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Founder & CEO of AI firm in field of forecastingMessage
Mathew Burkitt
20 years at banks & hedge funds.
Trader, quant, COO and fund chair.
Started in derivatives and ended up in systematic trading, at large and small funds.
My new firm creates forecasting algorithms inspired by those times.
Our approach forecasts time series and risk outcomes (clinical, insurance) better.
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Way back in 2015 (feels like another era), the big idea from RV was the MONSOON region thesis:
https://www.realvision.com/shows/horizon/videos/monsoon-an-emerging-markets-narrative
Spool forward to 2020, and RV is big on Emerging Markets as part of the reflation narrative.
By coincidence, I recently learned about the Austronesian Migration way back maybe 5,000 years ago:
And saw that this broadly mapped to the MONSOON region:
I don't immediately recall if this was part of the MONSOON thesis - so I won't claim any originality here - but I wonder, if not, if it's time to fuse the E/M reflation narrative with the MONSOON thesis.
Following on from yesterday's excellent Daily Briefing with Dave Floyd, where he talks about leaving quant trading to the big shops, today we learn that such houses are having a tough year:
Renaissance Technologies
Long-Biased Fund -20% YTD (end-Oct '20)
Market-Neutral Fund -27%
Global Stocks Fund -25%
Two Sigma
Risk-premia -11.5%
Absolute Return -2.7%
Absolute Return Macro -23%
Renaissance, Two Sigma See Losses as Quant Giants Navigate Chaos
"The cycle" starts with "strong hands" accumulating assets (and "weak hands" not owning assets). In modern language, strong hands are professional/institutional investors and weak hands are unsophisticated retail traders & investors.
As the cycle progresses, asset-prices rise, they become more widely owned and - at the end of the cycle - the strong hands sell to the weak hands. In modern language, professional investors exit and retail investors overpay for fashionable securities (that they don't understand) which then collapse.
Good recent example are the Dotcom boom & bust and the more recent bubble & collapse in volatility ETFs.
So two recent developments have caught my eye around this theme:
- The launch of CLO ETFs. Similar to CDOs, but now packaged as ETFs that the retail public can trade on their mobile phones.
- Direct issuance of Private Equity - to the public. Just for example, Moonfare https://www.moonfare.com/uk/ states:
"Until now, individual British investors have been locked out of the Private Equity asset class. Minimums around $10 million excluded almost everyone except institutional investors. Moonfare is making Private Equity accessible to a much broader range of investors through its fully digital platform and reasonable minimum investment."
In both cases, illiquid & complex securities are being offered out to unqualified retail investors.
These could both be viewed as providing strong hands with the distribution phase (i.e. ability to exit by selling to a greater fool) that is needed to end the cycle. The public will buy CLOs and Private Equity because they've heard they've gone up for ten years - but you are supposed to buy things before they go up, not after.
The cycle doesn't always end cleanly or immediately; but with US stimulus halted until (at least) February 2021 - and other government support schemes around the world waning (e.g. UK furlough ending) - the scene is set.
Interested to hear the Exchange's thoughts on this.
Post
Credit & Debt
https://www.ft.com/content/43c721a7-03b9-40d1-9d9f-ef319b923909
Over the past decade, the average CDS auction prices have moved in a band between 10 and 60 cents on the dollar, but have generally been between 30 and 40 cents. However the nine US auctions conducted in the year to August produced an average price of just 9 cents — and just 2.4 cents if you look at the worst four: Chesapeake, California Resources, Neiman Marcus Group, and McClatchy. “Recoveries for credits with CDS auctions have been alarmingly low,” Brad Rogoff writes in a Barclays note.
As per yesterday's Daily Briefing: ETF's of CLO's (Collateralized Loan Obligations) are being launched.
https://www.etftrends.com/equity-etf-channel/investors-can-access-clos-with-this-new-etf/
CLO's are similar to the CDO's of 2007 infamy: they slice and dice a pool of credit instruments into tranches.
The idea behind both CDO's and CLO's is that diversification compensates for the higher risk of default.
They differ only on what is in the pool:
- CLO = corporate credit / leveraged loans
- CDO = residential mortgages
https://www.pinebridge.com/en/investor-types/default/insights/clos-versus-cdos-whats-the-difference
Like CDO's, CLO's can be rated Triple A when the underlying credit instruments are rated much lower. Triple A CLO's can have illiquid B or C graded credits within the pool.
CLO's have historically very low default rates, but if the Insolvency phase of Raoul's thesis plays out - then default correlations can skyrocket and take down CLO's much like CDO's 13 years ago.
Some questions:
- Does anyone in the group trade (or have knowledge of) CLO's?
- Has the TLA of CLOs finally cracked financial alchemy?
- Can retail traders correctly price these instruments using Gaussian copulas?
- Can day traders at home correctly model default correlations?
- Is it a good idea to trade CLO ETF's on your mobile phone?
Is it different this time?
I'm seeing more and more about regulation, anti-trust and break-up.
Mr Market is showing no concern - charts continue to be constructive.
At what point - and how - might this change?
https://www.politico.com/news/2020/10/10/feds-may-target-googles-chrome-browser-for-breakup-428468
Feds may target Google’s Chrome browser for breakup
Prosecutors for the Justice Department and state attorney general offices are discussing ways of curbing the search giant's market power as they prepare to sue the company.
https://arstechnica.com/tech-policy/2020/10/eu-targets-big-tech-with-hit-list-facing-tougher-rules/
EU targets Big Tech with “hit list” facing tougher rules
Brussels broadens search for extra powers to curb power of digital platforms
https://www.ft.com/content/4a9ed79e-c8c8-4b47-8055-1cd029541c32
France and Netherlands join forces to back EU move against tech giants
Joint position paper says breaking up large companies is ‘on the table’
https://www.ft.com/content/9adb3a15-d610-4bd6-bae0-a87dc4f315c6
Weakened democracy is another harm caused by Big Tech
Using antitrust regulations to repair and prevent such damage is not enough
https://www.ft.com/content/654a8054-4f6a-4eb0-9943-6cdacddd08a8
EU digital regulation: the tech offensive
New rules to rein in the largest technology groups are sorely needed
Governments need tax revenues in the era of COVID. Big Tech pays no taxes.
So the way Big Tech is taxed is going to change, enormously.
Taxation has always driven flows and this is a disruptive change so it will have huge consequences.
What are the group's thoughts on this?
OECD drafts principles for $100bn global corporate tax revolution
Technical blueprint would upend taxation of US tech groups but still needs political agreement
"The world’s rich nations have drafted a set of technical principles which would revolutionise the corporate taxation of multinational companies and could raise $100bn in extra tax revenues around the world.
The blueprints of the new system are ready to be implemented if political agreement can be reached next year, the OECD said on Monday. The Paris-based organisation has sought consensus between more than 135 nations on the reforms, which it said would enable tax authorities to collect up to 4 per cent more corporate tax.
The blueprint’s goal is to ensure that multinationals — including highly profitable US tech giants and European luxury goods companies — pay corporate taxes on profits where they operate and cannot shift them to tax havens. [...]"
http://www.ft.com/content/c269d8ad-11d6-490a-b290-4d3dbf80bd03
House Panel to Seek Breakup of Tech Giants, GOP Member Says
[...] Cicilline’s recommendations would include what he has called a Glass-Steagall law for technology platforms, according to the draft discussion paper from Republican Representative Ken Buck of Colorado, which was reported on earlier by Politico and obtained by Bloomberg. Buck said that recommendation and some others in the staff report would be “non-starters” for the GOP. Glass-Steagall refers to the Depression-era law separating commercial and investment banking. [...]