All those US indicators: what did we learn this week?

This morning’s Employment Situation report coincided with the release of the latest Personal Income & Outlays report, bringing to a close this busy week of economic indicators and activity.

What did we learn? Here’s a brief roundup: Read more

All aboard the US$ flow merry-go-round!

Money managers have been stung hard this year due to US government bonds not performing the way their traditional mean-reverting strategies suggested they would. Taper was supposed to imply sell-off. That didn’t happen. And now everyone is trying to understand why not.

At FT Alphaville we’ve presented the flow explanation on a number of occasions. The theory is that taper talk prompts dumb money to sell safety, and the smart money — which knows there’s no such thing as underpriced principal safety these days and that taper implies risk-off — to pile into safety at an even faster rate.

In this theory the whole process is then exacerbated by a feedback loop. Sellers of safety buy risky assets, like emerging market debt, instead. But the sellers/issuers of that debt then recycle that cash back into safe US dollar securities, rather than goods or services in the emerging market. So every risk-on signal from the Fed only ends up creating more buyers for dollar denominated bonds. Read more

The iron index screen

“From Nord Stream in the Baltic, to Russian bank subsidiaries in Austria…”

Shares in Gazprom, a company that made $32bn in net income last year, trade at only 2.6 times forward earnings.

So it’s not as if plenty of foreign fund managers weren’t already pretending that the Moscow market has been wiped from the face of capitalism.

On the other hand — via Bloomberg on Friday (and more from the WSJ): Read more

The hare gets rich while you don’t. Back the passive tortoise

Nomura, as part of an excellent report looking at various aspects of active versus passive investment management, have considered Warren Buffett’s famous bet that an index fund will beat a fund of hedge funds over ten years.

Buffett is winning, and the bank’s conclusion is that this is very far from a fluke:

In our view, alternative assets as a group show consistently poor performance. Beta is high. Alpha is near zero, if not negative. Correlation with standard asset classes is high. Return and diversification benefits are negligible.

More on that below, but first note the proportion of pension fund fees going to the alternative investment fund managers. Never have so few been paid so much by so many for doing so little. Read more

Markets Live: Friday, 1st August, 2014

Live markets commentary from 

The (early) Lunch Wrap

RBS warns about bonus cap || ArcelorMittal profit warning || Direct Line special dividend || Norway driller sees Russian opportunity despite sanctions || Iberia to but new aircraft || UK manufacturing slows || Japanese to live forever || Stocks down Read more

Further reading

Elsewhere Friday,

- About that banking Union. Where do we stand?

- When it comes to governance, India’s Reliance is not a national champion but an embarrassment.

- Statistics is not lameRead more

The 6am London Cut

Markets: “Asian stocks dropped, extending the biggest global rout in six months that saw the Dow Jones Industrial Average wipe out this year’s gains in one session amid weaker earnings and credit-market concerns.” (BloombergRead more

The Closer


- Is living on the dole bad for you? Read more

Wage growth improved in Q2, remains low

From a note by Nomura on the usefulness of the Employment Cost Index, which climbed by 0.7 per cent from the first quarter to the second:

The Employment Cost Index (ECI) is the most reliable measure of labor cost that we have. It has two primary advantages. First, it is a fixed-weight measure. Changes in the ECI are a weighted average of changes across a matrix of occupational categories and industries. Thus, the ECI is less susceptible to changes in the mix of employment as opposed to changes in actual occupational categories than other measures. Second, the ECI measures not just wages and salaries but other components of compensation, most notably healthcare costs. Read more

Video: Argentina’s default

Joseph has a chat with FT capital markets editor Ralph Atkins:

The $10bn birth of the trusted deletion industry

Nobody has been more annoyed by Alibaba’s potential upcoming valuation of Snapchat at $10bn than the Bitcoin community, since its own “world changing” technology currently has a market value of no more than $7bn.

Here’s a flavour of the outrage on the Bitcoin subReddit: Read more

The curious case of capital gain-like profit

Iren Levina, economics lecturer at Kingston University, brings to our attention a fascinating, if under-appreciated, phenomenon in finance.

She describes this as the “puzzling rise in financial profits and the role of capital gain-like revenues” throughout most of the 2000s, which were totally delinked from real economic growth during the period.

Okay. Why so puzzling you ask? Don’t we know these profits were the result of too much risk taking? And haven’t there been hundreds of papers about this sort of thing?

Well, yes. But this isn’t quite Levina’s argument.

In a paper published in April this year she instead argues that the reason financial profits became disassociated from real economic growth was because of the way they were formed and the way they were transferred through the financial system consequently.

More to the point, because they were enabled by the very phenomenon of “capital gain-like revenues’.

Unfortunately, the monetary assets which facilitated these revenues have been incorrectly understood by the financial system. In Levina’s eyes they are not, as many believe, borrower liabilities matched by real assets at financial institutions, but rather borrower liabilities matched by something altogether different. Read more

Do you really want to open this can of trust-breachy worms?

You can’t shake everything up at once. Some sensible paragraphs from Bank of America Merrill Lynch’s China team who are searching for explanations in place of the trust defaults they expected:’s understandable why local officials do not want to see any default and try all they can to avoid one. Given the amount of resources they command and how much influence they can exert on local financial institutions, it’s not a surprise to us that they have managed to do so. However, the central government, supposedly having broader interests and a longer horizon in mind, could have stepped in to force some defaults, make investors more aware of the hidden risks, address the implicit-guarantee moral hazard and improve resources allocation.

 Read more

Markets Live: Thursday, 31st July, 2014

Live markets commentary from 

The (early) Lunch Wrap

Markets || Argentina defaults as last-minute talks fail || Sierra Leone declares Ebola virus public health emergency || SFO pays £1.5m to Robert Tchenguiz || Lloyds takes fresh £600m PPI hit || House price growth slows in July || Former Banco Espírito Santo board face legal action after losses || Balfour Beatty ends merger talks with Carillion: Read more

Banco Encephalopathy Spongiform

Relisted in Lisbon, Banco Espirito Santo, down 45 per cent at pixel…

 Read more

Most hedge funds fail

That conclusion, and its consequence — picking good hedge funds that will survive is beyond the ability of big investors like pension funds — has been the central point of this series about hedge fund zombies.

However, reading John Lanchester in the New Yorker on how the jargon of finance obscures and reverses the meaning of words, the simple clarity of the message was striking:

Most hedge funds fail: their average life span is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The over-all number did not decrease, however, because hope springs eternal, and new funds are constantly being launched.

 Read more

Further reading

Elsewhere on Thursday,

- Then and now, the similarities and differences between 1914 and 2014

- When entertainment passes for investment advice.

- The anti-court court. Read more

The 6am London Cut

Markets: Most Asian markets paused to end July on a quieter note after better-than-expected US economic data raised the possibility of a jump in interest rates. (FT’s Global Markets OverviewRead more

Argentina, default, and the prisoner’s dilemma

That was the Argentine economy minister, Axel Kicillof, shortly before pixel time, having announced a (rejected) ‘offer’ of the same terms as Argentina’s restructured debt to the holdouts; blamed Judge Griesa; and otherwise prepared his country for default. Direct negotiations, in short, are over for now. Read more

Banco Espírito Santo: call a policia?

Following the disclosure of the exposures to Espírito Santo Group to the market on July 10th, 2014 the Board of Directors learned about the existence of two letters issued by Banco Espírito Santo in favour of creditors of Espírito Santo International, which had not been approved in accordance with the internal procedures in place at the Bank and was not registered in its accounting records as at June 30th, 2014.

 Read more

The Closer


- America’s inverted tax logicRead more

Video: markets react to Q2 GDP and FOMC, look ahead to Friday

A brief chat with Fast FT’s Eric Platt:

Fed sees continued “underutilization of labor resources”

Better employment situation reports. Strong second-quarter growth. Inflation rising steadily. Recent congressional testimony from Janet Yellen admitting that the labour market was improving more quickly than the Fed had forecast.

Yet despite acknowledging the recent moves in the unemployment rate and inflation towards the Fed’s targets, Wednesday’s FOMC statement also added that “a range of labor market indicators suggests that there remains significant underutilization of labor resources”. Read more

This is nuts. When’s the crash?

This valuation will self destruct in ten, nine…

Snapchat is worth $10bn, according to Alibaba. The yet to list Chinese ecommerce company is in talks to inject a round of financing that would make the company worth as much as Dropbox and and Airbnb, reports BloombergRead more

US Q2 un-blips Q1

A healthy Q2 print is no surprise: underlying growth was already known to be much better than the abysmal, weather-traumatised first quarter numbers indicated, while labour market indicators had been portraying an accelerated recovery for months now.

But 4 per cent annualised growth, along with a slight positive revision to the first quarter number from -2.9 to -2.1 per cent, was even better than expected. Read more

What would an anti-corruption top even look like?

So, with the corruption investigation into taboo busting tiger, former Politburo Standing Committee member Zhou Yongkang, the first such investigation against a politburo standing member since 1949, are we calling the top of this thing?

Kinda, says Gavekal’s Andrew Batson: Read more

Markets Live: Wednesday, 30th July, 2014

Live markets commentary from 

The (early) Lunch Wrap

Power companies face tougher-than-expected price controls || Barclays takes £900m PPI charge as investment bank profits halve || Ukraine tensions prompt Total to suspend Novatek share buys || Airbus eyes Dassault stake sale as profits rise || Rightmove’s profit rise underscores recovery in UK property || Markets Read more