First Impressions

Chicago Sailing – and a STEAM Engine
Doug Ashburn – JLN
A couple of days ago our morning newsletter featured an article by Bloomberg’s Philip Tabuas, Champagne and Catamarans: The America’s Cup in New York Harbor, a picture-and-caption look at last Friday’s America’s Cup World Series held in New York Harbor. The story received a lot of attention, either because of the title or because of our comment/shout-out to local trading legend and sailing aficionado Don Wilson.

Don and his team wish to remind us that Chicago’s own America’s Cup World Series event is about a month away, June 10-12, on Chicago’s lakefront near Navy Pier. In the series, teams from around the world race 45-foot catamarans in order to win points toward next year’s America’s Cup qualifiers. CME Group and DRW serve as Foundation Partners for the event.

But America’s Cup does not just cater to the well-heeled racing set. The race series is bringing its Endeavour program, which introduces students to sailing as a way to learn about science, technology, engineering, arts, and math (STEAM) to Chicago this summer. Through Endeavour, groups of students learn about and apply the technical concepts of sailing to a STEAM curriculum.

For more information about the program, including the inaugural “Endeavour Day,” to be held June 9, click HERE.

Come sail away with us.

Quote of the Day

“If you take the 50 largest banks in the world, we wouldn’t even think about [investing in] probably 45 of them.”

Warren Buffett in the story, “Motley Fool: Best Buffett, Munger Quotes from Annual Meeting”

Lead Stories

Financial messaging service SWIFT says banks responsible for own cybersecurity
SWIFT has told its bank customers that they are responsible for securing computers used to send messages over its global network, which was used to steal some $81 million from a Bangladesh central bank account at the New York Fed in February.

A chronic problem: Ideas for reducing the debt burden
The Economist
Debt levels grew spectacularly in the rich world from 1982 to 2007. When the financial crisis broke, worries about the ability of borrowers to repay or refinance that debt caused the biggest economic downturn since the 1930s. It could have been worse. The danger was that, as private-sector borrowers scrambled to reduce their debts, the resulting contraction in credit would drive the world into depression. Fortunately, this outcome was averted. First, the governments of rich countries allowed their debts to rise, offsetting the reduction in private debt. In addition, emerging markets (notably China) continued to borrow. So there was no global deleveraging; quite the reverse (see chart). Central banks also helped, slashing interest rates to zero and below. Although lower policy rates have not always resulted in cheaper borrowing costs (in Greece, for example), debt-servicing costs have fallen in most developed countries.

Big Banks Could See Sizable Gains from Digital Advice Platforms
Fox Business
Don’t count the big banks out of the robo-advising game just yet. That’s the message from analysts who closely follow the industry as the market for digital advice platforms gets hotter. At the end of last year, $26 billion in new client assets were managed by just four of the nation’s prominent digital-advice firms: Vanguard’s Personal Advisor Services, Charles Schwab’s Intelligent Portfolios, Wealthfront, and Betterment. That data, accumulated by KPMG in a recent study, estimates that the market will skyrocket 68% by 2020 to $2.2 trillion in assets under management.

Rescaling China’s Debt Mountain
Barry Eichengreen – Project Syndicate
There is widespread agreement on two facts about the Chinese economy. First, the slowdown has ended and growth is picking up. Second, not all is well financially. But there is no agreement on what happens next. The good news is that domestic demand continues to grow. Car sales were up nearly 10% in March over the same month in 2015. And retail spending grew at an annual clip of 10% in the first quarter. The most dramatic increase, though, is in investment. Real estate investment is growing again, following its collapse in 2015. Industrial investment, especially by state-owned enterprises, has been rallying strongly.

Triple whammy
The Economist
If you think America’s banks are having a rough year, take a look at Europe (see chart). American lenders’ share prices, having rallied from their trough in mid-February, are 6% lower than at the start of 2016; European ones are over 20% down. So miserable has the first quarter been that investors have applauded figures that beat dire expectations. On May 10th Credit Suisse, a Swiss giant, reported a second successive quarterly loss—and was rewarded with a 5% bounce in its shares.

Kerry seeks to soothe European bank nerves over Iran trade
U.S. Secretary of State John Kerry told Europe’s top banks they have nothing to fear from resuming business with Iran, as long as they make proper checks on trade partners and pursue “legitimate business”.

Germany’s School for Central Bankers Draws Risk-Averse Crowd; Bundesbank, having lost clout in Europe, keeps tradition alive in its castle redoubt.
Tom Fairless – WSJ
Behind the walls of a 12th-century castle here, perched above a wooded valley 30 miles by winding forest road from the nearest big town, Germany is training its first line of defense against foreign instability.

Greeks Leery of Debt-Relief Talks as They Brace for New Tax Wave
Ioannis Plotas doesn’t share his prime minister’s belief that the start of debt-relief discussions on Monday is a step forward for Greece. Rather, the 52-year-old is worried that the latest hikes in income tax and social security contributions passed by Greek lawmakers on Sunday to appease creditors will drive the dry cleaning shop he runs with his sister in central Athens out of business.

Wall Street Dealmaking Goes From Boom to Bust in Few Months
Wall Street bankers celebrated last year as mergers and acquisitions reached the highest level ever, topping even pre-crash 2007. This year M&A is hitting a more dubious record: Deals gone bust. Of the $5 trillion in transactions that were announced in 2015, almost 10 percent — $504 billion — have since been terminated. Wednesday was especially bad for bankers as two mergers valued at a combined $21 billion collapsed.

Italy must choose between the euro and its own economic survival
The Telegraph
Italy is running out of economic time. Seven years into an ageing global expansion, the country is still stuck in debt-deflation and still grappling with a banking crisis that it cannot combat within the paralyzing constraints of monetary union.

Central Banks

Different this time? Trump candidacy could weigh on Fed thinking
Donald Trump’s rise to de-facto Republican nominee for president poses an unusually high level of uncertainty for investors and businesses, potentially weighing on the economy and the Federal Reserve’s plan to raise interest rates this year.

As Korean shipyards founder, central bank dragged into rescue bid
They are South Korea’s “too-big-to-fail” firms – the world’s largest shipbuilders that are both a massive economic force and an important national symbol – and the government wants the central bank to fund an unconventional rescue of the sector. The three biggest shipbuilders – Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries Co Ltd and Samsung Heavy Industries Co Ltd – sustained record losses last year, dragged down by the global commodities plunge and falling trade volumes.

U.S. economic uncertainty should not ‘paralyze’ Fed: Mester
The U.S. Federal Reserve should recognize that there is uncertainty in its economic forecasting but that should not stop it from taking monetary policy decisions, Cleveland Fed President Loretta Mester said on Thursday.

Seven Strange Market Moves for an Unusual Fed Tightening Cycle
Ben Eisen – WSJ
When the Federal Reserve lifted interest rates at the end of last year, many expected the dollar to strengthen, interest rates to rise, and volatility to climb back toward its long-run average. But in a world of sluggish growth that’s prompting other central banks to move in the opposite direction, some strange and unusual twists are taking place.

Former Kuroda colleague says BOJ to ease in June or July
The Bank of Japan will probably expand its stimulus at one of its next two policy meetings, with first quarter data expected to give policymakers compelling reasons to ease, an academic with close ties to the central bank governor said on Thursday. The BOJ will also be watching for the outcome of the Group of Seven summit this month, which could show major economies’ willingness to spur global growth and help determine Japan’s own fiscal stimulus agenda.

Hillary Clinton shake up the Fed
Business Insider
Hillary Clinton wants the Federal Reserve to look a lot different. The Democratic candidate’s campaign said Thursday that it supports a plan presented by Democratic lawmakers calling for more diversity at the Federal Reserve and removing bankers from the boards of regional branches.

WSJ Survey: Economists Divided Over Next Fed Rate Increase
David Harrison – WSJ
Economists are split about the timing of the Federal Reserve’s next interest-rate increase, reflecting the uncertainty of the current economic and financial environment magnified by a potentially disruptive vote in the U.K. next month over its place in the European Union.

American Capitalism’s Great Crisis
A couple of weeks ago, a poll conducted by the Harvard Institute of Politics found something startling: only 19% of Americans ages 18 to 29 identified themselves as “capitalists.” In the richest and most market-oriented country in the world, only 42% of that group said they “supported capitalism.” The numbers were higher among older people; still, only 26% considered themselves capitalists. A little over half supported the system as a whole.

Bank of England says Brexit slowdown could lead to recession
The Bank of England said Britain’s economy would slow sharply, and could even fall into recession, if the country voted to leave the European Union and said there were limits to what the bank could do about it.

Regulatory News

Dark money: London’s dirty secret
Financial Times
One Monday in March last year, an announcement by the US justice department caught the attention of a former employee of the Swiss bank BSI. BSI’s bosses had agreed to violate the first rule of Swiss banking. To escape prosecution for abetting tax evasion, the bank would disclose the names of its clients and reveal the tricks it had used to hide their wealth.


Hedge Funds Almost Double Currency Algo Trading, Greenwich Says
Hedge funds almost doubled their use of algorithmic trading in the foreign-exchange market last year, according to Greenwich Associates. Sophisticated investors executed 61 percent of their currency trades via automated computer programs in 2015, up from 33 percent in 2014, the Stamford, Connecticut-based financial-services consulting firm said in a report. That compares with buy-side institutions more broadly, including pension funds and other asset managers, which used algos to handle 33 percent of volumes versus 27 percent a year earlier, according to a Greenwich survey of more than 1,600 foreign-exchange market participants in North America, Latin America, Europe, Asia, Australia and Japan.

SELL signals
The Economist
Has the euro crisis dissuaded other countries from adopting the single currency? Not a bit of it. Since 2009, when euro-zone GDP shrank by 5%, four countries—Slovakia, Estonia, Latvia and Lithuania (let’s call them the “SELLs”) have joined. Their experience suggests that the euro still has its benefits, but also some familiar risks.

Bitcoin has been declared dead 101 times
Bitcoin has had an eventful life. Since the cryptocurrency’s inception in 2008, all the bitcoins in circulation have grown from being worth nothing to a value of nearly $7 billion today.

Deutsche Bank raises euro forecast versus dollar
Deutsche Bank of Thursday raised its forecast for the euro, citing scepticism about the European Central Bank’s ability to weaken the currency further with policy and a retreat in expectations for rises in U.S. interest rates.

Brazil’s Real Drops as Swap Sale Outweighs Impeachment Hoopla
Brazil’s real halted a two-day rally after the central bank’s efforts to weaken the currency overshadowed the Senate’s decision to suspend President Dilma Rousseff from office amid a widening corruption scandal.


Distressed-Debt Traders Await `Revolutionary’ Bond Ruling
Investors in the $225 billion distressed-debt market are watching a Manhattan appeals court to see whether judges can impose what the U.S. Chamber of Commerce has called “revolutionary” limits on out-of-court restructurings. Three federal judges will hear arguments Thursday in a $14 million dispute over how much corporate borrowers can alter debt terms before they run afoul of a Depression-era law designed to protect bondholders. Last year, a lower-court judge set a new, more stringent standard that critics say would force more companies into bankruptcy by limiting their restructuring options.

Electronifie: Better Bond Trading
The application of technology to financial markets has revolutionized countless aspects of investing and trading, from things as simple as online quotes to dark pools and extraordinarily fast algorithms that can move more stock, currencies or derivatives in an instant than most of us will trade in a lifetime. For years, technology has slowly but surely replaced the age-old back and forth between buyer and seller, inching investors closer to what many hope will eventually be “perfect” markets – those with the smallest possible spreads between bids on the one hand, and asks on the other. However, second perhaps only to the diehards in the open-outcry futures pits, the institutional bond market’s traditionally high-touch style of trading has proven to be a tough nut to crack.

Indexes & Index Products

Germany’s DAX is Britain’s Brexit Index
City Index
The FTSE 100 would appear to be the obvious choice among stock market indices given numerous ways to trade it. But it’s widely known the benchmark is only loosely connected to Britain. FTSE 100 companies generated only about 22% of their revenues in the UK last year, according to Thomson Reuters. Broader indices, like the FTSE 350, for instance, will have more sales exposure to the UK. But who trades the FTSE 350? Only a tiny fraction of City Index clients placed FTSE 350 (or FTSE 250) trades over the last year. ‘Economically British’ UK indices are a minority pursuit. It’s the same at the ‘professional’ end of markets too. The biggest daily volume so far this year in Intercontinental Exchange’s FTSE 250 index futures was a skimpy 5,184 on 16th March compared to more than 234,000 in ICE’s FTSE 100 future on the same day.

Smart or Active Beta ETFs Focus on Dividend Yield, Volatility in 2016
A portion of the new smart or active beta ETF funds which were launched in 2016 are largely focused on dividend yield, volatility and momentum.

Russell Investments mobilizes asset allocation expertise globally
Russell Investments
Russell Investments, a global asset manager providing multi-asset portfolios and services that include advice, investments and implementation, today announced the formation of a new team within its investment division. The Global Client Strategy & Research (GCS&R) team is charged with integrating the firm’s full breadth of asset allocation expertise across regions and businesses, enhancing its ability to design innovative strategies for multi-asset solutions.


Gold Fund Buying Frenzy Spurs Demand to Second-Highest Ever
Eddie Van Der Walt and Swansy Afonso – Bloomberg
Gold demand surged to the second-highest level ever as investors piled into funds, doubling investment in the metal. Global demand in the first quarter climbed 21 percent from a year earlier to 1,289.8 metric tons, the World Gold Council said in a report Thursday. That’s second only to the final quarter of 2012 in data going back to 2000. Still, jewelry buying slid 19 percent amid a strike by jewelers in India and as higher prices deterred buying.

Negative interest rates spark record gold rush as demand for safe deposit boxes jumps
The Telegraph
Gold demand climbed by 21pc to 1,290 tonnes in the first three months of 2016 compared with a year earlier, its gold demand trends report said. This represents the biggest first quarter increase since records began in 2000. The council said the rise was “fuelled by investor concerns regarding economic fragility and an uncertain financial landscape.”


Motley Fool: Best Buffett, Munger Quotes from Annual Meeting
Warren Buffett, famed billionaire CEO of Berkshire Hathaway, took the stage alongside Vice Chairman Charlie Munger last weekend at the company’s annual meeting to answer questions from shareholders and analysts.

Money Monster review – George Clooney goes Leslie Nielsen in popcorn hostage thriller
The Guardian
A miasma of pure silliness settles on this movie directed by Jodie Foster, showing here in Cannes out of competition; it deserves a genre of its own: screwball action. Julia Roberts plays a harassed TV producer who has to keep in line her waning star: Lee Gates, played by George Clooney, the ego-crazed, silver-fox presenter of a TV show called Money Monster, giving stock picks and spurious shock-jock-type commentary on the market, celebrating unfettered capitalism by breaking into embarrassingly geriatric hip-hop moves with backing dancers.

John Boehner’s ‘plastics’ advice to Wall Street
Business Insider
At the SkyBridge Alternatives conference in Las Vegas, former House Speaker John Boehner advised the Wall Streeters in attendance about how to improve their industry’s public image: Take a page from the plastics industry.

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