Diary of a Financier

Top Newsstuffs (November 18-24)

In Bookshelf on Sun 24 Nov 2013 at 06:00

Regular ol’ socialite this weekend…

Investor behavior: Same as it ever was | Vanguard
This time it’s not different, as global investors have jettisoned bonds for stocks again, now dramatically overweight risk:
Equity allocations currently 57% vs 51% 20-year average (38% cycle low in 2009).
#Bearish #Contrarian #Euphoria #Rebalancing

Another major permabear capitulates | Business Insider
Hugh Hendry turns bullish:
“I can no longer say I am bearish. When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out… I cannot look at myself in the mirror; everything I have believed-in I have had to reject. This environment only makes sense through the prism of trends… I may be providing a public utility here, as the last bear to capitulate.”
Adds to a long list of bears who have flip-flopped recently; among others:
1. Jeremy Grantham (GMO)
2. Hugh Hendry (Eclectica)
3. John Hussman (Hussman Funds)
4. Bob Janjuah (Nomura)
5. David Rosenberg (Gluskin Sheff)
6. Nouriel Roubini (RGE, NYU)
7. 60% of my prospect list’s hold-outs
[Another sign of exuberance. Previously]
#Bearish #Contrarian #Euphoria

Pros show anxiety over asset bubbles | Bloomberg Global Poll
Survey of professional investors identifies strong consensus of the following bubbly excesses:
1. Social media stocks (82% of respondents)
2. Chinese housing (73%)
3. London housing (69%)
4. US credit (67%)- loans & junk bonds
5. US Treasuries (54%)
6. Emerging markets (33%)
7. US housing (31%)
[First, let’s stop the “bubble” talk, which portends something more epic than cyclical, garden-variety exuberance. Second, you can’t have a bubble where so many people are pointing. See also: A bubble in bubbles]
#Bullish #Contrarian #Grey swans #Framing bias

Rail traffic weekly: Q4 rally digs-in heels | Association of American Railroads (AAR)
Weekly traffic +4.5% y/y; ytd growth remains +1.6%.
7 of 10 carload groups posted gains: grain +23.5%, petroleum +21.6, motor vehicles/parts +8.3; coal -5%.
[For the first time this year, we’re finally seeing material aggregate growth rates.]
#Bullish $DBA $CL_F $XLE $XOP $KOL

The cautionary tale of the Salad Oil Swindler (November 1963) | Global Financial Data
Con-man Anthony “Tino” De Angelis of Allied Crude tried cornering the soybean oil market, to boost his business holdings in positively correlated vegetable oil.  He used his commodity stockpiles as collateral for margin & bank loans, then redoubled his leverage by falsifying inventories with fake warehouse receipts & diluting storage tanks with water.  In reality, he has only $6mm worth of oil vs $150mm professed, which would’ve been more than the entire US inventory.
Soybean oil futures crashed from $9.875 to $7.75 on the news; regulators shut down the NYSE (down >3%), exacerbated by JFK’s assassination.
American Express ($AXP) was one lender left holding-the-bag for Allied Crude’s defaulted loans & its stock fell 43% over the subsequent months, when Warren Buffet opportunistically bought a stake that appreciated 10x over the next decade.

US deleveraging: Why consumers won’t releverage | Elliot Clarke (Westpac)
“While it is true that deleveraging relative to income has slowed and that household debt in dollar terms rose in the September quarter, it should be clear that the underlying sectoral breakdown of debt gives little support to the idea that the US is about to embark on a new leveraging episode. Rather, what is most likely is that total household debt will remain at or around current levels as student and auto debt and poor labour market outcomes preclude younger households from leveraging up further, and, all the while, existing mortgage borrowers continue to pay down their outstanding balances. As alluded to last week, poor income growth will make this process painfully slow.”
[Flies in the face of Larry Summers’ recurring bubble theory below, plus economic data never move sideways along the mean–they always trend with high variance, over & undershooting equilibrium. Counterpoint & See also: Credit & consumer spending]

Speech: The economic justification of bubbles during secular stagnation (IMF Research Conference, 2013.11.08) | Lawrence “Larry” Summers
Discusses the optimal policy rate for a central bank to accomplish its dual mandate (inflation & employment); this “natural interest rate” should roughly* equal population growth over time, which would be negative in the wealthy, developed world today due to weak demographics.  With that in mind:
1. Secular stagnation- Low population growth means low investment demand; US labor force (18-64) grew +2.1% average from 1960-85 vs +0.2% estimated 2015-25, so the crisis isn’t over yet
2. When prudence is folly- In a ZIRP regime, everything gets flipped on its head–saving & debt/deficit hawkishness hurt the economy
3. This economy needs bubbles- To achieve full employment without negative real & nominal rates, bubbles are necessary evils to pick-up slack
4. Destructive virtue- Radical implication of this is that excessive regulation, monetary & fiscal policy prevent the excesses that are required right now
[How many times have I discussed #1-3?!  *The natural interest rate is truthfully a multifactor model, accounting for population, forward sentiment, natural resources, etc.  See also: Executive summary & Paul Krugman’s take]
#Samuelson consumption-loan model

Top applicants: Photograph of the Year Contest (2013) | National Geographic
Early frontrunners as submissions are still being accepted until 11/30, before finalists are selected.
[Previously: 2012 winners]

Charts: Why the stock market won’t crash | Business Insider
Among the arguments:
1. Historical distribution of equity returns: 2013’s 3y rolling & 1y average returns are historically normal
2. US corporate profits: net incomes are mid-cycle compared to history (+60 vs +185% average & 17 vs 20 quarter average)
[Takeaway: expect 2014 returns in the range of 5-15%.]


  1. […] raw materials and components expressed by rallying railtraffic echo the boost in inventories and orders.  Yet, without a followthrough in shipments, the system […]

  2. […] transcended “Thrill” for “Euphoria,” and while a number of major bears just capitulated, there remain a [quantifyable] handful of doubters, whose surrender to the bull market’s […]

  3. […] Quant study: The S&P 500′s history of 25%+ years | MKM Partners In 16 occurrences of annual performance >25%, $SPX has returned an average of +5.47% in the subsequent year–underperforming its +11.5% average annual return. [Subjectively, 1945 may be the best analogue for 2013's market, given the context of war ending, demographics upswinging, and secular disinflation bottoming;  quantitatively too: 1944 +13%; 1945 +30%; 1946 -11% 2012 +13%; 2013 +30%; 2014 ? Further reinforces my 2014 thesis.  Previously: SPX's historical distrubution of returns] […]

  4. […] (−): consensus acknowledgement of a “bubble” alone means there’s not a bubble; further, regulators have done an effective job of identifying […]

  5. […] “Oversupply of capital means that any investible project can get funded” [Previously: Larry Summers’ theory of secular stagnation, IMF expects more ZIRP in the future of interest rates & The technology revelation’s […]


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