First Impressions

Expo Bits & Pieces, Day 1
JLN Staff

Yesterday was the first full day of 31st Annual FIA Expo Chicago, and from our vantage point, the conference is shaping up to be among the best ever. Sure, it helps that we are experiencing unusually balmy temperatures for November. One exchange executive said to me yesterday, “it feels more like an FIA Boca than an Expo.”

One of the highlights of the day was the showing of MarketVoice’s video on the closing of the trading floors. Quite a nostalgic trip for many of us in the room.

But after a quick look back, the crowd took to looking forward, to the real story of Expo 2015 – innovation. Innovation is everywhere at the Chicago Hilton – in every panel, throughout the exhibit hall, and especially in the Innovators Pavilion, in what used to be the less-traveled Red Room. You would be well served to spend some time there.

Innovation made its way into the video project we have undertaken this week at Booth 314, where, in partnership with Cinnober Financial Technology, we conduct short interviews with industry participants on the important topics facing the financial markets, in what we are calling “Sweet 16: The Tops For 2016.” What technology, regulation, exchange or macroeconomic issue or trend will be most important to our industry next year? We will take the 16 best ideas and thoughts and package them in a John Lothian News video series.

Interestingly, very few of yesterday’s participants stuck to one topic – a true testament to how interwoven these topics are to the industry, and this fact is punctuated by today’s innovation.

The ever-popular Exchange Leaders panel looked at the challenges of the lack of liquidity and the concern that the fragmentation common in the equity markets could infect the derivatives markets. Market making programs help provide liquidity, but there, too, the equity model is problematic, as market makers are finding ways to put on “risk free” trades, ICE CEO Jeff Sprecher said. Eurex CEO Andreas Preuss agreed that transparency is needed around exchanges’ market making programs and said Eurex’s program details are all publicly available. He said that individual deals with market makers should be abolished and that “stupid stipends won’t help the industry overall and have never proven a good way to create sustainable open interest in these programs.”

Paul Pantano, partner at Cadwalader, Wickersham & Taft LLP, chucked a few wry barbs at regulators during the sparsely attended end of day “Commodities: Will Hedging Survive” panel, — sparsely attended, we’d assume, because beer had already appeared in the Exhibit Hall.

“The good news is the longer the [position limit] rules take, the better they’ll be.”

“In the U.S., deadlines only apply to market participants, not to regulators.”

And if anybody was wondering, Pantano revealed he likes Oreos during a discussion of the ongoing anti-manipulation case against Kraft Foods.

During the same commodities panel, Matthew Chamberlain, head of business development at the LME, had a few colorful analogies from across the pond, the best of which was “the snake in the tunnel,” a reference to the need for flexibility in new rules and regs (and not, as was suggested, a less family-friendly meaning).

And one of the most important items of the week, is the return of CME Group’s Kim Taylor who has quietly returned to work, looking healthy again and giving us that signature laugh. Welcome back Kim.

Quote of the Day

“God’s plan is not for things to rise in the autumn, as a matter of fact, that’s why we call it fall, nor is it God’s plan for things to rise in the winter, through the snow. God’s plan is that things rise in the spring. And so if you want to be good with the Almighty, you might want to delay until May.”

Representative Brad Sherman, a Democrat from California at a hearing of the House Financial Services Committee, in the story, “God Wants Yellen to Delay Rate Hike to Spring, Lawmaker Says”

Lead Stories

ECB Firepower Waning as Out-of-Reach Bonds Approach $1 Trillion
Anchalee Worrachate – Bloomberg
The European Central Bank is finding that the pool of bonds it can purchase under its quantitative-easing program is shrinking.
Under current rules, the Frankfurt-based bank can only buy bonds yielding more than its minus 0.2 percent deposit rate. A recent rally in euro-zone debt markets has pushed the total value of ineligible securities to $924 billion, from $750 billion on Oct. 22 when the ECB last had a policy meeting.

Bond Yields Buoyed Around Globe as Fed Rate-Boost Odds Beat 50%
Lukanyo Mnyanda and Jennifer Surane – Bloomberg
Global bond yields climbed to a seven-week high after Federal Reserve Chair Janet Yellen said a U.S. interest-rate increase remains a possibility for 2015.
Her comments Wednesday left the odds of the Fed tightening policy by its December meeting hovering around 54 percent, while the yield on the Bloomberg Global Developed Sovereign Bond Index climbed to the highest since Sept. 16. Traders now have their eyes on the October payroll report, to be released on Friday, after the Labor Department reported Thursday that the number of Americans filing for unemployment benefits climbed to the highest level in five weeks.

How to tackle Europe’s non-performing loan problem
Shekhar Aiyar, Anna Ilyina and Andreas Jobst – VOX, CEPR’s Policy Portal
European banks are struggling with high levels of non-performing loans. This column explores the channels through which persistently high non-performing loans hold down credit growth and economic activity. A survey of EU authorities and banks reveals that the loans are not written-off for a variety of deep-seated reasons, including legal and tax code issues. An agenda is proposed comprising tightened bank supervision, structural bankruptcy reforms, and the development of markets for distressed assets.

Municipal Bonds Shine in Bleak Landscape
Aaron Kuriloff – WSJ
Investing in boring bridges and sewers is paying off once again.
Municipal bonds sold by U.S. state and local governments are returning about 2% this year, according to Barclays PLC data, beating corporate bonds and many other supposedly higher-performing asset classes.
It is the second year of near market-leading returns from a sector typically prized for its low, steady performance. Muni bonds last year posted a total return of 9%, which comprises price appreciation and interest payments, approaching the S&P 500’s total return of 14%.

I’ll eat my hat if we are anywhere near a global recession
Ambrose Evans-Pritchard – The Telegraph
The damp kindling wood of global economic recovery is poised to catch fire.
For the first time in half a decade of stagnation, government policy has turned expansionary in the US, China and the eurozone at the same time. Fiscal austerity is largely over. The combined money supply is surging.
Such optimistic claims are perhaps hazardous, given record debt ratios in most areas of the world and given that we are six-and-a-half years into an aging economic cycle that might normally be rolling over at this stage. It certainly feels lonely.

The Accounting Technique Valeant Used to Help It Buy Company After Company
“In Valeant, a financialized age has produced a financialized pharma company,” Jim Grant, legendary contrarian investor, wrote in March of last year. More than a year later and the wider markets are only just beginning to unpick the complicated underpinnings behind Valeant’s stunning run.

Lagarde: Bank fines aren’t ‘normal cost’ of business
Financial Times
Christine Lagarde has called for stronger individual accountability for law-breaking and misconduct in banks.
The managing director of the International Monetary Fund criticised the assumption that fines are simply the “normal cost of doing business”, writes Kadhim Shubber.

Trends in Debt Concentration in the United States By Income
Donghoon Lee, Matt Mazewski, Joelle Scally and Basit Zafar – Liberty Street Economics
Household debt in the United States expanded before the Great Recession, contracted afterward, and has been recovering since 2013. But how has the distribution of debt across different income groups evolved over time? Who has been driving the recovery of household debt over the past two years? To date, there has been little work on how borrowing patterns for high- and low-income individuals have changed over time, although one notable exception is Amromin and McGranahan. Here, using the New York Fed Consumer Credit Panel (CCP), a quarterly panel data set based on Equifax credit reports, we shed further light on these questions.

European Regulators Provide Details on Next Bank Stress Tests
Chad Bray – NY Times
Regulators provided more details on Thursday on next year’s tests of the European banking sector, as they prepare to examine the ability of the region’s lenders to survive a financial crisis or severe economic downturn.

Welcome to the ZLB global economy
Ricardo Caballero, Emmanuel Farhi and Pierre-Olivier Gourinchas – VOX, CEPR’s Policy Portal
Interest rates are near zero – or moving towards it – in major economies worldwide. This column introduces a new theoretical framework that helps to organise thinking on how liquidity traps and slow growth spread across the world. It stresses the role of capital flows, exchange rates, and the shortage of safe assets. Once rates are at the ZLB, the imbalance between the supply and demand of safe assets is redressed by lower global output. Liquidity traps emerge naturally and countries drag each other into them.

BREXIT – Should the UK stay or go? The economic consequences of Britain leaving the EU
Swati Dhingra, Gianmarco Ottaviano and Thomas Sampson – London School of Economics Blog
The direction of UK trade policy with its biggest trade partner – the EU – will be decided in the upcoming general election. The Conservatives are committed to holding an ‘in-or-out’ referendum on membership by 2017 while Labour and the Liberal Democrats have opposed this, but how would Britain’s exit from the EU affect the UK economy and the income of UK citizens?

Inside and Outside money at the end of the yield curve: a footnote
Back in April I gave a presentation at a conference in Oxford in which I discussed some brilliant work by Branko Milanovic, Charles Goodhart and Ben Broadbent , and posited that if squinted your eyes just so, lots of things made sense in a way that might be a little against the consensus. Specifically, the asset boom story of the past thirty five years, decline of labour power and increase in inequality in the West, general disinflation and a lower trend nominal GDP in developed markets might all just be an expression of the radical globalisation and rise of China that has transformed our day to day lives. If so, then Summers’ Secular Stagnation thesis might prove to be a needlessly elegant paradox for central bankers to muddle over. Furthermore, with China approaching a Lewis point, this historical trend could be challenged and potentially thrown into reverse (higher labour power, rates, headwinds for asset prices, and some portfolio construction stuff too).

Negative Interest Rate Policy as Conventional Monetary Policy
Miles S. Kimball – National Institute Economic Review
As long as all interest rates move in tandem – including the rate of return on paper currency – economic theory suggests no important difference between interest rate changes in the positive region and interest rate changes in the negative region. Indeed, in standard models, only the real interest rate and spreads between real interest rates matter. Thus, in most respects, negative interest rate policy is conventional. It is only (a) what needs to be done with paper currency, (b) difficulties in understanding negative rates or (c) institutional features interacting with negative rates that make negative interest rate policy unconventional.

4 Ways Banks Must Evolve to Attract Younger Investors
Sergio Chalbaud – TheStreet
Millennial investors have good reason to be skeptical of traditional investing, especially after the 2008 recession and more recent volatility due to China’s struggling economy, as well as the Federal Reserve’s forthcoming interest-rate increase. There’s an unprecedented uncertainty in the financial services industry.

Puerto Rico’s Debt Crisis and the 1975 Law Complicating Matters
Mary Williams Walsh – NY Times
To appreciate why it is proving so hard for Washington to help debt-burdened Puerto Rico, it helps to go back to 1975, the year New York City went broke, and consider the role played in that crisis by a prominent Republican senator from Texas named John Tower.

Central Banks

Super Thursday: Bank of England votes to leave rates on hold – live
Graeme Wearden – The Guardian
Britain’s central bank has left borrowing costs on hold again, and hinted that rates won’t rise for many months

Citi: Janet Yellen Has Violated “One of the Cardinal Rules” of Economists
On Wednesday, the Federal Reserve’s triumvirate reiterated that liftoff in December was still a possibility.
That possibility is contingent on economic data continuing to show improvements in the labor market that give monetary policy makers more confidence that inflation will trend back to 2 percent over the medium-term.
But Janet Yellen, Stanley Fischer, and William Dudley aren’t really data-dependent, according to Citigroup Head of North America Economics William Lee. They’re market-dependent.

Fed’s Fischer warns against shackles on central bank
Sam Fleming – Financial Times
A leading Federal Reserve official has warned against the imposition of constraints on the central bank’s monetary policy independence by Congress, arguing that new fetters would be economically dangerous.
Stanley Fischer, the vice-chair of the Federal Reserve Board, said that even though high inflation was not an immediate threat, it was still critically important that the central bank retained its discretion to set monetary policy without interference by politicians.

Fed would consider negative rates if economy soured: Yellen
The Federal Reserve would consider pushing interest rates below zero if the U.S. economy took a serious turn for the worse, Fed Chair Janet Yellen said on Wednesday.

Is Carney hurt by wrong rate steer?
BBC News
Mark Carney gave what many would see as a bum steer in July that interest rates would be going up around the turn of the year.

God Wants Yellen to Delay Rate Hike to Spring, Lawmaker Says
Jeanna Smialek – Bloomberg
Janet Yellen can stay in God’s good graces by waiting until springtime to raise interest rates, Representative Brad Sherman told the Federal Reserve chair on Wednesday.

Draghi Says QE One of Many Tools ECB Has to Counter Headwinds
Mario Draghi said the European Central Bank’s asset-purchase program could be boosted and other tools may be used to ensure inflation will return to its goal.
“Today, like yesterday, we are not constrained in our ability to act; we have many tools at our disposal,” the ECB president said in a speech in Milan on Thursday. “We are faced with a situation where the price dynamics are very weak, the macroeconomic environment is still uncertain.”


Pacific trade partners promise not to cheat on currencies
Pacific trade partners have pledged not to deliberately weaken their currencies to win an export edge as part of a new free trade pact, the U.S. Treasury said on Wednesday.
All 12 members of the Trans-Pacific Partnership (TPP) promised to publicly report data on currency intervention and foreign reserve holdings, as part of a declaration accompanying the deal.
The new rules fall short of the trade sanctions that U.S. unions, car makers such as Ford Motor Co and some lawmakers demanded for countries which devalue their currencies in an effort to make their exports cheaper.

In Turbulent Times, Carney Finds Unlikely Ally in Placid Pound
Anooja Debnath and Anchalee Worrachate – Bloomberg
The U.K. pound is becoming an oasis of calm in a market where other major currencies are being jostled by the approaching increase in U.S. interest rates.
The past month has been the least volatile trading period for sterling versus the dollar this year, and market-implied rates for future price swings are similarly muted. Even with Thursday’s declines, strategist forecasts signal little change in Britain’s currency through the end of the 2015 against both the greenback and euro.

Conduct Risk, Forex Lending to be added to European Bank Stress Tests
The European Banking Authority on Thursday said it will add conduct risk and foreign-exchange lending to its next round of stress tests in 2016, highlighting how such tests are increasingly looking beyond straightforward economic scenarios to assess banks’s financial health.

Bitcoin surges as Chinese flock to Russian fraudster’s site
Financial Times
The price of the cryptocurrency bitcoin surged on Wednesday to its highest in more than a year amid a wave of Chinese testimonials for a “social financial network” called MMM, which bears the hallmarks of a pyramid scheme.

JPMorgan CEO Jamie Dimon: Virtual Currency Will Be Stopped
Jamie Dimon isn’t on board with bitcoin.
Speaking on Wednesday at the Fortune Global Forum, the CEO of JPMorgan Chase JPM said that the market for the virtual currency isn’t large and it would be stopped by the government before it ever got to that point. Dimon said despite the fact that bitcoin was getting some lip service in Washington, as politicians try to say they support Silicon Valley innovation, he thinks eventually there will be a crackdown.

Indexes & Index Products

The Man Who Hates E.T.F.s
Landon Thomas Jr. – NY Times
Bearded and tanned, Peter S. Kraus, the chief executive of AllianceBernstein, strode with assurance into a Midtown Manhattan conference room full of financial advisers from a large investment bank. He was there to pitch them on Alliance mutual funds and promote the expertise of his stock and bond experts who manage these investment pools. But the financial advisers had been doing a nice little business ignoring these types of actively managed funds and steering their clients into cheaper, index-tracking exchange-traded funds, thank you very much. So Mr. Kraus had a gloomy message for those dazzled by the ascent of E.T.F.s.

While Investors Continue to Embrace ETFs, There’s Still an Awareness Gap in Canada
With a twenty-five year history, Exchange Traded Funds (ETFs) have seen consistent and record growth over the past decade(1), yet only a fifth of Canadians claim to be familiar with the investment vehicle, according to a recent ETF Awareness Survey from BlackRock Canada of over 1,500 Canadians (ETF Awareness Survey)(2).

The Essentials Of China A-Shares ETFs
Max Chen – ETF Trends
As Chinese economy matures, Beijing is adapting and enacting reforms to bolster the markets and country-related exchange traded funds.
On the recent webcast, Deciphering Asia: Pinpointing Potential Opportunities, Michael Jones, Chairman and Chief Investment Officer at RiverFront Investment Group, explains that China has been following the Asian Development Model of growth that helped lift millions out of poverty. However, like Japan witnessed, the model may lead to excessive debt and economic stagnation.
Jones, though, argues that China has a plan to beat the so-called Japan syndrome of slow growth, pointing to aggressive economic reforms that could help China become an attractive place to invest.

The Consumer Price Index—Why the Published Averages Don’t Always Match An Individual’s Inflation Experience
Bureau of Labor Statistics
The Consumer Price Index (CPI) is a measure of the average change in prices paid by urban consumers for a market basket of goods and services. Because the CPI is a statistical average, it may not reflect your experience or that of specific families or individuals, particularly those whose expenditure patterns differ substantially from the “average” urban consumer.


Gold ETF pivots around Fed expectations
Jamie Chisholm – Financial Times
If US jobs data cement expectations for a December rate rise by the Federal Reserve, then keep an eye on gold.
The chart below shows how SPDR Gold Shares (GLD), an exchange traded fund that tracks the precious metal, has been following CBOT two-year US government note futures of late

Gold Prices Continue to Fall, Erasing All October’s Gains
Gold prices continued to decline in European trading Thursday morning, and have now erased October’s gains on the back of U.S. Federal Reserve Chairwoman Janet Yellen’s comments that a December interest rate rise could still be in the cards.

China’s gold investment at risk as Beijing frees yuan
Appetite for gold in China, which accounts for one fifth of global investment demand, could fall in the long term as the country moves to free the yuan, enabling savers to gain direct access to foreign stocks or bonds.
In its latest five-year plan last month, a blueprint for China’s economic and social development, Beijing committed to liberalise its capital account in the Shanghai free trade zone, as part of efforts to making the yuan more convertible.

India wants people to turn in their gold
India’s Prime Minister Narendra Modi has launched a program to lure tons of gold from households into the country’s banking system. The program consists of three schemes; a gold monetization scheme, gold sovereign bonds and Indian gold coin.

Online retailer hoards gold as crisis defence
Financial Times
Overstock, an online retailer and redoubt of doomsday conservatism, has stashed away $10m in gold and silver coins as an insurance policy against financial apocalypse.


ATMs used to be during office hours only. A blizzard changed that.
The Economist
THEY are, in the view of Paul Volcker, a former chairman of the Federal Reserve, the only useful financial innovation of recent decades. Better yet, cashpoints (ATMs, to Americans) are still evolving. This week Citibank unveiled one that can identify account-holders by scanning their irises, thus doing away with codes—and with cards, for that matter. Customers request funds via their phones before confirming their identity with a scan.

The replication crisis has engulfed economics
Andreas Ortmann – The Conversation
A sense of crisis is developing in economics after two Federal Reserve economists came to the alarming conclusion that economics research is usually not replicable.
The economists took 67 empirical papers from 13 reputable academic journals. Without assistance from the original researchers they were only able to get the same result in a third of cases.

Short-Term Thinking (Infographic)
NY Times
From Wall Street to Washington and in the towers of academia, people are buzzing about what some say is the pernicious focus in corporate America on short-term profits. To understand the debate, it helps to understand the various forces that contribute to the pressures on companies to focus on short-term financial results. Those pressures are not just a product of one bad actor. It turns out that nearly everyone in the investment world plays a role in creating the challenges companies face in setting their sights on the far horizon.

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