December 28, 2015

2015 is ending in one fine flux, on a bittersweet melody after the whipsaw love-hate years of “taper tantrums” since June 2013 which it was first broached.

30 months later in December 2015, the FED gauges that the US economy is strong enough to withstand life not just without QE but slightly higher interest rates, as things are starting to look fragile for the rest of the world, more alarmingly in the growth engines of the BRICS which have  been long seen as the pillars of global growth for the past decade.

As confusion and stress reign across asset classes, investors are unable to think too hard about the future except that their pockets will feel the pinch of higher financing rates if they need those US dollars which impact on asset returns and thus, asset prices eventually. The world sits on a the cusp of a deflationary spiral on collapsing commodity prices with oil prices dipping to a new 7 year low, with nickel prices at 12 year lows, as China cuts their growth target for 2016 to 6.6%, a sub 7% number that markets find unacceptable although it is impossible to find better GDP growth projections anywhere else in the world except for India, which fiddled with their computation methods earlier this year to conjure a 7.4% growth number for 2016.

A Lonelier Place

It would not be unreasonable to see the world as a lonelier place in 2016, divided in opinions ranging from politics, to refugees, to the economy, to central bank policies.

Fault Lines

Central bankers have broken ranks and each off in pursuit of their own agenda; smaller central banks at the mercy of global giants who have the liberty of monetary easing without the threat of outflows while the EM central banks risk economic damage if they attempt stimulus which ultimately results in an impasse for those dependent on growth, healthy inflation and USD liabilities.

Refugees and more refugees coming from the Middle East, Africa and Asia has divided societies in Europe and Northern America as the protests grow in Holland and vigilante groups amass in Finland, worsening the economic prospects for Europe, especially, as this year’s economics Nobel laureate, Angus Deaton, sees it.

Terrorism that just would not go away, dividing societies against each other and springing up recently in the US and 3 incidents in France this year, pales in comparison to the daily attacks in Afghanistan and Africa where the recent attack on the Afghan international airport would be the most audacious to date because we have grown numb to the thousands slaughtered in Nigeria and also because we do not hear a lot about what happens inside China that they do not want us to know about.

Politics has taken on a new twist as we have some major votes coming up – the US Presidential elections for one… and UK’s EU referendum another… The stance on refugees and terrorism etc will be wedge between polarised voters in polarised societies.

The regulators had their go and banks paid up hefty fines. Now its class action time with investors divided against their bankers as the blame game grows – Citigroup sued by failed hedge fund over 2008 crisis trades, 25 civil securities and antitrust class action cases alleging that big banks are rigging U.S. Treasury auctions, The Public School Teachers’ Pension and Retirement Fund of Chicago in the largest class action suit accusing banks of market-rigging in a multi-billion derivatives market, Credit Suisse and six other banks are enmeshed in a proposed class-action antitrust lawsuit accusing the banks of manipulating currency rates to reach a $2 billion settlement against their plaintiffs comprising of investment funds, hedge funds and others.

It can only be the beginning of a lifetime of distrust from here.

Christmas Yet To Come Themes

Divisions and fault lines running across the world, as it has always been. The themes of today will remain and will not go away tomorrow, themes an optimistic substitute for the word problems and yet a possible misnomer because problems can be solved whilst themes cannot.

The Have’s versus The Have Not’s

  1. The wealth gap in society is keeping the billionaires up each night as billionaire hedge funder Paul Tudor Jones thinks it will end in either higher taxes, revolution or war. 
  2. The good borrowers and the bad borrowers is alienating the bond markets as companies like Apple borrow at near lows in rates while the hard hit oil and gas associated companies are unable to refinance. Home ownership rates are lowest since 1967 in the US because of decreased affordability.

Statistical Anomalies and The Liquidity Crisis

  1. Hedge funds are having their poorest quarter since the global financial crisis
  2. Fragmented markets as ETFs restrict withdrawals as we have asked before “Is it really more liquid when you buy an ETF?”
  3. “The number of assets registering large moves—four or more standard deviations away from their normal trading range — has been increasing. Such moves would normally be expected to happen once every 62 years.” And as we buy more ETFs and stick to index trading, market breadth simply vanishes.


  1. Cyber crimes are set to hit records in 2015. “Cyber threats and cyber security. Data security, network security, hackers, cyber drones and more. Most companies believe they will be hacked this year!”, “Virtual currencies are not safe in their virtual vaults as we count the Bitcoins lost in numerous on line raids! Even our Samsung TVs may be listening to us…” 
  2. The distrust of banks grow with lawsuits and criminal proceedings which propagates the fin-tech and shadow banking space leading us to point 1., above and a new systemic risk to emerge as “The Guy Who Warned About Broken Libor Now Sees Fast-Money Financing as the New Risk.”
    Really, as friends tell me that they are happy financing Brazilian real estate in chunks of S$50,000, for a 30% return just because they got their 22% from German realty financing…
  3. As the gap between the “Have’s and Have Not’s” grow, a contractor told me recently that he is turning away jobs as he doubts the creditworthiness of his client.

Robotics, Artificial Intelligence and The Internet of Things

As the Terminator future beckons, robots are manning hotels, drones are fighting wars and policing the internet. Driver-less cars are coming next and the GPS and map companies will win as Baidu announced last week that “its vehicle had completed a fully autonomous test on a route with mixed roads and different weather types.” which has been accident free, for who shall bear the blame for an accident for wont of a driver?

The Internet of Things is the next big thing with connectivity as the key. Sadly, “unicorns” are all out of reach for the common man without access to private equity. But “user bases are possibly, at best, “revenue streams” that are plucked out of air for the thousand times PE that we are investing in” and “The numbers are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they’ll get their money back first if the company goes public or sells. . . valuations are just a placeholder number, part of an equation fueled by other, more important factors. Those can include market share, growth projections, and a founder’s ego.”

EM and the commodity crunch

Lower oil prices are no reason to cheer? For it seems that oil is the anchor of growth or is it that growth anchors oil and nickel too, which is at its 12 year lows? And everything else is anchored around the healthy inflation of growth or oil prices? Which is why we are seeing lower cattle prices – Michael Pollan has theorised years ago, that the US agribusiness is in fact, a subset of the oil industry given the heavy reliance on corn that is in fact, all about oil.

EM growth is tapering which is surely not unexpected, to excuse the double negative, after years of banking on them to save the developed world. EM growth will not disappear overnight just because China is taking a break and deciding to gentrify to developed nation status. The rest of EM would just be lost in the woods for at least the first half of 2016 or until the world runs out of worthy investments but not before the pain of paying some bills.

“38% of bonds sold by Indonesian, Malaysian, Philippine and Thai companies this year have been in foreign currencies, up from 27 percent in 2014, data compiled by Bloomberg show. Companies face $45 billion of bond repayments in greenbacks, euros or yen in the coming five years, breaking records set after the 1997 Asian Financial Crisis, when economists Barry Eichengreen and Ricardo Hausmann coined the term “original sin” to describe the dangers of overseas borrowing“. US$9 billion per annum is really not a lot compared to the leakages we are seeing in Brazil and even Microsoft managed to borrow US$23.75 billion in 2015.

The Nasty USD, Dodd Frank and The Banks To Watch

Rules and more rules means that we have to look to new sources of market liquidity. These come in the form of the second tiered banks – the Middle East and Asian banks that are unscathed from the crisis.

Yet, we can be sure that the days of power trading  have come to an end, just as we continue to see hedge fund closures and the end of risk taking as some of us know it. With the balance of power shifting, evidenced by the Chinese yuan’s growing global acceptance, the USD could be the nasty surprise for 2016 after gainging between 3 to 55% in the past 5 years against every other recognisable global currency except for the Chinese yuan! This calls for a reassessment some time down the road and perhaps some time sooner than later for the wounds it has inflicted, especially if Donald Trump remains in the US presidential race.

Come, my friends, ‘T is not too late to seek a newer world

There is much hope and excitement for the days ahead, with the Olympics to look forward to next year, after this year’s El Nino expected to last into the first quarter of 2016 before another disaster in La Nina emerges, buoying soft commodities, surely? Minksy moments will lurk behind every corner, because we shall see more defaults to come and the domino effects that they will bring.

It would all hinge on oil prices, as well, and we can be confident that it will not take much to shift prices higher from whatever lows we get to in the days ahead albeit not tipping into a dizzying rally, restoring some confidence in markets, nonetheless, that higher oil prices equate to demand and demand to economic growth.

Yet, the new era is private wealth which is sadly, tied up in illiquid bonds, funds and real estate, being the “unburnt class” – “Private bank and mass affluent clients are the panacea for the modern bank’s ills with their deposits which make good collateral and a new avenue for sales of those assets that cost much more to maintain. In addition, retail customers have always proven to be more “sticky” and unlikely to switch banks, especially when they are tied down with loans, and that gives banks a captive audience for new sales.”

2015 has been a lesson and the lesson will be learnt even as many an investor “will now run and hide behind the “long term investor” excuse for comfort” and we know that long term investors do not always win.

We just cannot but help feel that with all this going on, by China, Brazil and gang nabbing folks, banks on the reform and investors stuck in their investments, markets will be vindicated into 2016 as a new world emerges. Not a world of old, and maybe even a broken world with social fault lines growing, “but strong in will; To strive, to seek, to find, and not to yield.”

Come, my friends,
T is not too late to seek a newer world.
Push off, and sitting well in order smite
The sounding furrows; for my purpose holds
To sail beyond the sunset, and the baths
Of all the western stars, until I die.
It may be that the gulfs will wash us down:
It may be we shall touch the Happy Isles,
And see the great Achilles, whom we knew.
Tho’ much is taken, much abides; and tho’
We are not now that strength which in old days
Moved earth and heaven, that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.
Alfred, Lord Tennyson

Seasons Greetings to all!