Up Over 2000% In 2 Days - Meet The Big-Data, AI, Blockchain, FinTech Mania Stock Of The Year

Update: Well that escalated quickly...

The stock is now up over 500% today and has been halted numerous times...

 

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Having closed last Thursday on its IPO-day at $5.38, news of the acquisition of Ziddu - a blockchain solutions provider (whatever that means in the real world) - LongFin has since exploded to $44.80 in today"s pre-market... up 730% in 2 days.

Remember LongFin? an independent finance and technology company. The Company offers commodity trading, alternate risk transfer, and carry trade financing services. LongFin also provides hedging and risk management solutions to importers, exporters, and small medium business enterprises. LongFin serves customers worldwide.

As iBankCoin notes, it has all of the trimmings of wanton degeneracy on an industrial scale.

• Recent IPO: check


• Small float: check


• Shady as heck: check


• AI company: check

and the cherry on the top...

• a day after coming public, they announce the purchase of a blockchain company: check

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On Thursday Dec 14th, LongFin launched as a FinTech company that helped with FX hedging (and slipped from its post-IPO open price to close lower)

US-based Longfin Corp., a Fintech company providing Finance and foreign exchange hedging solutions to importers and exporters and SMEs, started trading on Nasdaq from today.
According to a statement issued by Longfin, its Low Latency Network is connected to multiple exchanges and banks across the regions to provide the cheapest Forex hedging and low-cost financing to small and medium-size importers and exporters across the globe.
Longfin Founder Venkata S. Meenavalli said, "We are the first Asian Entrepreneur promoted Reg A+ company under JOBS Act, to list its shares directly in Nasdaq and the second Indian entrepreneur promoted company to list directly in the Nasdaq since 2010"

On Friday Dec 15th, they acquired Ziddue and became the future face of Cyrptocurrency awesomeness...

Longfin Corp. (NASDAQ: LFIN), a leading global FinTech company, announces the acquisition of Ziddu.com, a Blockchain-empowered solutions provider that offers Microfinance Lending against Collateralized Warehouse Receipts in the form of Ziddu Coins.

And with all those buzzwords, why wouldn"t it be up 730%!!!!

As a reminder, there are no financials on this company, no reg details on shares outstanding, and no direct evidence of a business model that makes any money?

Is This The Biggest Blockchain, Big-Data, A.I., FinTech YOLO Trade Of All Time?

Meet LongFin Corp  - an independent finance and technology company. The Company offers commodity trading, alternate risk transfer, and carry trade financing services. LongFin also provides hedging and risk management solutions to importers, exporters, and small medium business enterprises. LongFin serves customers worldwide.

As iBankCoin notes, it has all of the trimmings of wanton degeneracy on an industrial scale.

• Recent IPO: check


• Small float: check


• Shady as heck: check


• AI company: check

and the cherry on the top...

• a day after coming public, they announce the purchase of a blockchain company: check

Longfin Corp.  a leading global FinTech company, announces the acquisition of Ziddu.com, a Blockchain-empowered solutions provider that offers Microfinance Lending against Collateralized Warehouse Receipts in the form of Ziddu Coins.

Ziddu Coin is a smart contract that enables SME’s, processors, manufacturers, importers and exporters using cryptocurrencies across continents. Ziddu Coins are loosely pegged to Ethereum and Bitcoin. The importers/exporters convert offered Ziddu coins into Ethereum or Bitcoin and use the proceeds for their working capital needs. At the end of the contract, importers/exporters will realize their proceeds and pay back their funds through cryptocurrencies only. Depending upon the risk profile of the counterparty, the interest will vary from 12% to 48%.

 

“The advent of Blockchain technology has caught the imagination of the global financial services industry; blockchain is emerging as a technological revolution that is set to disrupt the financial services infrastructure. Cryptocurrencies such as Bitcoin and Ethereum will act as a global financing currency to avail credit against hard currencies of many emerging markets.” Says Venkat Meenavalli, Chairman of Longfin Corp.

And with all those buzzwords, why wouldn"t it be up 200%!!

 

"Calculating the incalculable..." -  An ironic tagline indeed!

The Stage Has Been Set For The Next Financial Crisis

Authored by Constantin Gurdgiev via CaymanFinancialReview.com,

Last month, the Japanese government auctioned off some US$4 billion worth of new two-year bonds at a new record low yield of negative 0.149 percent. The country’s five-year debt is currently yielding minus 0.135 percent per annum, and its 10-year bonds are trading at -0.001 percent. Strange as it may sound, the safe haven status of Japanese bonds means that there is an ample demand among private investors, especially foreign buyers, for giving away free money to the Japanese government: the bid-to-cover ratio in the latest auction was at a hefty US$19.9 billion or 4.97 times the targeted volume. The average bid-to-cover ratio in the past 12 auctions was similar at 4.75 times. Japan’s status as the world’s most indebted advanced economy is not a deterrent to the foreign investors, banking primarily on the expectation that continued strengthening of the yen against the U.S. dollar, the U.K. pound sterling and, to a lesser extent, the euro, will stay on track into the foreseeable future. See chart 1

In a way, the bet on Japanese bonds is the bet that the massive tsunami of monetary easing that hit the global economy since 2008 is not going to recede anytime soon, no matter what the central bankers say in their dovishly-hawkish or hawkishly-dovish public statements. And this expectation is not only contributing to the continued inflation of a massive asset bubble, but also widens the financial sustainability gap within the insurance and pensions sectors. The stage has been set, cleaned and lit for the next global financial crisis.

Worldwide, current stock of government debt trading at negative yields is at or above the US$9 trillion mark, with more than two-thirds of this the debt of the highly leveraged advanced economies. Just under 85 percent of all government bonds outstanding and traded worldwide are carrying yields below the global inflation rate. In simple terms, fixed income investments can only stay in the positive real returns territory if speculative bets made by investors on the direction of the global exchange rates play out.

We are in a multidimensional and fully internationalized carry trade game, folks, which means there is a very serious and tangible risk pool sitting just below the surface across world’s largest insurance companies, pensions funds and banks, the so-called “mandated” undertakings. This pool is the deep uncertainty about the quality of their investment allocations. Regulatory requirements mandate that these financial intermediaries hold a large proportion of their investments in “safe” or “high quality” instruments, a class of assets that draws heavily on higher rated sovereign debt, primarily that of the advanced economies.

The first part of the problem is that with negative or ultra-low yields, this debt delivers poor income streams on the current portfolio. Earlier this year, Stanford’s Hoover Institution research showed that “in aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97 percent of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion. Key culprit: the U.S. pension funds require 7.5-8 percent average annual returns on their assets to break even on their future expected liabilities. In 2013-2016 they achieved an average return of below 3 percent. This year, things are looking even worse. Last year, Milliman research showed that on average, over 2012-2016, U.S. pension funds held 27-30 percent of their assets in cash (3-4 percent) and bonds (23-27 percent), generating total median returns over the same period of around 1.31 percent per annum.

Not surprisingly, over the recent years, traditionally conservative investment portfolios of the insurance companies and pensions funds have shifted dramatically toward higher risk and more exotic (or in simple parlance, more complex) assets. BlackRock Inc recently looked at the portfolio allocations, as disclosed in regulatory filings, of more than 500 insurance companies. The analysts found that their asset books – investments that sustain insurance companies’ solvency – can be expected to suffer an 11 percent drop in values, on average, in the case of another financial crisis. In other words, half of all the large insurance companies trading in the U.S. markets are currently carrying greater risks on their balance sheets than prior to 2007. Milliman 2016 report showed that among pension funds, share of assets allocated to private equity and real estate rose from 19 percent in 2012 to 24 percent in 2016.

The reason for this is that the insurance companies, just as the pension funds, re-insurers and other longer-term “mandated” investment vehicles have spent the last eight years loading up on highly risky assets, such as illiquid private equity, hedge funds and real estate. All in the name of chasing the yield: while mainstream low-risk assets-generated income (as opposed to capital gains) returned around zero percent per annum, higher risk assets were turning up double-digit yields through 2014 and high single digits since then. At the end of 2Q 2017, U.S. insurance companies’ holdings of private equity stood at the highest levels in history, and their exposures to direct real estate assets were almost at the levels comparable to 2007. Ditto for the pension funds. And, appetite for both of these high risk asset classes is still there.

The second reason to worry about the current assets mix in insurance and pension funds portfolios relates to monetary policy cycle timing. The prospect of serious monetary tightening is looming on the horizon in the U.S., U.K., Australia, Canada and the eurozone; meanwhile, the risk of the slower rate of bonds monetization in Japan is also quite real. This means that the capital values of the low-risk assets are unlikely to post significant capital gains going forward, which spells trouble for capital buffers and trading income for the mandated intermediaries.

Thirdly, the Central Banks continue to hold large volumes of top-rated debt. As of Aug. 1, 2017, the Fed, Bank of Japan and the ECB held combined US$13.8 trillion worth of assets, with both Bank of Japan (US$4.55 trillion) and the ECB (US$5.1 trillion) now exceeding the Fed holdings (US$4.3 trillion) for the third month in a row.

Debt maturity profiles are exacerbating the risks of contagion from the monetary policy tightening to insurance and pension funds balance sheets. In the case of the U.S., based on data from Pimco, the maturity cliff for the Federal Reserve holdings of the Treasury bonds, Agency debt and TIPS, as well as MBS is falling on 1Q 2018 – 3Q 2020. Per Bloomberg data, the maturity cliff for the U.S. insurers and pensions funds debt assets is closer to 2020-2022. If the Fed simply stops replacing maturing debt – the most likely scenario for unwinding its QE legacy – there will be little market support for prices of assets that dominate capital base of large financial institutions. Prices will fall, values of assets will decline, marking these to markets will trigger the need for new capital. The picture is similar in the U.K. and Canada, but the risks are even more pronounced in the euro area, where the QE started later (2Q 2015 as opposed to the U.S. 1Q 2013) and, as of today, involves more significant interventions in the sovereign bonds markets than at the peak of the Fed interventions.

How distorted the EU markets for sovereign debt have become? At the end of August, Cyprus – a country that suffered a structural banking crisis, requiring bail-in of depositors and complete restructuring of the banking sector in March 2013 – has joined the club of euro area sovereigns with negative yields on two-year government debt. All in, 18 EU member states have negative yields on their two-year paper. All, save Greece, have negative real yields.

The problem is monetary in nature. Just as the entire set of quantitative easing (QE) policies aimed to do, the long period of extremely low interest rates and aggressive asset purchasing programs have created an indirect tax on savers, including the net savings institutions, such as pensions funds and insurers. However, contrary to the QE architects’ other objectives, the policies failed to drive up general inflation, pushing costs (and values) of only financial assets and real estate. This delayed and extended the QE beyond anyone’s expectations and drove unprecedented bubbles in financial capital. Even after the immediate crisis rescinded, growth returned, unemployment fell and the household debt dramatically ticked up, the world’s largest Central Banks continue buying some US$200 billion worth of sovereign and corporate debt per month.

Much of this debt buying produced no meaningfully productive investment in infrastructure or public services, having gone primarily to cover systemic inefficiencies already evident in the state programs. The result, in addition to unprecedented bubbles in property and financial markets, is low productivity growth and anemic private investment. (See chart 2.) As recently warned by the Bank for International Settlements, the global debt pile has reached 325 percent of the world’s GDP, just as the labor and total factor productivity growth measures collapsed.

The only two ways in which these financial and monetary excesses can be unwound involves pain.

The first path – currently favored by the status quo policy elites – is through another transfer of funds from the general population to the financial institutions that are holding the assets caught in the QE net. These transfers will likely start with tax increases, but will inevitably morph into another financial crisis and internal devaluation (inflation and currencies devaluations, coupled with a deep recession).

The alternative is also painful, but offers at least a ray of hope in the end: put a stop to debt accumulation through fiscal and tax reforms, reducing both government spending across the board (and, yes, in the U.S. case this involves cutting back on the coercive institutions and military, among other things) and flattening out personal income tax rates (to achieve tax savings in middle and upper-middle class cohorts, and to increase effective tax rates – via closure of loopholes – for highest earners). As a part of spending reforms, public investment and state pensions provisions should be shifted to private sector providers, while existent public sector pension funds should be forced to raise their members contributions to solvency-consistent levels.

Beyond this, we need serious rethink of the monetary policy institutions going forward. Historically, taxpayers and middle class and professionals have paid for both, the bailouts of the insolvent financial institutions and for the creation of conditions that lead to this insolvency. In other words, the real economy has consistently been charged with paying for utopian, unrealistic and state-subsidizing pricing of risks by the Central Banks. In the future, this pattern of the rounds upon rounds of financial repression policies must be broken.

Whether we like it or not, since the beginning of the Clinton economic bubble in the mid-1990s, the West has lived in a series of carry trade games that transferred real economic resources from the economy to the state. Today, we are broke. If we do not change our course, the next financial crisis will take out our insurers and pensions providers, and with them, the last remaining lifeline to future financial security.

FX Weekly Preview: Is The USD Correction Done Yet?

Submitted by Shant Movsesian and Rajan Dhall MSTA of fxdailyterminal.com

USD correction done yet?

After a number of weeks of painfully tight ranges, there is little on the horizon which looks potent enough to warrant a break out.  Has the apathy in global stocks spread into FX? It looks like it, especially when looking at the carry trade.  Watching USD/JPY has been nothing short of tortuous as we currently remain hemmed into a 113.00-115.00 range.  We have been getting used to watching EUR/USD as the benchmark rate to spark off fresh activity across the currency spectrum, but despite the open "ended-ness" of the APP come Jan 2018, the pair is now in a fresh stalemate as bids in the mid 1.1500"s have only served to limit the correction which was so evidently needed once we had reached the first objective at 1.2000.  For USD/JPY, the market is pinning hopes for tax reform to take off, but the chinks are starting to show again with the corporate rate tax cut to 20% set to be delayed until 2019.  As we saw in the aftermath of president Trump"s victory, there seems to be little concern over how these tax cuts are going to be paid for and perhaps move significantly greater concern as to how much they will add to GDP if/when implemented.

Scepticism set in earlier this year once we had pushed above the 116.00 mark, and while the extension stretched into the 118.00"s, calls for 120.00 soon fell flat.  After the move down into the 107.00"s, we have since moved back into the upper end of the 2017 range, but still looking for a move above 115.00.  There was little data to feed off in the US last week, but we have inflation and consumer data in the week ahead which will shed more light on whether the USD run is truly exhausted or not.  Little correlation with rates at the moment, with the 10yr US benchmark backing off 2.50% in recent weeks, but to little effect, but 2.30% has held since then.  

In Europe, as the turmoil in Spain calms down, divisions inside the ECB flare up again, with Germany calling for firmer guidance towards signalling an end to QE.  President Draghi and a number of his fellow members are keen to keep the Euro recovery from fizzling out, so keeping the APP open ended at this stage offers them room for manoeuvre as well as containing another impulsive EUR rally.  On the latter, they have succeeded, but in the mid 1.1500"s, strong buying last week underlined the focus on a longer term recovery.  Little prospect of a surge back up to 1.2000 at this stage, but that is partly down to the USD.  

All the big names from the ECB are due to speak next week - again - but in the steady flow of rhetoric nothing will impact the near term consolidation in the EUR other than a firmer commitment towards and "end date".  Inflation is tailing off again as we are expected to see in the final Oct reading on Thursday, but on Tuesday we get the second reading on Q3 GDP which will need to stick at 0.6% at the very least to underpin the tentative hold in the single currency.  Flash GDP in Germany also out, and mixed readings in factory orders could seen this slip back towards 2.0% annualised.  Italy is closer to 1.5%, but Portugal and Holland are over 3% for comparison, but all from a lower base remember. 

It will be an interesting start to the week for the Pound, as we wait to see how the market reacts to news that around 40 MPs are ready to sign a letter of no confidence in Theresa May.  The PM is really struggling to get a break at the moment, in a government which we should not forget, still hasn"t got majority.  As if fending off the hard Brexiteers and the "remainers", is not hard enough when negotiating exit from the EU, recent departures from her cabinet and constant in-fighting makes here position untenable by the day, and this will continue to weigh on GBP, if not, then when we push on to higher levels, which we did at the end of last week.  

The Brexit talks offered nothing now, indeed perhaps more to be concerned about as Michel Barnier effectively gave the UK a few more weeks to commit to the divorce bill which some papers have suggested will be raised in order to get progress onto the next stage of trade talks.  Optimistic or opportunistic, the longer the EU talks, the more business investment will suffer, so arguments for buying GBP at these levels based on valuation lose credibility by the day.  Were Cable down at 1.2000 or 1.2500, this would carry more weight, but inside 1.3000-1.3500, buyers must be looking for 1.4000+ at the very least, and few can justify that with the rate perspective also dashed after the previous week"s dovish hike by the BoE.  

EUR/GBP is more likely to be range bound in the meantime, but we have continued to test sub 0.8800 with little progress, but 0.9000+ is equally lethargic at this stage.  

Plenty of data though next week, with the latest inflation print on Tuesday, employment on Wednesday and retail sales on Thursday.  Notable are some of the concerns over the UK high street at the moment.  CPI above 3.0% is expected, but the BoE believe it will top out at 3.2% - lets see.  

In Australia, rising employment has been the economic saviour which keeps the hopes of wage inflation alive - as it has in the US.  We get the Oct report on Thursday.  Despite the strong gains in industrial metals price, the AUD has been clearly faltering in recent weeks, and we are not convinced that 0.7600-25 is the low just yet.  What happens when commodity prices adjust, or if the Chinese data fades again?  If the AUD cannot recover at this time, then we cannot rule out a move on 0.7500 just yet, with the market focusing on softer inflation which has seen the yearly rate slip below the 2-3% RBA range, and set to fall further after the CPI re-weighting. 

Industrial production in China is due out on Thursday, but the yoy rate is currently above 6.0%, so expectations for a drop off from 6.6% to 6.3% will likely be dismissed at this stage.  

Nothing of note for NZ however, so focus here will be on any fresh policy announcements from the new government.  RBNZ mandate reform is set to bring full employment into policy considerations, but as we have seen in the Q3 numbers, job gains are moving the right way, so any dovish implications will be held back for now. Indeed, last week"s RBNZ statement was pretty positive on the outlook, with NZD softness of late also welcome.   0.7000 capping the NZD/USD rate for now though, and as with the AUD/USD rate, the base at 0.6815-20 does not fill us with confidence as yet.  

In Canada, we have to wait until Friday to get any top tier data, which will be Oct CPI.  BoC gov Poloz was focusing on this last week, in what looked to be another turnaround in policy sentiment, focusing on the inflationary impact of reaching full capacity and output.  The central bank have done well to contain the rate pricing euphoria which took the 10yr rate up to 2.20%, and USD/CAD down into the mid 1.200"s, but with long end rates back below 2.00% and the spot rate back under 1.2700, the gov can afford to be a little more neutral.  1.2500-1.2700 looks to be fair value in the meantime, so expect to see rallies above 1.2900 sold into (if we test back here again) as we have seen from late Oct.  

For Norway we have Q3 GDP next week, while in Sweden it is inflation time also, but NOK/SEK is starting to threaten the upside again, which is not unsurprising given where Brent Oil is trading at the moment.   EUR rates look more congested at the present time, but looking at the weekly spot charts, we can see further USD progress has been rejected for now.   

Credit, Crypto, & Kuroda's "Bat-Shit-Crazy Monetary Expansion"

Authored by Kevin Muir via The Macro Tourist,

Today’s post will be about Japanese yen vol, but I am sure to bore some readers with that topic, so I am starting with something a little more interesting.

 As many of you know, I am a little bit of a bitcoin skeptic. At the end of the day, I have trouble investing in the ledger in the sky.

Call me old-fashioned, call me a troglodyte, call me a bitter gold bug, call me whatever you want, I just can’t bring myself to get long bits in the cloud. And before you send me messages how I don’t understand it, don’t forget I was mining bitcoin before most of Wall Street had ever heard of it. So I am much more than just some trade-a-saurus that refuses to get with the times, I am the knob who passed on bitcoin at $5.

Yet I have the privilege of counting Tony Greer from TG Macro as one of my pals, and his enthusiasm about using crypto currencies for micro-payments has piqued my interest. From Tony’s great letter the other day:

For selfish reasons, this is the article that gets me most excited about bitcoin and the blockchain. The streamlining of media distribution is going to kick the door open for individuals to compete with publishing powerhouses and main stream periodicals.

Publishing content on Amazon, iTunes, even YouTube is extremely costly for the author/artist. Youtubers can’t earn money until they get 10,000 views. Apple and Amazon take between 30% and 75% for the right to their distribution networks. Since media consumption has gone digital, it’s been difficult to charge on a PER ARTICLE basis because of high transaction costs making it prohibitively expensive. All that’s about to change. The blockchain is going to allow thousands of transactions to be processed at low to no cost, it will preserve a record of all those transactions along with all the content, it provides transparency for the artist/author and consumer, and one day, it will make the Morning Navigator available to every single reader in the world for $1 per copy.

Take a moment to read the article Tony linked to. Yeah, I know. You would never expect me to be linking to an article in BitCoin Magazine, but life’s funny.

I have no real counterargument to the idea of using cryptos for micropayments. There is a real need for the ability to easily transfer small amounts of money. Given that it is simply a change in a ledger at a bank, it should be virtually free. Yet the banks, VISA and Mastercard, have for too long enjoyed oligopoly pricing, and just like the music industry fifteen years ago, they will not willingly lower their fees until it is too late.

The other day I was out with some bankers who were explaining Ben Davies’ newest project. Many of you will remember Ben as the CIO of Hinde Capital, but a year or so ago he left to devote his time to GLINT. Having a look at the prototype, I realized this product very well might change the way we think about global currencies and how we transact. I will not bother shilling their service (if you are interested click on the link to get to their website), but needless to say, existing financial institutions should be worried about the emergence of GLINT, Goldmoney, and all the other fintech startups that are nipping at their heels.

Up until now, the biggest beneficiaries of the move to digital cash have been VISA and Mastercard. And although I understand all the reasons why their point of presence will make de-throning them difficult, I just can’t help but wonder how long before their margins are threatened.

It’s not like their stocks are down and out…

I am not advocating investing in bitcoin, GLINT, or any other fintech startup. As I have shown, I am not smart enough to tell you who is going to win. But I am beginning to wonder if the easier trade is to short VISA and Mastercard. For too long they have enjoyed oligopoly style rents, and I just think that the real takeaway from all this new technology is that their day in the sun might soon well be over…

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Japanese Yen Volatility

Between 1999 and 2012, the Bank of Japan increased their balance sheet threefold, raising it from 10% of GDP to 30%. Many a pundit screamed about Japan’s irresponsible monetary policy, but then the 2008 Great Financial Crisis hit, and suddenly the BoJ’s policies didn’t seem that extreme. The Fed embarked on a massive quantitative easing program, followed by most of the rest of the developed world. Next thing you knew, the Bank of Japan’s bloated balance sheet seemed like just one of many.

Post GFC, the rate at which these other Central Banks were expanding their balance sheet put extreme stress on the Japanese economy as the BoJ’s relatively tame quantitative easing policy was overwhelmed by the rest of the world. Global deflation was exported to Japan. And just when things couldn’t get worse, Japan was hit by the tsunami / nuclear disaster. Paradoxically, this caused a spike in the USDJPY rate down to 75, with the Yen hitting an all-time high value against the US dollar.

This proved the final straw for the Japanese people, and Prime Minister Abe was elected on a platform of breaking the back of deflation through innovative extreme policies. And just like that, Abeconomics was born.

Since then the Bank of Japan balance sheet has swelled from 30% of GDP to 95%!

It’s too easy to take this for granted. The blue tickets just seem to keep coming, and coming, and coming. Pretty soon, it all seems so normal.

But it isn’t. Not even close. This is bat-shit-crazy monetary expansion. Forget about arguing whether it is appropriate or needed. It doesn’t matter. The markets don’t give a hoot about your opinion. Nor does the BoJ. Heck, they barely even care what Yellen or Trump thinks. They are going to do what they think best for their people, and that means inflating the shit out of their currency.

What I find amazing is how complacent the markets have become about all of this. Sure when Abeconomics first came to pass there were tons of worrisome hedge fund presentations about the inevitability of disaster. But since then Kyle Bass and all the other Japan skeptics have moved on to China, or to the most recent hedge-fund-herding-theme-of-the-day. Yet at one point a few years back a reporter asked Kyle if he could put on one trade for the next decade and couldn’t touch it, what would it be? Bass answered gold denominated in Yen. I have this sneaking suspicion our favourite Texas hedge fund manager’s call was way more prescient than even he imagines (I just hope Kyle hasn’t taken it all off to bet on the China collapse.)

It’s not like the market hasn’t figured the short Japanese Yen trade out. Shorting Yen is one of the go-to carry trades for macro traders everywhere.

I am not adding much value by reiterating climbing aboard this trade. It’s a crowded trade, and most importantly, not that original.

The trouble with crowded trades is that the exit doors are always too small. And even the BoJ is worried about the possibility of a speculative unwind in the Japanese foreign exchange market.

It was with great interest that I read an article in the Nikkei Asian Review titled “Japan looking to tamp down leverage in forex trades”.

Japan is considering lowering the maximum leverage permissible in foreign exchange trading on grounds that both retail and institutional investors are facing greater risks should the market face sudden fluctuations.

Foreign exchange margin trading in Japan amounts to roughly 5 quadrillion yen ($44.2 trillion) annually. The lower cap would reduce the risk of a crisis originating in Japan, but will likely be met by resistance from industry players.

The Financial Services Agency has begun discussions with the Financial Futures Association of Japan on changing the rule. The leading proposal would reduce the maximum leverage ratio from 25 to 10. The cabinet could issue an order as early as next year to place the new ceiling into effect.

I don’t necessarily think this regulatory change will be something that causes the whole Yen carry trade to unwind, but it’s one piece of a puzzle that definitely seems precariously perched. The BoJ wants the yen to decline, just not too fast. The trouble is that markets don’t always let Central Bankers devalue currencies in a nice calm manner.

I have long held the view that most market pundits are expecting the next crisis to look just like the last. They are all shorting credit because that’s what worked last time. And it’s also why for the longest time, VIX was consistently trading at a higher price than realized volatility. Long equity volatility was the real big winner last time, so everyone loads up on VXX because after all, we all know the next 2008 style crash is right around the corner.

Well, I might not know much, but I know that the next crisis will not be the same as the last one. It never is.

So while everyone is busy loading up on VIX calls, or buying CDX protection, I am more interested in thinking about where the global financial system is most unbalanced.

And I can’t believe there is anything more frightening than the manic increase in the BoJ’s balance sheet. I don’t know if it is going to end in a stomach churning roller-coaster-style free fall where the BoJ loses control of their money supply and the Yen spikes to 200, or if some other event will cause a massive short covering rally of Yen that forces a rally back to 95 or even 85 before the BoJ steps in, and prints an even stupider amount. But I am convinced it is not stable.

You would think that given the massive money printing the market would have bid up the price of protection, but Japanese implied volatility is remarkably low. I have plotted the 6-month over-the-counter implied volatility level of the Yen over the past few years.

Of course, the 2008 crash caused a pick up in volatility, so the move to 22% does not seem unreasonable. And the ensuing move back to 8% makes sense. Then with the introduction of Abeconomics, the rally to 14% is easy to justify. But it’s the drifting back down to sub 10% that I think mispriced.

There is no way that the Yen has the same risk as the 2001-2006 period. It just ain’t so. Kuroda has taken Japan down a monetary path that is unprecedented. To think that this will road will not be filled with huge obstacles is naive. Yet here at 10% for six-month Yen vol, we are only a couple vol points away from the lower end of the range of the past couple of decades.

I am buying long-term Japanese yen volatility. No, I don’t trade OTC, so I am going to the CME and buying straddles, strangles, and every other long vol option spread I can think of. I wish there is was some way to just buy a VXX type ETF of the Yen, but there simply isn’t demand for this type of product. The inability to easily buy a hedge is precisely why it stands a much better chance of being the real risk you should be worried about.

Japanese yen volatility is too cheap given the dangers involved in this crazy monetary experiment. Just because all the hedge fund wise guys have forgotten about the trade doesn’t mean you have to.

Panics don’t occur when everyone is looking for them. I am not sure about the trigger, and heck, I am not even sure about the direction.

But I do know that you don’t print 65% of your GDP in 5 years and not affect markets.

There will be consequences, we just don’t know what they are yet. Get your insurance while you can, not when you have to…

"If The VIX Goes Bananas", Morgan Stanley Shows What It Would Look Like

From Chris Metli of Morgan Stanley

It’s easy to become numb to the low volatility environment and the risks it presents.  While trying to pick a trough in vol has been a fool’s errand, focusing on the risks resulting from vol being so low is not.  Low volatility has produced a regime where the risks are asymmetric and negatively convex, so being prepared for an unwind is critical.  This is not a call that vol is about to spike, but you need a plan if it does.

This note details how a short vol unwind might develop. A violent rise in volatility could be driven by just a 3% to 4% one-day S&P 500 selloff.  Right now the risk is greatest in the VIX complex, and demand for VIX futures from three main sources could result in 100,000 contracts ($100mm vega) to buy in a down 3.5% SPX move.  For context VIX futures ADV over the last year is 230,000 (although has risen to as high as 700,000 in big selloffs).

It’s important to note that this only happens if there is a large 1-day move lower in equities starting when VIX is very low – a slower drawdown, or a selloff from higher starting levels of vol, would not create as much demand.  The biggest S&P 500 selloff when VIX was less than 12 was 3.5% (Feb 2007), so this type of move would be on par with the worst-case historical move for a low vol environment.

Why highlight this now?  Simply because as volatility goes lower, these risks rise.   In April and May QDS acknowledged that the short vol base was large, but viewed the risk as manageable (‘Keep Calm and Carry On’).  In June the team’s stance on volatility turned neutral.  And since then volatility levels have only gone lower.

What happens if the S&P 500 were to fall 3.5% today?

1) First, the VIX could rise as much as 12 points.  When volatility is low it tends to move a lot for a given change in the S&P 500.  That effect is likely to be exacerbated now because a) skew is steep (and VIX rolls up the skew in a selloff) and b) many players in the VIX market are short.  Taking these dynamics into account QDS estimates VIX could rise ~12 points for a 3.5% 1-day decline in SPX.

If VIX rises 12 points, 1-month VIX futures are likely up 5.5 points, a ~50% increase.  The 1-day percentage change is a big deal in the VIX complex because the levered and inverse VIX ETFs and ETNs rebalance daily based on the percentage change, and some of the thresholds for forced unwinds are based on the percentage change.  This is why lower vol creates higher risk.

2) In a 50% increase in VIX futures, the levered and inverse VIX ETFs and ETNs need to buy ~70,000 VIX futures to rebalance their portfolios and maintain target exposures (this estimate is net of redemptions – long vol ETPs are generally sold by their holders as vol rises, offsetting the levered rebalance).  While these flows likely occur near the close, the dynamic is well known, and many traders will bring forward those flows to the middle of the day.

3) A VIX futures level in the high teens (up from 11 – 12 now) means dealers get short VIX call gamma.  There has been considerable buying of VIX calls and call spreads, with much of the hedging flow in the last month focused on VIX (instead of SPX).  As VIX futures rise, dealers will get more and more short delta, which needs to be hedged by buying VIX futures.  In a 3.5% SPX selloff QDS estimates there could be 25,000 VIX futures to buy from dealers hedging.

4) If VIX futures approach +100% in a single day, there is a risk that the providers of inverse VIX ETPs cover the VIX futures that they sold to hedge the products.  This is because there is a mismatch in the hedge if VIX futures rise more than 100% – the inverse ETPs can’t go below zero (-100%) but the loss on a short VIX futures position can be more than -100%.

There are two inverse ETPs that sell the front of the VIX futures curve – XIV (an ETN) and SVXY (an ETF).  For XIV (holding ~73,000 contracts short) the prospectus indicates that it will unwind if the NAV falls more than 80% intraday, with investors receiving the end of day value.  Given this is a known threshold, anything close to a +80% move in VIX futures would likely trigger buying (by the ETN provider and/or market participants) in anticipation of the unwind.  Note that because XIV is an ETN, investors receive the theoretical value of the index based on its rules, not what the provider actually trades.

SVXY (holding ~37,000 contracts short) does not have a set threshold to unwind according to its prospectus.  That said VIX futures currently have a margin requirement of ~45% of notional for the average of the front two contracts, and any decline in value of the inverse ETPs to those levels could trigger a rapid forced unwind.   Note that SVXY is an ETF, so the NAV is based on the actual holdings of the fund at the end of the day.

5)  The 2nd derivative impacts are likely large.  An overnight gap higher that doesn’t give investors the opportunity to hedge is the worst case.  Consider if there is an overnight gap in VIX futures of +150% (VIX futures to ~29, VIX to 35+):

• The holders of the inverse ETPs lose the $1.4bn as the AUM of inverse ETPs goes to zero.


• The providers (hedge counterparties / clearers) of the ETPs lose $600mm due to the mismatched hedge if VIX futures more than double.


• Investors that sold long vol ETPs against short vol ETPs (a somewhat common carry trade) have the same unhedged gap risk in a +100% VIX futures move as the ETP providers.  Assuming they are 20% of the shorts in the inverse ETPs (a guess) – they lose $250mm.


• Dealers who can’t hedge their delta on the way up could lose $500mm on our estimates.


• Hedge funds who are short VIX futures ($250mm vega on just the short leg per CFTC) playing the rolldown trade lose over $4bn.


• Investors who are wrong way in VXX, SVXY, and UVXY options could lose hundreds of millions – estimating loss here is hard, but assuming 20% of the open interest is wrong way, the loss would be ~$1bn.


• Investors who have sold vol in other forms (options, variance, etc.) would take losses and likely look to cover as well.

With a buyer for every seller someone is making this money too, and some of the above could be hedged as well.  But the point is that when there are losses, ‘sell what you can’ will take over and drive further supply.  While the point of max pain in volatility would likely be the first day of the spike, the knock on effects could mean equity markets take longer to recover.

6)   Adding to the pain – on days after the initial shock – would be the flow from annuity and risk parity deleveraging.  Both of those investors are slow by comparison to the VIX market – annuities will sell over several days, starting the day after a selloff.  Risk parity funds are more discretionary, and the supply could come over a matter of weeks.  But given high leverage resulting from the low vol environment, their potential supply is large and could prolong any downturn.

Investors have been crying wolf about the VIX complex for years, and have been wrong so far.  And it’s important to note that the odds are still heavily stacked against the above scenario playing out and the most likely scenario is still a graceful unwind of the short vol trade:

• If volatility is just a little bit higher, the unwind potential is much less – there needs to be a shock when volatility starts at these very low levels


• The unwind in VIX only happens in a 1-day gap lower in stocks – a slow bleed would not create as much supply


• History suggests a gap from low vol levels is unlikely:  the biggest selloff in S&P 500 when VIX was less than 12 was -3.5%, and -2.2% when VIX was less than 11, not enough to trigger this type of unwind.  That -2.2% selloff occurred on Feb 4th 1994 when the Fed raised interest rates – bond volatility remains the major risk factor.


• Investors are still not all-in on stocks, with exposures moderate and many hiding out in defensives and Tech – raising the bar for a big selloff in stocks


• Active manager performance this year has been strong, meaning funds are less likely to become forced sellers of positions, which helps keeps volatility tame and can limit the speed of a selloff


• Correlation remains low due to both fundamentals and positioning, and for the index to sell off sharply it would need to rise

The point is simply that if there is an external market shock that nobody is prepared for (and this likely coincides with a selloff across asset classes), the risks of a quick unwind are higher than in the past.  QDS favors staying long equities, but does not view the risk / reward on simply selling volatility as attractive anymore.  Instead consider:

• Replacing long stock with S&P 500 upside calls that look very cheap given low volatility – buy the SPX Dec 2550 call (30^) for ~1% (sub-9% implied vol)


• Buying VIX puts instead of selling VIX futures to collect rolldown – buy the VIX Sept 10.5 put for $0.25, which offers attractive leverage if futures roll down to current spot levels of VIX with a 9 handle.


• Hedging this potential tail event with OTM VIX calls – buy the Sept 20 calls (17^) for $0.45.  VIX calls are not cheap by any measure, but they are reasonably priced given these potential risks, and for those that see a shock occurring in the next few months VIX calls are the best hedge.

Goldman: "Periods Of Low Vol End In Tears... The Biggest Risk Is Central Banks"

One month ago, unleashing the latest series of warnings that the current period of low volatility will not have a very unhappy ending, came from Bank of America, which said that "These Markets Are Very Weird." A few weeks later, JPM" Marko Kolanovic warned that complacency will end in "catastrophic losses" for short vol strategies followed promptly by Deutsche Bank"s Aleksandar Kocic who demonstrated that there is no scarcity of scary adjectives when he likewise warned that the current period of market "metastability" will showed lead to "cataclysmic events." Now it"s Goldman"s turn.

In a note by Goldman"s Christian Glissman seeking to explain "The upside of boring - risks and asset allocation in low volatility regimes", the vol strategist joins the bandwagon and writes that while "low volatility periods do not have to end in tears, they often do." His explanation:

Volatility tends to cluster and is often low for a good reason – this indicates investors should add risk during those periods. However, a prolonged low vol period can also eventually result in excessive risk  taking and latent risks from elevated valuations. But moving out of a low vol period does not have to come with a material ‘risk off’, at least initially. Usually volatility tends to spike and equities settle into a higher volatility regime first (Exhibit 37) and the average drawdown is less than 5%.

Markets often enter a higher vol regime before there are larger equity corrections, usually 6-24 months later (Exhibit 38). This suggests a more gradual risk reduction as markets shift into a more persistent higher volatility regime as the macro backdrop worsens. Currently, we see little recession risk in the next 12 months although growth momentum may have peaked and the US economy is moving more late cycle.

So if not a recession, what could unleash more images of traders with hands on their faces? Here Goldman channels the latest note by Matt King, and says that the "bigger risk could prove to be central bank tightening, which could drive more volatility in the near term, especially owing to the elevated uncertainty around the balance sheet runoff by the Fed and ECB."

Further, volatility can spike due to unexpected shocks and tail events – with higher vol of vol risk, running increased cash allocations and some tail risk protection appears sensible. This is particularly true as valuations across risky assets remain high, resulting in poor asymmetry for LT returns.

The shift from a low volatility regime to a higher is shown below:

There are other dangers too, for example low volatility masking correlation risk in multi-asset portfolios.

In multi-asset portfolios, investors might face further risk based on the premise of diversification. Absolute cross-asset correlations tend to increase with higher volatility (Exhibit 39). This is especially a risk for risk parity funds and volatility target funds which often increase risk based on volatility by asset class and on a portfolio level. Since the 1990s bonds have provided hedges for equities in periods of higher volatility, allowing multi-asset investors to run higher risk/leverage levels. But right now, as both bonds and equities appear expensive, bonds may be less good hedges for equities in drawdowns, and there is the potential for negative rate shocks to weigh on equities, as central banks tighten policy. Commodities have helped in high inflation periods like the 1970s but they have been more a source of risk recently, with large oil price declines and still-low inflation.

So why not just go long vol? Well, in a world of BTFD the theta is simply far too great. The result: everyone is shorting vol instead, even though "Short vol strategies are becoming riskier." For more on this, see the latest Kolanovic note.

Unsurprisingly, short vol strategies tend to very profitable in low vol periods, while being long vol tends to be costly. Exhibit 41 shows that being long vol through the VXX (long shorter-dated VIX future ETF) has been very costly since 2011 – the VXX is down 99% since then. It is not just low realised S&P 500 vol but also the contango in the VIX futures curve (in-line steep equity vol curves) that creates a painful rolldown, even if volatility is unchanged (see Navigating the VIX ETP market, April 25, 2017). VIX options can be a better way to position for a rise in the VIX.

As the VIX spikes revert rapidly, it has also been particularly difficult to capture ‘risk off’ episodes through a long VIX future position recently. On the flipside, this has made short vol a popular (and profitable) carry trade; for example, the XIV (short shorter-dated VIX future ETF) has nearly tripled since the beginning of last year. As a result, the net and outright short position in VIX futures is at all-time highs. But the risk of short vol strategies in most markets is clearly rising. For example on May 17, 2017, following to the VIX spike due to concerns on the impeachment of President Trump, the XIV was down 18%.

Taking all of the above, Goldman"s advice: go to cash, and reduce risk.

This further strengthens the case for increased cash allocations and also for broader diversification. Alternatives such as real estate and private equity can help, although they often introduce liquidity risk in the portfolio and also carry equity and duration risk. Generally, a more momentum-based investment approach can help manage risk-adjusted returns in periods of rising volatility – with declining momentum in risky assets in low vol periods, we believe investors should further reduce risk.

One last chart: according to Goldman calculations, 1-month S&P500 realized vol now finds itself in the 0%th percentile. It has never been lower.

A Bearish Positive Carry Trade?

Authored by Kevin Muir via The Macro Tourist blog,

The Eurostoxx outperformance of the past month has garnered a lot of attention, but there is another similar trade many investors are missing. Not only that, but it has a positive carry, something that is sorely lacking in this day and age of NIRP.

Since early April, the German Bund / US T-note 10 year yield spread has rallied 35 basis points, rising from negative 220 bps to 185 bps.

For all those who think quantitative easing is long end fixed income friendly, this move makes no sense. After all, the ECB is busy buying bunds by the bucketful while the Federal Reserve is preparing the market for the eventual winding down of their balance sheet, reducing the rate of reinvestment (and therefore bond buying). Yet, for me, this move makes complete sense. What is a bond investor’s worst nightmare (after default)? Inflation. What is quantitative easing suppose to create? Inflation. Why then does the market expect QE to cause bond prices to rise? If Central Banks are successful, it should actually create the exact opposite reaction.

Of course, it’s not quite this simple, and no doubt the rate of private sector money creation greatly influences the extent of the inflation created by the Central Banks’ quantitative easing, but fixed income investors shouldn’t cheer when Central Banks write blue tickets.

But let’s step back and think about the current European / US situation. The ECB is the second easiest Central Bank out there (right behind the BoJ), while the Federal Reserve the most hawkish. It might take a while, but eventually, these policies will filter through to the real economy.

And it looks like it might finally be happening. Have a look at the CitiBank Economic Surprise index for both the EU and the US:

US economic performance versus expectations has plummeted, while Europe is hanging in there at lofty levels.

If you are a big US economic bear, you could try shorting stocks. But I would much rather own US fixed income against being short German bunds.

Even though the 10 year German bund / US t-note spread has backed up 35 basis points over the past couple of months, it is still sitting at extremely depressed levels.

While you wait, you earn the monster positive carry.

This has long been one of my favourite trades, and even though it has moved my way, I am not taking any off. In fact, now that it is working, I probably should be adding…

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P.S.: For those who don’t have access to a Bloomberg or similar bond calculating program, here is the Position Hedging screenshot for the Eurex Bund future vs. CME US 10 Year T-note future. It is almost 2 TYM7 for each FGBLM7.