Apparently I was wrong to say the EU officials weren’t talking about the African fertility crisis:

“The biggest migration movements are still ahead: Africa’s population will double in the next decades. A country like Egypt will grow to 100 million people, Nigeria to 400 million. In our digital age with the internet and mobile phones, everyone knows about our prosperity and lifestyle.” — German Development Minister Gerd Müller.

“Young people all have cellphones and they can see what’s happening in other parts of the world, and that acts as a magnet.” — Michael Møller, Director of the United Nations office in Geneva.

“If we do not manage to solve the central problems in African countries, ten, 20 or even 30 million immigrants will arrive in the European Union within the next ten years.” — Antonio Tajani, President of the European Parliament

Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.

Portfolio Insurance

A strategy called portfolio insurance, which nowadays we would call a form of dynamic hedging, is widely blamed for the 1987 crash. This strategy, in effect, creates a ‘stop-loss order’ that gets larger in size and closer to the current market price as volatility gets lower.

The combination of shorting volatility, option hedging and risk-parity strategies sets up a very similar situation. Make hay while the sun shines, but thunderstorms are likely.


Just a quick rant about “cryptocurrencies.”

The blockchain architecture is a distributed database. As such, it is slow, because the process of committing a transaction to the database is subject to network delays. The “Bitcoin” system is about to undergo a code fork as a result of disagreements between developers on the proper way to improve performance, which is currently about 6 TPS. Compare to, say, VISA – trundling along at 30K TPS.

Performance improvements are certainly possible, but IMO there is no chance it will ever support the open-ended scalability that conventional high-performance transaction systems provide. Blockchain systems are an interesting innovation for high-value, low rate applications.

As a currency? Not happening.

However, the concept is certainly useful to separate a lot of naive people from their real cash in exchange for ?.

Now as to VISA – it is trying all by itself to eliminate cash by paying merchants to refuse cash. At least it has the infrastructure.


P&G is one of the most sophisticated advertisers in the world. You have to be, to sell soap.

Tired of paying for “bot”-clicks and poorly placed ads, P&G cut over $100 million out of its digital advertising spend in the fourth quarter, and nothing happened.

As P&G CFO Jon Moeller said on the recent earnings call: “We didn’t see a reduction in the growth rate… What that tells me is that that spending that we cut was largely ineffective.”

This should be a warning to the advertising companies – Google, Facebook, etc.

Edit: During the Cannes Lions Festival of Creativity, Unilever’s chief marketing and communications officer Keith Weed reportedly asserted that some 60% of online traffic is “bots”.

The Economy In One Chart

Source: WSJ

Virtual Folly

The mania goes on. Perhaps the most bizarre and disturbing symptom is the proliferation of so-called digital currencies like Bitcoin and Ethereum.

At best, these are virtual commodities, not currencies. Bitcoin, perhaps the most visible, clearly attempts to emulate gold. New bitcoins are generated by executing a complex computation which requires considerable computer time. This is intended to limit the supply, just as the increase in the supply of gold is limited by mine output. There is also a hard limit on the number of bitcoins that can exist, just as there is with gold (once it has all been dug up, there is no more until we start mining off Earth). Ethereum has something similar, but the limits are weaker.

There is, however, a genuine and valuable innovation here and that is the blockchain. The blockchain is, notionally, the global transaction log of a distributed database that allows multiple un-trusting writers. Unfortunately, AFAIK, all the implementations of this comcept so far are slow and unreliable, as is seen by the various reported (and doubtless un-reported) thefts, frauds, crashes and service outages.

Last I saw, there were some 80 or so competing “digital currencies”. We now see new ICOs (Initial Coin Offerings) on almost a daily basis. Each of these offers some variations on the basic concepts. For example, take Tezos which has raised $200 million in four days. Tezos is run by an ex-Goldman HFT trader. Draw your own conclusions.

So far, the primary applications for these systems are speculation on the money value of the digital commodities and, as a payment system, supporting money transfers by avoiding capital controls and facilitating anonymous commerce, such as in illegal drugs.

I am reminded of the old adage about gold mining; A gold mine is a hole in the ground with a liar on top.

Lasciate ogne speranza, voi ch’intrate” Inferno, Dante Alighieri

Illinois And The Tsunami

Apparently the standoff between Governor Rauner and Speaker Madigan continues. As it should. Madigan’s willingness to dispense unfunded largesse to his supporters is largely responsible for the state’s financial woes. Today also the state was ordered by a Federal court to pay its backlog of Medicaid bills, which will be interesting as the state is already cash flow negative.

However the biggest issue is the unfunded state employee pension obligations. This article from Bloomberg contains a nice graphic ostensibly showing the funding levels of most states (no data for California? Really? just check this blog)

These reported funding levels are a cruel joke. These funds continue to assume 7-8% returns, despite the fact that they have not achieved them for years. Just look at the column showing the decline in funding ratio from 2014 to 2015. Not only are the assumptions high, but they are for long-term averages, so that they adjust future return estimates higher to compensate for below-average realized returns. John Hussman’s work shows more or less zero returns for the next 12 years, with the high likelihood that there will be a major drawdown in that period. Drawdowns are lethal to pension funds because the payment of benefits continues, sapping the capital base and making recovery to previous levels nearly impossible.

Pension funds used to invest in bonds. The trustees would meet once a quarter, review the actuarial forecast of liabilities and approve adjustment of the laddered bond portfolio’s maturities to exactly meet the liability schedule. Then there would be lunch and golf. The future returns would be locked in and the contributions needed to fund the bond portfolio would be obtained from the sponsor. Everyone got to sleep at night.

Then Wall Street decided that pension funds had a lot of money, and not enough was being siphoned off into Wall Street pockets. So the sales force went out, armed with charts showing that stocks had historically offered higher returns than bonds. Higher returns mean that less contributions would be needed, so fund sponsors bought the pitch. Yes, stocks have offered higher returns but for a reason – much higher risk. Well, we’ll just assume a long-term average return and surely it will average out. GLWT.

Unexpected Outcome

People seem to be surprised that the Fed’s rate hikes have resulted in rates declining. Really? It seems pretty clear that the Fed’s outlook is at odds with reality, and that rates are responding to the real outlook, which is that Fed rate hikes are a negative for an economy that is already tanking.

Fed Folly

Lacy Hunt from Hoisington Management.