Thought Bubbles from the Deep

[DeepState]

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]

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]

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]

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)