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Monthly Archives: September 2017

BIS Uncovers $14 Trillion In Hidden Derivatives ‘Credit Bubble’

The Sword of Damocles still hangs precariously a decade later. -Ambrose Evans-Pritchard

The Bank for International Settlements (BIS) has uncovered a $14 trillion dollar-denominated debt bubble hidden in derivatives and swap contracts – a shocking sum that doubles the amount of offshore USD credit in the international system.

While the debt serves as a lubricant and a hedging mechanism for global commerce, its mere existence greatly adds to the risk of a global debt crisis if the the Dollar surges via Fed tightening or extreme risk-off trading.

A forensic study by the BIS concludes that enormous liabilities have accumulated through FX swaps, currency swaps, and “forwards” – all hidden in the footnotes of bank reports.

“Contracts worth tens of trillions of dollars stand open and trillions change hands daily. Yet one cannot find these amounts on balance sheets. The debt is, in effect, missing,” reports a BIS investigative team led by chief economist Claudio Borio.

“A defining question for the global economy is how vulnerable balance sheets may be to higher interest rates,” said Borio, adding “These transactions are functionally equivalent to borrowing and lending in the cash market. Yet the corresponding debt is not shown on the balance sheet and thus remains obscured.”

Booked as a derivative, acts like a debt

Due to global accounting rules, the trillions in new-found debt has been booked as a notional derivative – “even though it is in effect a secured loan with principal to be repaid in full at maturity,” says the BIS.

Often used for dangerous illiquid investments

Via Financial Post

The dollar swaps serve as a “money market” for global finance. Investors often take out short-term contracts that must be rolled over every three months. The great majority have maturities of less than a year. Much of the money is used to make long-term investments in illiquid assets, the time-honoured cause of financial blow-ups. “Even sound institutional investors may face difficulties. If they have trouble rolling over their hedges, they could be forced into fire sales,” said the Swiss-based watchdog.

Signs of strain

The BIS goes on to warn of the massive excesses in debt across the spectrum. “Corporate debt is now considerably higher than it was pre-crisis. Leverage indicators have reached levels reminiscent of those that prevailed during previous corporate credit booms. A growing share of firms face interest expenses exceeding earnings before interest and taxes,” said the report.

The BIS also warns that margin debt on equities exceeds the dotcom extreme in 2000, and so-called ‘leveraged loans’ have surged to a record $1 trillion.

Of interest

So far, the global financial system has been able to service these derivative-based debts thanks to low interest rates – however once rates begin to rise, the entire house of cards will be subject to increasing levels of risk.

The structure is deeply unhealthy. Central bankers dare not lift rates despite economic recovery because of what they might detonate. “There is a certain circularity that points to the risk of a debt trap,” said Borio.”

FP reports “the Achilles Heel is global dollar debt. It was a seizure of the offshore dollar capital markets in late 2008 that turned the Lehman and AIG bankruptcies into a global event, and came close to bringing down the European banking system. “The meltdown in dollar-denominated structured products caused funding markets to seize up and banks to scramble for dollars. Markets calmed only after coordinated central bank swap lines to supply dollars,” said the BIS.”

Will the Fed come to the rescue again?

After former Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson held a gun to congress’ head in September of 2008, kicking off Trillions of bailouts and a massive revolving liquidity complex – the U.S. Fed effectively saved the global banking system from disaster. The question now is whether or not they’ll do it again. One would assume that team Yellen / Mnuchen / Cohn could easily convince President Trump to turn on the spigot.

Emerging markets screwed

If the dollar spikes violently, for whatever reason – be it interest rates rising or global risk-off trading and a flight to bonds, the emerging markets stand to suffer the most from a strong dollar.

Via FP:

Currency analysts say it would be an emerging market bloodbath. While the “fragile five” – India, South Africa, Indonesia, Turkey, Brazil – have mostly cut their current account deficits and are in better shape than during the “taper tantrum” of 2013, the problem has rotated to oil producers. China’s corporate debt has soared to vertiginous levels.

Recorded dollar debt in emerging markets has doubled to US$3.4 trillion in a decade, without including the hidden swaps. Local currency borrowing has risen by leaps and bounds. They are no longer low-debt economies.

The BIS credit gap indicator of banking risk is flashing a red alert for Hong Kong, reaching 35 per cent of GDP. While it has dropped to 22.1 per cent in China, the country is still in the danger zone. Any sustained reading above 30 is a warning signal for a banking crisis three years later.

So – enjoy historically low interest rates while they last. Lord knows central banks around the globe will be keeping them as low and liquidity-generating as long as they possibly can.

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Equifax Accused Of Scrubbing Chief Security Officer’s Music Major Background

After what may be the largest data breach of sensitive information in history, Equifax is now coming under fire for allegedly scrubbing the background of its (now former) Chief Security Officer’s background, which reveals she had zero formal training in security.

Susan Mauldin, who was fired today, was Equifax’s CSO / CISO since 2013. Prior to that, she served as Senior VP and Chief Security Officer for First Data – and before that, she was a VP at SunTrust Bank from 2007 – 2009.

While Mauldin had been involved in security since 2009, her educational background contains no security or tech credentials. In fact, the woman in charge of safeguarding the information of over 100 million Americans has a bachelor’s degree in music composition and a Master of Fine Arts degree in music composition from the University of Georgia.

Furthermore, ZeroHedge catalogs attempts by “someone” to scrub Mauldin’s background from Linkedin:

As MarketWatch’s Brett Arends writes, “there has been very little coverage so far of Susan Mauldin’s background and training. Given the ongoing disaster of the hack and Equifax’s handling of the affair, the media spotlight has so far been elsewhere.” It now emerges that someone was very keen on keeping as little information about Mauldin’s background in the public domain as possible.

Shortly after the Equifax scandal broke, Maludin’s LinkedIn page was made private and her last name replaced with “M.” Below is a screengrab showing Susan Mauldin’s old and current LinkedIn pages in Google search results as of 9/9/2017.

Mauldin’s original LinkedIn page was on this url before it was made completely private: linkedin.com/in/susan-mauldin-93069a (now a 404 page not found)

A few days after the news of the data hacking broke, the following page reappeared a with a different url, with the specific detail that her degrees were in Music Composition removed. Also, her surname Mauldin was replaced with the initial letter M. to complicate profile discovery.

Additionally, two videos of interviews with Mauldin have been removed from YouTube. A podcast of an interview has also been taken down. As Hollywoodlanews.com reports, in March 2016, Mauldin was interviewed on camera by the CEO of the big-data company Cazena.

The videos featuring parts of an interview with Susan Mauldin, which were embedded on this page, have been taken down as of the afternoon of September 10.



A partial transcript of her remarks during the interview have been archived for posterity by a third party. http://archive.is/6M8mg

The full interview videos went far in explaining what may have been the eventual cause of the massive leak of information now gravely affecting 143 million Americans.

The audio-only version of the interview that was publicly available on Soundcloud has also been scrubbed from the web.


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Boeing Makes Big Bet To Shore Up Underfunded Pension $BA

With pensions around the country facing funding shortfalls, Boeing has taken an unorthodox approach to shoring up its $20 billion funding gap – the second largest shortfall of any S&P 500 company behind General Electric with $57 billion in assets and $77 billion in obligations.

The planemaker transferred $3.5 billion of its own shares into the pension – essentially betting on continued growth after what’s already been a massive rally in share prices.

Via Bloomberg

It’s a bold move, and one cheered by many on Wall Street. Yet to pension experts, it isn’t worth the risk. After a record-setting, 58 percent rally this year, Boeing is betting it can keep producing the kind of earnings that push shares higher. If all goes well, not only will the pension benefit, but Boeing says it will be able to forgo contributions for the next four years.

But if anything goes awry, the $57 billion pension — which covers a majority of its workers and retirees — could easily end up worse off than before.
Critics of the move say it’s a dangerous move. “It’s an irresponsible thing to do certainly from the perspective of the plan participants,” said Daniel Bergstresser, a finance professor at the Brandeis International Business School. “Ideally, you would like to put assets in the pension plan that won’t fall in value at exactly the same time that the company is suffering.”
Boeing disagrees
The company says the stock strategy as a win-win. “We continue to see Boeing stock as a good value,” said a spokesman for the company, adding “This action further reduces risk to our business while increasing the funding level of our pension plans. Our employees and retirees benefit as well since this action provides funding earlier, giving the plan sponsor more flexibility to grow the plans’ assets.”
While Boeing has the assets to shore up as much as $30 billion in underfunded pension liabilities, 186 of the 200 largest defined-benefit plans in the S&P 500 are underfunded.

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Trump’s Terror Tweets, Goodbye Cassini, And Jose Threatens NY: Bloomberg Friday Roundup


End of the week roundup, courtesy of Bloomberg
Trump sparks anger in the U.K. over London terror tweets. President Trump was accused of betraying intelligence details following a terrorist attack in London on Friday, by saying those responsible for an explosion on an underground train “are sick and demented people who were in the sights of Scotland Yard,” before adding “must be proactive!” His comments prompted an immediate backlash. Prime Minister Theresa May and police led criticism of his intervention.
Tropical Storm Jose could threaten New York next week, according to a National Hurricane Center advisory. The storm, currently about 360 miles northeast of the Bahamas, is expected to strengthen to a Category 1 hurricane in the next 48 hours as it moves through the Atlantic Ocean. Jose’s path could put it near New Jersey and New York by Wednesday morning, though it may weaken to a tropical storm again by then.

Farewell, Cassini. We’ll always have your photos. NASA’s Cassini orbiter hurtled into Saturn at nearly 80,000 miles an hour to incinerate itself on Friday morning, ending its 20-year mission. NASA still has a ton of data to sift through, including the spacecraft’s closest sniff of Saturn’s atmosphere as it melted the orbiter into nothing. Here are some of the most stunning photos it captured.

Your identity is for sale on the dark webVerified high-limit credit cards from countries including the U.S., Japan, and South Korea are selling on the dark web for the bitcoin equivalent of about $10 to $20, according to an annual report on cybercrime. It’s not just credit cards: An underground hacker market is selling identities that are detailed enough to facilitate “impersonation-based fraud” for as little as $10 apiece.

Amtrak wants to remind you how awful flying is. As former CEO of Delta, Richard Anderson knows why so many people hate air travel — and he appears ready to exploit those pain points in his new role as president and co-CEO of Amtrak. From free Wi-Fi to the absence of middle seats to the two bags you may check for free, Amtrak is pitching itself as a more comfortable, civilized travel alternative to an airline.

Where are the Mar-a-Lago visitor logs? A government transparency group vowed to continue a court battle to open visitor logs at Trump’s Florida resort, after the administration provided only the names of Japanese staff who attended a February visit from Prime Minister Shinzo Abe. Ethics specialists have criticized Trump for not divesting from his business holdings, including Mar-a-Lago, saying they provide an avenue for those seeking influence to curry the president’s favor.

Read this before you spend $2 billion on your own submarine. For those bored with multimillion-dollar megayachts, with their ho-hum helipads and snooze-inducing jacuzzis, consider the 928-foot-long M7, designed by the Austrian company, Migaloo Private Submersible Yachts.

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Equifax Used ‘Admin’ As Login And Password For Second Database

Hundreds of consumer records stored on an Argentinian Equifax database were allegedly protected by the generic username and password: ‘admin.’

After the credit monitoring company announced a massive breach last week in which over 140 million Americans’ private data was hacked, Milwaukee based cybersecurity firm Hold Security began probing Equifax’s other websites, when they discovered the company’s South American site was woefully un-secure.

The Argentinian Equifax database is unrelated to the breach in the U.S.


[T]hey were able to uncover personal employee information housed on Equifax’s South American site, including names, emails, and Social Security equivalents of over 100 individuals.

The researchers easily acquired administrative access and quickly discovered consumer complaint records, complete with the Argentine equivalent of Social Security numbers, known as Documento Nacional de Identidad (National Identity Document).

“You don’t expect anything like that,” said Alex Holden, Hold Security’s chief information security officer. “An ability to lookup cases for individuals based on a single numeric ID and gender drew our attention.”
Equifax responded to CNBC, telling the network:
“We learned of a potential vulnerability in an internal portal in Argentina which was not in any way connected to the cybersecurity event that occurred in the United States last week. We immediately acted to remediate the situation, which affected a limited amount of public information strictly related to consumers who contacted our customer service center and the employees who managed those interactions.”

“What I can tell you is that we fixed the vulnerability immediately upon learning of it, and that this internal portal has not been in use since 2013. The Argentine consumer dispute information that was mentioned in the Krebs article is all publicly available, searchable and not confidential. Additionally, our consumer credit and commercial databases were not accessed or affected.”

Multiple investigations
Equifax is facing several investigations, including a major probe by the Federal Trade Commission (FTC) announced Thursday.
Shares take a nosedive
Since announcing the hack last Thursday, Equifax shares have dropped more than 30 percent, closing at a 2.5 year low of $96.66.

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Google Parent Alphabet To Consider $1 Billion Investment In Lyft $GOOG

Google parent company Alphabet, Inc. ($GOOG) is reportedly in discussions to invest a cool $1 billion in Lyft, a move which signals support for Uber’s main U.S. competitor – and very likely designed to go hand-in-hand with the Mountain View, CA tech giant’s investments in autonomous vehicles.

‘People familiar with the matter’ tell Bloomberg said the discussions are private, and the investment may come from Google or Alphabet’s private-equity arm, CapitalG.


Waymo, an Alphabet subsidiary, has signed an agreement with Lyft to test autonomous vehicles together. Although Alphabet is an Uber shareholder through it’s GV venture capital arm, Waymo is currently suing Uber over self-driving technology.

Via Recode

The self-driving technology arm of Google parent Alphabet, filed the lawsuit in February, alleging theft of trade secrets that Uber planned to use in its autonomous vehicles. The case centers around engineer Anthony Levandowski, who Waymo claims stole 14,000 documents before leaving the company and founding Otto, a self-driving trucking company which Uber later acquired.


If at first you don’t succeed… 

Lyft failed to find a taker for a $9 billion buyout in 2016 after shopping themselves to GM, Alphabet, Amazon, Microsoft, and even Apple, according to recode.

While not exactly what they were looking for, Lyft can use an extra $1 billion to pursue more aggressive growth – offering subsidies to drivers, discounts to riders, and marketing. Lyft kicked off an ad campaign this month starring Jeff Bridges.

Lyft co-founder John Zimmer has said financial independence is a priority, however some investors have suggested Alphabet would be a natural home for the ride-hailing startup. Lyft held informal talks with Alphabet and other potential acquirers last year but didn’t pursue a sale.

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Hugh Hendry Shuts Down Fund, Says “Markets Are Wrong, It Wasn’t Supposed To Be Like This”

Hugh Hendry, the feisty bearish Scotsman who posted a 31% gain in 2008 betting against banks is shuttering his firm, Eclectica Asset Management, following a 15 year run that ended in loss.

Hendry’s flagship fund, Eclectica, dropped 9.4 percent this year through August, with assets of $30.6 million.

Via Bloomberg

“It wasn’t supposed to be like this,” Hendry said in an investor letter seen by Bloomberg. The fund “became strongly correlated over the short term to maelstrom of President Trump and the daily news bombs emanating from the Korean Peninsula,” making it impossible to manage small amounts of money, he said.

After a killer 2008, Hugh made headlines in 2009 talking shit about all the empty real estate in China, posting YouTube videos and whatnot showing darkened office buildings with no tenants.

Hendry’s joining a long list of vanquished fund managers for 2017

With the closing of Eclectica, Hendry joins a long list of hedge fund managers who have folded up shop this year – including Eric Mindich, Leland Lim and John Burrbank. Just shy of 260 funds liquidated in Q1, which followed a record number of closings in 2016 – with more managers liquidating funds than any year since the financial crisis.

What’s Hugh gonna do? 

Hendry told investors he’s going to sit out the next major market inflection, though he said he’s optimistic about the global economy and recommends investors stay long.

“For the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time,” he wrote in the letter. Hendry added that he doesn’t envision an abrupt rise in interest rates that would interrupt the equity rally.

Full letter here (via ZeroHedge)

CF Eclectica Absolute Macro Fund

Manager Commentary, September 2017

What if I was to tell you I wasn’t bearish on anything? Is that something you would be interested in?

It wasn’t supposed to be like this and it is especially frustrating as nothing much has gone wrong with the economy over the summer. If anything we feel more convinced that our thesis of a healing global economy is understated: for the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time. It’s just that our substantial risk book became strongly correlated over the short term to the maelstrom of President Trump and the daily news bombs emanating from the Korean Peninsula; that and the increasing regulatory burden which makes it almost impossible to manage small pools of capital today. Like I said, it wasn’t supposed to be like this…

But let me bow out by sharing my team’s views. For the implications of a sustained bout of economic growth are good for you. It’s good because it should continue to underwrite a continuation in the positive performance of global equities. I would stay longIt’s also good because I can’t see interest rates rising abruptly to interrupt the upward path of equities. And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. That’s a lot of good news.

But it is bad news for me because funds like mine are required to demonstrate negative correlation with risk assets (when they go up like this I go down…), avoid large drawdowns and post consistent high risk adjusted returns.

Oh, and I forgot, macro fund clients don’t like us investing in the stock market for the understandable fear that we concentrate their already considerable risk undertaking. That proved to be an almighty puzzle for a fund like mine that has been proclaiming the stock market as a “safe-ish” bet ever since 2013.

Let me explain the “markets are wrong and we boom now” argument. To begin with, and for the sake of clarity, I think we have to carefully go back and deconstruct the volatile engagement between capital markets and central banks for the last ten years for an understanding of where we stand today.

The first die was cast by the central bankers in early 2009: having stared into the abyss of a deflationary spiral in 2008 the Fed and the BoE announced a radical new policy of bond purchases named Quantitative Easing. The bond market hated the idea as it was expected to cause a severe inflation problem.

Thankfully Bernanke, a student of the great depression knew better.

Markets primed themselves for inflation yet even with a ripping stock market in 2009/10 they were disappointed. QE rescued the financial system but the liquidity created was distributed to the very rich who have a very low monetary velocity and so the expected inflation fillip never materialised as the liquidity injection came to be stored rather than multiplied by the banking system.

Several years later, in 2013, the Fed suggested a reduction in the pace of its QE program. They wanted to tighten credit conditions gradually. However, capital markets beat them to it and the ensuing “taper tantrum” tightened monetary policy on their behalf. Within four months the market had taken 10 year treasuries from a yield of 1.6% to 2.9%, a move of far greater impact, and much more rapid, than anything the Fed had contemplated doing.

Markets initially thought the US could cope with this higher level of rates, but with a slowing economy, an unfortunately-timed oil price crash, and persistent ghosts in the machine (like the substantial Yuan devaluation fear which never materialised) they were proven wrong. Back then, with a 7.6% national unemployment rate and tepid wage inflation, this tightening always looked a little premature to us and so it proved with the rate of price inflation inevitably sliding lower to present levels.

And so last year, following many years of berating the Fed for its easy monetary policy regime, investors collectively threw in the towel. This rejection of the basic tenets of the business cycle by those who direct the huge pools of real money is proving particularly onerous to attack as it seems that the basic macro fund model is broken: there are just not enough “coins in them pirates’ chests” to challenge the navy of this flawed real money doctrine. Managers, and I must count myself in this camp, feel compromised by our poor absolute returns since 2012 and we find ourselves unable to put up much resistance to this FAKE NEWS.

Why should you fight it? Well let’s look at the last few times American unemployment dipped below 4.5% like today. I would largely ignore 2000 and 2006 when monetary policy was tightened and the economy buckled under the duress of the dramatic reversal in what had been credit fuelled misallocations of capital in the TMT and property sectors. No, for me 1965 is far more illuminating. Then, like today, there was no epic bubble or set of circumstances whose reversal could cause a slump; people forget but recessions don’t come out of thin air. No, in 1965, economic growth got choked by a tight labour market; a market as ominously tight as today’s.

In the middle of 1964, CPI core inflation was running at 1.7% and indeed dropped to just 1.2% in 1965; unemployment was 4.5%, the same as today. And yet by the end of 1966 inflation had essentially got out of control and didn’t dip below 2% again until 1995, almost 30 years later.

It seems to me that wage or cost push inflation is far more difficult to prevent and contain than asset price inflation. It tends to bear comparison with how Hemmingway described going broke: slow at first and then devastatingly quick. It may prove especially potent right now as the labour market is tight and there are no catalysts to generate a self-correcting US recession with both central bankers and markets now  united in their desire for loose policy.

Look at the graph below, the unemployment rate (red) is at lows, job openings (blue) have increased beyond the hiring rate (teal) and are now approaching the unemployment rate for the first time since the Job Openings and Labor Turnover Survey data began. Ultimately robust GDP growth plus this labour tightness will lead to wage hikes and conceivably a self-sustaining inflationary cycle.

This is all the more ominous as the Fed has been reluctant to unwind its balance sheet. The largesse of this program fell to those already wealthy (“the global creditor”) and who had a low propensity to spend:
financial markets boomed, less so the real economy. However the legacy of QE plus wage gains would turn this equation on its head. It would distribute incremental dollars to those with a much higher propensity to spend. The boost to monetary velocity from widespread wage increases would start to look much more like the helicopter money that Chairman Bernanke promised back in 2002 and subsequent central bankers dared not distribute.

The macro shock would not necessarily be the subsequent inflation but, that by waiting to respond until later, higher policy rates might fail in the first instance to induce a recession setting off a loop begetting higher and higher rates. Let me explain: companies will continue to employ staff, and with wages increasing, it is likely that sales will hold up and, depending on whether they achieve productivity gains or not, corporate profitability might also remain firm. So companies will commit to pay staff more whilst raising prices to meet higher wage and interest payment demands where possible. Like I said, wage or cost push inflation is a very different beast to contain.

I have to say that should this scenario unfold then capital markets will be as culpable as the Fed. This year, bond investors have aggressively flattened the US yield curve. The clear message is that 1.25% overnight rates threaten to pull the US economy into recession. I disagree. I think they are undermining the ability of the Federal Reserve to respond proactively; the Fed is simply not going to hike rates under such conditions having learnt the hard way back in 1999 and 2005. But what if such flatness has more to do with the commercial investment pressure brought on by QE rather than a genuine recession threat? Could it be that the bond market’s cautionary recessionary indicator is stuck flashing RED whilst the US economy goes from strength to strength? I fear so.

Clearly of course no one knows. However if an inflationary path like 1966 is gestating then I fear there is very little chance that anything timely will be done about it. Rate hikes will continue to be sparse, we only have one quarter point hike predicted between now and the end of 2019, which if fulfilled will be highly unlikely to spark a severe recession. Most likely the US economy will continue to grow and the labour market will tighten making a larger adjustment to rates in the future inevitable.

And so QE could conceivably end up doing what it was always supposed to do in the first place: find its way through the financial system to increase, not decrease, interest rates. This scenario would diminish greatly if bond curves steepened a lot now and gave the Fed the credibility to hike. Sadly I just don’t see this happening. They will steepen of course but I fear only after the virus of cost push inflation is released into the global hothouse.

This potentially leaves us in a strange environment. In the absence of any recognisable asset bubble set to burst, and the Fed grounded, the US economy is unlikely to slip into recession. China continues to rip. And now the European continent is recovering. Risk assets should continue to trend positively. And with the bond market, wrongly in my opinion, infatuated with the likelihood of an approaching US recession, the Treasury market is unlikely to move much. This is simply not a good time to offer a risk diversifying portfolio.

However, perhaps being long fixed income volatility isn’t such a bad idea. It has not been persistently lower than this for almost three decades. And unlike equity volatility it does not tend to trade in lengthy and definable regimes; it is never a great idea to go long equity volatility just because it happens to be low. The same cannot be said of its fixed income counterpart.

The collapse in volatility since 2012 seems to resonate with the drawn out process of QE in the US and its slow spread across the world. However that era is clearly now abating as this year’s synchronised global growth gradually shifts the debate from looseness to gradual global tightening. And yet fixed income volatility resides on the floor…

Looking at the one year implied volatility on 10 year swaps, the cost of entry seems reasonable even compared to the narrow trading range we have seen this year. That is unless you expect volatility to crash and  the trading range to contract even further. With only one Fed hike priced in until the end of 2019 any further contractions are likely to be driven by outright recession. In that case volatility will rise across all asset classes. On the other hand, if our thesis is right, and the market and Fed are too complacent on inflationary pressures, then it is likely that we see more hikes from the Fed alongside yield curves steepening from their currently very low levels. Fixed income volatility will surge. When the status quo priced in is this boring, fixed income volatility really has only one direction it can go.

With inflation still weak and government bond prices unlikely to crack just yet it is too early to seek a short fixed income trade in disguise. In the past, correlations have, just like in the stock market, typically been negative between the price (SPX or Treasury) and the implied volatility (VIX or swaption vol.). Now however the correlation is mildly positive. So being long fixed income volatility is not necessarily the same as  being short fixed income. My contention is simply that fixed income volatility has over shot to the downside, that such moments are fleeting and that you are not necessarily dependant on a correction in treasury prices.

Sadly I will be unable to participate with such trades during the next upheaval in global markets with the Fund but I hope that this commentary has at least roused you into contemplating scenarios that are presently deemed less plausible.

It remains only that I thank you for the great honour of having been responsible for managing your capital and to wish you all great financial fortune.

Hugh Hendry and team

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Shkreli Played? Motel 6 Dropping Dime On Illegals? Buffett’s Successor? Afternoon Happenings

This afternoon’s top stories from Bloomberg

Shkreli played? 

How’s this for irony? Pharma bro Martin Shkreli, who was recently convicted of fraud, may have been played. His $2 million Wu-Tang album, the most expensive record ever sold, might not actually be… a Wu-Tang album. Bloomberg News reporters Devin Leonard and Annmarie Hordern have the full story here. In other Shkreli news, the former pharmaceutical executive was jailed Wednesday—but not for his fraud conviction.—Katie Robertson

Trump and Democrats near another deal, this time on “Dreamers.”​​​​ President Trump said he’s close to a deal with congressional Democrats to permanently safeguard from deportation nearly a million immigrants brought illegally to the U.S. as children—people whose protections he promised as a candidate to end on his first day in office. Trump also said the deal to reinstate DACA, an Obama-era program, wouldn’t include money to construct a wall on the border with Mexico.

North Korea threatened to use a nuclear weapon to “sink” Japan. Kim Jong Un’s regime also said it would turn the U.S. into “ashes and darkness.” The comments, which came after fresh United Nations sanctions were agreed upon this week, are likely to exacerbate tensions in North Asia. There are also reports North Korea may be preparing another missile test.
 Motel 6 just left the lights on for ICE. Some Phoenix locations have been voluntarily handing over guest information to U.S. Immigration and Customs Enforcement employees, and at least 20 undocumented people have been arrested. The role of Motel 6 outposts aiding U.S. immigration enforcement raises the question: are other chains doing the same thing?

Bitcoin crashed after a Chinese exchange said it will halt trading. The cryptocurrency fell for a fifth day, the longest losing streak in more than a year, after one of China’s largest online exchanges said it would stop handling trades by the end of the month amid a government crackdown. China accounts for about 23 percent of bitcoin trades and is home to many of the world’s biggest bitcoin miners.

Nestle is buying a majority stake in coffee roaster Blue Bottle. The Nespresso owner is looking to bolster its lead in the java market amid increasing demand for upscale blends. Blue Bottle, which is based out of California, sells coffee within 48 hours of roasting it and gives Nestle a bigger bite of the U.S. market.

Who is Warren Buffett’s successor? The next CEO of Berkshire Hathaway is one of the most guarded secrets in the business world. That didn’t stop JPMorgan’s new Berkshire analyst from placing odds on one man: Greg Abel. The 55-year-old is the head of Berkshire’s utility businesses.

How rich Chinese use visa fixers to move to the U.S. Have a spare $500,000 to invest in an economically distressed American area (that actually isn’t distressed at all)? China’s EB-5 fixers will help you every step of the way. They’ve turned some of the world’s most forbidding bureaucratic machinery into a kind of consumer good for China’s rising wealthy class.

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Netflix CFO Has No Regrets After Spending $6 Billion On Content $NFLX

Netflix CFO David Wells told a room full of attendees at the Goldman Sachs ‘Communacopia’ Conference in NY that the company has no regrets spending $6 billion on content this year, despite the company’s $4.8 billion debt.

While Netflix has been criticized by analysts for their “free spending ways,” especially on original content, Wells says the cash outlay has been worth it, considering the streaming giant’s 104 million users worldwide.  made massive financial bets on Emmy nominated content which appear to be paying off.

“You could decide to invest everything and more into content, so we have some discipline reserve for growing operating margin at this point,” Wells said.

Subscriber growth has been booming too, with over 100 million customers:

“Just a headline: If we’re able to grow the top line, we’re going to be guided by steady growth of operating margin and reinvest what’s left into content,” he said.

“For a while, we were not budget-constrained, we were project-constrained,” Wells continued. “We might be to the point where we might start seeing more budget constraint. That has some benefits in terms of helping drive discipline on the content line.”

Of note, Netflix original content is getting better ratings, on average, than licensed shows from legacy networks

Courtesy Business Insider

Yes, they have a ton of debt. Yes, their P/E of 223 is at Amazonian levels – their closest competitor. But they’ve been crushing user growth estimates and guidance while falling in line on revenues / eps.

Variety reports that Netflix’s spending budget could increase to $7 billion next year.

Exodus nails $NFLX

While Netflix is currently trading well above the “Oversold” level within iBankCoin‘s Exodus service, keep an eye on it… 8 out of the last 8 times it flagged oversold, $NFLX returned 14.11% within 7 days.

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Martin Shkreli Thrown In Jail After Offering $5K For Strand Of Hillary’s Hair

An angry federal judge revoked Martin Shkreli’s $5 million bail and ordered him jail on Wednesday at the request of prosecutors, after the former pharmaceutical exec offered $5,000 over Facebook to anyone who could deliver a strand of Hillary Clinton’s hair.

“On HRC’s book tour, try and grab a hair from her,” Shkreli wrote on Sept. 4, adding “I must confirm the sequences I have. Will pay $5,000 per hair obtained from Hillary Clinton.”

The post caught the attention of the U.S. Secret Service, who beefed up protective measures for Clinton during her book tour.

New York Judge Kiyo Matsumoto said the 34 year old Shkreli “demonstrated that he has posed a real danger” to the public. Shkreli – who was out on bail awaiting sentencing in his securities fraud trial – wrote a letter to the court which stated that his offer was an “awkward attempt at humor or satire.”

“I wanted to personally apologize to this Court and my lawyers for the aggravation that my recent postings have caused,” Shkreli wrote, adding “I understand now that some may have read my comments about Mrs. Clinton as threatening, when that was never my intention when making those comments”


A somber-looking Shkreli, wearing a purple dress shirt and a shaggy mop of hair, was taken into custody by U.S, Marshal deputies just after 6 p.m. as his grim-faced legal team stood by.

He will be held in the federal jail known as the Metropolitan Detention Center in Brooklyn until his sentencing on securities fraud charges, which Matsumoto set on Wednesday for Jan. 16.

Shkreli’s lawyer Benjamin Brafman argued in his own letter that his client – an avid supporter of President Trump – was simply engaging in political hyperbole, pointing out that comedian Kathy Griffin was not prosecuted after she posted a photo of herself holding up a bloody Trump-head effigy.

“Another example of political hyperbole is when President Donald Trump, as a candidate, caused a controversy last year by implying that ‘Second Amendment people’ could prevent former Secretary Clinton from abolishing their right to bear arms.”

Sorry Martin, club Fed awaits.

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