NO STRINGS ATTACHED NEWS THAT MAINSTREAM JUST WON'T COVER.
Tucker Carlson: There is plenty of evidence the Trump campaign was spied on.
https://www.foxnews.com/opinion/tucker-carlson-the-obama-administration-spied-on-the-trump-campaign-and-the-media-refuse-to-call-it-spying
Only 18% Of "The Irishman" Viewers Made It All The Way To The End
If you started watching Martin Scorsese's "The Irishman" on Netflix last week but didn't finish it, you're in good company.
According to Bloomberg, just 18% of the 13.2 million viewers who tuned in actually finished the the 3 1/2-hour gangster epic starting Robert De Niro, Al Pacino, Ray Romano Harvey Keitel and Joe Pesci.
According to the Hollywood Reporter, Netflix bought the rights to the film and spent $200 million to produce it after Paramount stepped aside. In its first five days, it attracted a bigger average audience than "El Camino" - the "Breaking Bad"-inspired film, however it fell short of the 16.9 million viewers that watched the Sandra Bullock thriller "Bird Box," released at the end of 2018.
Interestingly, around the same number of people finished "Bird Box," while just 11% made it all the way through "El Camino," according to Bloomberg.
Tyler Durden Sun, 12/08/2019 - 15:10 Tags Entertainment Culture2020 - The Year Decennial & Presidential Cycles Collide
Authored by Lance Roberts via RealInvestmentAdvice.com,
Here Comes Santa Claus (Rally)On Friday, the market rallied sharply on the back of a much better than expected employment report and comments from Larry Kudlow that a “trade deal” is near. Given we are now at the last stages of the year where mutual, pension, and hedge funds need to “window dress” for year-end reporting, we removed our small equity hedge from the portfolio for the time being.
A quick word about that employment report.
While the headline number was good, it remained primarily a story of auto workers returning to work and continued increases in lower wage-paying jobs and multiple jobholders. Such has been the story of the bulk of this recovery. However, more importantly, the bump did not change the overall dynamics of the job market cycle, which is clearly deteriorating as shown in the chart below.
The key to trend change is CEO confidence which is extremely negative and coincident with employment cycle turns. Note that the end of employment cycles, when compared to CEO confidence, looks very similar at the end of each decade.
Nonetheless, in the short-term, the market dynamics are positive suggesting the market can indeed rally into the end of the year. As noted above, we have removed our equity hedge for now to allow our long-positions to fully benefit from the expected “Santa Claus” rally. (Or if you prefer the more PC version then it would be the expected “Jovial Full-Figured Holiday Person” rally.)
With the market back to short-term overbought, and the short-term “sell signal” still in place, it is possible we could see a bit of a correction next week. However, as we head into the last week of the year, a retest of highs is quite likely.
In the longer-term, as we will discuss more in a moment, the risk remains to the downside. It is highly unlikely there will be a “trade deal” anytime soon, and with the upcoming election, there will likely be increased volatility going into 2020.
From a purely technical perspective, on a monthly basis, the market is exceedingly overbought and at the top of the long-term trend channel. When these two conditions have been filled previously, we have seen fairly sharp corrections within the confines of the bullish trend.
With QE-4 in play, the bias remains to the upside keeping our target of 3300 on the S&P 500 in place. This is particularly the case as we head further into the seasonally strong period combined with an election year cycle.
Currently, we are exploring the energy space in particular where there is value being generated after the long drought of interest in energy-related stocks.
We have just released a research report for our RIAPro Subscribers (30-Day Free Trial) where we are looking for an opportunity. Here is a snippet:
“A decline in the dividend yield to the norm, assuming the dividend payout is unchanged, would result in a price increase of 13.17% for AMLP. Alternatively, if oil declined about 20% in value, the current AMLP dividend yield would then be fairly priced. We consider this a significant margin of safety should the price of oil fall, as it likely would if the U.S. enters a recession in the near future.”
There have been quite a few articles out lately suggesting that in 2020 the 10-year bull market is set to continue because it is a presidential election year. This sounds great in theory, but Wall Street and the financial media always suggest that next year is going to be another bullish year.
However, there are a lot of things that will need to go “right” next year from:
Avoidance of a recession
A rebound in global economic growth
The consumer will need to expand their current debt-driven consumption
A marked improvement in both corporate earnings and corporate profitability
A reduction or removal in current tariffs, and;
The Fed continues to remain ultra-accommodative to the markets.
These are all certainly possible, but given we are currently into both the longest, and weakest, economic expansion in history, and the longest bull market in history, the risks of something going wrong have certainly risen.
(While most financial media types present bull and bear markets in percentages, which is deceiving because a 100% gain and a 50% loss are the same thing, it worth noting what happens to investors by viewing cumulative point gains and losses. In every case the majority of the previous point gain is lost.)
However, what about the election coming up in less than a year?
Presidential CycleWith “hope” running high that things can continue going into 2020, the question becomes whether or not the Presidential election cycle can hold its performance precedent. Since 1871, markets have gained in 35 of those years, with losses in only 11.
Since 1948, there have only been two losses during presidential election years which were 2000 and 2008. In fact, stocks have, on average, put in their second-best performance in the fourth year of a president’s term. (The third year has been best as we are seeing currently.)
With a “win ratio” of 76%, the media has been quick to assume the bull market will continue unabated. However, there is a 24% chance a bear market will occur which is not entirely insignificant. Furthermore, given the duration, magnitude, and valuation issues associated with the market currently, a “Vegas handicapper” might increase those odds just a bit.
One thing to remember about all of this is that while the odds are weighted in favor of a positive 2020 from an election cycle standpoint – there have been NO cycles in history when the majority of the industrialized world was on the brink of a debt crisis all at the same time.
While the election of the next President will impact the market’s view towards policy stability; it is the world stage that will drive investor sentiment over the coming months and years. The biggest of those drivers is employment which has been weakening as of late. Importantly, there is an important correlation between consumer/investor sentiment, CEO confidence, and employment as noted above.
“Take a closer look at the chart above.
Notice that CEO confidence leads consumer confidence by a wide margin. This lures bullish investors, and the media, into believing that CEO’s really don’t know what they are doing. Unfortunately, consumer confidence tends to crash as it catches up with what CEO’s were already telling them.
What were CEO’s telling consumers that crushed their confidence?
‘I’m sorry, we think you are really great, but I have to let you go.’”
“It is hard for consumers to remain ‘confident,’ and continue spending, when they have lost their source of income. This is why consumer confidence doesn’t ‘go gently into night,’ but rather ‘screaming into the abyss.’”
But there is another cycle that we need to consider which is colliding with the Presdential election cycle, and that is the 10-year or decennial cycle.
Decennial CycleUsing the same data set going back to 1833 we find a little different outlook. While the 10th year of the decade (2020) is on average slightly positive, it’s win/loss ratio is only 56%, or not much better than a coin toss.
Furthermore, while presidential election years have a near 10% average annual return profile, the 10th-year of the decennial cycle is markedly weaker at just 1.91% on average.
The best year of the decade is the 5th which has been positive 79% of the time with an average return of 22%. The worst year is the 7th with only a 53% win rate but a negative average annual return. As noted, 2020 comes in as the second place for the worst of the annual returns.
With a win/loss record of 11-7 an investor betting heavily on a positive outcome for 2020 may be left short changed given the current political, economic, fundamental, and financial environment.
I have also overlaid the 1st-year of the new presidential cycle with the “orange boxes” above. You will notice that again, return parameters and win/loss percentages are low. This should suggest some caution for investors over the next 24-months given the length of the current bull market advance.
A Lot Of If’sAll of this analysis is fine but whether the market is positive or negative in 2020 comes down to a laundry list of assumptions:
If we can avoid a recession in the U.S.
If we can avoid a recession in Europe.
If corporate earnings can strengthen.
If the consumer can remain strong.
Etc.
Those are some pretty broad “if’s” and given the weakness is imports, which suggests a weakening domestic consumer, and struggling manufacturing, the risk of something going wrong is elevated.
As far as corporate earnings go – they peaked this year as the tax cut stimulus ran its course, and forward expectations are being sharply ratcheted lower. As we discussed on Tuesday:
“Since April, forward expectations have fallen by more than $11/share as economic realities continue to impale overly optimistic projections.”
This earnings boom cycle was skewed heavily by accounting rule changes, loan loss provisioning, tax breaks, massive layoffs, extreme cost cutting, suppression of wages and benefits, longer work hours, and massive share buybacks along with extraordinary government stimulus.
But when it comes to actual reported “profits,” which is what companies actually earned, reported, and paid taxes on, it is a vastly different story.
“Many are dismissing currently high valuations under the guise of ‘low interest rates,’ however, the one thing you should not dismiss, and cannot make an excuse for, is the massive deviation between the market and corporate profits after tax. The only other time in history the difference was this great was in 1999.”
The chart below shows the real, inflation-adjusted, profits after-tax versus the cumulative change to the S&P 500. Here is the important point – when markets grow faster than profitability, which it can do for a while; eventually a reversion occurs. This is simply the case that all excesses must eventually be cleared before the next growth cycle can occur. Currently, we are once again trading a fairly substantial premium to corporate profit growth.
So, if, somehow, maybe, possibly, all these things can be sustained we should be just fine.
The problem is, however, all of the pillars that supported the earnings boom are now going away beginning next year, each of them to some degree, which throws into question the sustainability going into 2020-2021.
While doing statistical analysis on the Presidential and Decennial cycles certainly make for interesting articles, it is crucially important to remember what drives the financial markets the short-term which is psychology and sentiment.
In the next 12-18 months, there will be more than enough event risks to skew the potential outcomes of the markets. This doesn’t mean that you should go and hide all in cash or gold. It does suggest you need to actively pay attention to your money.
This idea plays into our allocation theme of higher quality income, hedged investments and precious metals as an alternative to direct market risk. With expectations of lower economic growth in the coming quarters, reduced earnings, and pressure on the consumer, the markets are likely to remain highly volatile with little overall progress.
While we are in the midst of prognostications, it has also been predicted the world will end in 2020, so anything other than that will be a “win.”
Tyler Durden Sun, 12/08/2019 - 14:45 Tags Business FinanceAre Profit Margins Really Plunging? Goldman Responds To Zero Hedge
Ask any Wall Street analyst why stocks are at all time highs and the immediate answer will be because adjusted corporate profits and income are similarly at or near all time highs, which means that the multiple needed to justify an S&P around 3,150 is not all that egregious (technically it is, as DB's Binky Chadha noted last week when he pointed out that the S&P 500 is trading at a multiple that’s higher than any time since the dot-com era, except for a few months in late 2017 and early 2018. As Chadha wrote , "the S&P 500 trailing multiple has historically mostly stayed in a range between 10x-20x. So current valuation at 19.1x is clearly at the higher end of the historical range. Indeed, over the last 85 years, outside the late 1990s equity bubble, the multiple remained below current levels around 90% of the time.")
But is that really the case in a world where virtually everything is fake, pro-forma, non-GAAP or otherwise "adjusted" to fit a given narrative?
To answer this question, ten days ago we showed the one measure of corporate profitability that avoids various non-GAAP adjustments and one-time addbacks. We referred to the data set tracking corporate profitability without the benefits of non-GAAP adjustments, which is reported by the BEA as Corporate profits with inventory valuation (IVA) and Capital Consumption (CCAdj) adjustments. Such operating profits, or profits from current production, are the purest form of corporate earnings since this series puts all firms on the same accounting framework - it avoids non-GAAP adjustments - and the profit numbers are not adjusted for the number of shares outstanding.
And here, something stunning emerged when looking at corporate profits (after tax with IVA and CCAdj) as a % of US GDP: these have not only tumbled to the lowest level this decade, but are in fact lower than where they were when the US was sliding into the 2007-2009 financial crisis and when the US entered the 2007 recession!
Needless to say, this is a problem because as former chief economist for Alliance Bernstein, Joseph Carson, put it in July, "the argument being used by equity analysts and strategists that the equity market is cheap or inexpensive relative to profits appears to be dubious in light of revised data on operating profits, and it suggests that the "actual " market multiple is a lot higher than what is being reported by analysts."
Our report appears to have struck a nerve with none other than Goldman's clients, because in his latest closely read Weekly Kickstart report, Goldman's chief US equity strategist, David Kostin, who as we noted previously has a 3,400 price target for the S&P in 2020 (specifically, Kostin believes that "the S&P 500 will rise to 3250 during the next three months, trade around that level for most of the year, and climb to 3400 post-election as political uncertainty abates", unless the Democrats sweep Washington next year, in which case the S&P would tumble to 2,600 as Trump's corporate tax generosity is unwound)...
... writes that "one common pushback to our [optimistic] forecast is that government data paint a bleak picture of corporate profitability and S&P 500 profits may "catch down."
In other words, Goldman's clients are hardly confident in Goldman's profit and profit margin forecasts - which expect that S&P 500 EPS will grow by 6% in 2020 and 5% in 2021 - and instead are quite concerned by the true profit data, which we pointed out at the end of November, is plunging.
That also explains the title of Kostin's weekly piece, namely "BEA vs. CPAs: Why the government says margins have been falling while S&P 500 firms say the opposite."
Without directly referencing our article, Kostin writes that "a duel is taking place between the federal government, represented by the Bureau of Economic Analysis, and publicly-traded firms audited by Certified Public Accountants."
The BEA publishes the National Income and Profit Accounts (NIPA), which shows that profit margins for US companies fell from 6% in 2012 to 5% in 2017, and rose by only 20 bp in 2018 despite the 14 pp decline in the statutory corporate tax rate. In contrast, S&P 500 margins have increased on an adjusted, operating, and GAAP basis, including growth of more than 100 bp in 2018."
Visually this unprecedented discrepancy is shown in the chart below:
The issue is that whereas the S&P has been tracking operating earnings to all time highs and profits are just off all-time highs at 11%, corporate profits as reported by the BEA have been declining for the past 5 years, eroding any case for a fairly valued market and continued equity upside.
So going back to this "pushback" that Goldman's clients are offering to Kostin's rosy take (as "government data paint a bleak picture of corporate profitability and S&P 500 profits may "catch down"), which Goldman explains as "investor concerns stemming from the fact that NIPA profit margin declines have typically preceded S&P 500 margin declines, as in the lead-up to the Tech Bubble", what is Kostin's response? Well, obviously, since Goldman expects stocks to keep rising (and rising, and rising), the Goldman chief equity strategist believes that these fears are overdone - or in other words, Goldman claims that corporate profits are set to keep rising despite what the government says - for the following five reasons (we quote from Kostin):
1. Size: The S&P 500 comprises large, profitable companies while NIPA data reflects all companies, large and small and public and private. Aggregate S&P 500 profits represent just 61% of total NIPA profits. As a result, the broader US economy has a far greater exposure to smaller, less profitable companies. Before even considering private companies, the net profit margin for publicly-traded small caps (S&P 600) equals 3%, compared with 11% for large caps (S&P 500). In addition, similar to NIPA data, profit margins for the S&P 600 have been declining since 2013 despite the secular rise in S&P 500 profit margins.
2. Labor: Due in part to their size and efficiency, labor costs represent a much smaller share of S&P 500 sales than of the broader US economy. We previously found that labor costs account for 12% of S&P 500 sales, while compensation as a share of gross output for the US economy equals 27%. In addition, rising concentration and the corresponding bargaining and pricing power have also helped insulate large companies from wage pressures. The share of respondents reporting rising wages in the NABE survey has been steadily climbing since 2013 and wages in the US grew by more than 3% in each of the last 14 months. However, S&P 500 profit margins remain just shy of their record high. In contrast, small companies have less flexibility to offset these margin pressures, reflected in the 130 bp decline in S&P 600 margins since 2013.
3. Sector: The continued divergence between “superstar” firms – with larger weights in the S&P 500 – and smaller firms also helps explain the margin differential with NIPA. Info Tech accounts for 23% of S&P 500 market cap and 19% of S&P 500 earnings. The sector has experienced 12 pp of margin expansion this cycle to the current level of 23% (vs. 11% for S&P 500) and has been the most significant contributor to index-level profitability. While the GICS and NAICS classifications do not match perfectly, these high-margin companies and sectors have smaller weights in NIPA data. Using each company’s NAICS code, we find that “manufacturing,” which includes many large technology and health care firms, represents 36% of S&P 500 sales (vs. 19% for NIPA) and has a 14% margin (vs. 4% for NIPA). NIPA also has a greater exposure to low-margin industries such as Real Estate.
4. Tax: Following the passage of corporate tax reform, the S&P 500 aggregate effective tax rate fell by 8 pp (from 26% to 18%). Based on NIPA data for the entire US economy, the effective tax rate fell by only 5 pp (from 16% to 11%). The S&P 500 therefore received a larger one-time earnings boost from lower tax rates. Much of the gap may be explained by compositional differences, such as greater exposure to small, unprofitable firms that do not pay taxes and the inclusion of S-corporations and nonprofits in NIPA data. Within the S&P 600, 23% of companies have income taxes less than or equal to zero during the last four quarters.
5. Accounting: Many investors question whether accounting discrepancies between S&P 500 firms and NIPA data drive the gap in profit margins. Most equity analysts consider “adjusted” earnings, looking through one-time charges that may add to quarterly earnings noise. While adjusted margins and earnings growth have certainly exceeded GAAP measures, GAAP fundamentals for the S&P 500 nonetheless appear much stronger than the signal sent by NIPA data. GAAP earnings have grown by 21% and GAAP net profit margins have expanded by 65 bp since 2013, below adjusted margin growth of 190 bp but well above NIPA margin declines.
Summarizing what Kostin said, yes, adjusted non-GAAP "numbers" vs GAAP reality is a major "data massaging" issue - just as we said in our original article - but the biggest reason why there is a large and growing profit divergence has to do with how the market-cap weighted S&P accounts for "superstar" and giant tech firm profits, which are given substantially more weight than the rest of the corporate world... which incidentally is what we also noted when we said that "whereas EBITDA margins for tech companies are near or at all time highs, margins for the rest of the US corporate universe is fast approaching its financial crisis level. In other words, just the tech sector has account for all of the EBITDA margin improvement since the financial crisis!"
Conveniently, SocGen recently had a great slide that explains precisely what is going on, and what Kostin refused to explicitly note: the biggest US companies are disguising problems elsewhere, i.e., the bottom 90% of US companies.
In other words, for all of his verbosity, all Kostin is saying is trust us, because already supermassive tech companies with record high margins will only get bigger and more supermassive, in the process drowning out the reality of collapsing profits for all other companies.
Only, that's not true either, as Credit Suisse wrote in its 2020 year ahead outlook, margins within some tech subsectors, such as semis and tech hardware, are now rapidly sagging under trade war pressure and it's only a matter of time before this solitary margin outlier mean reverts.
Which again brings us to what we said when we wrote the article that prompted all this pushback to Goldman's cheerful optimism: "Whether or not tech succumbs to gravity and finally catches down with the rest of the economy - something that is virtually assured if some of the biggest tech monopolies are broken up in the coming years - is of secondary importance. What is more relevant is that if one looks at the real profits numbers, stripped of all adjustments, revisions and addbacks, a very ugly picture emerges, one where US corporate profitability is the worst since the financial crisis."
Incidentally, it's worth noting that despite his attempts to "explain" the unprecedented "BEA vs CPA" divergence, Kostin had nothing to counter that last, bolded sentence. Which may explain why he concludes his note with a fare more muted vision of the future, to wit:
Looking forward, we nonetheless expect only a slight S&P 500 margin expansion through 2020. S&P 500 net profit margins are on pace to fall by 65 bp in 2019, driven in large part by a 180 bp margin compression in the Energy sector and declines in a few large-cap technology stocks.... [C]ontinued wage and input cost pressures will limit margin expansion to just 13 bp in 2020 and 5 bp in 2021. If realized, S&P 500 profit margins would remain below the record high of 11.3%, set in 2018 following the passage of tax reform."
Of course, when - not if - S&P margins collapse and catch down to NIPA when the next recession hits and slams tech companies, Kostin will simply say that nobody could have possibly foreseen what is now so obvious even to Goldman's own clients.
Tyler Durden Sun, 12/08/2019 - 14:25 Tags Business FinancePrins: Dark Money Will Push Gold Higher
Authored by Nomi Prins via The Daily Reckoning,
Even though it’s on rate-cutting hold, the Fed nonetheless keeps engaging in aggressive oversubscribed repo ops, or as we like to call the process, “QE4R.”
QE4R involves offering money to banks in return for short-term U.S. Treasury and mortgage bonds, in shades of 2009.
The fact that the Fed is expanding its balance sheet through these repo operations allows it to pretend it is merely auctioning “adjustment-based” policy moves, rather than problem-based ones, to keep rates from rising and money becoming too expensive for banks.
This provides the Fed a kind of cover during which it can hold off on rate cuts until it deems that data clearly suggest they do otherwise.
Regardless of the reasons for QE4R, this new flow of dark money has the ability to stimulate the stock and bond markets — along with gold.
Although gold prices have rallied on the back of the Fed’s recent balance sheet growing exercise, gold has been rising less quickly than it did during the initial phases of QE in the post-financial crisis period from 2009 through 2011.
However, the stock market has been rising steadily (with some bumps along the way) since the start of the Fed’s QE4R operations. There are several reasons for this phenomenon.
Computer algorithms, ETF-related trading and asset managers for pensions and other forms of retirement funds seeking yields above those of bonds have pushed the market up. So have corporate stock buybacks. There is also the steadfast (and proven true) belief that the Fed will step in whenever it “has to,” as would other central banks around the world.
There’s a reality behind the dark money-infused market euphoria, though. It’s that U.S. economic growth, as well as that of the global economy, has been slowing down and will likely continue to slow.
Shrinking corporate profits in conjunction with lower rates and increased debt loads is not a classic recipe for a prolonged bull market. The fact that bulls continue to run is a mark of just how much dark money can keep markets elevated.
In the past, slowing profits along with more debt and cheap money has more closely reflected a bear market (consider the U.S. stock market in 2000–02, 2007–09 and the Japanese stock market since 1989). Japan’s stock market would be even lower were it not for various QE and ZIRP moves by the Bank of Japan.
U.S. corporate margins may well have already hit a multiyear peak. As we head toward the 2020 U.S. election, it’s hard to see many corporations diverting their debt loads into R&D or investment programs. This could hold true after the elections regardless of which political party wins.
Another reason that the Fed began QE4R is the global shortage of U.S. dollars in money markets. This also happened at the start of the financial crisis in 2008.
The last thing Fed Chairman Jerome Powell wants under his stewardship is a repeat performance. Repo lending rates spiked in September because of this shortage and liquidity problems at the big banks. This continues to this day, as evidenced by the Fed’s term repo lending facilities being often oversubscribed by the largest Wall Street players.
Since Monday, the Fed has pumped $97.9 billion into the market in two parts. One was through overnight repurchase agreements of $72.9 billion. The other was through 42-day repos. The result is that the Fed’s balance sheet has topped the $4 trillion mark and looks to rise from there.
Also, the Fed again increased the amount of short-term cash loans it plans to offer banks to ensure rates remain stable. It now plans to offer $25 billion in cash loans for the 28-day period ended Jan. 6, up from $15 billion previously.
Last week, it increased the size of its 42-day facility for the period ended Jan. 13 by $10 billion, too. This was also based on its recent bank supervisory findings that 45% of U.S. banks holding more than $100 billion in assets have supervisory ratings that are less than satisfactory.
All of this means that the Fed’s easing this year was very much a defensive maneuver. And it continues to act pre-emptively against the potential for a dollar funding squeeze as derivative-trading banks close their books into year-end 2019 through its repo operations.
Though different from the longer-term QE operations the Fed actioned between 2009–2014 that inflated stock, government and corporate bond prices, the result is the same. An artificial stock market rally. And more debt.
The big difference is all of this money manufacturing is now occurring against a backdrop of economic weakness and trade-war and geopolitical uncertainty.
For now, and heading into 2020, there remain six key economic trouble spots in the U.S. alone:
Trade Wars. China trade talks are still going nowhere specific. President Trump has threatened to “raise the tariffs even higher” on Chinese imports if a trade deal cannot be reached by Dec. 15 and went so far as to indicate that he’d be fine if a deal didn’t occur until after the 2020 election. So “phase one,” which was announced over a month ago, has made no real progress…keeping markets knee-jerking on any positive or negative rumors.
U.S. household debt at a high of $14 trillion — $1.3 trillion higher than its prior peak in Q3 2008. This could eventually hurt consumer appetites and dampen U.S. GDP.
U.S. GDP is growing but decelerating. In this 11th year of expansion and easy monetary policy, the expansion may be longer, but it’s also shallower that past expansions.
U.S. $20 trillion national debt is at 104–105% of GDP, having passed 100% in Q3 2012. Though Jerome Powell has stressed to Congress that it must find a way to fix this, the Fed continues to be the largest buyer of U.S. Treasuries, thereby pushing the problem forward of debt growing faster than the economy.
Money supply (M2) has grown since the 1980s, but money velocity (VM2) has declined since 1997, particularly since the financial crisis. That means that local businesses aren’t working together enough to stimulate the foundation of the U.S. economy.
Ongoing quest for risky assets could backfire. These problems were created by central banks. The longer rates are low, the more risk asset managers — i.e., investment funds, pensions funds and long-term insurance companies — take on to meet liabilities. This is exacerbated by slowing economies and means more global exposure to credit and liquidity risk. This increases the underlying instability in the international markets.
Given all of this backdrop, I believe that markets will continue to rally on the back of dark-money operations with volatile periods. However, gold is increasingly an attractive safe-haven investment.
Thus, it’s only a matter of time before gold has a catch-up rally.
Tyler Durden Sun, 12/08/2019 - 13:55 Tags Business FinanceMeet The Old School Fund Manager Who Wants To Be The First To Embrace Quantum Computing
Hedge fund manager Michael Hintze of CQS, based in London, is still a certain type of "old school".
His firm makes its investment decisions based on daily meetings, where managers pitch their ideas and thoughts about macroeconomic events behind a podium. He also has a "situation room", where TVs feature news networks like Al Jazeera and China's CCTV, according to Bloomberg.
But nowadays that is considered archaic and behind the times, especially in the age of algorithms and high frequency trading.
And so Hintze looks as though he may be ready to embrace a switch, saying in a interview that his firm has now turned to "quantum computing" - a superfast technology that is still in labs, where major corporations like Google and IBM are still trying to figure it out.
Hintze said: “We’re trying to get a little bit ahead. You need to be mindful of the tools you have, the ground you’re fighting over, and, thirdly, who you’re fighting against.”
But he also dismissed plans to start a fund run by algorithms. Instead, he says that CQS is working with a startup to develop a quantum chip to help the firm optimize portfolios and execute hedging strategies. CQS recently hired Ahmad Deek, formerly of Oppenheimer, to be the firm's head of data science.
The firm has about $19 billion under management and so far, has done so just using traditional human analysts and managers. The company is one of the largest firms in Europe and its $3.1 billion multi-strategy CQS Directional Opportunities fund is up more than 550% since launching in August 2005. This is double the gain of the S&P 500 over the same time period and about 7x the average hedge fund return.
Hintze knows he faces upcoming challenges, too. Almost half of his firm's assets are in long-only strategies and he has recently entertained approaches by at least one PE firm about buying a stake in CQS.
He also has to deal with an investor appetite that is stoked primarily for quant funds and low-cost passive funds. He has previously called this a "paradigm shift" that hurts active money managers. Hintze still says that, to get an edge, managers need to add context and deep analysis of world economics and politics.
Hintze said: "The reality is you need to have imagination. It is problem-solving. That’s where it is.”
David Morant, who left CQS in 2015 and was the company's former head of equities, said he saw this approach first hand. Hintze would think about different ways to make bets, including options, credit bets and CDSs.
Morant said of his old boss: “He makes money in ways that no one else does or can. He effectively thinks in three dimensions.”
Three years ago, the firm brought in Neil Brown as a geopolitical strategist. Brown is a former commodore in the British navy and adviser to the U.K.’s prime minister’s office.
Hintze is focused on surrounding himself with people who make him better at what he does. In 2018, after a slew of executive departures, he brought in Xavier Rolet, the former CEO of London Stock Exchange, to be his CEO. The firm also goes against the herd "often".
For example, Hintze loaded up on risk in late 2018 and early 2019 when the market dipped, helping contribute to his 10.6% returns so far in 2019, ahead of the 6.8% index average.
While Hintze's firm waits for the quantum revolution, he seems content continuing his old school approach for the time being. And why not: if it isn't broke, don't fix it.
"I still have 20 years left in me," he concluded.
Tyler Durden Sun, 12/08/2019 - 13:30 Tags Business Finance
![Manufactures Are Coming Back To The US, [CB] Tries To Push Against The Plan - Episode 2039a](https://i1.ytimg.com/vi/TVpuwhIyfGI/hqdefault.jpg)
