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BAML says “Fed Blinks”; lowest interest rates in 5,000 years
Capital Markets
<p>“The Fed Blinks,” blares a headline in an investment strategy piece from Bank of America Merrill Lynch today, one that takes the tone that the Fed catered to those on Wall Street who were warning of a threat to the main street economy if the Fed lifted rates.<br /> BAML: Interest rates "lowest in 5,000 years" at depression levels<br /> As short term interest rates are the “lowest in 5,000 years,” running at the zero level not seen since the Great Depression in 1930, a BAML piece from Chief Investment Strategist Michael Hartnett along with Investment Strategists Brian Leung and Garrett Roche notes seven primary thoughts.</p> <p>The first thought is that the Fed caved to threats that China and withdrawing stimulus from Wall Street could reverse what little main street recovery that has occurred to date. The bigger picture is that this recovery is different from others, “thanks to low rates/oil/unemployment,” but the component troubling economists, deflation, remains low as a result of three factors: debt, tech disruption, demographics.<br /> BAML: Fed in "tactical delay," also known as a "stay of execution for the 'liquidity era'"<br /> The delay in the Fed rate hike was viewed by the bank as a “tactical delay,” calling it a “stay of execution for the ‘liquidity era’” but it could have more ominous meaning if a strong rally does not ensue. The combination of an “ultra-dovish Fed” and bearish market sentiment could be hinting that a recession and/or default is imminent, according to the report, which is looking for the S&amp;P 500 to reach the 2040 to 2070 level in light of a soft touch by the Fed recently.</p> <p>A key point could be the rolling over of the Federal Reserve’s monetary base, known as M1 as the report says that liquidity could be peaking.  The peak in M1 could result in a peak in excess returns. The best anecdote to fears could be stronger global growth.</p> <p>In a “deflationary recovery,” the report recommends “growth, yield and quality” which it predicts will “remain structurally bid.” In such an environment they recommend maintaining long exposure to the U.S. dollar, long volatility as well as real estate and stocks, “but upside for risk assets now (are) constrained until unambiguous handoff from liquidity to growth” market environment occurs.</p> <p>This story first appeared in ValueWalk.<br /> Photo: Philip Dehm</p>
Daily Scan: China leads Asia rout, Macau casinos on a losing streak
Capital Markets
<p>Updated throughout the day </p> <p>September 23</p> <p>Good  evening. Asian markets plunged downward today, with China taking the lead after the Caixin manufacturing PMI disappointed expectations coming in at 47 for September - its lowest level since March 2009. The Shanghai and Shenzhen composite indices were down by 2.2% and 0.83%, respectively, as Hong Kong fared worse with the Hang Seng Index finishing down 2.26%; the H-share index down 2.7%. Among the hardest hit were Macau's casino operators. Galaxy Entertainment (-4.5%), SJM Holdings (-5.44%), and Wynn Macau (-5.8%) - which was recently rocked by $258 million heist -  all hit 52-week lows. Here is what else you need to know:<br /> India commits to $2.5 b military helicopter deal and deeper ties with Washington. The world’s largest democracies, India and the US, have agreed to deepen their security and economic cooperation, part of an ambitious drive to boost trade between them five-fold. SCMP (paywall)<br /> China open to foreign business amid economic reforms - Xi. Chinese President Xi Jinping has sought to reassure US business leaders, in a wide-ranging speech covering China's economic reforms and cyber crime. Speaking in Seattle, Mr Xi said foreign firms are welcome in China, and that Beijing would not manipulate its currency to boost exports. BBC<br /> EU leaders to agree on migrant quotas. EU leaders meeting in Brussels are set to approve a plan to relocate 120,000 migrants across the continent, despite fierce opposition from some members. Romania, the Czech Republic, Slovakia and Hungary voted against the mandatory quota scheme. BBC<br /> Volkswagen scandal could affect 11 million vehicles. The carmaker is now the subject of global criminal probes involving software designed to lie about emissions in its diesel cars. It has set aside $7.27 billion to cover potential liabilities. On Monday, the stock plunged 23% and slid another 19% on Tuesday. VW owns Porsche, Audi, and Skoda. Wall Street Journal (paywall)<br /> Malaysia won't protect its companies in Indonesia for causing haze.  Malaysia has said it will not protect its companies if they are found guilty of practising slash-and-burn to clear lands in Kalimantan and Sumatra in Indonesia. Many oil palm concessions in the region are owned by listed plantation companies in Malaysia. Channel News Asia<br /> China president Xi’s US trip gets off to an awkward start.The White House has contacted China’s Foreign Ministry over the detention of an American businesswoman accused of spying, a spokesman said on Tuesday, in a case that blew up just as President Xi Jinping began a visit to the United States. Japan Times</p> <p>Goldman Sachs CEO Lloyd Blankfein diagnosed with lymphoma. Blankfein announced via email that he will be undergoing chemotherapy treatments over the next seve</p>
Want to work for Ray Dalio? Then you better be able to answer these questions!
Lifestyle, 4:01
<p>Getting hired at Bridgewater Associates isn't easy. As one of the world's biggest hedge funds, Ray Dalio's firm has a reputation for being incredibly intense, and maybe a little crazy. Dalio has said the self-improvement process is like "when a pack of hyenas takes down a young wildebeest," reports Business Insider. Like companies such as Google, Bridgewater is more interested in forcing an interviewee to think about a complex question than to get a correct answer.  Says Dalio:<br /> "The answer doesn't really matter. It's totally great if the person's thinking on the subject ends in a different place than the beginning, because moving forward together to get at the best answer is more important than being right from the outset."<br /> Here are some of the most interesting Bridgewater interview questions Business Insider found on Glassdoor:</p> <p> For a facilities-manager candidate: "Are there any circumstances under which torture is justified?"<br /> For an investment associate: "Would the world be better off with an open border policy?"<br /> For an investment associate: "Should hate crimes be punished more strictly than regular crimes?"<br /> For a management associate: "Should participation in a team sport be mandated for young children?"<br /> For an investment associate: "Should the U.S. be allowed to kill civilians using drone strikes?"</p> <p>Photo: Richard Toller</p>
Is fintech feeding on Wall Street's brains?
FinTech
<p>&nbsp;</p> <p>&nbsp;</p> <p>Is fintech partly responsible for a perceived Wall Street brain drain? It comes as no surprise that the legion of fintech start-ups coming onto the scene are gobbling up talent with gusto, but is it really to the detriment of industry incumbents?</p> <p>UK financial rag City AM came to this conclusion earlier this year. It noted that since the financial crisis a career at a major financial institution might not hold the same appeal for high-flying young go-getters.</p> <p>Data from top business schools like Chicago Booth, Wharton, London Business School, and Insead showed a 20% drop in MBA graduates entering finance between 2007 and 2013. This contrasts sharply with what's going on in the technology sector which has roughly doubled its intake of MBA graduates over the same period.</p> <p>Then again, correlation does not always equal causation. Mukesh Bubna, founder of Hong Kong-based P2P lending platform Monexo, told NexChange he has mixed views:<br /> "In Asia it is still about working for big names, but I think it is changing. A lot more people call Monexo (from the financial services space)  to say, 'Hey, we heard about you, can we join you?', but we are also very choosy about who we bring in,  because coming from a corporate world you are only doing one thing; in a start-up you do 20. Some people can't make that transition easily."<br /> It is worth noting at this point that Bubna quit his job with Citigroup to launch his fintech start-up.</p> <p>What is clear at least is that the fintech sector is hungry for talent, to the point of cannibalization. The Australian Financial Review accused the UK government not too long ago of "pinching" the best and brightest of Australia's nascent fintech industry by flying them over to London -- triggering a "global war for innovation talent".<br /> Photo: Charis Tsevis</p>
Daily Scan: The Pope has landed; Stocks fall
Capital Markets
<p>September 22</p> <p>Good afternoon,</p> <p>Stocks fell Tuesday as investors showed worry about global growth. And who knows what's going on in the Fed's mind? The Dow dropped 1.1%, recovering ever so slightly from further losses midday. The Nasdaq lost 1.5%, and S&amp;P 500 fell 1.2%. The Volkswagen scandal hit European markets hard as markets swing from optimism to pessimism on the outlook for economic expansion. The dollar gained overnight on hopes that the things are getting better while the Stoxx Europe 600 skittered more than 3% lower. It was a one-two punch. Auto stocks got crushed as the VW scandal blows up. Commodity currencies got hit hard after oil retraced much of its recent gains. We can only conclude: Markets are in a less-than-healthy frame of mind.  The next catalyst for market volatility: Atlanta Fed president Dennis Lockhart speaks at 7 p.m. ET.</p> <p>Here's what else you need to know:</p> <p>Pope Francis is in the U.S. The pope kicks off his historic visit with a trip to D.C. and a chat with Congress. Next up, his holiness will visit Philadelphia and New York City before the weekend.</p> <p>Brian Moynihan gets to keep his jobs. Bank of America's Chairman and CEO survived a vote of confidence, allowing Moynihan to keep both CEO and Chairman roles at the firm. Moynihan has led the bank for six years. Shareholders, including CalPERS, questioned why Moynihan needed both jobs. Wall Street Journal</p> <p>General David Petraeus will apologize to the Senate. In testimony before the Senate Armed Services Committee, the retired general will apologize for his extramarital. The Daily Beast</p> <p>Goldman Sachs CEO Lloyd Blankfein diagnosed with lymphoma. Blankfein announced via email that he will be undergoing chemotherapy treatments over the next several months in New York. He says his form of lymphoma is highly curable, and he will be able to work as normal. Blankfein added that he will cut back on some planned travel. Politico</p> <p>China's Xi lands in U.S. at controversial moment. President Xi Jinping comes to the U.S. on his first official visit as the Chinese economy wobbles,and the stock market sits 38% below its peak --  challenging his iron grip back home. Xi begins his visit in Seattle where he will meet with high tech giants at the Microsoft campus. China has been charged with massive cyberattacks, which Xi has denied. Back in China, Xi has tightened its grip on the Internet, moving to censor activity aggressively. Xi will visit Washington, D.C., where he will meet President Obama in what is bound to be testy conversations. Xi will then go to the United Nations to address the General Assembly. USA Today</p> <p>Volkswagen scandal could affect 11 million vehicles. The carmaker is now the subject of global criminal probes involving software designed to lie about emissions in its diesel cars. It has set aside $7.27 billion to cover potential liabilities. On Monday, the stock plunged 23% and slid another 19% on Tuesday. VW owns Porsche, Audi, and Skoda. Wall Street Journal (paywall)</p> <p>More than 3,000 rape kits go untested in Kentucky. The state blames a lack of resources for allo</p>
Billionaire's whole family struck with Lyme disease
Lifestyle, 4:01
<p>British billionaire John Caudwell announced that he and his entire family have been diagnosed with Lyme disease.</p> <p>Caudwell, a business man and founder of Phones 4u, recently revealed that his 20-year-old son Rufus has a possibly fatal strain of Lyme disease, reports the Daily Mail. Now, Caudwell says that he, as well as his two daughters and ex-wife, have all tested positive for the disease. Lyme disease is known to spread through infected ticks, but the Caudwell case suggests it could also spread from person to person.</p> <p>Rufus had been diagnosed with mental health problems including panic attacks and agoraphobia, but Caudwell says those symptoms are linked to the Lyme disease. Rufus is currently bed-ridden as the disease has progressed.</p> <p>Caudwell says his family is fortunate that it can afford treatment outside of the National Health Service, as the NHS provides little treatment for the disease. He initially kept the diagnosis private, but as the entire family will be treated, Caudwell decided to draw attention to the disease in the U.K.<br /> Photo: John Tann</p>
Goldman jumps on ETF bandwagon
Asset Management
<p>It's official. Everybody's doing it.</p> <p>Goldman Sachs Asset Management has launched its first exchange traded fund in attempt to grab assets in the growing strategy's space, reports the Financial Times. Retail and institutional investors alike are pouring money into ETFs, as a cheap and easy option for tracking a market. GSAM's first ETF launched with $50 million and tracks the Goldman "ActiveBeta" index, which weighs equities according to value, earnings, and volatility. The firm plans to launch similar products "in the coming months."<br /> “Our clients asked us to apply our investment expertise to exchange traded funds,” Michael Crinieri, GSAM’s global head of ETF strategies, said in a statement.<br /> Moody's has called this "smart beta"-ETF space "the next battleground for asset management dollars." The ratings agency says that it expects the biggest passive asset managers and the most innovative managers to be the winners.</p> <p>Earlier this month OppenheimerFunds acquired VTL Associates to break into the ETF space. Legg Mason bought QS Investors last year, and Franklin Templeton is also eyeing the space. The multi-boutique Legg Mason requested regulator approval for its first four ETFs earlier this month.</p> <p>According to ETFGI, ETFs posted net inflows of $219.7 billion globally during the first eight months of 2015, a 16% increase from the same period in 2014.<br /> Photo: WorldSeriesBoxing</p>
Video: 'The Big Short' trailer is out
Lifestyle, 4:01
<p>The movie trailer for "The Big Short" has been released. The film, based on Michael Lewis' book about the subprime housing crisis, is in theaters in December. Christian Bale, Steve Carrell, Ryan Gosling, and Brad Pitt star. It's like the "Wolf of Wall Street," but less sexy.</p>
When an easy Fed doesn't help stocks (and when it does)
Asset Management
<p>Last week, the Federal Reserve chose to do nothing to move short-term interest rates away from zero after nearly 6 years of extraordinary policy distortion. As detailed below, the inaction of the Fed, and the failure of the stock market to advance in response, follows the script that I detailed in February. Policy makers at the Fed actually appear to believe – contrary to historical evidence and contrary even to the recent experience of numerous countries around the world – that activist monetary policy has meaningful and reliable effects on subsequent economic activity. It’s lamentable that otherwise thoughtful policy makers, much less journalists who cover these actions, show no interest in how weak these correlations are in actual data, and seem incapable of operating even the most basic scatterplot. Despite the spew of projectile money creation around the world, the global economy is again deteriorating. The main defense of the Fed’s inaction seems to be that years of zero interest rate policy have been hopelessly ineffective, so continued zero interest rate policy is necessary.<br /> As we’ve demonstrated previously, there’s no statistical evidence in the historical record to suggest that activist monetary policy has any relationship to actual subsequent economic activity (see The Beauty of Truth and the Beast of Dogma). Historically, monetary policy variables themselves can be largely predicted by previous changes in output, employment and inflation. That “systematic” component of monetary policy does have a weak correlation with subsequent economic changes. It’s unclear whether that’s purely incidental, or whether those systematic changes in monetary variables (such as short-term interest rates) are actually necessary for the weak effects that follow. I should be careful to note that monetary policy also seems to weakly influence confidence expressed in certain survey-based questionnaires. But that correlation emphatically does not translate into changes in actual output, income, or employment. Put simply, massive activist deviations from systematic monetary policy rules provide no observable economic benefit, but instead create fertile ground for speculative bubbles and crashes.<br /> Despite its wild grandiosity, Fed intervention was not what ended the global financial crisis. Recall that the global financial crisis ended – and in hindsight ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned FAS 157 “mark-to-market” accounting, in response to Congressional pressure from the House Committee on Financial Services on March 12, 2009. That change immediately removed the threat of widespread insolvency by making insolvency opaque. This might not have meant much if regulators had continued to insist on mark-to-market when evaluating bank solvency. But with regulators willing to go along, the global financial crisis ended with the stroke of a pen.<br /> Those who hail the March 2009 replacement of mark-to-market with mark-to-unicorn as a “necessary” response miss the point (though Iceland has actually done quite well relative to the rest of the world, despite initial disruption, by insisting on massive bank restructuring rather than playing extend-and-pretend). The point is that Fed intervention did not end the </p>
Forum Global Opportunities up 107% YTD on big short yuan bet
Hedge Funds
<p>China’s losses have been one hedge fund’s gain – big time.</p> <p>Forum Global Opportunities Fund, the global macro hedge fund run by Ray Bakhramov, jumped 60.21% in the month of August. It is now up 106.71% year-to-date, putting it on track to post its first year in the green since 2011, according to a letter to investors reviewed by ValueWalk.</p> <p>The increase was driven by a 38.2% gain in the fund’s forex investments. The firm has a long-standing bet against China’s yuan, which the country devalued last month. It also won on short bets against the Taiwanese and Singapore dollars as well as the S&amp;P 500, DAX and Nikkei indices.</p> <p>&nbsp;</p> <p>The firm has operated in recent years under the belief that high levels of intervention from central banks has created severe distortions within financial markets, suppressing volatility and posing a flight risk to assets. It has held that at some point, the markets would enter a normalization phase in which distortions would correct – essentially, what happened in August. And Forum doesn’t think the ride is over yet.<br /> Forum Global Opportunities on yuan bet<br /> “Given our high conviction that certain asset prices had become massively inflated as investors piled into risk assets, volatility was suppressed to record lows, and underlying macroeconomic fundamentals continued to deteriorate, we heavily weighted our portfolio with long volatility, highly convex structures that would perform well as we moved into a normalization period that we believed would be characterized by sharp and abrupt adjustments,” the firm wrote in its August note to investors. “While our portfolio has been able to capture these recent market moves as evidenced by our recent performance, we believe the recent spate of volatility is merely the first adjustment in a longer normalization period for global markets. We expect to see continued heightened volatility in the current market cycle, punctuated by discrete waves of adjustment as these distortions correct.”</p> <p>Forum makes the argument that the current normalization process will be “significantly larger and longer” than previous cycles. It points to the acceleration of causal factors behind adjustments – slowing emerging market growth, commodity-led deflationary pressures and diverging global monetary policies – and uses China as an example:<br /> In China, intervention to slow the yuan’s depreciation has tightened financial conditions and accelerated capital outflows requiring further intervention. Cutting policy rates to offset financial tightening only increases fund flows to state-owned enterprises in over-supplied sectors, deepening deflationary pressures and pushing real rates higher. Across commodities, aggressive monetary easing has lowered cost curves via easy credit and local currency depreciation, boosting supply growth and negatively impacting pricing.</p> <p>Forum Global Opportunities on a changing market<br /> The fund also says market structure has transformed, with emerging markets nearly doubling their share of global GDP from 1997 to 2013, and that algorithmic and hedge fund trading “have changed market funding and behavior by linking multiple market segments into single trading strategies and amplifying ‘herding’ effects and liquidity-driven market imbalances during computer stampedes.”</p> <p>Founded in 2001, Forum is one of the leading investmen</p>