| | | | | | | | March 09, 2016 | | | | | First Impressions | | | Editor's Note
Carl Gilmore is guest editing the John Lothian Newsletter this week. In case you missed his column in the newsletter this morning, it is excerpted below.
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"You can always tell the pioneers by the arrows in their back"
Carl Gilmore, President, Integritas Financial Consulting
That venerable quote, originally anonymous, was mentioned by our own John Lothian at the Executive Club of Chicago breakfast yesterday featuring CME Group CEO Phupinder Gill. John did a great job as mediator, which by the way, was his first time speaking publicly since his surgery. Gill also did a great job. He was realistic and in tune with the fact that change will come and the future of our industry is all about technology. A very refreshing stance as traditionally someone in Gill's position tends to defend the status quo...Gill didn't do that at all! Gill's comments reflect why Chicago really is the risk management capital of the world (apologies to my friends in other geographical areas!). Good work by both.
That brings me to today's topic - where are we going and how will we get there? There is one thing we know for sure - change is going to happen and there isn't a darn thing that we can do to stop it. As Yogi Berra once said, "If the fans don't want to come to the ballpark, you can't stop them." Thus, we need to think about how change can benefit our lives and our industry. One subject we can't ignore is financial technology - FinTech.
FinTech, as we all know, broadly refers to using technology to make financial services more efficient. In our industry there are a lot of interesting things going on, from startups to incubators to disruptive technologies that could drastically change how our industry works.
(To read the rest of the commentary from the morning's newsletter, click here)
| | | | | | Quote of the day: | | | | | | “ | "The reality is that many of these places were quite top-heavy with MDs who were nonproducers. What this is doing is challenging the belief system that someone with an MD title is additive to the business. The people who have been coasting and who have been creating operating expenses, the return on capital for some of the individuals sitting in these seats, is really in focus."
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| ” | A credit trading veteran in in the story, "Wall Street is gripped by something called 'juniorization,' and it is freaking some people out"
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| | | | Lead Stories | | |
The fears of banks and industry over Brexit deserve to be heard
Ben Wright - The Telegraph
Brexiteers would rather we didn't listen to business leaders who, on the whole, are in favour of the UK remaining a member of the European Union. Having seen the shambles that Lord Rose, the former head of Marks & Spencer who is leading the Britain Stronger in Europe campaign, is making of their case, Inners may increasingly be of a similar mind. In Parliament last week to face the Treasury Select Committee, Lord Rose said: "The benefits of being in the EU are outweighed by the costs." Presumably he meant the opposite. He then said wages will rise if Britain votes to leave the European Union. Presumably he didn't realise how this would be interpreted - that the EU may be good for businesses but not necessarily for their employees.
goo.gl/KpvRQG
****SD: And on the other side from the Telegraph, How a Brexit could save Europe from itself
How Global Investors Turn Negative Japan Yields Into Big Returns
Kevin Buckland and Shigeki Nozawa - Bloomberg
Record-low negative yields are no deterrent to overseas demand for Japanese government bonds. In fact, they're an incentive. The discount offered to dollar holders to borrow yen for five years in the swap market reached a record 102.5 basis points this week, as the Bank of Japan's Jan. 29 decision to switch to interest rates below zero widened a divergence from U.S. monetary policy. Calculations on returns for investors using such funding show the fixed coupon equivalent for owning five-year JGBs was 2.3 percent on Wednesday, despite a yield of minus 0.175 percent on the debt.
bloom.bg/1QErVzD
****SD: Also see Bloomberg View's Fear Is Beating Greed in the Bond Market
Pension funds face derivatives exodus
Joe Parsons - The Trade
European pension funds could be forced out of the derivatives market if rules requiring them to post cash as variation margin are not changed. In a joint letter to the European Commission's Jonathan Hill, the heads of Europe's largest pension funds warned that rules restricting the use of non-cash collateral, such as government bonds, would reduce liquidity in the OTC derivatives market and could result in them being shut out.
goo.gl/xl0yH5
US financial watchdog flags up flaws in stress tests
Joe Rennison - Financial Times
Bank stress tests are failing to take account of the potential systemic risks of large counterparties failing, the US government's financial stability watchdog has warned. The Office of Financial Research, set up after the 2008 financial crisis as part of the Dodd-Frank Act, conducted analysis of banks' potential losses from credit derivatives exposures under regulatory stress scenarios.
on.ft.com/1XddcNR
Is the Perfect Storm Over for Markets?
Mohamed A. El-Erian - Project Syndicate
Earlier this year, financial markets around the world were forced to navigate a perfect storm - a violent disruption fueled by an unusual amalgamation of smaller disturbances. Financial volatility rose, unsettling investors; stocks went on a rollercoaster ride, ending substantially lower; government bond yields plummeted, and lenders found themselves in the unusual position of having to pay for the privilege of holding an even bigger amount of government debt (almost one-third of the total).
goo.gl/5ZPLJE
****SD: From Foreign Policy: Just How Bad Is the Global Economy? It's All a Matter of Perspective
The Case for Banks to Use Open, Public Blockchains
Siddharth Kalla - Bank Think
Marc Andreessen, the venture capitalist and inventor of the early web browser Mosaic, had it right when he tweeted in December: "Big companies desperately hoping for blockchain without Bitcoin is exactly like 1994: Can't we please have online without Internet?" In the mid-90s, the advent of the Web led to private companies attempting to create proprietary information-sharing networks (think AOL and CompuServe.) But the Internet as we know it today won out over every single private network because it was not restricted to the big players and bogged down by proprietary protocols. Banks are at risk of making the same mistake today as they show surprising interest in private distributed ledgers, or private blockchains, rather than put their intellectual capital to use on features that enhance the appeal of public blockchains and the virtual currencies - such as bitcoin - enabled by open-source ledger systems.
goo.gl/Gs7r76
Wall Street is gripped by something called 'juniorization,' and it is freaking some people out
Matt Turner - Business Insider
There is a phrase on Wall Street for the practice of firing senior traders and salespeople and replacing them with younger talent. It is called "juniorization," and it has been pretty prevalent over the past few years as banks have sought to cut costs. The chief executive at the investment-banking unit of a large firm explained this in simple terms: Headcount had stayed pretty stable at his firm, he said, but the makeup of that headcount had changed.
read.bi/1Xd4sad
Are Big Banks Necessary?
John Heltman - American Banker
The drive to break up the big banks has won a surprising number of adherents from both sides of the political spectrum  everyone from Neel Kashkari, the Republican head of the Federal Reserve Bank of Minneapolis, to Bernie Sanders of Vermont, the Democratic socialist who has made it the heart of his campaign. The issue is usually analyzed from a political standpoint, focusing on whether a breakup is possible and how it could be done. But the topic raises a critical question that is seldom asked, much less answered: Is there a legitimate, coherent business case to be made for the largest and most complex banks to stay large and complex? Do megabanks serve a critical function that justifies their undeniable risk to the financial system?
goo.gl/Ezl2PL
Big U.S. banks to take on tech rivals with instant payments
David Henry - Reuters
Depositors at some of the largest U.S. banks are finally going to get the chance to do something quick and simple: send money to another person's account instantaneously by mobile phone.
reut.rs/1U3Yp9X
Wall Street Is in Charge in Argentina (Again)
Carolina Millan - Bloomberg
Hours after Argentina cut a deal with New York hedge funds to end a nasty, 15-year-old debt dispute, the government's top economic officials took to the podium in Buenos Aires to bask in the moment. First to speak that February evening was the finance minister, Alfonso Prat-Gay. He's an old JPMorgan Chase & Co. guy, a currency strategist. To his left sat Luis Caputo and Santiago Bausili, the two men in charge of the ministry's debt program. They too are JPMorgan alums, and both would go on to serve stints at Deutsche Bank AG. To Prat-Gay's right was the cabinet secretary, Mario Quintana. He's an ex-private equity guy, the founder of a firm called Pegasus Venture Capital.
bloom.bg/1Xd5WkP
****SD: Speaking of a country's debt, Saudi Arabia seeks $6-8 billion bank loan to shore up state coffers
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| Central Banks | Monetary policy divergence has plenty of room to run, says Goldman
Alexandra Scaggs - Australian Financial Review
Policy divergence between the Federal Reserve and other central banks may continue longer than bond traders expect, say analysts from Goldman Sachs. The analysts say investors view policy divergence as unsustainable yet Goldman hasn't found much historical support for that opinion. If the Fed raises rates three times this year like Goldman expects, "it would not imply a gap between US and foreign rates that is unusual or implausible by historical standards", analysts led by Jan Hatzius wrote in a March 8 note. That means the gap between yields on short-term debt in the US and other developed economies may widen. The difference between two-year US and Japanese yields widened on Tuesday to the largest since 2008, while the gap between US and German two-year yields reached the most since 2006 the day before.
goo.gl/XeZzU7
Markets betting on near-zero interest rates for another decade
Jamie McGeever - Reuters
World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.
goo.gl/GNl6xX
Draghi May Catch a Fearful, Wary Market by Surprise: Analysis
Vassilis Karamanis and Richard Jones - Bloomberg
Market participants have refrained from taking large short positions in the euro against the dollar ahead of the European Central Bank meeting this week in fear of a repeat of December's disappointment, potentially paving the way for a dovish surprise, Bloomberg strategists Vassilis Karamanis and Richard Jones write.
bloom.bg/1Xd61Fi
****SD: Also see The ECB's Mario Draghi Could Announce 5 New Monetary Easing Measures, Weekly Bond Update: Draghi's day and ECB Faces Difficult Balancing Act to Revive Eurozone Inflation
The IMF Is Sounding the Alarm. Is Anyone Listening?
Ian Talley - WSJ
The International Monetary Fund is sounding louder and louder alarms about the state of the global economy. The problem is, few major economies seem to be hearing them. "The IMF's latest reading of the global economy shows once again a weakening baseline," the fund's No. 2 official, David Lipton, warned Tuesday in a speech to the National Association for Business Economics. While the world economy is still expanding, he said, "we are clearly at a delicate juncture, where risk of economic derailment has grown."
on.wsj.com/1LbRetT
****SD: So many bells ringing all the time it's hard to hear.
Are Central Banks Really Out of Ammunition?
Adair Turner - Project Syndicate
The global economy faces a chronic problem of deficient nominal demand. Japan is suffering near-zero growth and minimal inflation. Eurozone inflation has again turned negative, and British inflation is zero and economic growth is slowing. The US economy is slightly more robust, although even there recovery from the 2008 financial crisis remains disappointingly slow, employment rates are well below 2007 levels, and annual inflation will not reach the Federal Reserve's 2% target for several years.
bit.ly/1Xd8a3S
****SD: I guess now is the time to fix bayonets...
Monetary policy and the markets: What if the helicopters took off?
The Economist
Interest rates are negative in much of Europe and Japan, and it may be a while before the Federal Reserve follows up December's quarter-point increase in rates. So that doesn't leave the authorities with a lot of room, in terms of altering the level of rates, to ease policy if another downturn hits.
econ.st/1Xd92Wa
Bernanke: A Fresh Approach to Fiscal Stimulus Is China's Only Solution to the Impossible Trinity
Luke Kawa - Bloomberg
Former Fed Chair Ben Bernanke offered a solution to the problem that's long vexed Chinese policymakers and spurred turmoil in financial markets. As economic growth in China moderated and capital outflows picked up steam, market participants have become focused on how the world's second-largest economy will resolve the so-called "impossible trinity." Under the Mundell-Fleming model, an economy can choose only two of three following options at the same time: a fixed exchange rate, independent monetary policy, and an open capital account.
bloom.bg/1Xd6jfg
Draghi Doesn't Have What Europe Needs
Bloomberg View
Mario Draghi's job isn't getting any easier. The president of the European Central Bank has led investors to expect something big after Thursday's policy meeting -- but his ability to do anything substantial is limited, and his choices are far from appealing.
bv.ms/1U3YlHd
Swiss central bank still has policy options in currency fight
Brenna Hughes Neghaiwi - Reuters
A widely expected rate cut by the European Central Bank this week could nudge the Swiss National Bank towards further cutting its own negative interest rates as it seeks ways to weaken a currency it says is overvalued. While some analysts say the SNB has already played its best cards to try to weaken the franc, it has some left, and the ECB rate cut likely to come on Thursday will focus minds at an SNB policy assessment on March 17.
reut.rs/1Xd69ol
Jeff Gundlach on the global economy, the Fed's next move, and negative interest rates
Business Insider
Jeff Gundlach held his latest webcast on markets and the economy, called "Connect the Dots," on Tuesday.
read.bi/1Xd53Zy
| | | | Currencies | Currency Traders Bracing for Big Move in Euro as ECB Meeting Looms
Chelsey Dulaney - WSJ
Once bitten, twice shy.
Currency investors are bracing for big swings in the price of the euro when the European Central Bank holds its monetary policy meeting on Thursday. The ECB is widely expected to announce that it is implementing further easing measures such as increasing its bond-purchase program and cutting its deposit rate further into negative territory. But uncertainty remains about what form the stimulus could take, especially after the ECB unveiled stimulus measures that disappointed many investors at its December meeting.
on.wsj.com/1QEqVLD
Phantom Goods Disguise Billions in China Illicit Money Flows
Enda Curran - Bloomberg
Days after the Switzerland-based Bank for International Settlements played down fears over capital flight out of China, new trade data has put the spotlight on a channel used to ferret out billions worth of illicit money flows: phantom goods.
bloom.bg/1Xdggcz
****SD: From Busines Insider, Fake trade invoicing in China is back, this time to get money out of the country
TCA: Bridging the Gap Between Equities and FX
TABB Forum
Transaction cost analysis has been the Holy Grail of best execution in equities trading. While the over-the-counter nature of currency markets presents difficulties for FX TCA, however, the next generation of foreign exchange TCA promises to help traders develop effective trading strategies while continually monitoring market conditions and the quality of executions in real time.
goo.gl/6rXL1L
FX Option Volumes Flat Despite Brexit Vote
Shanny Basar - Markets Media
The upcoming Brexit referendum has not affected the volume of sterling foreign exchange options against the euro or US dollar according to an analysis of US swap data repositories by Clarus Financial Technology. The UK government has announced that a referendum on the UK's membership of the European Union will be held on 23 June in which voters will decide whether to remain or leave.
goo.gl/mz4Jjy
Pritzker Family Turns to Jen to Hedge Swings in Currencies
Miles Weiss - Bloomberg
Investment managers for U.S. Secretary of Commerce and billionaire Penny Pritzker and other members of her family are seeking to shield their fortune from foreign currency swings. Executives at Penny Pritzker's family office have set up a currency trading partnership with Stephen L. Jen, a former International Monetary Fund economist who later predicted the 1997 Asian financial crisis. The partnership has raised $72 million to date, according to a Feb. 24 filing with the U.S. Securities and Exchange Commission.
bloom.bg/24R176q
Hedge funds back off bets on China devaluation
Patrick Graham - Reuters
Two of the three types of hedge funds which bet heavily on a sharp devaluation of China's yuan last year have backed off the trade, leaving only some ultra-bearish "Black Swan" investors holding long-term bets, fund managers and bankers said. Hedge fund sales desks at four of Wall Street's biggest banks told Reuters that many U.S. players had made money betting against China by the time Beijing took aggressive steps to prop up the currency in early January.
reut.rs/1Yw2G5B
Buy the Dip in Euro / Dollar Exchange Rate Say Societe Generale, Chase to 1.05 say Commerzbank
Joaquin Monfort - PoundSterling Live
The use of what are known as non-standard, or unconventional monetary policy measures by the ECB and the BOJ have not been enough to weaken the euro or the yen, according to a recent research note by Societe Generale's Alvin Tan. The note comes ahead of the European Central Bank's (ECB) March meeting in which a raft of policy measures are to be announced. A good number of speculators believe the EUR/USD is too high in the lead up to the meeting suggesting markets learnt not to bet against the euro in December where policy measures were deemed too timid. Strategists believe the highest-probability outcome at this stage is for a decline in the exchange rate.
/goo.gl/0W4zUw
| | | | Indexes & Index Products | What Doesn't Kill Bull Market in Stocks May Make It Stronger
Lu Wang - Bloomberg
How low can stocks go," the Wall Street Journal wondered on March 9, 2009, as the financial crisis was wiping away trillions of dollars from American equities, the deepest rout since the Great Depression. That day, of course, marked the bottom. The bull market that celebrates its seventh anniversary today has restored $14 trillion to stock values, pushing up the Standard & Poor's 500 Index by almost 200 percent.
bloom.bg/1Xd79sy
Women rise to the top in merit-driven ETF industry
Caroline O'Shaughnessy - FTSE Russell
On March 8th, women executives rang bells at over 30 exchanges globally to celebrate International Women's Day. Organized by Women in ETFs, the event was executed in partnership with UN Global Compact, Sustainable Stock Exchanges Initiative, UN Women, IFC and The World Federation of Exchanges. While the event ostensibly was focused on celebrating gender equality, at FTSE Russell we'd also argue it accentuates the parallel growth of the ETF industry along with the rise of women to positions of leadership within this relatively new sector.
/goo.gl/6j9cjm
Most U.S. Stock Pickers Failed to Beat Index Last Year, S&P Says
Charles Stein - Bloomberg
Chalk up another victory for indexing.
Sixty-six percent of mutual-fund managers who buy large U.S. stocks underperformed the benchmark Standard & Poor's 500 Index last year, according to a study by S&P Dow Jones Indices.
bloom.bg/1QErNjD
Beware The S&P 500 - SPDR S&P 500 Trust ETF (NYSEARCA:SPY)
Seeking Alpha
The unemployment picture just continues to improve! If you haven't seen the release yet, the United States economy added 242,000 jobs in February, leaving the national unemployment rate at 4.9%. This is actually a very good release. In fact, we are currently seeing the best levels of employment in nearly a decade. Things are looking up!
goo.gl/PTW4QP
Fee Tactics Grow As ETF Costs Fall
Ellie Lan - ETF.com
When investing in any ETF, the fund's expense ratio is usually the most important cost. Expressed as a percentage of assets deducted for fund expenses, expense ratios include management fees, administrative fees, operating costs, and 12b-1 fees, if applicable. Expense ratios are also "the most dependable predictor of performance," according to a Morningstar study. The study showed that funds in the lowest quintile of expense ratios produced the highest total returns, whereas those funds in the most expensive quintile of expense ratios produced returns in the lowest quintile of funds analyzed. ETFs in particular are driving down the overall costs of investing. This is true both of stock and bond funds, where the average expense ratio dropped from 0.76% to 0.57% during the same time periodÂa decline of 25%. The unfortunate flip side is that, as expense ratios decrease, fund companies are now getting creative in attempts to make up for lost revenues. By marketing newer alternatives with more exotic investment strategies, these funds usually are also more costly and potentially riskier to individual investors.
goo.gl/tRV5jy
Why Strategic Beta Is Here to Stay
John Rekenthaler - Morningstar
Two Ph.D.s at BlackRock, Ronald Kahn and Michael Lemmon, have published an article that predicts continued success for strategic-beta funds (to use Morningstar's marketing-shorn phrase for what the authors call "smart beta"--that is, the approach of investing mechanically but selectively, by using an system that buys only securities that have certain features (i.e. factor exposures, or betas). Examples would be a fund that buys only low-volatility issues, or one that holds stocks that have low price ratios and high recent price momentum.
goo.gl/nusPcG
The Baltic Dry Index is an important indicator of global economic health, and it's doing badly
Matthew Nitch Smith - Business Insider
The BDI is a very useful gauge of global trade, and tells you how much it costs to move goods around the world in massive ships. These goods can be pretty much anything: iron ore, grain, coal ... stuff the world needs to build things and function. As such, analysts keen to predict how the health and future of the global economy like to pay close attention to it. It is frequently used as a so-called canary in the coal mine for the state of the world economy and how well international trade is doing. If the price is low, it suggests trade is slowing. And that's the problem. As this chart shows, right now it's doing really badly:
read.bi/1U3ZzlQ
New index will track Apple, GoPro and others in wearable tech space
Jennifer Booton - MarketWatch
A new stock market index launched Wednesday will track 45 to 55 companies from around the world that the creators believe have the biggest stake in the boom in wearable technology.
on.mktw.net/1U3ZrCS
| | | | Gold | This 4,000-Year-Old Financial Indicator Says That A Major Crisis Is Looming
Zero Hedge
Over 4,000 years ago during Sargon the Great's reign of the Akkadian Empire, it took 8 units of silver to buy one unit of gold. This was a time long before coins. It would be thousands of years before the Lydians in modern day Turkey would invent gold coins as a form of money. Back in the Akkadian Empire, gold and silver were still used as a medium of exchange. But the prices of goods and services were based on the weight of metal, and typically denominated in a unit called a 'shekel', about 8.33 grams.
goo.gl/MukVYl
Gold's Best Start Since 1974 Shows Not Just Inflation Hedge
Eddie Van Der Walt - Bloomberg
For an asset touted as a hedge against inflation, gold's doing pretty well right now. The metal is off to its best start to the year since 1974 even as expectations for gains in consumer prices are near their weakest since the global financial crisis seven years ago. That's odd. Gold has soared during times of high inflation in the past. In the late 1970s when annual U.S. consumer-price gains were on their way to a peak of almost 15 percent, it had its biggest ever rally. One reason for the shift now is that low inflation may be a sign the economy remains weak, deterring the Federal Reserve from tightening policy.
bloom.bg/1XdgOzk
| | | | Miscellaneous | Inside the growing business of divorce financing
The Economist
In many Western countries, including America and Britain, divorce lawyers are not allowed to represent a client in exchange for a share of whatever settlement they secure, rather than for a fixed fee. Such arrangements, it is feared, would beget more and nastier divorces. Yet the same rules do not apply to financiers: they are free to fund legal battles over marital assetsÂand a growing number do.
econ.st/1Xd99RA
Investing lessons from Bear Bryant
Business Insider
Legendary coach Bear Bryant once said, "Offense sells tickets, but defense wins championships." It was a winning formula for Bryant's college football team. It also holds the secret to success for the game of investing.
read.bi/1QEp49M
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