Friday, February 23, 2018

"The Best Bond Villain Ever – TLT"

Oh we had fun with this one and its leveraged mirror image, the TBT.

In the early years of the 2010's Doug Kass was getting on every TV show he could find to pitch his contention that bonds were the "Short of the Decade". It got so bad that the usually peaceable LearnBonds put up a post in August 2012 titled "Doug Kass and the WORST Trade of the Decade" with a picture of Kass' chosen vehicle that was worth a thousand words:
Remember, that chart was only the first few years of the trade.
It is difficult to be so wrong for so long. And he never fessed up.

Mr. Kass kept it up until late 2016. It got so bad, the TBT (UltraShort Lehman 20+ Yr. ETF) fell so far that the ETF sponsor, ProShares, had to do a 1:4 reverse split. In total the decline was roughly 300 to 33 last December 15th before heading up to this week's intermediate-term high.
$38.72 last.
Good times.

Anyhoo, here's the latest from Risk Reversal:
I am listening to a great discussion on CNBC between the Halftime Report’s Host Scott Wapner and Doubline Capital’s Jeffrey Gundlach, watch here:...

... Jeffrey, nick-named the Bond King has been calling for higher Treasury yields, weaker dollar and high commodity prices for months, and he’s obviously been right.

Gundlach made a pretty important point for those who like to look at charts, that 10year US Treasury yield has broken the long-term downtrend, and that he has a low conviction view that rates continue to go higher, but this is also a matter of how you connect the dots.

Here is a 20-year chart of the 10yr and the 30yr Treasury yields, connecting the peaks over that period.To my eye it shows both very near long-term resistance:

10yr yield

30yr yield
For the last ten or so years, it has been a take it to the bank trade to buy US Treasury Bonds when the yield has approached the downtrend. Now I get it, that was in a QE & ZIRP regime, both which have ended, with the Fed now embarking on QT, but the near precision of the double bottom in the one year chart of the TLT, the Ishares 20 year treasury bond etf is a sight to behold:...MUCH MORE
The long bond ETF, TLT is up a few cents at $124 even.
The double short TBT is off a few cent at $15.55. Compare with chart below.

Most everyone who pays attention to this stuff know that some day treasuries will mean-revert and trade lower.
What most everyone isn't doing is publicly recommending the trade and using double leveraged inverse ETF's to do it.
There's a lesson in here somewhere....
One of these days we'll repise Mr. Kass' Adventures in Tesla Shorts.

Credit Suisse Global Investment Returns Yearbook 2018

From Credit Suisse, February 20:
 Back to the future
  • Equities, not housing, have been the best long-run investment, contrary to  recent claims
  • Globally, the returns and risks from housing have been between those on equities and bonds
  • Gold has given poor returns, high volatility, and been a poor inflation hedge
  • Collectibles such as art, wine and musical instruments have beaten cash and government bonds
  • Episodes of volatility, as in early 2018, are hard to predict, tell us little about future returns, and appear as mere blips in the long secular rise of equities
  • We should expect lower investment returns in future on all asset classes
  • Value investors have experienced a lost decade, but there is no guarantee that is about to change
Published by the Credit Suisse Research Institute, in collaboration with London Business School professors, the Credit Suisse Global Investment Returns Yearbook has evolved into a reference volume providing respected long-run return data and risk premium estimates for 23 national stock and bond markets. The 2018 edition of the Yearbook is published today.

In the book, Professors Elroy Dimson and Paul Marsh and Dr Mike Staunton of London Business School examine the industrial transformation that has taken place since 1900, alongside the parallel transition in markets as countries have moved from emerging to developed status. The authors also assess the returns and risks from investing in equities, bonds, cash and currencies in 23 countries and three different regions. They also examine factor investing and the profitability of different investment styles. In a new study, they analyze the investment performance of nonfinancial assets such as housing, collectibles and precious metals. 

Key highlights:
  • Since 1900, global equities have beaten bonds and bills, outperforming cash (Treasury bills) by 4.3% and bonds by 3.2% a year – a reward for the higher risk associated with investing in stocks
  • Emerging markets were the stars of 2017, with a return of 38% vs 23% for developed markets. But over the last 118 years, they have underperformed developed markets by 1% per year.
  • Since 1900, the average collectible rose 30-fold in terms of purchasing power – equivalent to an annualized price appreciation of 2.9% - but returned less than stocks globally.
  • Of the four collectibles for which the Yearbook considers data back to 1900, wine performed the best with an inflation-adjusted price appreciation of 3.7%, while art achieved just 1.9% per year
  • Precious metals and gemstones are not an effective hedge against inflation. Gold, silver and diamonds gave a return lower than US Treasury-bills
  • Recent claims that housing provides a large financial reward at lower risk are incorrect. Since 1900, the quality-adjusted real capital gain on worldwide housing is approximately –2% per year.
  • Housing has been less risky than equities, but the expression "safe as houses" is misleading. US house prices fell by more than 36% in real terms from their late-2005 peak until their low in 2012....

HT it was out: Abnormal Returns

Some previous years:
2017 Credit Suisse Global Investment Returns Yearbook (and testing smart beta factors)
Lessons From the 2015 Credit Suisse Global Investment Returns Yearbook: Vice Pays
The Enigma Inside The Credit Suisse Global Investment Returns Yearbook 2014
Last year I referred to the authors of the Credit Suisse Global Investment Returns Yearbooks as "the hot new boy band Dimson, Marsh and Staunton" while looking at a picture of Professor Dimson.

Cracks me up but hasn't gained much traction in the academy.*
"Credit Suisse Investment Returns Yearbook 2013

And dozens and dozens of posts regarding Professor Dimson's interests, use the "search blog" box if interested.  

Media: "Newspaper company Tronc eyes buying TheStreet"

We haven't looked at The Street stock (TST) since last March, thinking that, as deer nuts (under a buck) it wasn't something for the blog but damn, it's up from $0.68 to $1.42 last.
Go figure.

From Talking Biz News:
Newspaper company Tronc is exploring whether to make an offer to purchase financial news company, reports Keith Kelly of the New York Post.

Kelly writes, “Tronc had looked at TheStreet in the past, sources said, but Cramer’s 22-year-old operation was struggling at the time. TheStreet, in fact, was warned by Nasdaq in late 2016 that its stock could be delisted since its shares had traded below $1 for more than 30 days in a row.

“In addition, the last time Tronc came kicking the tires, TheStreet still had a prohibitively expensive block of $55 million in preferred stock from Technology Crossover Partners on its books....MORE
Also at Talking Biz News:

Scaggs gets new beat at Financial Times
Fnancial Times reporter Alexandra Scaggs is now covering corporate fixed-income markets for the Alphaville blog and paper.

Scaggs has been at the FT since June 2016 as an Alphaville columnist.

She previously worked at Bloomberg News from February 2015 to June 2016, covering the government bond market....MORE
Part of our intro to her Wednesday post "US companies might be liquidating their offshore bond hoards" we said:
Alexandra seems to be one of the few journos bulldogging what for market operators is a pretty important story....

La Niña? El Niño? La Nada? Where We're At and Where We're Going

From IRI Columbia, February 19:
2018 February Quick Look
Published: February 19, 2018 

A monthly summary of the status of El Niño, La Niña, and the Southern Oscillation, or ENSO, based on the NINO3.4 index (120-170W, 5S-5N)

Use the navigation menu on the right to navigate to the different forecast sections
In mid-February 2018, the tropical Pacific reflected La Niña conditions, with SSTs in the east-central tropical Pacific in the range of weak to moderate La Niña and most key atmospheric variables showing patterns suggestive of La Niña conditions. The official CPC/IRI outlook calls for La Niña continuing through at least early spring, followed by a likely return to neutral conditions around mid-spring. Support for this scenario is provided by the latest forecasts of statistical and dynamical models....
Image result for IRI ENSO Forecast February 2018 

You Want Autonomous Vehicles? The Mining Industry Is Already Going to Level 5

The barriers to introducing fully automated vehicles on public roads are high. Self-driving vehicles will need to safely navigate near infinite scenarios “in the wild,” and meet high regulatory hurdles before full deployment is possible.

Mining sites offer an almost opposite environment — highly structured and physically remote, with pre-defined, repeatable tasks. The mining industry is using this structural advantage to deploy self-driving vehicles and robotic machinery ahead of the technology’s wider deployment.
Mining companies are highly sensitive to operating costs, and automation is one lever to improve margins. Even small efficiencies gained from automation can result in exponential savings when applied across global mining operations.

International mining companies and machine OEMs, including Caterpillar and Komatsu, are leading the industry’s automation push. Startups have emerged to provide the sensors and platforms that enable newly autonomous vehicle fleets.

We used CB Insights data to unearth startups enabling mining automation and analyze mining company and OEM activity in the space. This is the first in a series of three posts examining technology trends reshaping the mining industry.

OEMs Deploy Autonomous mining trucks
Moving rocks from one place to another has been an early target for automation. The large, ore-carting vehicles ubiquitous at surface mining sites are quickly being automated.
OEMs are doing much of the heavy lifting to develop the technology. Caterpillar first deployed autonomous mining trucks in 2013. The company’s Cat® Command platform implements autonomous hauling solutions for truck fleets.

Komatsu, another heavy equipment provider, makes hauling trucks for surface mining with autonomous capabilities. In 2016, the company unveiled a prototype cab-less mining truck. Widespread use of the prototype would be a big step forward from today’s automated vehicles, which are either retrofitted or built with self-driving capabilities on existing configurations.

All major mining companies use automation solutions offered by the machine OEMs. BHP Billiton, the second-largest mining company by revenue, deploys a range of autonomous vehicles, including underground trains and surface mine trucks.

The company sees autonomous equipment as the most mature emerging technology it currently uses.

BHP Investor Presentation, May 2017
Rio Tinto also has mature autonomous capabilities, with about 20% of its fleet of 400 haul trucks in the Pilbara region of Australia retrofitted with autonomous capabilities. The company estimates that each autonomous truck operated an average of 700 hours more than conventional trucks in 2017, with 15% lower unit costs.
STARTUPS Provide Sensors and Software
Startups have moved into the automation space to support OEMs and mining companies. No startup has attempted to create an autonomous mining truck, instead entering the space through the LIDAR sensors and software systems that enable automation.
LIDAR: Companies in this category provide LIDAR sensors for self-driving vehicles. LIDAR, which stands for Light Detection and Ranging, is a technology that uses light to sense objects.
Integrated Platform: These companies go a step further than sensor companies, offering sensors, automation software, and fleet management solutions....MUCH MORE

Grain Traders

From the Streetwise Professor, Jan. 23:

It’s pretty clear that the major agricultural trading firms, notably the ABCDs–ADM, Bunge, Cargill, and Dreyfus–are going through a rough patch of tight margins and low profits.  One common response in any industry facing these conditions is consolidation, and in fact there is a major potential combination in play: ADM approached Bunge about an acquisition..

I am unsatisfied with most of the explanations given.  A widely cited “reason” is that grain and oilseed prices are low due to bumper crops.  Yes, bumper crops and the resulting low prices can be a negative for producers, but it does not explain hard times in the midstream.  Ag traders do not have a natural flat price exposure. They are both buyers and sellers, and care about margin.
Indeed, ceteris paribus, abundant supplies should be a boon to traders.  More supply means they are handling more volume, which is by itself tends to increase revenue, and more volume means that handling capacity is being utilized more fully, which should contribute to firmer margins, which increases revenues even further.

Greg Meyer and Neil Hume have a long piece in the FT about the potential ADM-Bunge deal. Unfortunately, they advance some implausible reasons for the current conditions in the industry. For example, they say: “At the same time, a series of bumper harvests has weakened agricultural traders’ bargaining power with customers in the food industry.” Again, that’s a flat price story, not a spread/margin story.  And again, all else equal, bumper harvests should lead to greater capacity utilization in storage, logistics, transportation, and processing, which would actually serve to increase traders’ bargaining power because they own assets used to make those transformations.
Here’s how I’d narrow down where to look for more convincing explanations. All else equal, compressed margins arise when capacity utilization is low. In a time of relatively high world supply, lower capacity utilization would be attributable to increases in capacity that have outstripped gains in throughput caused by larger crops.  So where is that increased capacity?

There are some hints of better explanations along these lines in the FT article.  One thing it notes is that farmer-owned storage capacity has increased.  This reduces returns on storage assets.  In particular, when farmers have little on-farm storage they must sell their crops soon after harvest, or pay grain merchants to store it.  If they sell their crops, the merchant can exploit the optionality of choosing when to sell: if they store at a local elevator, they pay for the privilege. Either way, the middleman earns money from storage, either in trading profits (from exploiting the timing option inherent in storage) or in storage fees. If farmers can store on-farm, they don’t have to sell right after harvest, and they can exploit the timing options, and don’t have to pay for storage.  Either way, the increased on-farm storage capacity reduces the demand for, and utilization of, merchant-owned storage. This would adversely impact traders’ margins.

The article also mentions “rivals add[ing] to their crop-handling networks.” This would suggest that competitive entry/expansion by other firms (who?) is contributing to the compressed margins.  This would in turn suggest that ABCD margins in earlier years were abnormally high (which attracts entry), or that the costs of these unnamed “rivals” have gone down, allowing them to add capacity profitably even though margins are thinner.

Or maybe it’s that the margins are still healthy where the capacity expansions are taking place. Along those lines, I suspect that there is a geographic component to this. ADM in particular has its biggest asset footprint in North America. Bunge has a big footprint here too, although it also considerable assets in Brazil.  The growth of South America (relative to North America) as a major soybean and corn exporting region, and Russia as a major wheat exporting region, reduce the derived demand for North American handling capacity (although logistical constraints on Russian exports means that Russian export increases won’t match its production increases, and there are bottlenecks in South America too).

This would suggest that the circumstances of the well-known traders that have more of a North American (or western European) asset base are not representative of the profitability of grain trading overall. If that’s the case, consolidation-induced capacity “rationalization” (and that’s a major reason to merge in a stagnant industry) would occur disproportionately in the US, Canada, and western Europe.  This would also suggest that owners of storage and handling facilities in South America and Russia are doing quite well at the same time that owners of such assets in traditional exporting regions are not doing well....MUCH MORE

Thursday, February 22, 2018

"Turkey mulls 'national' bitcoin"

From Al-Monitor:
The alliance between Turkey’s ruling Justice and Development Party (AKP) and its de facto partner, the Nationalist Movement Party (MHP), has extended to an unlikely realm: the idea to develop Turkey's own bitcoin.

Amid bitcoin’s meteoric rise last year, the Turkish government had taken an unwelcoming stance toward the cryptocurrency. Ministers likened it to a pyramid scheme and warned citizens to stay away. The MHP, however, argues that instead of dismissing cryptocurrencies, Ankara should draw up legislation to regulate and control the market. MHP deputy chair and former Industry Minister Ahmet Kenan Tanrikulu has penned a detailed report on the issue, proposing the state-controlled release of a “national bitcoin” called "Turkcoin."

For Tanrikulu, missing out on blockchain, the underlying technology of cryptocurrencies, would be a serious mistake. “The world is advancing toward a new digital system. Turkey should create its own digital system and currency before it’s too late,” he told Al-Monitor.

The politician stressed that cryptocurrencies were already in use in Turkey, despite the lack of a legal framework. “The need for regulation is obvious,” he said. “Also, the use of those currencies in illegal activities must be prevented.”

He continued, “We need to create the infrastructure for the blockchain database. There are nearly 1,400 digital currencies in the world today and many countries are using them. We, too, can create a digital currency, based on companies in the Wealth Fund. Since the demand exists, we should create and release our own digital currency. Opposing those currencies is meaningless. This is a national issue which requires a national consensus.”...MUCH MORE

See Something, Say Something...

...expose yourself as a dimwit.

From TIME:
A news tip earlier this week that reported a Confederate flag flying beneath an American flag in the Greenwood neighborhood of Seattle, Washington was discovered to be a mistake...

...The Seattle Times received the following tip from New York Times best-selling author Rebecca Morris after she believed that she saw a Confederate flag flying in her neighborhood: “Hi. Suddenly there is a Confederate flag flying in front of a house in my Greenwood neighborhood. It is at the north-east corner of 92nd and Palatine, just a block west of 92nd and Greenwood Ave N. I would love to know what this ‘means’ … but of course don’t want to knock on their door. Maybe others in the area are flying the flag? Maybe it’s a story? Thank you.”

However, a more thorough examination revealed that it was actually a Norwegian flag was flying at the house of Darold Norman Strangeland, who raised it at the start of this year’s Winter Olympics in PyeongChang, South Korea as an homage to his Norwegian-American background — his parents emigrated to the states in the mid-1950s....MORE
The Seattle Times story is now ten hours old. At the time they reported the mistake Norway's Pyeongchang Medal count was 13/11/9 GSB.
It is now up to 13 gold, 12 silver, 10 bronze so at least the flag-flyer, Darold Norman Stangeland is probably happy although the French nudging the Norwegian women's biathlon relay team into fourth place may have been hard on Mr. Stangeland.

Still though, the 35 total medals for Norway far outdistances second-place Germany's 25, Canada's 24 or the USA's 21.

Stangeland said his father practiced the very Norwegian  profession of tugboat captain after emigrating. Here's the picture used to illustrate the original story although I'm not sure that is Mr. Stangeland's home:
Credit—Seattle Times

"After years of testing, The Wall Street Journal has built a paywall that bends to the individual reader"

Behind the algo curtain.
A major piece from NiemanLab:
Non-subscribers visiting now get a score, based on dozens of signals, that indicates how likely they’ll be to subscribe. The paywall tightens or loosens accordingly: “The content you see is the output of the paywall, rather than an input.”
The Wall Street Journal thinks it might know your reading habits — and your potential spending habits — better than you know them yourself.

For the past couple of years, the Journal — home to one of journalism’s oldest paywalls — has been testing different ways to allow non-subscribers to sample its stories — refining a subscription prediction model that allows it to show different visitors, who have different likelihoods of subscribing, different levels of access to its site.

Non-subscribed visitors to now each receive a propensity score based on more than 60 signals, such as whether the reader is visiting for the first time, the operating system they’re using, the device they’re reading on, what they chose to click on, and their location (plus a whole host of other demographic info it infers from that location).
Using machine learning to inform a more flexible paywall takes away guesswork around how many stories, or what kinds of stories, to let readers read for free, and whether readers will respond to hitting paywall by paying for access or simply leaving. (The Journal didn’t share additional details about the score, such as the exact range of numbers it could be. I asked what my personal score was; no luck there, because since the scores are anonymized.) 

“I think back to maybe eight months ago, when we were looking at all these charts with a lot of different data points. Now we’ve got a model that’s learned to a point where, if I get a person’s score, I pretty much know how likely they will be to subscribe,” Karl Wells, the Journal’s general manager for membership, told me when we spoke last week, with a Journal spokesperson on the call. “What we’ve found is that if we open up the paywall — we call it sampling — to those who have a low propensity to subscribe, then their likelihood to subscribe goes up.” (The Journal’s model looks at a window of two to three weeks.)

The Journal has found that these non-subscribed visitors fall into groups that can be roughly defined as hot, warm, or cold, according to Wells....MUCH MORE
HT: Talking Biz News

Activist Hedge Funds and Anti-Competitive Mergers

Matt Levine call your office.*
From The Hill:

Antitrust policy must account for hidden culprits: hedge funds
The recent surge of corporate mergers — last year’s Amazon purchase of Whole Foods being a glaring example — is gaining ground on the left as a political issue.

Antitrust policies are an important but under-utilized set of tools for addressing these mergers and the drag they put on our economy while padding the pockets of the very wealthy.

Yet, to really get at the root causes of this trend, policymakers must look beyond traditional antitrust policy and crack down on the predatory hedge funds often pushing these mergers to make a quick profit with no concern for the wreckage they leave in their wake.

The scale of corporate power today is something we have not seen since the Gilded Age more than a century ago. Since 1990, America has seen a spate of sustained merger activity. According to one 2017 study, the average publicly-traded firm is three times larger today than it was 20 years ago.
Corporations are merging across a range of industries — from telecom to airlines to agriculture and food production —and working people feel the negative consequences every day.

Mergers push up prices for consumers in the long run (think cellphone and cable bills), diminish competition and the invention of new and better products (including medicines) and inevitably lead to declining wages and job losses. These newly formed behemoths also wield outsized political power, which only serves to exacerbate the issue.

After growing pressure from progressive economists and advocates, congressional Democrats have begun recognizing the problems of these merger trends.

Their late summer “Better Deal” economic platform argued for much stronger antitrust regulation, as well as enforcement of existing rules, to boost competition and business opportunities for small businesses and suppliers, lower the cost of everyday goods and put economic and political power back in the hands of the American people.

Yet, one thing that is missing from their proposals — and much of the recent attention on corporate consolidation — is the role that so called “activist” hedge funds play in driving this troubling wave of mergers.

(The term “activist” refers to investors — hedge fund or otherwise — who obtain enough corporate shares to garner influence and effect change at the company.)

Today’s activist hedge funds are akin to the corporate raiders of the 1980s and have profoundly shaped the way corporations do business in the 21st century.

Despite the fact that their share of ownership of any one company is brief (on average two years), many are able to put extraordinary pressure on executives and boards to abandon any existing long-term strategy for a quick boost in share price.

They push companies to cut costs by laying off workers and selling assets, and they implore them to use company coffers by buying back stocks to elevate price, which amounts to insider trading. On top of that, many hedge funds pressure companies to sell themselves to their competitors to bump up share prices before they themselves cash out....MORE
*Back in 2015 Mr. Levine had a few posts that riffed off a tangentially related topic, some commentary on the paper: "Anti-Competitive Effects of Common Ownership.", the exemplar that I remembered being his "Should Mutual Funds Be Illegal?"

I'm guessing Mr. Levine's mention of the paper helped it to attain its current position on the SSRN leaderboard, #441 in downloads with 38,489 views of the abstract.

Unfortunately for Levine fans the post I remembered only has six footnotes while I have a nagging para-memory that the others contained more.
Sorry about the recall fail.

San Francisco: "UN expert decries homeless conditions in Bay Area as ‘cruel,’ ‘unacceptable’"

You may have seen the story.
The UN's special rapporteur on Adequate Housing has been jet-setting around, Mexico City, Mumbai, S.F., documenting what she sees:
“In Mexico City, I visited a low-income settlement that had been moved by the city onto empty land near a railway line,” [Farha] said. “They had no running water. They stole electricity.” The camp was noisy and dangerous. She noted that the camp in Mexico is virtually identical to those she visited in Oakland, including the Wood Street and 23rd Avenue encampments....
The above snip is from the East Bay Express reprinted in Curbed San Francisco.

Curbed has had one of the most impressive series on the situation of any major media.
There's the January 22 piece  we used for the headline which wraps up with:
After her trip to the Bay, Farha headed out to assess conditions in LA, an errand she told the East Bay Express she dreaded after observing encampments here.
Additionally they had coverage a week later with "How SF tourism industry deals with the homeless crisis":
“I actually think it’s the worst it’s ever been”

February 12's "San Francisco backs new law to intervene with severe homeless population":
“This is a public health issue and needs to be treated as such”

February 19's "Some SF streets filthier than world’s poorest slums, says UC Berkeley professor"
So kudos to Curbed.

Someone else who's been pointing out various aspects of the culture that is San Francisco is Elaine Ou who we linked to last summer in: San Francisco's Dirty Little Secret
And again in November's "Elaine Would Prefer That Amazon Not Move to San Francisco (AMZN)".

As I noted the first time we linked to the Curbed headliner:
It's a deliberate policy decision by the municipal and county government. More on that point next month....
Still not ready to do that but I thought we should update with the nod to Curbed.

Daily Mail Schadenfreude: Man's Ferrari Is Impounded, Towed

Granted, if you (or dad) can afford the car you can afford the £25K insurance premium so not having it is stupid but the DM seems to be taking quite a bit of pleasure in this story.

Moment limited edition Ferrari is towed away in front of stunned onlookers in Mayfair after police seized £500,000 supercar because it wasn't insured
    • Ferrari 458 Speciale Aperta, one of only 499 made, seized off Berkeley Square in London on Sunday afternoon
    • The incident attracted 20 to 30 onlookers who watched the £500,000 be towed away by police officers
    • Police said the driver was reported on suspicion of using the vehicle without insurance
      This is the moment a rare £500,000 Ferrari was towed away in front of stunned onlookers in Mayfair after police seized it for having no insurance.

      The Ferrari 458 Speciale Aperta, one of only 499 ever made, was stopped just off Berkeley Square in London on Sunday at around 2pm.

      The incident attracted a crowd of around 20 or 30 onlookers with people filming the moment the Ferrari was lifted onto a towing vehicle. Police said the driver was reported on suspicion of using the vehicle without insurance....MORE

      The Porsche in front of the Ferrari is dad's 918.

      "China overtakes US in AI startup funding with a focus on facial recognition and chips"

      NVIDIA watches.
      And yours truly writes stuff like Jan. 15's "'Can Chinese AI Chip Makers Compete with Nvidia?' (NVDA)":
      Not yet.
      However...the fact China not only built the world's fastest supercomputer but did it with chips they designed and manufactured themselves, see 2016's "Milestone: China Builds The (NEW) World's Fastest Supercomuter Using Only Chinese Components (and other news) INTC; NVDA; IBM" combined with our first hit of the three cities named in: November 21, 2016 "Artificial Intelligence: What Could Derail NVIDIA? A Lab in Shenzhen; A Basement in Moscow; An Office in Bristol (NVDA)", albeit a year later:

      "Sequoia Backs Graphcore as the Future of Artificial Intelligence Processors" (NVDA; INTC)
      November 13, 2017
      BRISTOL, England, Nov. 13, 2017 — Graphcore has today announced a $50 million Series C funding round by Sequoia Capital as the machine intelligence company prepares to ship its first Intelligence Processing Unit (IPU) products to early access customers at the start of 2018....
      makes one think the lab in Shenzhen idea is not as far out as it had been....
      And today's headliner from The Verge:
      The competition between China and the US in AI development is tricky to quantify. While we do have some hard numbers, even they are open to interpretation. The latest comes from technology analysts CB Insights, which reports that China has overtaken the US in the funding of AI startups. The country accounted for 48 percent of the world’s total AI startup funding in 2017, compared to 38 percent for the US. 

      It’s not a straightforward victory for China, however. In terms of the volume of individual deals, the country only accounts for 9 percent of the total, while the US leads in both the total number of AI startups and total funding overall. The bottom line is that China is ahead when it comes to the dollar value of AI startup funding, which CB Insights says shows the country is “aggressively executing a thoroughly-designed vision for AI.”

      China’s natural advantages in AI are well-documented. Compared to the US, it has a huge population (1.4 billion), which offers a wealth of data and opportunity for companies to scale quickly. Its AI sector also has the backing of a central government that’s able to quickly shift resources (as opposed to the missing-in-action White House), and the country’s looser approach to digital regulations means companies can experiment more freely....MORE

      Now, about that basement in Moscow...
      More to come. 

      Dollar Index: Rejected at 90 (DXY)

      What Had Been Support (the 90-line, Feb. 7-13) Is Now Resistance?

      Not really, those terms only apply to instruments that are actually traded, where chart memory comes into play: "When I get to breakeven I'll get out" and all that. But his is what the floor becoming the ceiling looks like:

      If you see that set-up in an individual currency or perhaps more profitably in an equity, you'll have that flash of pattern recognition that makes you think: "I should look into this."

      And with a more rational focus, for today at any rate, Marc Chandler from Brown Brothers Harriman with his personal blog Marc to Market:

      All Eyes on Equities
      The dramatic reversal of US shares yesterday in the last hour of trading has once again pulled the proverbial rug beneath the feet of investors. The turn down, moreover, occurred near important technical levels, seemingly adding to the significance.

      Global equities have followed suit. The MSCI Asia Pacific Index fell 0.8%, despite a 2% rally in Chinese markets re-opening after the holiday celebration. European bourses have been market down and the Dow Jones Stoxx 600 is off by little less than 1% in late morning turnover. That said, European shares opened lower still but have stabilized, perhaps waiting for fresh cues from the US markets. The S&P 500 is straddling unchanged levels.

      The S&P 500 traded on both sides of Tuesday's range yesterday and closed below its low. The outside down day is bearish price action. The S&P 500 was unable to take out Monday's high and it just nicked the 2743-level we have identified as key. The S&P 500 had bounced from 2532.7 to 2754.4 since February 9. Before anticipating a return to the lows, there are some mile markers on the way that will be watched. First, the 2669.7 area is a 38.2% retracement of the bounce and 2643.5 is 50%. Similar levels for the Dow Industrials are found at 24640.8 and 24396.3 respectively.

      The VIX actually closed a little lower yesterday (20.02 vs. 20.60). It is slightly firmer today but it is below the 21.6 high seen at the start of the week or even the 21.0 seen yesterday. Meanwhile, the Treasury market has steadied. Yields are off 1-3 bp through coupon curve. It has a great deal of new supply to digest, and there is another $29 bln (seven-year notes) that will be raised today. When looking at the price action closely, it as if the S&P 500 made its highs about 25 minutes after the FOMC minutes were released, and did not slip to new lows for a little more than half an hour. The 10-year yield initially slipped a basis point, but then climbed. Yields peaked a little before the S&P 500 made new lows for the day.

      We do not see much new news in the FOMC minutes. The January meeting was seen in real time as a hawkish hold and the statement reflected an upgraded economic assessment and greater confidence that inflation would move toward target. It seems clear that the fiscal stimulus helped boost the near-term confidence. While much attention has been devoted to debating whether the March dot plots will point to four hikes this year instead of three, which was the case in December, seems, the fact is that the Fed funds futures are not fully pricing in three hikes this year. That gap between the market and the Fed is closing gradually, but remains and it is that adjustment that seems key for the investment climate.

      We have argued that there is an accumulation of evidence that the US economy is showing some classic sign of being late in the expansion cycle. These included, metrics like the 12-month moving average of non-farm payrolls, auto sales, credit card delinquencies, and financial speculation (cyber-currencies?). The eurozone economy in contrast was seemingly accelerating. However, after softer PMIs, Germany reported softer ZEW and weaker IFO survey, and France reported all its February business confidence readings decline in February. Of note, the German IFO expectations component fell the most in two years (105.4 from 108.3) and is at its lowest level in five months. ....MORE...   

      Cambridge, Oxford Uni's, Electronic Frontier Foundation Report: "The Malicious Use of Artificial Intelligence:..."

      It's all about risk.

      First up, Engineering & Technology, Feb. 21: 

      AI is a threat to global stability, warns Cambridge University report
      Artificial intelligence (AI) could be used by rogue states to cause havoc and disruption, according to a new report from Cambridge University’s Centre for the Study of Existential Risk. 

      In a report titled The Malicious Use of Artificial Intelligence: Forecasting, Prevention, and Mitigation, the university body warns that malicious manipulation of AI could create a destabilising effect and calls on governments and corporations worldwide to ensure that this does not happen.
      It also warns of the rise of “highly believable fake videos” impersonating prominent figures or faking events to manipulate public opinion around political events.

      The 100-page report identifies three security domains (digital, physical and political security) as particularly relevant to the malicious use of AI. It suggests that AI will disrupt the trade-off between scale and efficiency and allow large-scale, finely-targeted and highly-efficient attacks.
      The authors expect novel cyber-attacks, such as automated hacking, speech synthesis used to impersonate targets, finely-targeted spam emails using information scraped from social media, or exploiting the vulnerabilities of AI systems themselves (e.g. through adversarial examples and data poisoning).

      Likewise, the proliferation of drones and cyber-physical systems will allow attackers to deploy or repurpose such systems for harmful ends, such as crashing fleets of autonomous vehicles, turning commercial drones into face-targeting missiles or holding critical infrastructure to ransom....MORE
      At the EFF, Feb. 21, their particular interest:

      The Malicious Use of Artificial Intelligence: Forecasting, Prevention, and Mitigation
      ...At EFF, one area of particular concern has been the potential interactions between computer insecurity and AI. At present, computers are inherently insecure, and this makes them a poor platform for deploying important, high-stakes machine learning systems....  
      From GigaOm (yes, they're still alive) some additional thoughts:

      What’s missing from the Malicious Use of Artificial Intelligence report?
      Only a fool would dare criticise the report “The Malicious Use of Artificial Intelligence: Forecasting, Prevention, and Mitigation,” coming as it does from such an august set of bodies — to quote: 
      “researchers at the Future of Humanity Institute, the Center for the Study of Existential Risk, OpenAI, the Electronic Frontier Foundation, the Center for a New American Security, and 9 other institutions, drawing on expertise from a wide range of areas, including AI, cybersecurity, and public policy.”
      Cripes, that’s quite a list. But let me at least try to summarize its 100 pages of dense text.
      – There’s a handy executive summary and introduction
      – 38 pages cover all the things that could go wrong
      – 15 pages describe ways to not let them happen
      – 33 pages cover the people and materials referenced
      It’s difficult to argue with any of it, on the surface at least. Particularly the overall message: there could be bad things, and we should not sleepwalk into them. While this is welcome advice, one factor is noticeable by its absence. Strangely, as the report comes from groups for whom the scientific method should be as familiar as brushing one’s teeth in the morning, it lacks any discussion, or indeed conception, of the nature of risk.

      Risk, as security and continuity professionals know, is a mathematical construct, the product of probability and impact. The report itself makes repeated use of the term ‘plausible’, to describe AI’s progress, potential targets and possible outcomes. Beyond this, there is little definition.

      We can all conjure disaster scenarios, but it is not until we apply our expertise and experience to assessing the risk, that we can prioritise and (hopefully) mitigate any risks that emerge.
      So, without this rather important element, what can we distil from its pages? First we can perceive the report’s underlying purpose, to bring together the dialogues of a number of disparate groups. “There remain many disagreements between the co-authors of this report,” it states, showing the reality, that it is a work in progress: to coin an old consultancy phrase, “I’m sorry their report is so long, we didn’t have time to make it shorter.”...MUCH MORE
      And the report via the EFF (101 page PDF)

      Wednesday, February 21, 2018

      Questions America Wants Answered: "How can I optimise my wardrobe?"

      From The Economist's 1843 Magazine, Feb. 6:

      An economist’s guide to dressing well
      Captain Samuel Vimes, denizen of Terry Pratchett’s “Discworld”, posited the “Boots” theory of socioeconomic unfairness: the rich were rich because they could afford to buy boots that cost $50 today but lasted a decade, while poor Vimes (with his copper’s coppers) was stuck buying $10 boots that wore through in a year. The seemingly cheaper boots would cost him twice as much in the long run, and leave his feet wet most of the year to boot (if you will). Banerjee and Duflo might phrase it differently, but the general concept of capital constraints preventing long-term optimal spending is familiar to any economist.

      In theory, then, buying costlier clothes might be prudent in the long run. After all, the actual value of an item of clothing is the purchase price divided by the number of times you wear it: an expensive jacket that you wear every day is ultimately better value than a sale-rack shirt that you only wear once. However, that logic depends on whether your $50 boots are truly going to last a decade. The savings evaporate if you’re liable to lose them, or if you’ll be embarrassed to wear them once fashions change, or if, heaven forbid, some expensive items of clothing are not actually better quality, but just charging for a logo.

      That said, a further consideration is whether by dressing to impress you can, for example, acquire a better job that will get you to a higher salary bracket, far exceeding the cost of your fancy threads. “Costly thy habit as thy purse can buy…For the apparel oft proclaims the man,” advised Polonius, a figure of noted acuity. Many economists have similarly suspected that, in the world of business, a fine wardrobe and bland opinions will get you further than the inverse.

      However, this is the kind of tricky signalling question where causality is very hard to establish. Do people do well in business because, to quote the economist J.K. Galbraith, they successfully “articulate the currently fashionable cliché”, or because they’re the kind of person with the social and financial capital necessary to climb the greasy pole and to stay on top of fashion trends (without getting too much grease on their outfit)? If you buy a $1,000 dollar suit, will your bosses be impressed, or mortified that you paired last-season’s shirt with the wrong brand of cufflinks? As Marge Simpson once discovered, a $28,000 suit can get you invited to the country club, but once you get there someone will notice that you always wear the same suit. Almost by definition, the kind of class-based signalling that expensive clothing aims to achieve is hard to get right; if it weren’t, it wouldn’t be an effective signal.....MORE
      Somehow related at Going Concern, February 2014:
      Turns Out Your Non-Diverse Wardrobe Probably Makes You a Better CPA
      Guys in public accounting, how many blue shirts do you own? For the ladies, how many of the same cardigan in different colors do you own? I get it, I rotate the same few suits when I actually have to appear in public for work in Washington, with the scarf I tie around my neck the most exciting and varying part of my sensible outfit.

      As it turns out, those of you with fewer wardrobe choices might actually be at least as smart as our own president, at least according to this Fast Company piece:
      As he told Vanity Fair:
      "You'll see I wear only gray or blue suits," [Obama] said. "I'm trying to pare down decisions. I don't want to make decisions about what I’m eating or wearing. Because I have too many other decisions to make."
      This is because, the Commander in Chief explained, the act of making a decision erodes your ability to make later decisions. Psychologists call it decision fatigue: it’s why shopping for groceries can be so exhausting and judges give harsher rulings later in the day....MORE

      "Six factors driving Iran’s sudden currency devaluation"

      Following up on last week's "Iran’s police step in to contain foreign currency debacle".

      From Al-Monitor:
      A major and unexpected devaluation of the rial on the free currency market has taken many in Iran by surprise. Analysis of the behavior patterns in the Iranian foreign exchange market suggests that six main parameters need to be assessed to understand what has contributed to recent events.

      First is the application of the inflation differential between Iran and the global inflation levels. This factor has previously been discussed by Al-Monitor, and there have been strong signs that the Rouhani administration has sought to maintain a degree of stability in order to contain the inflationary impacts of a devaluation. If one would have applied the inflation differential, the free market rate of the US dollar would have been around 48,000 rials in October 2016, meaning it would have theoretically far surpassed 50,000 rials by now. Based on statements by top officials, the Central Bank of Iran (CBI) and the administration remain committed to managing the value of the national currency. However, there is continued inflationary pressure on the rial, especially as Iranian exporters wish to see a weaker currency that makes their products more competitive. The ongoing ambiguity surrounding exchange rate policies, and especially the guessing game about the long-promised unification of the official and free market rates, continue to unsettle the market, which enters into panic mode whenever there are sudden fluctuations.

      Second is the CBI’s intervention in the currency market. The free currency market is fully managed by the Central Bank, which intervenes to balance supply and demand. Evidently, if the CBI fails to inject enough funds, the demand side will push up the price. This seems to have occurred in recent weeks — both due to a shortage in CBI injections as well as the sudden hike in demand as a result of panic buys. One can speculate whether the CBI’s actions were intentional or due to operational limitations. Respected economist Farshad Momeni has speculated that the Rouhani administration is manipulating the foreign exchange market to benefit from the arbitrage between the official and free market rates in order to compensate for its budget deficit. Others have reported that the CBI has faced difficulties in repatriating hard currency, thus the shortage on the domestic market. But both these explanations would only justify parts of the problem as the Rouhani government and the CBI always have alternative plans in place. As such, it is more likely that a chain of events and rumors, and especially talk of that the CBI would allow the rial’s value to slide, led to unexpectedly high demand for which the CBI was not operationally prepared.

      Third is the ability of the CBI to repatriate external funds. Besides managing the foreign currency market, the CBI is also clearing the overall transactions between international and Iranian banks — a process that is growing in volume due to the gradual normalization of banking relations between Iran and international second- and third-tier banks. The CBI’s ability to handle the growing volume of transactions has also been a factor in the recent hiccups in the market. Some explain the operational shortcomings as a function of international, and especially Emirati, banks not cooperating with the CBI. But it is also conceivable that there are some internal shortcomings, taking into account new compliance standards to which all Iranian banks have to adhere. Such operational hiccups are immediately understood as unsettling factors that lead to rumors that the CBI is short of funds. Thus, it is evident that the CBI and Iranian banks need to further upgrade their systems to manage the growing financial flows in order to prevent such bottlenecks....
      ...MUCH MORE

      Central Banking: "The Powell Fed Is Starting to Take Shape"

      From the WSJ's MoneyBeat blog:
      Wall Street has had a long list of questions for new Federal Reserve Chairman Jerome Powell since his nomination last November. It may finally be about to get some answers.

      Minutes from the Fed’s last meeting, on Jan. 30-31, are due out Wednesday afternoon. Those are expected to shed light on the last conclave under the stewardship of former Chairman Janet Yellen, but may also offer some early hints about how her successor is thinking.

      “The FOMC minutes should give financial markets a good idea of the tone of Chair Powell’s formal remarks,” said NatWest Markets economists in a research note.

      Even stronger clues on his thinking about everything from tighter monetary policy to U.S. inflation are likely to come from Mr. Powell’s first testimony as chair before Congress next week, as The Wall Street Journal’s Morning MoneyBeat newsletter noted on Wednesday.

      Mr. Powell previously has stressed continuity and indicated he will maintain the slow-and-steady approach toward interest-rate moves that Ms. Yellen stuck to during her four years at the helm.
      The worry among many investors is that the Fed turns more hawkish as the U.S. economy and inflation begin to pick up after years of sluggishness. “​The most likely surprise in the Fed minutes…is that they may be leaning to four hikes in 2018,” said Steven Englander, head of research and strategy for Rafiki Capital Management. The Fed had previously penciled in three rate-increases for 2018.

      Expectations that the Fed will tighten policy more aggressively have helped drive up U.S. Treasury yields. The yield on the 2-year U.S. government note rose to its highest level since 2008 on Tuesday, while the 10-year yield is nearing 3% for the first time in four years....MORE

      "US companies might be liquidating their offshore bond hoards"

      Alexandra seems to be one of the few journos bulldogging what for market operators is a pretty important story. As noted in the intro to Feb. 4's "Bonds: 'Apple, Alphabet and Microsoft... — might consider borrowing some bond-market manoeuvres from the Federal Reserve.'":
      If the companies simply repatriate the dollar amount they will only have to sell enough  assets to pay the tax. If they plan to distribute/invest the cash they will have to sell into already weakening markets.
      I haven't seen this point raised anywhere in the media other than...

      From FT Alphaville, Feb. 1:...
      And from FT Alphaville, Feb. 20:

      Something odd has been happening to short-term bank bonds.
      So far this month, spreads on banks' two-year bonds have widened by more than 15 basis points, according to Bank of America Merrill Lynch. For all US corporate debt maturing in 1-3 years (which includes bank bonds), spreads have widened 8bps, according to BofAML ICE's index. Spreads on three-year and four-year securities have widened by about 11bps and 12bps, respectively:
      This is more likely a sign of selling from big multinational companies, rather than a change in traders' beliefs about bank creditworthiness. Many multinationals had said they would liquidate savings they had invested offshore after tax reform. Companies that invested primarily in corporate bonds, such as Apple, were large buyers of short-term bank bonds, Zoltan Pozsar wrote in a note last month.
      Bank of America strategists wrote in a note today that they expect the short-term funding pressures to continue:
      The other aspect of overseas cash repatriation we have pushed for this year is that financial markets are losing one of the biggest providers of funding in the front-end... We think liquidations the past two weeks of 1-3 year paper in the corporate bond market is to some extent driven by this story. We are also seeing stress in the commercial paper market, 2-year swap spreads and LIBOR-OIS and one of the drivers we think is the overseas cash repatriation story... We continue to expect wider credit spreads in the front end of the curve.
      Maybe companies are going by the two-year timeline estimated by Pozsar:...MORE

      Monkeys Are Transcribing The New York Times, Typing Hamlet at 12 Words Per Minute

      If it makes anyone feel better they're Stanford monkeys.

      Note: we're aware these are either bonobos or chimps. (you try finding a pic of monkeys at the keyboard)

      From Engineering & Technology, Sept. 13: 
      Monkeys transcribe Hamlet with new brain-reading tech

      Monkeys equipped with a brain implant, which reads their thoughts in order to move a cursor, have been able to transcribe passages from Hamlet or the New York Times at 12 words per minute. 
      The technology, developed by Stanford University researchers, has been hailed as a major breakthrough for people suffering from severe paralysis such as physicist Stephen Hawking.

      According to the team behind the invention, directly reading brain signals to interpret thoughts and drive a computer cursor would allow users to communicate faster than existing technologies allow. For example, the system developed for Hawking by Intel and SwiftKey relies on tracking the movement of facial muscles. Alternatively, eye movement tracking can be used but this doesn’t always work. For example in Hawking’s case, eye movement tracking didn’t work because of droopy eyelids.

      "Our results demonstrate that this interface may have great promise for use in people," said Paul Nuyujukian, postdoctoral fellow at Stanford, who developed the system together with professor of electrical engineering Krishna Shenoy. "It enables a typing rate sufficient for a meaningful conversation."

      Surprisingly though, the researchers estimate humans will be typing more slowly using the technology than the monkeys involved in the experiment. While the monkeys were just transcribing given passages, humans will be slowed down by thinking about what they actually want to communicate and will also think about how to spell words correctly.

      "What we cannot quantify is the cognitive load of figuring out what words you are trying to say," Nuyujukian said....MORE
      Here's the Stanford press release, Sept. 12, 2016.

      In other primate news:
      Chimps begin to grow embarrassed by their close relation to humans 
      Today In History: Swedish Chimpanzee, Ola, Wraps Up Investing Career
      What Monkey Pornography and Celebrity Worship Tells Us About Human Nature  
      Commodity traders superior to chimpanzees, research shows 
      Jim Cramer beats Monkey in Stock Picking Contest!
      UPDATE-Jim Cramer Beats Monkey in Stock Picking Contest
      What Jim Cramer Does After Beating the Monkey

      Batteries: "Apple in Talks to Buy Cobalt Directly From Miners"

      From Bloomberg, Feb. 20:
      • iPhone maker is one of the largest end users of the metal
      • Cobalt is a key ingredient in mobile phone batteries
      Apple Inc. is in talks to buy long-term supplies of cobalt directly from miners for the first time, according to people familiar with the matter, seeking to ensure it will have enough of the key battery ingredient amid industry fears of a shortage driven by the electric vehicle boom.

      The iPhone maker is one of the world’s largest end users of cobalt for the batteries in its gadgets, but until now it has left the business of buying the metal to the companies that make its batteries.
      The talks show that the tech giant is keen to ensure that cobalt supplies for its iPhone and iPad batteries are sufficient, with the rapid growth in battery demand for electric vehicles threatening to create a shortage of the raw material. About a quarter of global cobalt production is used in smartphones.

      Apple is seeking contracts to secure several thousand metric tons of cobalt a year for five years or longer, according to one of the people, declining to be named as the discussions are confidential. Its first discussions on cobalt deals with miners were more than a year ago, and it may end up deciding not to go ahead with any deal, another person said.

      An Apple spokesman declined to comment. Glencore Plc Chief Executive Officer Ivan Glasenberg late last year named Apple among several companies the miner was talking to about cobalt, without giving further details.

      Securing Supplies
      The move means Apple will find itself in competition with carmakers and battery producers to lock up cobalt supplies. Companies from BMW AG and Volkswagen AG to Samsung SDI Co. are racing to sign multiyear cobalt contracts to ensure they have sufficient supplies of the metal to meet ambitious targets for electric vehicle production.

      Australian Mines Ltd., developing the Sconi mine in Queensland state, this week agreed a cobalt and nickel supply deal with SK Innovation Co., South Korea’s top oil refiner, that’s worth about A$5 billion ($3.9 billion) at current prices, the Perth-based company said Wednesday in a presentation.
      SK Innovation, which plans to use the raw materials at an EV battery manufacturing plant in Hungary, agreed to buy all of the project’s planned output for up to 13 years, according to the filing.
      BMW is also close to securing a 10-year supply deal, the carmaker’s head of procurement told German daily FAZ in early February....MORE

      Slow-Moving Drought Returning to California, Expanding in Midwest

      We've mentioned a preference for the Palmer Drought Index presentation of conditions for some applications, despite a somewhat justified concern the methodology behind it is 'simplistic' when compared with the University of Nebraska U.S. Drought Monitor.
      Here they are side by side: