<p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5dcd7f857eece553872dcecc-2333/ap19199037497255.jpg" border="0" alt="trump rally" data-mce-source="Gerry Broome/AP" data-mce-caption="President Donald Trump gestures while speaking at a campaign rally in Greenville, N.C., Wednesday, July 17, 2019." /></div></div></div></p><ul class="summary-list"><li>I was a former partner at Goldman Sachs who left earlier this year. I now am a macro political analyst and run MacroEagle. </li><li>As long as the US consumer doesn't break, the risk here is of a squeeze higher in equities as bears throw in the towel and algos rebuild their longs.</li><li>Trump's chances are at best 50/50. In the UK, Corbyn has no chance of sole power.</li><li>In Europe, keep an eye on (1) the rise of France/Macron, and (2) the worst Franco-German relationship I can remember.</li><li><a href="https://macrohive.com/hive-exclusives/how-to-navigate-politics-and-markets-into-year-end/">Read the original article on Macro Hive here. </a></li></ul><p> </p><p>In the short term, watch the great US consumer, but bigger picture - it's all about the US election.</p><p>Why? How Trump performs in the polls (especially during impeachment) will define the level of noise and randomness emanating from the White House on domestic and foreign policy. That consequently defines the overall level of 'uncertainty' about which the Fed cares (hence Trump does indirectly set monetary policy) and this in turn defines financial conditions and so the markets.</p><p>Also, watching Warren will define investor sentiment. Chances are as the best all-rounder she's Democratic nominee. In the recently published Barron's autumn 'Big Money Poll', 64% see Warren emerging as such. I agree, but then 62% expect Trump to win the re-election - not in my books. Also, 99% expect the market to take a serious dive should Warren win. That I emphatically agree with. So I think Trump's chances are at best 50/50, and here's why:</p><p>1.  Trump didn't win, Hillary lost. I know many Democrats who couldn't vote for Hillary but that can vote for Warren.</p><p>2. Trump needs the Rust &amp; Farm Belt to succeed. But with the ongoing trade war, the job numbers there look ugly.</p><p>3. Trump needs the Evangelicals. So why he 'sold out' the Kurds is beyond me … The evangelical Christians and Republican Hawks didn't like that one bit.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5dcd76fe7eece543e67216e3-832/screenshot 2019-11-14 at 154632.png" border="0" alt="chart" data-mce-source="Macro Hive" /></div></div></div></p><h2>The UK</h2><p>Add this one to your 'Politics 101': Brussels said it wouldn't re-open the deal. It did. Boris Johnson said he would rather die in a ditch than extend. He extended, still living. Few thought Parliament would vote for a deal. But it did. Corbyn said he wouldn't vote for an election. Yet he did.</p><p>I was less surprised by these turnarounds than most - but perhaps I'm a skeptic. As such, my 'long GBP/long UK asset' view has done rather well in October, with the pound alone rallying from 1.20 to 1.29. As I have mentioned many times before, using the pound as a 'Brexit Barometer', my targets have always been:</p><p>• 1.50 (no Brexit),</p><p>• 1.40 (soft Brexit),</p><p>• 1.30 (Deal Brexit),</p><p>• 1.20 (No Deal - Conservatives),</p><p>• 1.10 (No Deal - Corbyn).</p><p>I believe Corbyn has no chance of sole power. Now, after Boris' deal, I also think 'No Deal' is off. This means we either have a Tory government with a Deal (1.30-1.35 on rebalancing of UK underweights) or we have a Labour-LibDem coalition government with Corbyn gone, as LibDem leader Jo Swinson will demand his head and a 2nd Referendum as coalition price (McDonnell will gladly comply - he has fallen out with Corbyn anyway).</p><p>If we get a left-liberal coalition, the City 'bubble' will like the prospect of 'Remain' and the pound might rally to 1.35-1.40 (… then collapse later once the experienced McDonnell-troopers run circles around the inexperienced LibDems). So, I'm comfortable sticking with a 'long-GBP' view here for the time being, although the upside is now more limited.</p><p>As to Boris' chances, I often hear that 'the polls in 2017 got it wrong so don't trust them'. That misses the point. As the below chart shows, what broke the Conservatives in 2017 was their ridiculous Manifesto (attacking their core elder voters with 'dementia tax', 'winter allowance cut', and more). Hence the momentum swung to Labour and was visible in the polls. Today, the momentum is on Boris' side.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5dcd76ad7eece54350035c97-844/screenshot 2019-11-14 at 154521.png" border="0" alt="chart" data-mce-source="Macro Hive" /></div></div></div></p><h2>Europe</h2><p>Big picture? Keep an eye on (1) the rise of France/Macron, and (2) the worst Franco-German relationship I can remember.</p><p>France is now outperforming Germany economically (see latest IMF forecasts) and Macron is outperforming Merkel politically. In the medium-term that smells like trouble as the level of trust between Berlin and Paris seems to be heading south.</p><p>In the short term, I Berlin must soon change its paralyzed leadership. Keep an eye on the SPD's Parteitag (6-8 December). I can't see how they will want to stay in a coalition government while being destroyed at almost every regional election (see the most recent one in Thüringen where the far-left and the far-right won). I think the SPD will move into opposition after the party conference and a Center-Right/Green coalition will emerge in 2020, probably after an election and probably without Merkel.</p><p>What mystifies me is that the DAX is the best performing major equity market since September. I know the DAX is more of a bet on global demand than anything else, but looking at the current decision-making paralysis in Berlin, I wonder if it isn't just down to international equity portfolio rebalancing towards Europe rather than any fundamental insight regarding Germany.</p><p>Bottom Line: a lot of good news seems priced into German equities (inflows, German fiscal policy, China stimulus, no US tariffs, Brexit Deal), which seems at odds with the political and economic reality at home. Calls for caution.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5dcd767f7eece542de48e245-841/screenshot 2019-11-14 at 154423.png" border="0" alt="gs chart" data-mce-source="Macro Hive" /></div></div></div></p><h2>Markets</h2><p>For a typical US balanced fund (60/40), 2019 has been one of the best years since the 1990s. And with 70%+ of Q3 earnings coming in above expectations, hard data stands in stark contrast to the overall gloomy mood: Barron's autumn Money Manager survey came out at its most bearish in over 20 years. Hence the 'pain trade' is clearly equities higher.</p><p>So, as long as the US consumer doesn't break (last US Consumer Confidence came in below expectations but still near multi-year highs - so stay vigilant), the risk here is of a squeeze higher in equities as bears throw in the towel and algos rebuild their longs. For me that means taking advantage of low level of volatilities and being long the market in option format. My theoretical retirement portfolio looks as follows: tactically long SPX, long GBP (and overweight UK assets), long RUB carry. Strategically positioned for steeper rates curves, paying 10 year breakeven inflation, long Gold, SPX vs. FAANG outperformance, and long credit hedges in tranche format.</p><p><br /><em>Bobby Vedral is a macro-political analyst who runs MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit. Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. <a href="https://macrohive.com/hive-exclusives/how-to-navigate-politics-and-markets-into-year-end/">Read the original article on Macro Hive here. </a></em></p><p class="tagline">Get the latest Goldman Sachs stock price<a href="http://markets.businessinsider.com/stock/GS-Quote"> here.</a></p>

I'm a markets quant and former Goldman Sachs partner. Here's how to trade Trump and global politics into year-end.

<img src="https://static-ssl.businessinsider.com/image/5e0b0c0a855cc229d6598242-1199/gettyimages-1187381153.jpg" alt="Boris Johnson" /><ul><li><strong>There are at least three other potential shocks that could be as significant to the UK as Brexit.</strong></li><li><strong>To cope with the issues, it will require adept and creative central-bank policy.</strong></li><li><strong>Bilal Hafeez spent over 20 years doing research at big banks. </strong><strong><a href="https://macrohive.com/hive-exclusives/3-non-brexit-macro-shocks-the-new-uk-government-could-face-in-its-first-term/">Read his analysis as it appeared on Macro Hive.</a></strong></li><li><strong><a href="https://www.businessinsider.com/">Visit Business Insider for more stories.</a> </strong></li></ul><hr /><p>With the large Conservative majority in government, both UK markets and the economy are likely to enter a honeymoon period in the months ahead. While many are focused on Brexit as the main shock that could hit the UK economy, there are at least three other potential shocks that could be as significant.</p><p>And crucially they could all materialise in the next five years during the term of the newly elected UK government:</p><h2><strong> </strong><strong>1. Recession shock</strong></h2><p>Since the 1950s there has been a recession every nine years on average. The last UK recession was in 2008 around the global financial crisis, and we are now entering 2020. So on that metric, we are overdue. Perhaps the UK facing no inflation problem (allowing the Bank of England to keep interest rates very low) has kept a recession at bay. Equally, perhaps the US fiscal stimulus of recent years has prolonged the global business cycle, and the UK has been a beneficiary.</p><p>But the odds of a UK recession in the next five years are very high. There is no new large China-sized economy that will emerge like it did in the 2000s. Nor are tech advances having the same economy-wide productivity boosts as they were in the 1990s. At the same time, UK debt levels are high, the UK current account deficit is widening, and unit labour costs are on the rise. All these factors suggest the foundations for a recession are being set. And though the timing is unclear, within the first term of the new UK government looks probable.<strong> </strong></p><h2><strong>2. Market shock</strong></h2><p>No economies escaped the trauma of the 2008 financial crisis, not even the UK. It was caused by credit-fuelled asset bubbles, notably in real estate. Banks were at the heart of this and, ever since 2008, they have been regulated to ensure such a crisis will not repeat itself. However, crises typically do not follow the script of their predecessors. The next crisis will probably occur just where regulators fail to focus, or worse, because of mistakes regulators make where they have been focused.</p><p>The most obvious candidate would be a crisis in the non-bank financial sector. Regulators have constrained bank balance sheets, while asset managers have more freedom. Moreover, private markets - where private equity and leveraged finance live - have exploded. And these have even fewer constraints.</p><p>Perhaps the biggest advantage these players have is that they can more easily invest in illiquid assets. And much like banks incorrectly valued their 'level 3' assets in the run-up to 2008, private equity and asset managers could be overvaluing their illiquid assets. Their potentially obvious error would be to assume those assets have liquid markets into which they can be sold.</p><p>Already in the UK we have seen the Woodford fund and M&amp;G property funds suffer on this score. In the US, we have seen spikes in the repo market as pools of liquidity have been segmented. If these are the early signs, then we could be in for a much larger market liquidity shock. This could have far-reaching consequences for the economy, especially business investment and household wealth.</p><h2><strong>3. Pension shock</strong></h2><p>The long-heralded pension crisis is almost upon us.</p><p>Twenty years ago in the UK, one in eight people were over the age of 65. Today that number is nearing one in five. Throw in people in their fifties and early sixties, then close to 40% of the population are worrying about their pensions.</p><p>What makes matters worse is that people are expected to live well beyond the statutory retirement age of 65. For example, on a cohort-basis, women in the UK are now expected to live to 92 years. That means - at the current age of retirement - potentially 27 years living off their pensions.</p><p>The trouble is that current pension schemes will only offer on average 28% of earlier earnings in retirement. This is well below the OECD average of 60% and closer to what is seen in Mexico and Lithuania than France (74%), Germany (52%) or even the US (49%). This is a recipe for social unrest.</p><p>But what will trigger a crisis in the coming years is the collapse in bond yields. In the 1990s and 2000s, UK 10-year bond yields (adjusted for inflation) averaged over 4%. As a pension fund, if you compounded this out, funding future retirement benefits was straightforward.</p><p>However, in the 2010s, the real yield has collapsed to 0.15%. Worse still, since 2017 the real yield has been negative. Now the compounding accelerates against pension funds.</p><p>Of course, many pension funds, especially in the public sector with its crippling defined benefits, have diversified into private equity and other riskier investments. The trouble with these are that their returns are falling too.</p><p>If anything, <a href="https://www.ft.com/content/2812c2c6-d634-11e9-a0bd-ab8ec6435630">they appear</a> to be converging to those of public equity markets. This begs the question, why is the public sector paying the high fees of private equity to get an illiquid version of public equity returns?</p><p>In the end, public sector workers and others will need to increase their contributions to make up for any shortfalls. One of the largest pension schemes in the UK, the Universities Superannuation Scheme (USS), did try to do just that.</p><p>However, their request was met by university lecturers and support workers <a href="https://www.pensionsage.com/pa/University-pension-strikes-to-go-ahead.php">going on strike</a>. This is likely just the beginning. And lest one think this a UK problem - French workers have recently taken to the streets over sweeping pension reforms.</p><h2><strong>Bottom line</strong></h2><p>The UK is not only facing the potential of a Brexit-related shock, but there are three other plausible shocks and crises the UK government will face in its five-year term. This will require adept and creative central bank policy - that crucially will have to differ from the post-2008 policies that have led to these coming crisis. Moreover, with the central bank policy toolkit severely constrained, the onus will be on the government to avert or mitigate these. But is it ready to do so?</p><p><em><a href="https://macrohive.com/researcher/bilal-hafeez/">Bilal Hafeez</a> is the CEO and Editor of Macro Hive. He spent over 20 years doing research at big banks - JPMorgan, Deutsche Bank, and Nomura, where he had various "Global Head" roles and did FX, rates and cross-markets research.</em></p><p class="tagline">Our Brexit Insider Facebook group is the best place for up-to-date news and analysis about Britain's departure from the EU, direct from Business Insider's political reporters. Join <a href="https://www.facebook.com/groups/267178180471848/">here.</a></p>

Forget Brexit, the UK economy has these 3 other major risks

<img src="https://static-ssl.businessinsider.com/image/5de0e6f9fd9db20f852ac6b3-1500/china chinese parade dragon.jpg" alt="China Chinese Parade Dragon" /><ul><li><strong>Based on the performance of countries comparable to China, the latter's GDP growth could be as low as half the official number.</strong></li><li><strong>China stands out as having as having a growth rate much above that of comparable middle-income countries.</strong></li><li><strong>We can reasonably doubt China's own figures. Assuming that, thanks to Chinese exceptionalism, the country's productivity grows 1.5 times faster than in comparable countries, yearly trend growth in China would be about 3.5%. </strong></li><li><strong>Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.</strong></li><li><strong><a href="https://www.businessinsider.com/international?r=US&amp;IR=T">Visit Business Insider for more stories.</a></strong></li><li><strong><a href="https://macrohive.com/hive-exclusives/chinas-true-growth-could-be-half-what-you-think/">Read this article as it appeared on Macro Hive.</a></strong></li></ul><hr /><p>China's GDP data release always generates great market excitement despite rarely straying  more than 25 basis points below or above the government target. This stability has led a number of analysts to propose <a href="https://macrohive.com/deep-dives/whats-wrong-with-chinese-gdp-data/">their own measures</a>, typically based on a variety of Chinese proxy data but, in the end, not that different from the official numbers. In this article I argue that, based on the performance of countries comparable to China, the latter's GDP growth could be as low as half the official number and that markets are likely overestimating China's importance for the global economy. That being said, China has one of the highest levels of corporate debt in the world and slower growth implies greater risks of financial instability.</p><h2>China's amazing (supposed) productivity miracle</h2><p>There is a strong relationship between a country's level of development and its growth: poorer countries grow faster; richer countries grow more slowly (Chart 1). As countries get richer their population growth slows and productivity gains become more difficult. In the very early stages of development, productivity gains come primarily through workers moving from the low productivity agricultural sector to the higher productivity manufacturing sector. Once countries have reached their 'Lewis point' (where the surplus rural labor has disappeared), productivity gains slow. From that point onwards they largely depend on a country's ability to absorb technology - and that is driven by the quality of its economic and political institutions.</p><img src="https://static-ssl.businessinsider.com/image/5de0f1cefd9db211ad629bf5-691/screenshot 2019-11-29 at 101812.png" alt="macrohive" /><p>Past the Lewis point, most countries find it hard to continue catching advanced economies and instead get caught in the (in)famous middle-income trap. In 2018, only 24 countries (excluding oil economies) with more than 1 million inhabitants had income per capita above 60% of that of the US. Of these, only 6 had made it there from emerging market status: Hong Kong, Singapore, Taiwan, Japan, Korea, and Israel.</p><p>China stands out as having as having a growth rate much above that of comparable middle-income countries. Yet China's demographic growth is low, at about 0.5% a year, against 1% in countries in the same income range (Table 1). Most of China's growth advantage therefore comes from productivity growth, which is three times as fast as its peers. <a href="http://www.ifpri.org/publication/china-has-reached-lewis-turning-point">China, however, crossed its Lewis point around 2010</a>, making its official productivity growth truly extraordinary and somewhat difficult to take at face value.</p><img src="https://static-ssl.businessinsider.com/image/5de0ff40fd9db2219c336083-727/screenshot 2019-11-29 at 112059.png" alt="Screenshot 2019 11 29 at 11.20.59" /><h2><strong>Has China really escaped the middle income trap?</strong></h2><p>I base my skepticism over Chinese growth on three things primarily. First, China's government driven development model works well in the early stages of development but much less well when economies become more complex and growth becomes dependent on private sector innovations - the stage China is currently at. For instance, China's property rights system, with its fluid delimitation of public and private spheres, is <a href="https://harvardilj.org/wp-content/uploads/sites/15/HLI210_crop.pdf">an impediment to the country's integration into the global economic system</a>.</p><p>Second, <a href="https://www.nber.org/papers/w18673.pdf">studies of the middle income trap</a> show that countries tend to get stuck at lower levels of income per capita when they have very high investment ratios because these tend to reflect pervasive distortions. China's investment share of GDP was 45% in 2018, much higher than the 25% prevailing in comparable countries.</p><p>Third, China's share of global manufactured exports has been falling or stagnant since 2015 and the country is struggling to rebuild it (Chart 2). This is inconsistent with superior productivity growth. China's loss of global market share suggests productivity has failed to keep up with wage growth.</p><h2><strong><img src="https://static-ssl.businessinsider.com/image/5de0ff8bfd9db214252a12d7-722/screenshot 2019-11-29 at 112201.png" alt="Screenshot 2019 11 29 at 11.22.01" /></strong></h2><h2><strong>China's true growth could be much lower</strong></h2><p>So we can reasonably doubt China's own figures. But what, then, is a more likely growth rate?  Assuming that, thanks to Chinese exceptionalism, the country's productivity grows 1.5 times faster than in comparable countries, yearly trend growth in China would be about 3.5%. This growth rate would be commensurate with that of Korea after its financial crisis of the late 1990s.</p><p>Countries that are on an unsustainable growth path typically move to a lower and more sustainable trend following a shock, as Korea did after its crisis. In China's case, most of the transition to a slower trend growth could have happened in the down phase of the 2014-15 debt reflation. Chart 3 shows an example of an alternative growth trajectory based on a 3.5% trend in effect from 2015 onwards. Based on this path, China's 2018 growth would have been about 4% against 6.6% officially, and global growth 3.1% instead of 3.6%.</p><img src="https://static-ssl.businessinsider.com/image/5de0ff03fd9db214d51c50a2-725/screenshot 2019-11-29 at 111947.png" alt="macrohive" /><h2><strong>Bottom line</strong></h2><p>China's lower trend growth has two key consequences going forward. First, global growth is probably more resilient to a Chinese slow down than markets assume: most of China's slowdown is likely behind us. In addition, as manufacturing capacity migrates from China to other EMs, those are likely to grow faster and make up for the Chinese slowdown. Second, China will find it difficult to grow out of its high corporate debt that, at 155% of official GDP, is one of the highest in the world. China's middle income trap could still bring about financial instability.</p>

China's true economic growth could be half of what everyone thinks

<img src="https://static-ssl.businessinsider.com/image/5dee3645fd9db24823308ea2-1500/dry cracked earth.jpg" alt="dry cracked earth" /><ul><li><strong>The Fed has not idled in wait of potential new flare-ups - it has rolled out more repo operations and added 42-day calendar repos to help provide funding over the year-end turn. </strong></li><li><strong>These operations have seen nearly double the amount of submissions versus the offering size of $25 billion each.</strong></li><li><strong>We do not know if that dosage was too much or too little.</strong></li><li><strong>All eyes are on 2020: The handoff from temporary liquidity to 'not QE' Treasury bill purchases may end up being more abrupt than risk markets are comfortable with.</strong></li><li><strong><a href="https://macrohive.com/researcher/george-goncalves/">George Goncalves</a> is a 20-year fixed income markets veteran. Over that time he has covered rates, structured products and credit. He worked both on the buy-side and sell-side.</strong></li><li><strong> <a href="https://macrohive.com/hive-exclusives/feds-challenge-to-administer-liquidity-into-year-end-and-beyond/">Read this analysis as it appeared on Macro Hive.</a></strong><hr /></li></ul><p>Even with hundreds of billions of dollars in new liquidity created out of thin air, it's too soon for the Fed to signal a clear coast for repo markets.</p><p>On the one hand, through heavy liquidity dosages the Fed has doused the fire; but on the other hand, we do not know if that dosage was too much or too little.</p><p>The true test still lies in the weeks around year-end.</p><h2><strong>Fed fears the worst</strong></h2><p>The Fed has not idled in wait of potential new flare-ups. Since our last update on <a href="https://macrohive.com/hive-exclusives/understanding-fed-policy-qe-returns-thanks-to-qt-aftershocks-and-repo-shock/">Fed policy dynamics</a>, it has rolled out more repo operations and added 42-day calendar repos to help provide funding over the year-end turn. These operations have seen nearly double the amount of submissions versus the offering size of $25 billion each. This demonstrates that primary dealers aren't taking any chances either.</p><p>In addition to daily and term repo operations, the Fed has purchased over $100 billion T-bills for its SOMA portfolio since October. These so-called 'not QE' asset purchases, along with the repo operations, have led to the Fed's balance-sheet growing at a faster clip than that experienced in the first twelve weeks of QE2 and QE3 (Chart 1). Luckily it's not QE though, right?</p><p>If that's true, we come to our primary question: what comes next in 2020? But before we brainstorm that and the implications thereof, we should take stock of what has changed in the key Fed balance sheet categories.</p><img src="https://static-ssl.businessinsider.com/image/5dee35a3fd9db23fdf2ac8c4-643/screenshot 2019-12-09 at 115243.png" alt="Screenshot 2019 12 09 at 11.52.43" /><h2><strong>The balance sheet changes since September</strong></h2><p>As of November's last week, the Fed's balance sheet has grown in size by nearly $300 billion since the repo flare-up. This speed goes to prove a concept well known in the marketplace: the Fed tightens slowly and eases quickly. In less than three months the Fed unwound basically half of QT.</p><p>The Fed has imperfect control over its liabilities, so investors should never assume a one-for-one relationship exists between asset purchases and the expansion of excess reserves. For starters, currency in circulation has been on cruise control since the financial crisis (rising at ~6% a year). But it's the non-reserve items, foreign central bank (FCB) reverse repos, and Treasury general account (TGA) that make it challenging to predict reserve trends.</p><img src="https://static-ssl.businessinsider.com/image/5dee357dfd9db22ff046c6d2-675/screenshot 2019-12-09 at 115146.png" alt="Screenshot 2019 12 09 at 11.51.46" /><p>As seen above (Chart 2), total reserves have increased. But the TGA grew much more in total (in fact, the first week post 9/11 was the week that led to the reserve shortfall/repo spike as TGA expanded). It's as if most of the Fed repos since that period indirectly provided short-term cash to the Treasury as dealers are able to purchase more USTs and 'temporarily' fund them with the Fed.</p><p>Now, it's not that simple and there is overlap with the Treasury bill purchases which are producing more permanent excess reserves. Nonetheless, the amount of Fed repos nearly matches the growth in TGA. If the Fed had not expanded, its balance sheet there would have been more reserve draining because UST issuance would have mopped up cash needed to restock the TGA. Meanwhile, FCBs have pulled some money from the Fed and are providing relief by reducing their F-RRP allocation.</p><img src="https://static-ssl.businessinsider.com/image/5dee35e3fd9db2300a4db766-635/screenshot 2019-12-09 at 115328.png" alt="Screenshot 2019 12 09 at 11.53.28" /><h2><strong>The hand-off from repo to 'not QE' reserve growth</strong></h2><p>The effective Fed funds rate is back under control as are repo rates for the most part. That said, there is the occasional drift up in rates and the year-end turn is trading hundreds of basis points above the Fed target. The rest of this month could still see further pressures build as dealers pull back balance sheet usage and shy away from Fed term repos. Dealers will also aim to run a tight ship and will likely operate one day at a time in December.</p><p>But here is the tricky part (and another example of falling into a false sense of security). Clearly with the Fed on notice and providing a laddered safety net of repo liquidity, this year-end should theoretically be better than last year. And once we turn the calendar into 2020, commercial banks should start to open up their balance sheets and so Fed's repo should decline as well.</p><h2>The 2020 path</h2><p>So back to our main concern: 2020. Assuming there isn't something more nefarious going on in the banking system by some point in early next year, Fed repo assets should decline in size. That said, the handoff from temporary liquidity to 'not QE' T-bill purchases may end up being more abrupt than risk markets are comfortable with.</p><p>Case in point: as seen in Chart 3, in the months after the initial spike due to Lehman, some of the Fed's temporary liquidity programs started to see less usage as the panic subsided. This led to actual reserve declines as QE1 took some time to replace them. On a smaller scale, there is risk of a similar sort of repeat in 1H20. For example, if repo usage dropped to normal levels (i.e. as they were used pre-crisis), repo assets at the Fed could drop by over $200 billion (it would take over three months to replace those reserves via Treasury bill purchases).</p><h2>Curve could steepen</h2><p>Further complicating matters, if the Fed only buys T-bills they may end up enriching enough to encourage money market funds to start using the RRP again (which would drain reserves from banks). If that were to occur, the Fed would likely need to start buying out the curve and buy less T-bills (maybe via a curve control process through 5s). At that point they would need to stop their line that their purchases are "not-QE" (it would clearly be QE). This would favour staying with steepeners outright and/or on a forward basis as the front part of the curve (eg 2ys) would start to get depressed by this QE.</p><p>One way the Fed could avoid having to morph the T-bill purchases into outright QE would be to figure out how to launch a standing repo facility soon. This would be akin to 'QE on demand' but more so for reserve expansion for banks whenever they actually need it. All of these moving parts highlight how difficult it becomes for a central bank that is increasingly active on providing cash and collateral to the marketplace.</p><p>Bottom Line: This all feels very technical but, unfortunately, it's the world we live in since the Fed needs to provide reserves in ample supply to keep using the floor system to set rate policy. If and when we fall back into a recession and real QE returns, watch out. In many ways that is what risk markets are yearning for, forward expectations of QE. Meanwhile, as we wait the risk is that the Fed's balance sheet can actually temporarily shrink before growing (slowly via the Treasury bill purchases). Such a scenario is not priced into most asset classes.</p><p><em><a href="https://macrohive.com/researcher/george-goncalves/">George Goncalves</a> is a 20-year fixed income markets veteran. Over that time he has covered rates, structured products and credit. He worked both on the buy-side and sell-side. <a href="https://macrohive.com/hive-exclusives/feds-challenge-to-administer-liquidity-into-year-end-and-beyond/">Read this article as it appeared on Macro Hive.</a></em></p>

The Fed's liquidity problem hasn't yet gone away - and an abrupt shock may be looming in 2020

<ul><li><strong>Global <keyword id="6354298" type="DEFINITION" weightage="60" keywordseo="Stocks">stocks</keyword> climbed on Tuesday as investors largely ignored mass <keyword id="6354896" type="UNKNOWN" weightage="60" keywordseo="protests">protests</keyword> in the US, threats from President Donald <keyword id="6354862" type="UNKNOWN" weightage="60" keywordseo="trump">Trump</keyword> to <a href="https://www.businessinsider.com/trump-calls-for-national-guard-and-military-nationwide-protests-2020-6">deploy military forces to quash</a> the protests, and a backdrop of escalating US-China tensions.</strong></li><li><strong>Stocks in Europe jumped Tuesday, with the pan-European Stoxx 50 up more than 3%. Futures for the S&amp;P 500 rose 0.5%.</strong></li><li><strong>Analysts say the rise in stocks could be explained by investors choosing to focus on unprecedented aid from central banks and government intervention. </strong></li><li><strong>"Other than insurance and possibly reinsurance, the protests themselves should not directly impact financial <keyword id="31671" type="CITY" weightage="100" keywordseo="markets">markets</keyword>," said Jeoff Hall, managing economist at Refinitiv.</strong></li><li><strong><a href="https://www.businessinsider.com/?hprecirc-bullet">Visit Business Insider's homepage for more stories</a>.</strong></li></ul><p>Global stocks climbed on Tuesday as investors largely ignored mass protests in the US, threats from President Donald Trump to <a href="https://www.businessinsider.com/trump-calls-for-national-guard-and-military-nationwide-protests-2020-6">deploy military forces to quash</a> the protests, and a backdrop of escalating US-China tensions.</p><p>Futures for the S&amp;P 500 rose 0.5%, while in Europe stocks rallied sharply, with the pan-European <a href="https://markets.businessinsider.com/index/euro_stoxx_50?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest">Stoxx 50</a> jumping more than 3% in morning trade.</p><p>At the close in Asia Tuesday, Hong Kong's <a href="https://markets.businessinsider.com/index/hang_seng?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest">Hang Seng</a> rose 0.9%, and Japan's benchmark <a href="https://markets.businessinsider.com/index/nikkei_225?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest">Nikkei</a> rose 1.2%.</p><p>Investor optimism has been fueled by economic reopening and a decline in new <keyword id="1754604" type="PERSON" weightage="60" keywordseo="coronavirus">coronavirus</keyword> cases in recent weeks, but <a href="https://markets.businessinsider.com/news/stocks/protests-negatively-affect-markets-us-economic-recovery-financial-experts-stocks-2020-6-1029269622">some experts fear the protests could lead to a second wave</a> of infections in the US because of the close proximity of protesters. </p><p>Protests started last week after <a href="https://www.insider.com/george-floyd-autopsy-cause-death-asphyxia-neck-back-compression-ben-crump-2020-6">the death of George Floyd</a> while in police custody in Minneapolis. Floyd became unresponsive when a police officer knelt on his neck for more than eight minutes last Monday.</p><p>The large majority of protests have been peaceful, but many US cities have now seen civil unrest, with the destruction of property, violence, and looting in some places. On Monday night, <a href="https://www.businessinsider.com/trump-calls-for-national-guard-and-military-nationwide-protests-2020-6?r=US&amp;IR=TIR=T">President Trump threatened to deploy troops</a> on the streets to quash unrest.</p><p>While analysts think it odd to see a rise in stocks when the president has threatened to mobilize the military, they say investors are shrugging off widespread unrest and geopolitical risks because of unprecedented ongoing support from central banks. </p><p>Zach Abraham, chief investment officer at Bulwark Capital Management, told Markets Insider that the US protests will have "little to no effect" on <keyword id="45369" type="CITY" weightage="60" keywordseo="equities">equities</keyword>.</p><p>He pointed to US markets being at all-time highs despite mounting economic issues of record unemployment and an ongoing recession.</p><p>Moreover, the protests could "possibly be considered bullish as they would only serve to increase federal spending and government intervention," Abraham said. </p><p><strong><em>Read More: </em></strong><a href="https://www.businessinsider.com/stock-picks-to-buy-25-high-upside-recommendations-goldman-sachs-2020-6"><em>GOLDMAN SACHS: Buy these 25 beaten-down stocks all poised to jump more than 18% from current levels</em></a></p><p> Jeoff Hall, managing economist at Refinitiv, said he believes violence, the destruction of property, and the looting of stores, will have an economic impact on the private and public sectors, and specifically on insurance companies, but shouldn't impact markets too much.</p><p>"Other than insurance and possibly reinsurance, the protests themselves should not directly impact financial markets," he said. </p><p>"Insurance should cover most if not all property losses, including theft of merchandise and damage to structures," Hall said.</p><p>"These would come at a time where state and local balance sheets are already in poor shape due to <keyword id="8763838" type="UNKNOWN" weightage="60" keywordseo="covid-19">COVID-19</keyword> responses, higher payments to unemployment insurance and lower tax receipts from individuals and corporations."</p><p>To provide historical context, previous periods of civil unrest in the US, like the <a href="https://www.businessinsider.com/pictures-ferguson-protests-2014-8">Ferguson protests</a> in 2014 and the <a href="https://www.businessinsider.com/la-riots-what-happened-1992-rodney-king-los-angeles-protests-2017-5">LA riots in 1992</a> barely impacted markets, said Bilal Hafeez, chief executive and editor of financial research firm Macro Hive.</p><p>However, he believes the protests will have a significant impact on the US election in November, which itself is likely to move markets.</p><p><strong><em>Read More:</em></strong> <a href="https://www.businessinsider.com/stock-market-investing-strategy-momentum-growth-factor-volatility-morgan-stanley-2020-6"><em>MORGAN STANLEY: The market's hottest stocks are in danger of being disrupted to a degree not seen since the Great Recession. Here's how to adjust your portfolio for the coming shift.</em></a></p><p><strong>Here's the market roundup as of 09.45 a.m. in London (4.45 a.m. ET):</strong></p><ul><li>Asian indexes were up with China's Shanghai Composite up 0.2%, Hong Kong's <a href="https://markets.businessinsider.com/index/hang_seng?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>Hang Seng</strong></a> rose 0.9%, and Japan's <a href="https://markets.businessinsider.com/index/nikkei_225?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>Nikkei</strong></a> rose 1.2%.</li><li>European equities rose, with Germany's <a href="https://markets.businessinsider.com/index/dax?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>DAX</strong></a> up 3.4%, Britain's <a href="https://markets.businessinsider.com/index/ftse_100?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>FTSE 100</strong></a> up 0.8%, and the <a href="https://markets.businessinsider.com/index/euro_stoxx_50?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>Euro Stoxx 50</strong></a> up 3.2%.</li><li>US stocks are set to open higher. Futures underlying the <a href="https://markets.businessinsider.com/index/dow_jones?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>Dow Jones Industrial Average</strong></a>, the <a href="https://markets.businessinsider.com/index/s&amp;p_500?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestedium=ingest"><strong>S&amp;P 500</strong></a><strong>,</strong> and the <a href="https://markets.businessinsider.com/index/nasdaq_100?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>Nasdaq</strong></a> rose 0.5%.</li><li>Oil prices rose, with <a href="https://markets.businessinsider.com/commodities/oil-price?type=wti?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>West Texas Intermediate</strong></a> rose 2.2% at $36.25, and <a href="https://markets.businessinsider.com/commodities/oil-price?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>Brent</strong></a> crude rose 2.5% at $39.28.</li><li>The benchmark<strong> 10-year Treasury</strong> yield fell to 0.1%.</li><li><a href="https://markets.businessinsider.com/commodities/gold-price?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestm=ingest"><strong>Gold</strong></a> fell 0.2% to $1,747 per ounce.</li></ul><p><strong><em>Read More:</em></strong> <a href="https://www.businessinsider.com/stock-picks-to-buy-small-cap-tech-recommendations-companies-bofa-2020-5"><em>BANK OF AMERICA: Buy these 13 under-the-radar tech stocks poised to outperform amid flaring China tensions and lasting pandemic damage</em></a></p>Read the original article on <a href="https://www.businessinsider.com/global-stocks-rise-investors-see-no-market-impact-from-protests-2020-6">Business Insider</a>

Global stocks jump as analysts say widespread protests in the US will have 'little to no effect' on markets

<img src="https://static-ssl.businessinsider.com/image/5dfb5e9f855cc22a4e0814f2-1126/screenshot 2019-11-28 at 161450.png" alt="FIG Artistic Gymnastics Championships - Day 10 Jin Zhang of  China during Balance Beam for Women at the Aspire Dome in Doha, Qatar, Artistic FIG Gymnastics World Championships on 3 of November 2018. (Photo by Ulrik Pedersen/NurPhoto via Getty Images)" /><p class="source"><span>Getty Images / NurPhoto / Contributor</span></p><ul><li><strong>Bluntly, gamma is the first derivative of the option delta and describes the sensitivity of the delta in relation to price movements of the underlying security. </strong></li><li><strong>A flip is the transition from a prior (in this case positive) state, to its opposite (now negative) state. </strong></li><li><strong>Basically, it's the point in the market where you want to step back and wait until the forces of good and evil have battled it out and more sane explanations come into play. </strong></li><li><strong>Thorsten Roland Wegener spent 20 years trading equity derivatives and was a partner at Bear Stearns. <a href="https://macrohive.com/deep-dives/whats-a-gamma-flip/">Read his original column on Macro Hive here.</a></strong></li><li><strong><a href="https://www.businessinsider.com/">Visit Business Insider for more stories. </a></strong></li></ul><hr /><p>There is a new buzzword in town: 'Gamma Flip'. It is used to explain (due to a lack of any <em>sane</em> explanation for current market behaviour) why the S&amp;P seems stuck at practically all-time highs and what might happen if things turn bad. In fact, it is so hot that even TV pundits are elaborating on its potential advantages and dangers. But what exactly is it?</p><h2><strong>Learning Greek</strong></h2><p>Gamma as a <em>thing</em> has been around since traders began to use options to hedge, speculate, and mitigate risk. But it was not until the shiny Black-Scholes model emerged in the '70s that anyone knew what to call it. Bluntly, gamma is the first derivative of the option delta and describes the sensitivity of the delta in relation to price movements of the underlying security. A flip is the transition from a prior (in this case positive) state, to its opposite (now negative) state. For many that's hardly an eloquent answer, nor even a particularly explanatory one. Of course, there is a far easier way of describing gamma (and the potential flip it implies), but to reveal it would rob derivatives experts of their inordinately rotund paycheques… Luckily for you, nobody is paying me to be pretentious anymore.</p><h2><strong>Selling Options</strong></h2><p>The majority of investors own equities. Only a few short them to make a living. Pension funds, asset managers, or family offices sit on large equity holdings producing (apart from anxiety) dividends. And that's pretty much it. But there is a way to squeeze some additional returns out of your existing positions: namely, selling call options above the current market level. The logic, especially after a long bull market, goes as follows.</p><p>Let's say you are sitting on rather good performance figures by holding a market portfolio. The market went up for a long time. That's awesome. However, you think the air is getting thinner up there and expect a market correction is around the corner. Maybe there is room for another 10%, but that's it. So, you think to yourself, 'why don't I start selling my holdings potentially 10% above the current level?' To achieve this, you can sell call options at levels above the current market to some unfortunate market maker (dealer) at a big financial institution. If the market does rise another 10%, you will fully participate up to that point and will have generated additional income through the option premium received for selling to the friendly market maker the privilege of participating on the spoils above the unlikely up move.</p><p>To add insult to injury, you will ask the poor sap at the same time for a price to protect your portfolio against a market drop and buy some 'crash protection' (e.g., put options). That will show him. With a lot of supply on the upside and increasing demand on the downside, prices for calls will fall and prices for puts will increase. This is what is called an investment skew and you can observe it in every equity options market and sometimes also in a commodities market (this tells you some very interesting things about market conditions but is a story for another column).</p><p>So far, so good. You have sold some potential upside performance against a fee and hedged yourself against some downside risk. You are still interested in a positive market development and want to be long overall.</p><h2><strong>The Advantages of Being Long</strong></h2><p>However, the market maker does not share your inclination. He wants to be market neutral; he is not payed to take any directional risks and abhors the idea of predicting anything other than volatility (I should know, I used to be one of them).</p><p>Now when you own options, you are 'gamma long'. Gamma long is pretty cool, especially for market makers. When markets move, a long gamma will always work in your favour no matter whether you own calls or puts or both. If markets are rising, you suddenly become long. If markets decline, you are suddenly short (well, not really suddenly - you can actually calculate by how much, but for argument's sake let's say that is what happens). Unfortunately, you will have to pay for that privilege by losing gradually the stored time value in your option position, the so called 'theta'.</p><p>The good news is you can actually earn it back if markets move. If you are long call options at let's say 3150 points in the S&amp;P (i.e., the level of the S&amp;P as of writing), every further move to the upside increases your long position and your theoretical profit. To lock this profit in you sell on up moves and you buy on down moves, adjusting your market maker book back to neutral. If there are a lot of market makers around who have been forced to bid for call options, this is exactly what they are doing. All of them, all the time.</p><p>Suddenly this level become very sticky. Every bit of volatility is being used to recover the lost time value of the options that the market makers are now sitting on. And as these positions slowly waste away, the urge to compensate for this by hedging with every little move becomes stronger, slowly bringing the market to a standstill.</p><p>Due to the nature of gamma, these points are largest where the most options have been sold and bought. And they are easily trackable with a quick check of the open interest. The further the market moves away from these inflection points the less gamma is in the market, decreasing the urge to hedge all the time. It's like wading through a swamp; once the market clears it, things start happening again.</p><h2><strong>Watch the Market Makers</strong></h2><p>So why do markets move at all if gamma is, like in this example, the big decelerator? Because it depends who owns it. Market makers use their gamma because they must. There is nothing worse than sitting on a position and bleeding white over time as your options deteriorate. Institutions, on the other hand, do not have to get panicky as they benefit on their sold upside positions over time and use their long, protective position to the downside to insure their portfolio. If they were to do the same as the market makers - trade in and out of positions to utilize their long gamma - they would become neutral, which is clearly not what they wanted by setting up this position in the first place. So, the market downside is now defined by institutions who do not use their long gamma, which would make the market sticky but by market makers who are gamma short.</p><p>You remember what I said about long gamma being cool? Well short gamma is terror. If the market moves against you, you will always have to do what you do not want to: shift your positions to neutral. In a falling market you are suddenly long; in a rising market you are short.</p><p>We have already covered the long side of the market and deduced that things get a bit sticky there because market makers have to sell when markets rise and buy when markets fall. The opposite is now true on the downside. With markets gathering speed towards one of the lower inflection points, the same market makers who had long gamma on the upside now have to compensate for their short gamma positions, which actually means they have to sell when markets are low, sell a bit more when they get lower, and sell a shitload when the market tanks. What used to facilitate a <em>sticky</em> market on the top is now cause for a very <em>slippery</em> market on the bottom.</p><h2><strong>The Flip</strong></h2><p>The expression 'gamma flip' simply describes the point where long gamma positions of those who use them turn into short gamma positions for those who actually would have a need to use them, but don't have them. In other words, it's the point in the market where you want to step back and graciously wait until the forces of good and evil have battled it out and more sane explanations like macro factors, corporate earnings, or illusive trade deals make the headlines again. That's it. That's the simple explanation.</p><p>What I haven't told you is that gamma also reacts in mysterious ways in relation to time, volatility, and distance to spot markets. But that must wait for another column. In the meantime, the gamma flip is supposed to happen at levels of roughly 3070 points in the S&amp;P. Of course, it might just slowly fade away while we see new highs.  If you read this column at some future date, we will know what has happened.</p><p><em><a href="https://macrohive.com/researcher/thorsten-wegener/">Thorsten Roland Wegener</a> spent 20 years trading equity derivatives and was a partner at Bear Stearns. Currently, he teaches as well as cooking, driving, and cleaning lots.</em></p><h6> </h6>            <h3>NOW WATCH: <a href="https://www.businessinsider.com/bill-gates-warren-buffett-billionaires-donate-money-2017-10">On Giving Tuesday, see how Bill Gates and Warren Buffett are changing the world like no other humans in history</a></h3>                    <iframe class="bijwplayerclass" src="https://content.jwplatform.com/players/M78g9qx1-CEZHWCBG.html" width="100%" height="100%" frameborder="0" scrolling="auto" style="margin:0px;"></iframe>            

US stocks near all-time highs has traders talking about a 'gamma flip' - and what might happen if things turn bad

<p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5d4d9634cd97840fd2132694-2400/121.jpg" border="0" alt="quantum droplet 1" data-mce-source="Nature/Brad Baxley" data-mce-caption="The &amp;quotdropleton&quot; is a new type of particle cluster that forms from light energy. It's sate is dependent on the light's intensity." /></div></div></div></p><ul class="summary-list"><li>Here is a selection of sectors that could have liquidity problems if buyers for thinly traded assets disappear, quickly collapsing prices when markets go into a correction.</li><li>Secondary markets for private equity, commercial mortgage-backed securities derivatives, leveraged loans and "passive" ETFs are all areas where analysts are worrying illiquidity exists.</li><li>Ironically, central banks' desire to supply as much liquidity as possible - via low interest rates - has reduced yields globally, pushing investors into ever-riskier, less liquid markets.</li><li><a href="https://www.businessinsider.com/category/prime">Read all our Business Insider Prime stories here.</a></li></ul><p>The stock markets are faltering. The economies of the UK, Germany and Italy are contracting. The bond yield curve has inverted in the US, signalling an upcoming recession.</p><p>There is nothing but danger on the radar.</p><p>How bad is it going to get?</p><p>If you remember the crash of 2008, you'll know that these things can get out of hand very, very quickly. But today, there are no obvious asset bubbles waiting to pop. While some sectors that look frothy - low-grade US corporate debt, car loans, property prices in some European cities - no single sector looks toxic enough to trigger a systemic collapse like the great financial crisis of 11 years ago.</p><p>But there are several individual sectors that could have liquidity problems if buyers for thinly traded assets disappear, quickly collapsing prices when the markets go into a correction. Here is a selection:</p><h2>"Secondary" markets for private equity</h2><p>Business page headlines in the UK have been dominated in recent weeks by the collapse in the value of the<span> </span><a href="https://www.businessinsider.com/woodford-investment-fund-is-a-private-equity-liquidity-crisis-2019-6?r=US&amp;IR=T">Woodford Equity Income Fund</a>. It once held $13 billion in assets under management, but only about a third of that is now left. Investors believed the fund offered daily liquidity - meaning they could withdraw money any time. But founder Neil Woodford parked client funds in a series of non-liquid private equity and venture capital bets. Those can't be sold on the public markets. They have to be sold privately, and deals can take weeks or months to arrange.</p><p>When clients realised this, they demanded their money back - and Woodford "gated" them inside the fund as he scrambled to liquidate positions to satisfy them. A lot of people trapped inside Woodford are going to lose money. The Woodford episode rings alarm bells because this fiasco happened at the top of the market, after an historic bull run.</p><p>Woodford is the tip of the iceberg.</p><p>As more companies wait longer times to go public they take in more venture capital/private equity investor money. That money sits inside those companies - often tech and biotech startups - for years longer than it used to before it reaches an IPO. Look at Uber: Before its IPO it took in <em>twenty-three </em>different private investment rounds.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5d4d93b417e5d73475202d44-2358/screenshot 2019-08-09 at 122123.png" border="0" alt="Bernstein Research" data-mce-source="Bernstein Research" /></div></div></div></p><p>Bernstein Research analyst Inigo Fraser-Jones says the trend is toward "active" investment managers abandoning the public stock markets and instead investing in private equity.</p><p>"We are rapidly moving towards a world where for US pension funds and endowments their investment in public markets is mainly passivised [via exchange-traded funds that buy and sell automatically based on a formula] and their main expression of active investing will soon be in private assets," he told clients recently.</p><p>Often such private stock can only be sold with the permission of other investors or the board. This isn't a problem as long as the market for such offerings remains hot. But good luck getting out on the way down.</p><h2>Derivative indexes that track fading US shopping malls.</h2><p>CMBX is a series of indexes that track securitised bundles of mortgages, which are traded like bonds, based on shopping malls in the US. A short-seller, <a href="https://www.businessinsider.com/putnam-fund-exposed-to-commercial-mortgage-backed-securities-2019-7?r=US&amp;IR=T">MP Securitized Credit Partners, said</a> CMBX 6 (which tracks bundles of mortgages sold in 2012) is so filled with faltering shopping malls, <span>retail locations, and office buildings that some of these properties will default, at which point the thinly traded CMBX 6 index will dry up. </span></p><p>Forty-five percent of nearly $1 billion in net assets inside <a href="https://www.businessinsider.com/putnam-fund-exposed-to-commercial-mortgage-backed-securities-2019-7?r=US&amp;IR=T">Putnam Investments' Mortgage Securities Fund (PGSIX) are exposed to CMBX</a>. (The folks at Putnam, naturally, believe that the shorts are wrong.)</p><h2>Corporate "leveraged loans"</h2><p>The total volume of loans to not-great companies levelled off recently after hitting a peak in 2018. But the quality of those loans has continued to plumment. In <a href="https://www.businessinsider.com/cov-lite-leveraged-loans-reach-95-in-some-markets-2019-7?r=US&amp;IR=T">Europe, 95% of all leveraged loans are now "cov-lite,"</a> meaning that companies have made fewer promises to investors about how they get their money back. Globally, it's over 80%.</p><p>The market for such loans has been hot because they pay more interest than normal investment-grade debt. (With greater interest payments comes greater risk.) People want that risk because vanilla money-market savings rates are close to zero. When central banks like the US Fed, the European Central Bank, and the Bank of England keep interest rates low, "yields" from debt vehicles go lower too. </p><p>Yields "are on a relentless march toward zero," Bank of America's Hans Mikkelsen told clients in a recent research note seen by Business Insider.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5d4d93f11a700d341f3fd529-1482/screenshot 2019-08-09 at 122941.png" border="0" alt="Bank of America" data-mce-source="Bank of America" /></div></div></div></p><p>So investors end up in ever-more obscure places, looking for better yields. That's why <a href="https://www.bloomberg.com/news/articles/2019-07-08/clo-market-whale-is-back-after-regulatory-scrutiny-drove-retreat">Japan's Norinchukin Bank once owned 18% of all triple A-rated collateralized loan obligation (CLO) bonds</a> earlier this year, and remains a huge buyer in the $600 billion CLO market, according to Citi and Bloomberg.</p><p>When these companies go into recession, many of them will go to the wall. Twelve percent of all companies globally only survive because they can rollover debt. <a href="https://www.businessinsider.com/zombie-firms-statistics-on-low-interest-rates-and-leveraged-loans-2018-10?r=US&amp;IR=T">The "zombie" rate in the US is 16%</a>.</p><h2>Fewer banks absorbing risk</h2><p>In less-liquid markets based on obscure private assets and derivatives, there are now fewer buyers, according to Salomon Sebbag, who managed trading books for more than 26 years at JPMorgan. "The number of banks willing to absorb and warehouse risk has shrunk since the 2008 crisis because only the top players find it profitable to support the market," <a href="https://macrohive.com/are-markets-under-anaesthetics-3-min-read/">he wrote recently on Macro Hive</a>.</p><p>"Be wary of the exit door. It has become smaller as consensus views translate into much bigger positions than real liquidity can absorb and as asset managers chase their benchmark."</p><h2>Passive-investment stock market ETFs</h2><p>The most brilliant tactic for ordinary investors ever invented, the exchange-traded fund (ETF), may itself be a source of illiquidity, according to Bernstein Research's Inigo Fraser-Jenkins. ETFs were invented by Jack Bogle, the founder of Vanguard, who noticed that most fund managers who actively trade their portfolio fail to beat the market as a whole. Bogle asked, Why not simply buy a representative sample of the entire market, like the S&amp;P 500, and automatically buy and sell the whole thing?</p><p>That way, any investor would get the average return of the whole market, which is about 6% each year. Crucially, it's a much less risky (and cheaper) way of making money than handing it to an investment "guru" who is more likely than not to return less than that. </p><p>ETFs have been hugely popular, and now roughly half of all stock is owned by ETF buyers. That would imply that if the markets start to decline, <em>half</em> the owners in the market could be selling the<em> entire</em> market when they hit the "sell" button. </p><p><strong><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5d4d93881aedf834ad156766-2268/screenshot 2019-08-09 at 121912.png" border="0" alt="Bernstein Research" data-mce-source="Bernstein Research" /></div></div></div></strong></p><p> </p><p>Fraser-Jenkins told clients: "a general retreat from active public equities to illiquid investments [in the private sector] all point to a greater fragility of liquidity in public markets. We probably need to get used to more 'flash crashes', and also of the potential for flash crashes that spill over from one asset class to another."</p><p>"It means that there is an increased tail risk of a sell-off in the market becoming disorderly. A sell-off is not our forecast, but were one to happen we basically do not know what will happen when thousands of investors reach for their smart phones and try to sell positions that they have in passive ETF products."</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><img src="https://static-ssl.businessinsider.com/image/5d4d93d01aedf834ee7c6833-2232/screenshot 2019-08-09 at 122214.png" border="0" alt="Bernstein Research" data-mce-source="Bernstein Research" /></div></div></div></p><ul class="read-more-links"><li><strong>Read more:</strong></li><li><a href="https://www.businessinsider.com/putnam-fund-exposed-to-commercial-mortgage-backed-securities-2019-7">A $1 billion Putnam Investments fund is over-exposed to derivative trades based on fragile shopping mall mortgages, says this short bettor</a></li><li><a href="https://www.businessinsider.com/cov-lite-leveraged-loans-reach-95-in-some-markets-2019-7?r=US&amp;IR=T">The top strategist at $2 trillion investor JPMorgan Asset Management says the leveraged loan market is now 'deeply concerning'</a></li><li><a href="https://www.businessinsider.com/zombie-firms-statistics-on-low-interest-rates-and-leveraged-loans-2018-10?r=US&amp;IR=T">The 'zombie' problem: Low interest rates and 'leveraged loans' sustain a vast number of lousy companies which should have gone to the wall years ago</a></li><li><a href="https://www.businessinsider.com/bond-yield-curve-inversion-2018-8" data-analytics-position="1">If the yield curve is not an indicator of impending doom, why is everybody talking about the yield curve so much?</a></li></ul>

You Searched For "macro hive" and got 7 results

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