Capitalogix

Economists and Markets

I recently got a text from Megan Greene, who is a friend and the global chief economist at Manulife Asset Management.

 

She told me that she wrote an article in FT about a conversation we had.  Her take was that 

systemic failures and the misallocation of capital could cause a bear market.

 

 

Here are some excerpts:

I was recently informed by the owner of an artificial intelligence fund that markets do not listen to economists anymore. Rather than immediately dust off my CV and see what transferable skills I might have, I dug around for evidence of his claim and found there was something to it.

A fundamental shift in market structure towards rules-based, passive investing over the past decade means a lot of trading is no longer based on fundamentals. But just because some markets do not pay attention to economists, it does not mean economists should not pay attention to these markets. On the contrary — this shift in market structure could well be a trigger for the next global downturn. The US Federal Reserve is concerned enough that “Changing Market Structure and Implications for Monetary Policy” is the topic for this year’s economic symposium in Jackson Hole.

JPMorgan notes that only about 10 percent of US equity investment is now done by traditional, discretionary traders. AI quant funds use powerful supercomputers to crunch huge amounts of data, unearth patterns and survey trading strategies across different markets in real time. They do not care why markets move, only that they do.

These funds are not waiting on tenterhooks for my analysis of every non-farm payrolls report, Fed press conference, Donald Trump tweet, or earnings report. Instead, they look for trading strategies that are succeeding and adopt those strategies until a better one comes along, regardless of the underlying fundamentals. But what happens when the strategy suddenly becomes to sell everything? Will the computers find the buyers they need?

Passive investments, such as exchange traded funds (ETFs) and index funds, similarly ignore fundamentals. Often set up to mimic an index, ETFs have to buy more of equities rising in price, sending those stock prices even higher.

...

Passive investors and quant funds could also threaten the economy by making markets vastly more complex, noisy and opaque. They send mixed signals to active investors about what the fair value of a stock is. That could cause a significant misallocation of capital.

The danger is exacerbated by the speed at which trading is now done. The average holding period for a security on the New York Stock Exchange has fallen from two months in 2008 to just under 20 seconds today, according to analysis from Cumberland Advisors. Market regulators have put circuit breakers in place, but the flash crashes we have seen suggest they may not work in a crisis.

Systemic failures, misallocation of capital and dried up liquidity could cause a bear market, dragging on growth when the economic backdrop is already lackluster. Do not be fooled by the 4.1 percent growth in gross domestic product in the second quarter of 2018. The underlying fundamentals of the US economy leave a lot to be desired. A market crash — worsened by systemic effects — would probably send the economy into a tailspin.

So even though passive investors ignore economists, economists should pay attention to risks posed by the shift in market structure they represent. One would be hard pressed to find a customer willing to hand their money to an investor who genuinely does not care about fundamentals or price. Yet this is the strategy pursued by passive and quant funds.

This is not to say these funds are necessarily bad. But the real test will come when there is a sudden crisis followed by a sustained bear market. If markets stay liquid, my AI friend might be right. If not, I will be waiting by the phone to discuss the fundamentals that might lead to recovery.

Interesting take ... Let me know what you think.

Here Are Some Links For Your Weekly Reading - August 5th, 2018

Here are some of the posts that caught my eye recently. Hope you find something interesting.

 

Lighter Links

• The 5 Levels of Leadership. (Quartz)
• Your Obsession with Cognitive Biases is Probably Making You Dumber. (Inc)
• Apple Watch Keeps Spotting Cardiac Issues and Saving Lives, this Time in Australia. (AppleInsider)
• What is Intermittent Fasting and is It Actually Good for You? (Time)
• New Radio Telescope Picks up Mysterious Signal from Space. (CNet)

 

 

Trading Links

• Jeff Bezos' Parents Invested $245,573 in Amazon in 1995 Now They Could Be Worth $30 Billion. (Insider)
• The Biggest Thing to Happen in Blockchain since Bitcoin. (Forbes)
• Russia Dumped 84% of Its American Debt. What that Means. (Money)
• Big Pharma Would like Your DNA. (The Atlantic)
• AAPL Gets Even Closer to $1Tn Market Cap, Hits New All-time High in After-hours Trading. (9to5Mac)

 

Largest Single-Day Market Cap Loss in History

Facebook has been under fire for a while now - misuse of data, privacy issues and more. 

This Thursday, following a horrible quarterly report with lower-than-expected revenue and low daily active users,  Facebook posted the largest single-day loss in market value by any company in U.S. history. They had peaked at about $630 billion. 

Mark Zuckerberg himself lost approximately 17 billion. 

via CNBC

Looking at the list of the largest "losers" there are plenty of winning companies in their ranks, but, Facebook expects their revenue growth rate to continue to slow. 

Do you think Facebook will still be a major player in the next 5 years?

Here Are Some Links For Your Weekly Reading - July 22nd, 2018

 

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links

• The Boston Dynamics Robots Can Now Hunt You in the Woods. (DailyDot)
• What Cyber-War Will Look Like. (Scholars-Stage)
• The Mistakes You Make in a Meeting's First Milliseconds. (Wall Street Journal)
• Does Intermittent Fasting Work? Here's What It Can (And Can't) Do for You. (Cheatsheet)
• 'Never Underestimate Human Stupidity,' Says Historian Whose Fans Include Bill Gates and Barack Obama. (CNBC)

 

Trading Links

• Coinbase Says It Has Green Light to List Coins Deemed Securities. (Bloomberg)
• CRISPR Stocks Plummet over Study Pointing to Potential Adverse Effects. (FastCompany)
• Warren Buffett Donates $3.4-Billion to Gates Foundation and His Family's Charities. (Globe&Mail)
• The 24 Rules for Success Left behind by a Legendary Wall Street Banker. (Time)
• Scientists Discovered a Quadrillion Diamonds Hidden Deep within the Earth. (Inverse)

The Sound of Silence [The Disturbed Music Video Version]

I spent last week with almost no Internet or cell service.  On one hand, I suffered some withdrawal symptoms.  On the other hand, it was nice to hear the sound of silence.

50 years ago, Simon & Garfunkel become folk-rock stars with their song, ‘Sound of Silence’.  I don't think that's what they meant.

Recently, someone else made it a hit ... a heavy metal rock band, Disturbed.

Here is the video.  Believe it or not, totally worth watching.

 

 

 

 

YouTube.

Surprisingly good.

Here Are Some Links For Your Weekly Reading - July 8th, 2018

Here are some of the posts that caught my eye recently. Hope you find something interesting.

 

Lighter Links

• Yes, Your Phone is Spying on You and these Researchers Proved It. (BGR)
• Talking to Your Team about Cyber Threats. (Myventurepad)
• A Mesmerizing 4K Timelapse of Kilauea's Famous Lava Flow. (TwistedSifter)
• The 2018 National Geographic Travel Photographer of the Year Winners. (TwistedSifter)
• Harvard University is Fighting to Keep Its Secretive Admissions Process under Wraps. (MarketWatch)

 

Trading Links

• JPMorgan's Ultimate Guide to Markets and the Economy. (BusinessInsider)
• Yes, America Still is an Export Superpower. (BigThink)
• The Top 10 Biggest Airline Money Making Routes in the World (One Generates a Billion Dollars). (VFTW)
• First Commercial DNA Data Storage Service Set to Launch in 2019. (NewScientist)
• Why Quantum Computers Will Be Super Awesome, Someday. (Bloomberg)

A Helpful Old Parable ...

I was talking to a friend this weekend and was reminded of an old parable I heard years ago...

 

I stand on top of the mountain and I just kick pebbles ... Minute by minute, hour after hour, day in and day out ... I simply kick pebbles.

Mostly, those pebbles fly off into nowhere and I watch them skip away ... Occasionally those pebbles hit a small stone ... Juuuusst right ... and that stone slides down the hill.

...

Then, sometimes, those stones collide, on the way down, and their slide becomes a tumble and they smack a ROCK.

And, those ROCKS begin to fall, end over end, gathering speed ... and a couple hit a BOULDER ... Then ... the Boulder shifts... there is a RUMBLE ... the EARTH MOVES BENEATH ME ...

AND THE ENTIRE LANDSCAPE CHANGES ... EVERYTHING LOOKS DIFFERENT ... !!!

I stand on top of the mountain and I just kick pebbles ... Minute by minute, hour after hour, day in and day out ... I simply kick pebbles!

 

Keep up the good work!

A Look at Online Trading

Trading used to be reserved to those in the pit at exchanges ... but the advent of electronic trading made this enterprise available to a host of other people.

Millions of online traders have opened accounts in the past few years.

Apps like Robinhood and Coinbase make it easy for retail customers to start trading. 

Who are they?  This chart breaks it down.

 

via brokernotes

To start, 37% don't have a degree, and 58% are millennials.  The average income of a trader is less than 35,000.  You can check brokernotes full report here.

Interesting.

What does it mean?  How will it affect the popularity of new markets (like Crypto)?

Curious to hear your opinion.

Here Are Some Links For Your Weekly Reading - June 24th, 2018

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links

• Why Blockchain Isn't a Revolution. (Knowledge)
• Daniel Kahneman: Four Keys to Better Decision Making.(CFAInstitute)
• Mr. Rogers Had a Simple Set of Rules for Talking to Children. (The Atlantic)
• Rise of the Machines: Has Technology Evolved beyond Our Control? (The Guardian)
• Leader Schedules; 72% Meeting Time; 43% Priority Time; 3% Customer Time; ExO Course next Week. (Verne Harnish)

 

 

Trading Links

• 4 Horsemen of the Recession and Stock Market Apocalypse. (SeekingAlpha)
• Blockchain beyond the Hype: What is the Strategic Business Value? (McKinsey)
• Cryptocurrency Will Become a $20 Trillion Market: Billionaire Bull Mike Novogratz. (Finance)
• Top Banking Takeaways from the 2018 Internet Trends Report. (TheFinancialBrand)
• How Amazon Became One of Washington's Most Powerful Players. (Wall Street Journal)

Understanding the VIX

Regardless what you're trading, the VIX can be a helpful index to monitor. 

The VIX is an index that's commonly known as the "fear gauge." It tracks how quickly asset prices move (or, in other words, their "volatility"). 

While you can't invest in it directly, you can invest in derivative products like VIX futures, ETFs, inverse ETFs and more. 

The infographic below is a good primer, and you can download RCM's full whitepaper here.

 

 

VIX trading volume is increasing nicely.   Meanwhile, it is also a valuable data source.

I'd love to hear how you use it.