is healthy and alive.  If an equity manager charges fees that are too high, there are hundreds more that someone can choose from, including index funds.

A captive audience is not the reason why some fund managers charge high fees.  The first hedge funds were 2/20 arrangements in the US (by Aussie Alfred Winslow Jones) where there was no compulsory savings.  The first Vanguard fee for their mutual fund was.....

With the increased demand for fund manager services came a huge supply of them.  It is a functioning market and not a cartel arrangement.  Manager fees have come down a long way as scale has increased and the industry is actually more concentrated with the big supers and funds than for fundies.  The cartel is at the super fund level.  So, I suppose you are going to say that the fees charged at the level of major super funds are too high....and I would have some difficulty arguing against it.  In my view, there are conflicts of incentives in there which move towards the direction of creating expensive complexity.


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## DeepState

craft said:


> Why should their be a positive risk free rate? Is there a moral or economic reason that money should make more money for nothing? If anything there are good fairness and resource sustainability reasons why it shouldn't.



There is no reason the cash rate should be anything in particular. It is an instrument of policy. Certainly, the level at which it is set does have consequences and people can make their own moral judgements about the fairness of a 2% interest rate vs a 1.5% rate.  Those same arguments should extend to the moral value of the S&P ASX trading at 5700 vs 3500.  In a break from the past, where I believed in the primacy of markets, these questions are reasonable to ask and the outcomes are somewhat the results of societal choices made by leaders entrusted to make these calls....


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## luutzu

DeepState said:


> There is no reason the cash rate should be anything in particular. It is an instrument of policy. Certainly, the level at which it is set does have consequences and people can make their own moral judgements about the fairness of a 2% interest rate vs a 1.5% rate.  Those same arguments should extend to the moral value of the S&P ASX trading at 5700 vs 3500.  In a break from the past, where I believed in the primacy of markets, these questions are reasonable to ask and the outcomes are somewhat the results of societal choices made by leaders entrusted to make these calls....




Wait, interest rate on money is just a moral issue now? There's no reason why cash rate should be anything in particular?

I would have thought that when a person or a business borrow other people's money to benefit themselves, they ought to pay a risk-free rate+.

It's just common sense that when you borrow money, it shouldn't cost you nothing.

Why? Because believe it or not, most people work hard to earn their money and often, those with most of their savings in cash or a long term deposit or govt bonds does so because they have very little other assets or in a situation where they cannot afford any risk of loss.

To take people's savings for practically nothing is legalised theft. To take it from the poor and the elderly... Instead of seeing there's something morally corrupt about that, we're justifying why it must be anything else but? 

I guess the poor and the elderly weren't doing much good with their savings anyway. I mean, besides paying the ever increasing cost of living and stuff.

But that's the poor's problem so who cares.

What economic implication does low interest have? Driving up property prices; driving up asset prices; giving cheap money to aspiring empire builders to play with... I guess these tend to end well for the economy, eventually.


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## ducati916

Chaps,

The fundamental problem is that economic theory today has seemingly forgotten what capital actually is. The abstraction of money is so prevalent, not that economists seem to understand money either, that capital and its function has been lost.

Take the mind experiment of Crusoe on the island alone. He has a bright idea to build a boat and a net to catch more fish. He has the idea, now, how to build the boat and net. Both will require time to build/make and both will require materials, which again require time to be gathered.

The time required to gather and manufacture his products, require him to forego time spent gathering food. He decides to gather extra food each day for 3 months and save it. Then when he is manufacturing his product, he can allocate time from gathering food to manufacturing his products, living off of his saved capital, viz. stored/saved food.

The saved food is present value consumption. It is valuable. More valuable than future value consumption. The future haul of food will however be far more using a boat and net than current production of food. The difference or discounted value is the return to capital. Whether this capital be the saved capital goods of stored food, or the capital goods manufactured, capital is critical to actioning an idea.

If however there was a second castaway, and instead of Crusoe ‘saving’ food [capital] he could borrow the food [loan]. The difference or interest rate, will be the future haul of food, which will however be far more using a boat and net than current production of food. The difference or discounted value is the return to capital and is the interest rate charged for the loan [food].

Another way of looking at it is if I want to manufacture a boat and I can borrow money [food] to do so: will the return exceed the cost of interest? If it does, I build the boat. If not, I don’t.

Or,

I manufacture wigits. I can borrow at an interest rate of 5%. My selling profit is 18%. My net profit is 13%. It is worth borrowing the capital.

When the interest rate is low, more projects of production will be profitable, the marginal project. When it’s high, less.

So the only way to manipulate the interest rate is through inflation, creating money to maintain and overcome time preference. So it is more accurate to talk about inflation rather than the interest rate, as the natural rate of interest is not able to be manipulated by Central Bank. The natural rate of interest, eventually, dictates the the trend of the economy.

jog on
duc


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## Value Hunter

Deepstate the issue about the morality of interest rates is that its not a free market and the RBA and the whole financial system as a whole is arguably suppressing interest rates. If under a truly free market interest rates were this low I would not pass moral judgement on the level of rates. However I strongly suspect in a free market system interest rates would be higher than they are today.

Yes, there is a cartel at Super fund level. Like I pointed out before because of the complex super system there are people that for one reason or another (tax consequences, union agreements, etc) actually have limited choice, despite the wide array of super funds on offer. Also the scale necessary to run a Super fund tends to lead to a cartel situation.

Also you did not address my argument that artificially low rates are pushing more money into equities and property from inexperienced investors leading to fund managers having more FUM than otherwise. Another bow in the captive audience argument. Many of these investors are too in-experienced and lack the financial literacy to find themselves a good deal. We are pushing these people into riskier assets then they would otherwise be in, yet they lack the knowledge to make good choices. Under free market arguably higher interest rates many of these people would invest in cash or term deposits.  

Yet another bow in the captive audience argument is the four pillars banking policy. This has made the big banks enormously large and powerful. The banks then use this power and scale to successfully cross-sell garbage products with high fees and poor performance to their customers under the guise of "financial advice". The poor financially illiterate customers thinking they are getting advice are actually just getting a product sales pitch.


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## Value Hunter

Its morally wrong that banks can call some of their employees financial advisors, financial planners, etc. If by law they had to name these people "bank product salesmen" instead and they had to verbally explain to the client the conflict of interest, sales targets, and the commission/fee structure etc (many people don't have the skill to make sense of a PDS written in legalese) in simple language, I bet a lot of people would stop using financial planners. Are you telling me a 75 year old widow with a Commbank savings account knows what she is getting herself into when she visits a Commbank "financial planner"?

Another point that has not been mentioned is that the government and the RBA actually creates a lot of the need for financial products and financial advice, not only by suppressing interest rates but by complex superannuation regulations, complex tax law, complex inheritance law, complex divorce law, etc. So the government is actually creating a need for all sorts of products and advice, where that need would not exist without such a big and bloated and intrusive government.

Deepstate are you telling me that this system (as described above) does not affect the fees service providers can charge? If the tax system was incredibly simple, how many people would need an accountant? The ones that still did use an accountant would be paying much less because it would not take as much time or technical knowledge to submit a tax return. Under a more free market system of no compulsory super and high real interest rates (after taking into account tax and inflation) then fewer financially illiterate people would invest in property, shares, alternative assets, etc and would instead invest in cash and term deposits, where you do not need to pay high fees to fund managers. The remaining people that did invest with fund managers would be more likely to be financially literate/savvy and thus the whole fee structure would come down.


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## Klogg

craft said:


> The economy should be more productive and probably more equitable the more returns are attributable to how money is used in the future rather than money for nothing via a risk free rate on money that has been accumulated in the past.




I've had this argument with myself many times (I'm sane, I promise). If you look at the effect of this through generations of wealth accumulation, those who hold significant assets simply in terms deposits/government bonds were (not so much now) receiving a real return that just increases the class divide. Negative interest rates go a long way to address this. The alternative to this (or perhaps we do both) is have some form of taxes on inheritance. 

Assuming one goes down this path of ensuring positive real return (i.e. after inflation) through negative rates, the problem then becomes how one maintains a stable economy (i.e. avoid hyperinflation). 
Do you artificially ensure that 'savings' that are essentially risk-free (govt bonds) receive no real-return through a constant negative cash rate? It sort of breaks the model that we currently work with (not that we haven't done that before - removal of Bretton Woods is a great example).

Interest rates are currently set to maintain stability in the economy, but perhaps this is not the only tool we need. Perhaps further limiting creation of money by adjusting capital requirements can deal with inflation, rather than using interest rates...

I didn't really get much further than that TBH. Some more thought required.


On a side note - one could argue that doing this ensures no-one will save, but that's not the case. If the alternatives were far riskier, but had only a slightly higher return, which would one take? The choice of returns are not taken by the absolute figure, rather they're chosen by the return relative to other opportunities, or the opportunity cost. (Assuming a rational decision maker... which, of course, is also flawed, but that's another discussion).


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## DeepState

VH: Would a free market result in a higher IR?

Don't know. But, what would happen is that wealth and means of production would be heavily concentrated in the hands of the few and they dictate the terms.  So the natural end point of a free market is a market which is not free, but controlled by a small number of borderless citizens.  Depending on what they feel like doing to the masses, they might want to make access to capital more or less easy. It becomes a command economy.

VH: Morality of low IR in that it forces savings in to property and equities where FMs get more fees.

Low IR hurts those with existing liquid savers much more than those who are paying down debt and seeking to build a nest egg.  Low IRs help the majority of super fund investors in the real economy.  It is people holding debt investments who pay for this in a direct sense...rich savers.

Super fund members can opt out by choosing a cash option if they want.

If it is optimal, given the sitn to move to more growth assets, demand for these services increases but so does supply.  Prices have come down a lot, but more fees have flowed to FMs it is true.

If interest rates were higher, those people in REST would be collecting welfare cheques or even more underemployed.  So, if you have a moral concern for paying an extra 10bps on the investment, you need to balance that out with the moral outcome of peristent 8% unemployment and even more stagnant wages.  I would vote for lower interest rates.  These same people have seen their wealth grow considerably faster bank deposits would have, even if they were at some notion of a natural interest rate of, say, 3-4% pa.

The choice of IR is one very blunt instrument with which to balance these things out.  If you consider the counterfactual, it seems likely that those renting a house on a 2% net rental yield wondering how they will afford a house would, instead, be in their parents' house wondering how to get a job or get enough hours to rent in a place with a net 3% yield.

Based on what I observe, of all the possible evils, low IR is not amongst the most heinous.  Amongst the most heinous would be not to intervene in a clear market failure.  In doing so, there will be relative winners and losers. In society, what abt the aggregate.  We are better off as a whole...and FMs were amongst the winners. As were builders and renters, those in economically sensitive sectors, anyone who cared about maintaining a stock of skilled workers...and so on.

There seems to be some moral outrage at wealth flowing to FMs.  There is no law which prevents to from trying to be one. There is no school tie boundary.  The market for funds management is utterly savage and highly competitive. For all the glass walled offices, inside is very little job security and a bunch of highly motivated, smart, people generally doing the best they can.

Are you also upset at home builders?  Because the primary motivation for lower front end interest rates is not to push more savings in to products with higher FM fees. It is to stimulate housing development.  This is the most direct impact of low interest rates for the real economy.


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## DeepState

Value Hunter said:


> Its morally wrong that banks can call some of their employees financial advisors, financial planners, etc. If by law they had to name these people "bank product salesmen" instead and they had to verbally explain to the client the conflict of interest, sales targets, and the commission/fee structure etc (many people don't have the skill to make sense of a PDS written in legalese) in simple language, I bet a lot of people would stop using financial planners. Are you telling me a 75 year old widow with a Commbank savings account knows what she is getting herself into when she visits a Commbank "financial planner"?
> 
> Another point that has not been mentioned is that the government and the RBA actually creates a lot of the need for financial products and financial advice, not only by suppressing interest rates but by complex superannuation regulations, complex tax law, complex inheritance law, complex divorce law, etc. So the government is actually creating a need for all sorts of products and advice, where that need would not exist without such a big and bloated and intrusive government.
> 
> Deepstate are you telling me that this system (as described above) does not affect the fees service providers can charge? If the tax system was incredibly simple, how many people would need an accountant? The ones that still did use an accountant would be paying much less because it would not take as much time or technical knowledge to submit a tax return. Under a more free market system of no compulsory super and high real interest rates (after taking into account tax and inflation) then fewer financially illiterate people would invest in property, shares, alternative assets, etc and would instead invest in cash and term deposits, where you do not need to pay high fees to fund managers. The remaining people that did invest with fund managers would be more likely to be financially literate/savvy and thus the whole fee structure would come down.




Perhaps we should also force hair stylists to be called barbers once again. Real estate agents should have Shark in Suit under their names on business cards and tradesmen should caveat appointment times with...subject to change without notice.  Caveat Emptor has always been a principle in commerce and there is only so much you can do to stop someone from making a stupid decision.

Financial planners, I feel, should be moved towards a fiduciary mentality.  I think commission based sales is fine for a salesman but not fine for a fiduciary.  Anyone who reads the first paragraph of the engagement letter should see that "I get paid to sell you stuff" makes you a salesman rather than an independent advisor.  If you for the CBA, you aren't independent.  It was like this with life insurance salesmen in the 1980s and snake oil salesmen in the 1800s.  Just to be clear, fund managers are fiduciaries.

In an environment with no compulsory super, tax and financial arrangements for most people would be simpler.  Mainly because they'd have no savings to speak of.  The financial industry would be smaller and, given that much of wealth is held in liquid assets, there would also be a lower standard of living for all.  Then we'd be back in to the welfare state and unsustainable debt trajectories given the moves in demographics.  No.

If you have an issue with an overcomplicated system, that's fine.  I agree. It is overbuilt but there are all sorts of things being done to streamline the experience.  Yet, you seem to be inferring that this is largely done for the benefit of financial advisors, accountants and fund managers.  Really?  I am uncertain whether Paul Keating was in the pocket of BlackRock and E&Y when deciding to negotiate the Accords in a far-sighted way.  Actually, scratch that. I am certain they didn't.  Partly because BlackRock didn't exist then.

Were you to look back at how money was invested in the, say, mid 1990s, not so long after the Recession We Had To Have and high interest rates, you would find that the dominant fund managers of the time had about the same amount in equities then as the key investment options in major super funds today.  So that angle, of low interest rates forcing higher exposures to equities, is outright wrong. It forced money out of fixed income for sure, but it went to other things.  As for more sophisticated investments, they are only accessible to 'sophisticated investors'.  The illiterate have to choose who to entrust with their finances.  Hopefully they are competent enough to make those decision on their behalf.  Being unsophisticated, I would not normally go in for a cartilage repair using XYZ sophisticated surgical instrument, but I hired a knee surgeon to do it and he made those choices for me.  So it is with investment.

As to this low fee in deposits stuff, let's look at it.  The difference between the return you get as a direct investor holding a pile of stocks and bonds and one intermediated by fund managers and super funds with their army of accountants is about 60bps per annum.  Cost of doing business.

A deposit in the CBA ultimately finds its way to a mortgage (interest at around 4.5% or a small business loan at around 6%).  Your deposit interest rate is, what, 2.2%?  So that would make bank fees...what?  And who is the moral beneficiary of high interest rates??

Nothing stops you from moving your holdings to cash....please do if that works for you.


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## Value Hunter

Deepstate I concede the caveat emptor point you made. Its totally true and correct. Its just that after all the banking, financial planning and insurance scandals of the past 5-10 years its hard to not feel outraged at the fat cats in the financial industry. Do you not feel any sense of outage? Especially given how poor the performance of the funds management and financial planning industry as a whole has been? Are their any other sectors of the economy that you are aware of where poor performance is so common and so readily accepted and highly remunerated? Perhaps, the government, legal, insurance and building sectors come somewhat close (but not quite as bad). Building used to be a proud profession once upon a time but building standards have slipped greatly over time. Compare the quality of a newly built off the plan apartments to 50 year old double brick homes which are still going strong.

If I came across as implying that low interest rates and financial complexity, etc were solely to benefit the financial industry that is certainly not what I meant. I agree completely that there are many other beneficiaries including the construction industry, existing homeowners, etc. Low interest rates benefit existing home owners not first home buyers, because in practice the lower interest rates push house prices up so far that the total debt servicing burden does not go down in the long run. You only need to go look at graphs of mortgage payments as a percentage of income to see that its not that far from previous record highs. And what happens to those people when the interest rate cycle reverses and heads higher?

Looking at fund manager holdings in the 90s when interest rates were high is misisng th point. You have to look at the retail investor level and see how much retail investors hold in equities, in property and in cash now compared to the 90s. Because the funds management pie has grown as a whole.

Also if you look at the growth of the banking and financial services industry over the past 30 years in any developed country its been absolutely gargantuan and well in excess of nominal GDP growth. A fractional reserve banking system with a controlled interest rates and a monopoly on currency creation and an oligopoly on credit creation feeds the parasites. Hedge fund managers, getting paid billions of dollars just to shuffle assets around, and banks making obscene profits on the back of lending more and more against the same pieces of land (simply pushing the price of land higher without adding productive capacity into the system) is hardly a productive system.

I don't know where you get 60 basis points for the funds management industry from? Maybe at the wholesale level but at the retail level just look at managed funds open to retail investors and listed investment companies. The base fee is typically 1 to 1.5% plus some sort of outrageous performance fee on top. Which by the way I never understood the concept of a performance fee, isn't their whole reason for existence and the base fee meant to be for them to outperform? In my opinion a fund manager that under-performs the index should charge zero (no base fees even) because they cost you money.

What makes you think I want to move my holdings into cash? I have enough knowledge about the stock and property markets to buy individual properties and shares successfully (at least so far) thank you very much.

The banking system as a whole is mainly focused on grabbing maximum share of the economic rent as opposed to adding productive capacity to the economy. Yes there is productive activity in Australia's banking system but the majority of the lending is unproductive. This is due to our system of enclosing the economic rent i.e. land price. The majority of the lending activity will go towards chasing economic rent higher. The economist Phil Anderson has a lot of good research on this topic of land price and economic rent.


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## Value Hunter

In theory there is nothing to stop somebody from becoming a fund manager but the licensing/regulation, scale requirements (at least to be decently profitable) and the fact that the industry is run like a boys club act as deterrents. Otherwise there are so many investors on Aussie stockforums that are thrashing the market returns (and the returns of the majority of overpaid fat cat professionals) yet cannot or would not open a funds management business (true that some on the forums manage capital for family and friends, etc and charge a small fee).

Eternal growth partners https://egpcapital.com.au/ is a typical example of what might happen if lets a skilled investor from lets say this forum decided to open a funds management business. With his minuscule level of FUM do you really think he makes much money from being a fund manager? And that his despite his relatively strong performance track record. There are a lot of things other than performance that dictate how well a funds management business will do.


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## Value Hunter

Deepstate tell me do you think its a coincidence that the financial industry took off like a rocket after the final link to gold was severed in the monetary system (in the 1970s)? And that low interest rates and high credit creation at the same time are also a coincidence and that the financial industry and credit both vastly outgrew the economy at the same time? We both know that all these things are linked. What do you think of the views of Austrian economists that the whole fiat, fractional reserve, banking cartel system is a sham to benefit certain elites at the expense of the rest of society? Of course even the Austrian economists don't put it so bluntly but that is what they hint at if you read between the lines. You speak as of the current system were the world is awash in debt was/is somehow good for society.

p.s. I left out the point before that while industry super funds have relatively low fees many retail super funds are charging 1%+


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## Value Hunter

"Most of the funds management industry is full of unscrupulous fat cats. An example of a fund manager doing things right is EGP which I mentioned before. here is a quote from their website:

The funds management industry is fundamentally flawed. EGP Capital is here to change this. EGP Capital charges no management fee. We charge a performance fee which is set against a high benchmark. And if you don’t make money then neither do we.

On average, fund managers charge clients around _*1.67%p.a.*_ for the privilege of managing their money, regardless of how they perform. History shows around 80% of funds fail to beat their benchmark over a *five-year period*, there are a lot of investors paying a lot of money for nothing, or in some cases, less than nothing."

Not to mention all the rants people like Warren Buffett and Charlie Munger have had against the fat cats in the funds management industry. Deepstate for somebody as knowledgeable as you not to feel some sort of outage is disappointing. I am not saying funds management should be illegal or that fees should be capped via regulation but at the very least it needs to be decried and denounced in bold fashion by investors, financial advisors (assuming they are independent and not conflicted) and the media. Its morally wrong.


----------



## DeepState

Need to answer in patches given the numerous areas for discussion

---

VH: "here is a quote from their website:

The funds management industry is fundamentally flawed. EGP Capital is here to change this. EGP Capital charges no management fee. We charge a performance fee which is set against a high benchmark. And if you don’t make money then neither do we."

That particular fee set-up creates the incentive to shoot for the moon under the guise of not being a fat cat.  It creates a huge conflict of interest despite the apparent alignment.


---

VH: "On average, fund managers charge clients around _*1.67%p.a.*_ for the privilege of managing their money, regardless of how they perform. History shows around 80% of funds fail to beat their benchmark over a *five-year period*, there are a lot of investors paying a lot of money for nothing, or in some cases, less than nothing."

I was referring to illiterate super fund investors forced to invest in to the major super funds like REST as per your thoughts.  These high load funds are retail direct which are totally a rip off and anyone who did any work on a fee comparison would know that there is something odd with paying $5 for an orange.

"p.s. I left out the point before that while industry super funds have relatively low fees many retail super funds are charging 1%+"

OK.

---
 VH: "Deepstate for somebody as knowledgeable as you not to feel some sort of outage is disappointing. I am not saying funds management should be illegal or that fees should be capped via regulation but at the very least it needs to be decried and denounced in bold fashion by investors, financial advisors (assuming they are independent and not conflicted) and the media. Its morally wrong."

Fund managers are paid to offer a service.  It is impossible to create a net $1 gain on overall alpha.  The fund managers are paid to try, and most make the honest effort to do so.  Expecting an outcome much better than 80% not adding value against a benchmark after fees would be like expecting the finalists in the 100m Olympics to all come in the top three on average.  If you want to quote Buffett, let's go to the report when he says words to the effect that (paraphrase) 'It is ridiculous that people, wanting and expecting to be above average, should expect to make money just by engaging in activity'.  BTW, even index managers, if they do their job right, underperform.  There should be a 100% chance of underperforming the index in their case.  They also charge fees.

Am I outraged that the industry outcomes obeys what the laws of physics demands?  No.

Should it be a regulated industry in terms of fees?  Fund managers are not infrastructure monopolies and no-one exerts dominant pricing.  No.

Denounce all you like.  Or vote with your feet.  It is a market.  It functions as such.

---
 VH: " You speak as of the current system were the world is awash in debt was/is somehow good for society.

I did not say excess debt was a good thing.  The ability to create debt, however, is probably a good thing if the excesses are contained or managed.  I would like you to imagine a world without fractional reserve banking.  We'd still be at least 100 years behind in our economic development.  Or it could be a command economy instead.  Uh, pass.

Credit does favour the rich.  Because they have the capacity to borrow the most.  And it creates the potential for hyper-capitalism.  Which is why we need restraints against the excesses.  However, the net standard of living we have now owes a lot to human ingenuity.  One of those things is the ability to create a capital market and harness it.  Nothing is perfect.  Despite crisis after crisis, we keep going back to that system everywhere.  There is a reason....it works better than shiny stones as currency. 


---

VH: "What makes you think I want to move my holdings into cash? I have enough knowledge about the stock and property markets to buy individual properties and shares successfully (at least so far) thank you very much."

Because of the tirade against low interest rates resulting in more funds and fees flowing to FMs in equity and growth type assets in general....and the outrage at the fees.  

Now, of all your successful investments, how many of them were financed with debt at some stage out of our fractional reserve banks and how many of your companies that you are invested in borrow from this same system. How much have you benefited from that personally vs the alternative of the Dark Ages.

Now imagine the Austrians came in and credit creation disappeared. Broad Money becomes M1.  

It wouldn't take much imagination.  Society wouldn't be very complex.

---


VH: "In theory there is nothing to stop somebody from becoming a fund manager but the licensing/regulation, scale requirements (at least to be decently profitable) and the fact that the industry is run like a boys club act as deterrents. Otherwise there are so many investors on Aussie stockforums that are thrashing the market returns (and the returns of the majority of overpaid fat cat professionals) yet cannot or would not open a funds management business (true that some on the forums manage capital for family and friends, etc and charge a small fee)."

It is also hard to become a neuroscientist or astronaut.  Both need a bit of training and some need registration.  If you think an industry is earning excess profits, the natural incentive is to fill that gap or benefit from it in some way.

Fund managers exist.  They are drawn from the general population.  The old school tie is utterly a bygone era.  If you think it is a closed shop, you are making up excuses for yourself or others against the usual, and tiresome, unseen powers of the financial world who conspire to organise the entire economy for centuries to strip the poor.  The Medici's are unlikely to have planned to make Jamie Dimon wealthy, in my view.  

Many fundies come from the most modest of backgrounds.  The jocks have been matched by the nerds.  The fair-skinned Anglo is not a dominant majority.  A number wear skirts, although the lifestyle is torrid and not so many want to hang around.  It is very merit based.  You make money...you get paid and promoted.  No-one cares about where you went to school.  Most wouldn't know.  Capitalism is very pure and clean in that way.

I have already commented on the success fee element.  

---

VH: "And what happens to those people when the interest rate cycle reverses and heads higher?"

They pay more of their income in interest.  That's what happens when you borrow on variable interest rates.

---

VH: "Looking at fund manager holdings in the 90s when interest rates were high is misisng th point. You have to look at the retail investor level and see how much retail investors hold in equities, in property and in cash now compared to the 90s. Because the funds management pie has grown as a whole."

I was responding to your perspective that low interest rates forced investors into equities etc and that this benefited FMs via increased demand for those services.

The average retail punter in the early 1990s had no net assets to speak of.  Those who had any assets were invested in 'Balanced' Funds which had around 60% allocations to equities and a further 10% in property of some stripe.  Much as they do now.

---


----------



## kermit345

I don't want to get in the middle of your interest rate discussion but feel I can add something with regards to the fund manager / industry super fund / SMSF part of the discussion.

VH: "On average, fund managers charge clients around _*1.67%p.a.*_ for the privilege of managing their money, regardless of how they perform. History shows around 80% of funds fail to beat their benchmark over a *five-year period*, there are a lot of investors paying a lot of money for nothing, or in some cases, less than nothing."

Firstly regarding fund manager fees, with the competition for fees in the financial services industry now the days are gone where 2% fees are charged by fund managers (there are still some that charge this but they are a minority, not the norm). I don't have any figures by from my work in the industry a lot of fund managers now charge less than 1% unless you're an international fund manager. In addition to this all industry super funds now have to offer a 'MySuper' or 'Core' type option which has fee limits imposed as their default option. For instance with rest their admin fee is $1.10 a week plus 0.10% of their account balance and the default option is 0.60% - hardly the 1.67% figure quoted above. Australian Super is $1.50 per week and 0.64% for the default option. Now are these default options appropriate for everyone, no, but they are hardly being ripped off either particularly for the broader public who show little to no interest in their superannuation accounts.

The mentality of the broader public towards superannuation is that its free money they might get to access one day and they couldn't really be interested in what it costs or how it performers - they just know that its there. It's really quite easy to have a decent investment approach using ETF's or index based fund managers where your total investment fee is <0.30% and your admin fee can likely be <0.5% - quite reasonable in my view and these fees continue to come down with competition (5 years ago these fees would be 1% for investment fees and 1% for admin fees).

On the note of ETF's and index funds brings me to your point that 80% of funds fail to beat the benchmark over 5 years which is spot on. There are figures for the end of 2016 that show over 5 years of 300 funds in the general aussie equity space (ASX200 benchmark) only 30.12% outperformed the index for 5 years. In the general international equity space which has around 200 funds only 6.85% outperformed the index for 5 years - staggering. The only space in which fund managers truely offer some potential for outperformance is the mid and small cap space where 52% of managers outperform the index.

So in some ways I agree with you VH that fund managers are taking money from people for doing an inadequate job, however I don't believe they are gauging huge amounts of money nor do I believe that it is their fault. People need to take responsibility for their money and simply pointing the finger at fees and performance (not referring to you, I mean the wider public) rather than taking some initiative is just the easy way out. Almost all business are required to offer super choice and banks are not the only option when it comes to receiving financial advice - people just don't want to put in a little effort for potentially big reward which is astounding when it is essentially their forced savings and own money.

EDIT:

Forgot to mention SMSF's - these are often not as good as they are cracked up to be. The members need to take an interest and some control over the funds which can often be an issue if only one member is interested in the finance side of things and the partner isn't. For instance the Male does all the share trading, looking after the ETF's and other investments etc - if he passes away the Female is left with an SMSF that they have no interest in managing.

Further to this you have audit fees, accountancy fees, maintaining an investment allocation statement that the fund has to loosely adhere to. They aren't all they are cracked up to be unless you 1) want property in there, 2) take significant interest in your own investments and 3) have at least a few hundred thousand in there.


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## Value Hunter

DeepState said:


> That particular fee set-up creates the incentive to shoot for the moon under the guise of not being a fat cat. It creates a huge conflict of interest despite the apparent alignment.




Deepstate you have to keep in mind in this case the fund manger has a huge chunk of their net worth invested in the fund, which would reduce the likelihood of excessive risk taking. As it should be. When Buffet ran the Buffet partnerships he had to earn a 4% return before he could take a single dollar in fees and he had a huge chunk of his own money invested.

Index funds charge a fee to under-perform the market but the fee is very low and less than what it would cost for an individual investor trying to replicate the market by buying hundreds of stocks. 

Most fund managers do not make an honest effort to outperform the market. They make an honest effort to keep their jobs and increase FUM. As Peter Lynch explained in one his books, there is an old wall street saying "you will never lose your job losing your clients money on IBM". Fund managers would rather slightly under-perform the market than risk sticking their necks out too far to outperform and stuffing it up. Look what happened to Leg Mason after Bill Miller stuck his neck out too far during the GFC and stuffed it up. Its safer to just hug the index (while charging active fees) and under-perform slightly, that way the marketing department can still work their magic to increase FUM despite crap performance. If fund managers were good at their jobs or even necessary, then people would not be stampeding towards index funds.

For proper alignment a fund manager needs to have:
a) a huge chunk of their own assets invested in the fund (only using other people money results in excessive risk taking)
b) Some sort of minimum return/out-performance hurdle before a single dollar in fees is paid. Fund managers should be paid for results/performance not merely for trying. If they perform well then they achieved nothing for you and don't deserve to be remunerated. The less parasites in the system the better.

Yes Kermit I agree the public needs to take more responsibility for their investments. However at the same time less parasites in the system would be a good thing.

Deepstate, we just have to agree to disagree what is a good incentive system for fund managers. As for people voting with their feet in relation to fund managers, you are already well aware of the stampede towards index funds. This is sensible and I hope it gathers further momentum.

Yes Deepstate, some of my investments are financed by debt. You have to make the most of the system we have. It does not mean the system is ideal. Its like when people complain and protest to council about a shopping centre being built near their house (more noise, traffic congestion, parking problems, etc) but then when the shopping centre is built they go and shop there. If they decided not to shop there the noise, traffic etc would still affect them so they might as well enjoy the benefits of the shopping centre. That is how I feel about fractional reserve banking. I do not like it but since it is here and I suffer the negative consequences (whether I use it or not), I might as well use it and reap the benefits/positives.

Deepstate you only need to look at the rise in wealth inequality in the past generation in the U.S.A. and other similar countries to see how an increasing share of the wealth created is going to the top 10% of society. If you look at real unemployment rates (looking at underemployment also, etc) and the real  median household income, coupled with the increase in household debt, etc in the U.S.A. you will see that the bottom 80% of society there has actually gone backwards in the past 20-30 years. U.S.A. is not unique and there are other countries in a similar situation. Explain to me again how fractional reserve banking benefits society as a whole and not just the wealthy?

To say that there is either fractional reserve banking or the dark ages is a false dichotomy and is hyperbolic straw man argument.


----------



## Value Hunter

Deepstate I remember in one blog an ex-fund manager stated that when he was a fund manager, his fund only out-perfomed the market by 1% per annum, while during the same time period his personal portfolio outperformed by 14% per annum. The institutional imperative, mandate constraints, focus on FUM gathering, career risk, etc all impact performance and outperforming the market is not their number one priority, not by a long shot despite what they publicly tell people.


----------



## DeepState

Value Hunter said:


> Deepstate you have to keep in mind in this case the fund manger has a huge chunk of their net worth invested in the fund, which would reduce the likelihood of excessive risk taking. As it should be. When Buffet ran the Buffet partnerships he had to earn a 4% return before he could take a single dollar in fees and he had a huge chunk of his own money invested.
> 
> Index funds charge a fee to under-perform the market but the fee is very low and less than what it would cost for an individual investor trying to replicate the market by buying hundreds of stocks.
> 
> Most fund managers do not make an honest effort to outperform the market. They make an honest effort to keep their jobs and increase FUM. As Peter Lynch explained in one his books, there is an old wall street saying "you will never lose your job losing your clients money on IBM". Fund managers would rather slightly under-perform the market than risk sticking their necks out too far to outperform and stuffing it up. Look what happened to Leg Mason after Bill Miller stuck his neck out too far during the GFC and stuffed it up. Its safer to just hug the index (while charging active fees) and under-perform slightly, that way the marketing department can still work their magic to increase FUM despite crap performance. If fund managers were good at their jobs or even necessary, then people would not be stampeding towards index funds.




So, feel free to avoid buying active funds in favour of an index ETF or index fund or holding direct should that be more to your liking.

Meanwhile, the active funds management community will continue to, after fees, create money from nothing in aggregate. All in an effort to placate calls about their incompetence for not outperforming after fees as an industry.  When they finish with that, world peace should be simple.




Value Hunter said:


> For proper alignment a fund manager needs to have:
> a) a huge chunk of their own assets invested in the fund (only using other people money results in excessive risk taking)




Like, say, LTCM perhaps.



Value Hunter said:


> b) Some sort of minimum return/out-performance hurdle before a single dollar in fees is paid. Fund managers should be paid for results/performance not merely for trying. If they perform well then they achieved nothing for you and don't deserve to be remunerated. The less parasites in the system the better.



Feel free to do as ECP capital does and good luck with the $11.1 million stampede of asset raised without having an AFSL on the basis you invest OPM via a pty ltd structure. Ahem. Hello ASIC?  http://asic.gov.au/for-finance-professionals/afs-licensees/do-you-need-an-afs-licence/



Value Hunter said:


> Yes Kermit I agree the public needs to take more responsibility for their investments. However at the same time less parasites in the system would be a good thing.



True. Additionally, the less idiotic decisions taken by people who need to find someone to blame for those decisions would also be helpful to the cause as well, I believe. In order for there to be an irritating parasite, there first needs to be a host Miss Piggy.



Value Hunter said:


> Deepstate, we just have to agree to disagree what is a good incentive system for fund managers. As for people voting with their feet in relation to fund managers, you are already well aware of the stampede towards index funds. This is sensible and I hope it gathers further momentum.



Index management has a strong role to play in equity markets.  Yes, we can agree to disagree on the matter of fees for not providing outperformance, modelling our industry, instead, on personal injury lawyers and buskers.



Value Hunter said:


> Yes Deepstate, some of my investments are financed by debt. You have to make the most of the system we have. It does not mean the system is ideal. Its like when people complain and protest to council about a shopping centre being built near their house (more noise, traffic congestion, parking problems, etc) but then when the shopping centre is built they go and shop there. If they decided not to shop there the noise, traffic etc would still affect them so they might as well enjoy the benefits of the shopping centre. That is how I feel about fractional reserve banking. I do not like it but since it is here and I suffer the negative consequences (whether I use it or not), I might as well use it and reap the benefits/positives.



Can't beat 'em, join 'em.  So, by extension of the above arguments, why not become a fund manager?



Value Hunter said:


> Deepstate you only need to look at the rise in wealth inequality in the past generation in the U.S.A. and other similar countries to see how an increasing share of the wealth created is going to the top 10% of society. If you look at real unemployment rates (looking at underemployment also, etc) and the real  median household income, coupled with the increase in household debt, etc in the U.S.A. you will see that the bottom 80% of society there has actually gone backwards in the past 20-30 years. U.S.A. is not unique and there are other countries in a similar situation. Explain to me again how fractional reserve banking benefits society as a whole and not just the wealthy?



Wealth inequality gets a lot of airplay.   Let's consider some base level measures of societal benefits.  Proportion of births where the child survives until 2yrs old.  Overall life expectancy. Malnutrition. Disease. Proportion of people working in primary industry. Literacy (even if not financial). ...  We are vastly richer now than, say, 1900.  If you wish to go back in time to 1900, please feel free.  Not many people would be better off then.  The ability to create credit had a great deal to contribute to this development.  GDP growth is strongly influenced by credit.  No credit, squash GDP, squash development.  Most would rather be poor, alive, and with 2 tvs in the apartment, than gathering cotton.  Perhaps you disagree.  Fine.



Value Hunter said:


> To say that there is either fractional reserve banking or the dark ages is a false dichotomy and is hyperbolic straw man argument.



Fair enough.  I retract.  The moderately dark ages.  Without credit, very little development occurs.  Even the supposed gold standard became fractional reserve over and over again, trying to transcend itself.


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## DeepState

Value Hunter said:


> Deepstate I remember in one blog an ex-fund manager stated that when he was a fund manager, his fund only out-perfomed the market by 1% per annum, while during the same time period his personal portfolio outperformed by 14% per annum. The institutional imperative, mandate constraints, focus on FUM gathering, career risk, etc all impact performance and outperforming the market is not their number one priority, not by a long shot despite what they publicly tell people.



So, let me guess, the number one priority would be to maximise profit for the firm?  Shame!


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## DeepState

OK, just FYI.  I am not here to be the apologist for the world's FM's or excuse the stupidity of those who have no idea what they do and yet make meaningful decisions.  And really don't want to go point for point on things which have been heavily considered by the industry from a range of participants who are expert in it.

The capital markets exist to price risk.  It is an important function and those within the system play this role.  Without it, we would all be worse off, albeit more equally worse off - as if that were progress.

If you don't want active funds management, stop whinging, buy passive.  How hard is that?  If I want to buy an orange, I don't have to bag the crap out of an apple to justify it. Particularly if the basis for doing so is that a packet of 12 apples couldn't become 13 apples spontaneously. And that the particular type of apple sold was deemed more suitable for public consumption than the fugu-fish version which I personally prefer at home because I understand the risk of it better than the illiterate apple eaters. Yet, some apples are delicious.

If you don't like credit, don't borrow and don't interact with anything that does.  If you benefited from it...as you do with every breath, why not show some gratitude whilst enjoying the benefits of whining about it from the perch it provided you.  Investment properties bought on leverage, shares in companies whose prices are determined by real price discoverers who use leverage....and crying about inequality and concerned for the over-levered in the housing market?  Poor me! Give your house to them! Inequality reduced, mortgage debt down, credit quantity down.  Easy.

If you actually mean what you say and cared to do something about it, do it. The benefits are immediate and you are perfectly aligned.  Set an example so that we may see the wisdom of this.  If not, then bathe knowingly in the hypocrisy of the position of claiming the higher moral standard and, yet, not taking obvious moves in that direction.

You are morally obliged to take this action or declare that you are more about promise than delivery.  Hmmm.

And EGP should be shut down by ASIC.  Perhaps you might want to tell Tony before someone tells ASIC.

Thanks, but I'm done for this exchange.


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## Value Hunter

Deepstate, thanks for the brisk debate. There are in my opinion numerous straw man arguments in your last few posts but given that you have decided to opt of this particular debate I am happy to leave things as they are and not continue this debate.

On another topic are you familiar with the works of Australian economist Philip J. Anderson? Although I do not agree with everything he writes, he has a lot of fascinating insights (primarily about the real estate cycle). You should read his stuff if you get a chance.


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## Klogg

DeepState said:


> VH: "here is a quote from their website:
> 
> The funds management industry is fundamentally flawed. EGP Capital is here to change this. EGP Capital charges no management fee. We charge a performance fee which is set against a high benchmark. And if you don’t make money then neither do we."
> 
> That particular fee set-up creates the incentive to shoot for the moon under the guise of not being a fat cat.  It creates a huge conflict of interest despite the apparent alignment.




I realise you're done for this exchange, but I'm not sure this is correct. There's a high watermark set. If the annualised rate is not above 6%, no performance fee is charged regardless. I'll also add that the fund manager of EGP has a substantial sum of money in the fund. Again, it changes the incentive...
(The LTCM example is cherry-picking. One statistical anomaly does not prove a point. Of course, the onus is on me to prove mine as well, as the one Buffett example is not sufficient either, so I'll see what I can dig up)

Thorney Opportunities (ASX:TOP) have a similar setup, except they don't have a high watermark... this is far worse.

I'll also add that EGP's structure was the same as the Buffett Partnerships.


"And EGP should be shut down by ASIC."

I don't see why. IIRC, Tony is operating as a company, coming under the limit of 20 investors/$2m per annum, as the $11.1m has come in over many years. This means no financial services license is required.


----------



## DeepState

Klogg said:


> "And EGP should be shut down by ASIC."
> 
> I don't see why. IIRC, Tony is operating as a company, coming under the limit of 20 investors/$2m per annum, as the $11.1m has come in over many years. This means no financial services license is required.




Pls refer attached and contact ASIC.

The idea of alignment of interest is very solid.  To the extend that this is achieved by heavy investment of personal wealth, great.  The practice and true implications beneath the surface vary a lot.  I really don't want to list it all out.  Buffett does it, so we must all do it I suppose or justify why we don't also drink Cherry Cola when investing.

Your 'true' incentive is to maximise wealth.  That is different to maximising the value of your investment inside the fund, particularly one with mandate constraints of some type.  Think about it.

It depends. 100% of Net, excluding PPOR, sounds great when you have $1m. Or, if thought to be material, it can just be a ploy or otherwise unverifiable in tinpot cases. For the most open fund in Australia, it sure is hard to get any info on the accounts for the EGP.  DYOR. And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end.  For that outcome is also perfectly aligned to the manager.


*
Please ensure you disclose any financial association with EGP if you have not already done so.*


----------



## Klogg

DeepState said:


> Pls refer attached and contact ASIC.
> 
> The idea of alignment of interest is very solid.  To the extend that this is achieved by heavy investment of personal wealth, great.  The practice and true implications beneath the surface vary a lot.  I really don't want to list it all out.  Buffett does it, so we must all do it I suppose or justify why we don't also drink Cherry Cola when investing.
> 
> Your 'true' incentive is to maximise wealth.  That is different to maximising the value of your investment inside the fund, particularly one with mandate constraints of some type.  Think about it.
> 
> It depends. 100% of Net, excluding PPOR, sounds great when you have $1m. Or, if thought to be material, it can just be a ploy or otherwise unverifiable in tinpot cases. For the most open fund in Australia, it sure is hard to get any info on the accounts.  DYOR. And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end.  For that outcome is also perfectly aligned to the manager.
> 
> Just looping the EGP thing off as just another disaster waiting to happen.  How does a fund manager expecting 5%pa outperformance, say, with $11m in teh fund, say $3m for alignment purposes, meaning $80k revenue, maintain an office on Bligh St, travel, host conferences and feed his wife and three kids?  What was that, Bernie?
> *
> Please ensure you disclose any financial association with EGP if you have not already done so.*




Good point on the bolded bit - I'll start with that. 
I have no financial association with EGP whatsoever. But for disclosure purposes, I'll mention that I have:
- spoken to Tony (the fund manager) about various ASX listed companies, specifically when I have an interest in investing in them
- spoken to Tony about investing in the fund (I have not invested, as I am investing my own capital at the moment)

_
"The practice and true implications beneath the surface vary a lot.  I really don't want to list it all out.  Buffett does it, so we must all do it I suppose or justify why we don't also drink Cherry Cola when investing."_

Fair point, you do need to ensure things check out and interests truly align, regardless of any others who may have followed a particular process.


_"And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end. For that outcome is also perfectly aligned to the manager."_

Again, this is true. But has a financial services license stopped this in the past? 


_"Just looping the EGP thing off as just another disaster waiting to happen.  How does a fund manager expecting 5%pa outperformance, say, with $11m in teh fund, say $3m for alignment purposes, meaning $80k revenue, maintain an office on Bligh St, travel, host conferences and feed his wife and three kids?  What was that, Bernie?"
_
And this comes down to understanding the situation. What if this is not their only job? What if they don't need to travel and host conferences?
I'm not saying your questions are not valid, but the work must be done before one can assume there is fraud involved.



Finally, on the attached file - an unregistered fund needs a license to:
_1. deal in a financial product 
2. provide advice (although exemptions exist in some circumstances), and 
3. provide a custodial service._

From what I know of the situation (again, I could be wrong), they're doing none of the above.


----------



## DeepState

Klogg said:


> Finally, on the attached file - an unregistered fund needs a license to:
> _1. deal in a financial product
> 2. provide advice (although exemptions exist in some circumstances), and
> 3. provide a custodial service._
> 
> From what I know of the situation (again, I could be wrong), they're doing none of the above.




Offering a Pty Ltd company for subscription at prices which the manager determines whose primary business consists of liquid investments traded by the manager... is not a 'financial product'?




Klogg said:


> _"And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end. For that outcome is also perfectly aligned to the manager."_
> 
> Again, this is true. But has a financial services license stopped this in the past?




Hard to know.  But let's run a thought experiment.  If you were going to organise a ponzi scheme, would you more likely register yourself with the regulator after an exhaustive application process, or ... create a small fund whose performance cannot be verified etc..


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## DeepState

Klogg said:


> I'm not saying your questions are not valid, but the work must be done before one can assume there is fraud involved.



Let me be clear.  i did not raise EGP, I do not know Tony and have not run forensics over this.  I am not assuming he is a fraud, but am interested to find that much of what is asserted here cannot actually be verified and this seems at odds with statements about superior practices and desire for transparency together with the business model. That's it so far as anything related to fraud goes. I have no interest either way other than to prefer a legit outcome.

I do believe EGP requires an AFSL. EGP is an investment vehicle plain and simple. It should be dead obvious when you use terms like 'invest with' in relation to the l.

Caveat Emptor. That's it for EGP.


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## Value Hunter

DeepState said:


> EDGE: Can you point out what yours is?
> 
> 1. If I were to ask what your reason is to believe that you can take money out of the market, what would it be?
> 
> 2. If I then asked, are you in a position to show proof of this, could you?
> 
> 3. Whatever your response to 2. above, are you able to say who you are taking these returns from? [Not the name of the person, but a general set of market participants of some kind...like other tech traders or large retail investors and the like]




I think this is an interesting discussion to see what edges people think they have.

1) My edges are:
-A long-term time frame with a long holding period. I am not beholden to quarterly or even yearly performance. 2 or 3 years of consecutive substantial under-performance does not bother me. I operate on a 5-10 year time horizon. This coupled with patience in holding onto stocks (I often hold stocks for more than 5 years) means that the performance of the businesses (stocks) has time to play out. Additionally my portfolio turnover is very low, much lower than average. My low portfolio turnover means less is paid in brokerage and taxes are deferred for longer and are more frequently paid at the long-term rate ensuring more of the gross return makes its way to the bottom line. Also many institutional funds are open ended and have to deal with fund outflows in a falling market whereas my investments are long-term money and I can sit out any downturns without selling.

-Liquidity/nimbleness. Since I am investing small sums I can easily invest in any stock including micro-caps and get in and out usually quickly and without affecting the price. This is a definite advantage over institutional investors/fund managers.

-No mandate constraints means I can invest in any and all stocks (no ethical or market cap limitations, maximum sector weightings, etc) meaning I have a larger universe of stocks to choose from. Also I can be levered and do use leverage in my portfolio (leverage secured against property so it has a low interest rate and is not subject to margin calls or expiry, etc). I do not have to be diversified and I can invest in as few or as many stocks as I want with no minimum or maximum weightings. This has led me to have a concentrated portfolio with a large amount invested in a small number of my best ideas.

2) I have substantially outperformed the market. I do not have audited results or the like so  I cannot prove it easily. You can choose to believe me or not.

3) I take my return from fund managers/institutions who invest based on so called "fundamentals"/"value" who typically have a short term time horizon (despite what their marketing material says) which means they buy and sell based on short-term business or macro or portfolio weighting considerations (or even fund flows) and are overly diversified. They and broking analysts also typically are overly focused on what the business will earn over the next 1 or 2 (or sometimes 3) years. I typically look at what is the business going to look like in 5 or 10 years from now.

Also when it comes to small caps which are my preferred hunting ground I have huge advantages over small cap fund managers. Even small cap funds often have hundreds of millions of dollars to invest, and with many small cap stocks it can take them months to get in or out of a position while it only takes me hours or days to get in or out. Yes, I do not trade short-term but when a small cap stock is undervalued I can go full position size in a day, while for example a small cap fund manager could take weeks or months to get set while the share price rises on them as they are buying. Not to mention that often their buying is enough to push up the price of the thinly traded stock as they are buying it. On the opposite side of the coin I the fundamentals of a small cap deteriorate I can get out quickly while the small cap fund manager takes weeks or months to sell out often into a falling share price.

Sure small/retail investors do not have the same research firepower or technical/industry knowledge as many fund managers, or stock-broking analysts, etc but really given all the other previously mentioned advantages small/retail investors have over institutions (for long-term investing at least) it should be easy for any retail investor with half a brain to outperform the market.


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## DeepState

Great response VH.  What do you regard as your "investment objective"?


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## DeepState

Ouch...on the money?


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## Value Hunter

I have multiple investment objectives:

1) Preserve/protect my capital from permanent loss (including loss of purchasing power from inflation) and keep risk to an acceptable/reasonable level.

So far the objective of preserving my capital has been achieved. Its very difficult to accurately quantify risk, as for my purposes, diversification levels, volatility/beta, draw down, sharpe ratios, etc do not accurately measure the risk of permanent loss of capital. It is to a large extent a qualitative judgement. I feel that the risks I have taken have been acceptable/reasonable but I am not fully sure and perhaps the risks I have taken have been too high and I am merely ignorant of the fact.

2) Over rolling 5 year periods achieve a net after tax return which is higher than:
A) The returns from cash and term deposits
B) The returns from the growth and balanced options of major super funds
C) The All Ordinaries accumulation index
D) The rate of inflation (i.e. increase my purchasing power)
E) And in the double digits

Although I have not worked out my exact internal rates of return (which would involve complex calculations due to leverage and multiple inflows and outflows into/out of the portfolios over many years) I know that all the portfolios I manage have so far exceeded all of those hurdles benchmarks since inception (and over the past 5 years also). Additionally I manage 3 portfolios: my personal share portfolio, my mum's personal share portfolio and my parents self managed super fund. They all have differing returns, but thus far all 3 portfolios have met the return objectives stated above.

Deepstate as for the paper you referred to in your post I largely agree with it. Gambling and speculation have many commonalities and are often engaged in by the same people. Investment has some similarities to both but far fewer. I rarely engage in either speculation or gambling. I would not call playing poker with your friends/family and betting $20 over the course of a night (I occasionally do that sort of thing) gambling. I have only ever gambled on two occasions in my life, got burnt and have sworn off it.  As for speculation it is something I partake in on rare occasions.


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## craft

Value Hunter said:


> 2) Over rolling 5 year periods achieve a net after tax return which is higher than:
> A) The returns from cash and term deposits
> B) The returns from the growth and balanced options of major super funds
> C) The All Ordinaries accumulation index
> D) The rate of inflation (i.e. increase my purchasing power)
> E) And in the double digits
> 
> Although I have not worked out my exact internal rates of return (which would involve complex calculations due to leverage and multiple inflows and outflows into/out of the portfolios over many years) I know that all the portfolios I manage have so far exceeded all of those hurdles benchmarks since inception (and over the past 5 years also). Additionally I manage 3 portfolios: my personal share portfolio, my mum's personal share portfolio and my parents self managed super fund. They all have differing returns, but thus far all 3 portfolios have met the return objectives stated above.
> .



Seriously, you can't (don't bother to) measure it, but you know you have achieved it.......

You forgot goal F) Be unaccountable.


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## Value Hunter

Craft I know each of the 3 portfolios since inception (late 2007 or early 2008) have an internal rate of return (after tax) somewhere between 10% and 20% p.a. based on rough back of the envelope calculations. However I have not sat down and made a proper spreadsheet or used a proper portfolio management software to know the exact returns. Like I said when you are using some leverage and have multiple inflows and outflows stretching over many years its complex and time consuming to do such calculations. If I am achieving my objectives what difference does it make if I find out whether my internal rate of return since inception is 13.5% p.a. or 16.2% p.a.?


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## craft

Value Hunter said:


> Craft I know each of the 3 portfolios since inception (late 2007 or early 2008) have an internal rate of return (after tax) somewhere between 10% and 20% p.a. based on rough back of the envelope calculations. However I have not sat down and made a proper spreadsheet or used a proper portfolio management software to know the exact returns. Like I said when you are using some leverage and have multiple inflows and outflows stretching over many years its complex and time consuming to do such calculations. If I am achieving my objectives what difference does it make if I find out whether my internal rate of return since inception is 13.5% p.a. or 16.2% p.a.?



 It's not the precision that matters it's having the factual data so that we can guard against delusional cognitive bias'.

Are you realy achieving you goals or do you just think you are.

If you're proactively managing money and not tracking your performance against a passive accumulation benchmark, that's faith not accountability of performance.

Maybe faith is all you need.


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## Value Hunter

You speak as if I have zero idea of my performance. Like I said I did some back of the envelope calculations.


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## Value Hunter

Once it becomes 10 years of investing (after the FY2018 tax returns are submitted) I will likely pay to get a proper performance audit done on all of the portfolios I manage. For now back of the envelope calculations will suffice.

I know from back of the envelope calcuations that my parents SMSF (unleveraged) has generated net returns somewhere between 10-15% p.a. net IRR and my personal portfolio (substantially leveraged) and my mum's personal portfolio (slightly leveraged) have both generated 15-20% p.a. net IRR.


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## craft

Value Hunter said:


> You speak as if I have zero idea of my performance. Like I said I did some back of the envelope calculations.



On the back of my envelope I'm a legend!

On more thorough analysis, I'm just an ar#ehole.

The back of the envelope always provides enough scope to come up with what ever we want to justify our beliefs.


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## McLovin

Value Hunter said:


> Once it becomes 10 years of investing (after the FY2018 tax returns are submitted) I will likely pay to get a proper performance audit done on all of the portfolios I manage. For now back of the envelope calculations will suffice.




Why do you need to pay someone to do it? It's not complicated to unitise a portfolio and track its performance. Even just measuring RoA will give you some understanding of whether your returns are that much better than the market's, then you can worry about overlaying leverage. To me it seems like a no-brainer. It's really what everyone should be doing.


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## Value Hunter

I would be interested to hear if anybody has any thoughts on whether the general real estate cycle is time-able/tradeable to any useful degree (and the flow on impacts to other areas of the economy) as suggested by land economists like Fred Harrison, Fred Folvary and Phillip J. Anderson http://www.phillipjanderson.com/18-year-real-estate-cycle/

I subscribe to Phillip J. Anderson's newsletter (cycles, trends, forecasts). While I am not necessarily fully convinced of the rightness of his conclusions, he does produce a lot of high quality research on areas that few other people are writing about.


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## DeepState

Value Hunter said:


> I would be interested to hear if anybody has any thoughts on whether the general real estate cycle is time-able/tradeable to any useful degree (and the flow on impacts to other areas of the economy) as suggested by land economists like Fred Harrison, Fred Folvary and Phillip J. Anderson http://www.phillipjanderson.com/18-year-real-estate-cycle/
> 
> I subscribe to Phillip J. Anderson's newsletter (cycles, trends, forecasts). While I am not necessarily fully convinced of the rightness of his conclusions, he does produce a lot of high quality research on areas that few other people are writing about.





The property cycle might actually be driven by the lunar standstill.  I wonder if that explanation, which synchronises to the hypothesis of 18 year cycles, puts things in perspective.


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## Value Hunter

Deepstate before you dismiss these guys as quacks you should look into their research, even if you disagree that the real estate cycle averages approximately 18 years and is easily time-able, they still publish a lot of interesting research on the overall land market (and other markets also) that is worth reading. I do not necessarily agree that the cycle has to be 18 years or any given length of time but there is so much insightful research being produced by land economists like these guys I am happy to wade through a few disagreeable ideas to get to the gems.


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## DeepState

Value Hunter said:


> Deepstate before you dismiss these guys as quacks you should look into their research, even if you disagree that the real estate cycle averages approximately 18 years and is easily time-able, they still publish a lot of interesting research on the overall land market (and other markets also) that is worth reading. I do not necessarily agree that the cycle has to be 18 years or any given length of time but there is so much insightful research being produced by land economists like these guys I am happy to wade through a few disagreeable ideas to get to the gems.



Well, your question related to the property cycle, and that was my observation.  Cycles do exist, but to claim their rhythm for centuries is fixed seems silly.  They may well have other things going which are interesting to review. However, my focus is elsewhere.


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## DeepState

DeepState said:


> Let me be clear.  i did not raise EGP, I do not know Tony and have not run forensics over this.  I am not assuming he is a fraud, but am interested to find that much of what is asserted here cannot actually be verified and this seems at odds with statements about superior practices and desire for transparency together with the business model. That's it so far as anything related to fraud goes. I have no interest either way other than to prefer a legit outcome.
> 
> I do believe EGP requires an AFSL. EGP is an investment vehicle plain and simple. It should be dead obvious when you use terms like 'invest with' in relation to the l.
> 
> Caveat Emptor. That's it for EGP.



 I note EGP got itself an AFSL today.  It's quite a thing to get Chris Cuffe in to the frame.  Hope they succeed in their endeavours.


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## qldfrog

Nice to see you back DS, is the silence related to the perplexed position the world[investment world including] is at..or just relaxing time?


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## Trembling Hand

qldfrog said:


> Nice to see you back DS, is the silence related to the perplexed position the world[investment world including] is at..or just relaxing time?



Or the perplexing state that ASF is in?


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## DeepState

qldfrog said:


> Nice to see you back DS, is the silence related to the perplexed position the world[investment world including] is at..or just relaxing time?



Thanks.  Have been doing a lot of development work of late to lift the quality, such as it is, of what I have been doing and adding new strategies to the suite.  Takes me months to roll out a new idea.


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## qldfrog

DeepState said:


> Thanks.  Have been doing a lot of development work of late to lift the quality, such as it is, of what I have been doing and adding new strategies to the suite.  Takes me months to roll out a new idea.



Would really like have the opportunity to catch up one day, any engineering skill (software inc.) which you could benefit from?
Nice to see you are OK


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## DeepState

qldfrog said:


> Would really like have the opportunity to catch up one day, any engineering skill (software inc.) which you could benefit from?
> Nice to see you are OK



Yes, we came close a few years back. Hope the farm is going well.


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## qldfrog

DeepState said:


> Yes, we came close a few years back. Hope the farm is going well.



We will find a way: farms and startups/projects going reasonably well, life is good...but could always be better with better government and now especially proper internet access...
A real bromance here!!  
But always looking forward/and up to your comments/sentiments


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## DeepState

Those union skim offs reported by Senator Cash are disgraceful.


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## DeepState

Jeremy Corbyn is apparently seen as PM-elect.  Something his own party had thought was an impossibility only a short time ago. His election and policies would see a fundamental restructuring of the UK and possible further Scottish referendum. Macron is more unpopular than Trump.  Merkl is back but needs to form a more complex coalition to govern.  Once again Winston Peters holds the balance of power in NZ.  It will be a significant test to see if Trump can achieve tax reform but, thus far, the very dangerous developments on North Korea and the calling out of Tehran seems a close echo of the 'Axis of Evil'. His capricious choice of words and partners in the Congress and Senate makes lasting alliances hard to form.  However, recent polls show his popularity rising again as a war posture is taken. Once a poster child of Democracy, Aung San Suu Kyi, has fallen in to disrepair or utter disgrace with the genocide in Myanmar.

Meanwhile, Erdogan, Putin, Xi, Abe...are actually getting things done for better or worse.

This seems to be the era of the strong-man once again as the weaknesses of democracies are showing through following the lack of inclusion in post GFC economic gains and mass immigration.

I recently toured the Darwin War Museum and the parallels between North Korea now and WWII Japan are not lost despite significant differences.  Gladly the UN understands that sanctions do not mean a total shut-off of energy imports.  A lesson Trump has yet to understand.

I have been astounded at how completely idiotic Trump has been in the implementation of his proposals to this point.  Yet he has the singularly greatest military arsenal in the world at his call...a man who shirked his obligations despite attending military educational institutions.  And we have another madman posing as a foil in NK and, following provocation despite meeting treaty obligations, Tehran testing ballistic missiles. A US military and political over-extension appears on the horizon.

China's rise into complete dominance in the Asian sphere is looking ever more assured.  When Bill Clinton completed his term, he expressed that "How China chooses to express its greatness" was one of the three big questions of the time.  We're about to find out.  China's statecraft makes the US appear utterly outmatched.  The more I learn about the One Belt One Road initiative, the more I think we are witnessing the rise of one of the strongest and lasting empires in history.  It may be more durable if held together by a degree of mutual interest rather than outright land-grabbing and extraction of labour and resources which were part of past examples.

I'm thinking about getting some lessons in Mandarin.


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## qldfrog

DeepState said:


> Meanwhile, Erdogan, Putin, Xi, Abe...are actually getting things done for better or worse.
> I'm thinking about getting some lessons in Mandarin.



After my earlier world tour this year, after seeing China/Russia and then Europe and the Americas, same conclusion.
Wife is starting Mandarin!!!!


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