First Impressions

Ther Dodd-Frank Act celebrated its fourth anniversary last month. But rather than resounding choruses of “Happy Birthday,” the newsletter was filled with story after story complaining about the state of the market structure.

No one, it seems, is happy. Market participants have complained that the regulations are too onerous, that compliance costs are prohibitive and anti-competitive, and collateral requirements, once implemented, will diminish liquidity and access. Others have criticized the regulations for having not solved the primary purpose of eliminating the systemic risks associated with the crisis.

One proposed solution that seems to be gaining attention, if not serious consideration, is featured in today’s lead story. Is this Stanford professor a representative of the lunatic fringe, or is she just ahead of her time?

Quote of the Day

The market has decided nobody else should be driving faster than 70 miles an hour and these are the biggest trucks with the most explosive cargo and they are driving at almost 100 miles an hour.

Stanford finance professor Anat Admati, as quoted in the NY Times article

Lead Stories

When She Talks, Banks Shudder
Bankers are nearly unanimous on the subject of Anat R. Admati, the Stanford finance professor and persistent industry gadfly: Her ideas are wildly impractical, bad for the American economy and not to be taken seriously. But after years of quixotic advocacy, Ms. Admati is reaching some very prominent ears.

Hedge-Fund Manager Dips Back Into Fannie, Freddie Bonds – MoneyBeat
Al Yoon – MoneyBeat – WSJ
The brisk downturn for the newest type of Fannie Mae and Freddie Mac bonds since May has brought back one of their original fans. Chris Hentemann, chief investment officer for hedge fund 400 Capital, said he stepped back into the market on Wednesday with a piece of Freddie Mac’s latest debt issue that sheds risks of homeowner defaults onto other investors.

***DA: Buy the dips.

Investors in junk bond funds face a Matrix moment
Tracy Alloway in New York – Financial Times
In the 1999 science fiction film of the same name, the Matrix is a simulated world created by machines to keep humans complacent. In real life 2014, the Matrix is a pricing methodology used by fund managers to value bonds that are trading in illiquid markets. After a month in which investors offloaded debt securities at a frantic pace, it is worth asking if the reality of the current bond market structure is accurately reflected in that pricing methodology.

***DA: OMG, that movie came out 15 years ago? Thanks, Tracy, for making me feel old.

Bond Yields Plumb New Lows, in Three Charts
Steven Russolillo – MoneyBeat – WSJ
Government bond yields around the globe sank Friday to new lows for the year, as geopolitical worries continued to boost the allure of safe-haven bonds.

How Bond Traders Profit Off Americans Earning $24.45 an Hour
Daniel Kruger – Bloomberg
Jason Evans knew he had to act fast.
It was 8:30 in the morning on Aug. 1, which meant the U.S. Labor Department’s monthly wage data had just been released.
One day earlier, the 46-year-old co-founder of NineAlpha Capital LP, a hedge fund specializing in U.S. government debt, detected signs of bearishness in the bond market after a report showed employment costs rose by the most since 2008.

Rate and liquidity fears drive investor flight from bonds
Matt Turner and Sarah Krouse – Financial News
A rush to exit high-yield bonds is accelerating, driven by investor fears that the predicted rise in interest rates could trigger a mass sell-off too big for the market to absorb.

Safer banks make bond markets more risky
Sarah Krouse and Matt Turner – Financial News
In the offices of financial authorities worldwide, justified satisfaction at making big banks more stable is giving way to twinges of alarm that one side effect has been to make the bond market riskier.

A mere trickle of flows, so far
Dan McCrum – Financial Times
Outflows from US high yield bond exchange traded funds slowed last week, according to JP Morgan, so that mini-correction in debt markets may have run its course.

***DA: Or it is on hiatus until the next scare.

That high yield question
David Keohane – Financial Times
Record outflows? Check. Highly illiquid market that has been outstripped by demand and which may have become disconnected from reality? Check. BTFD? Hmmm.

Argentina’s Cheapest Bonds Are Most Resilient in Default
Camila Russo – Bloomberg
Argentina’s lowest-priced bonds are holding up the best following the country’s default last month.
The South American nation’s notes maturing in 2038, known as Par bonds, have lost 6.5 percent to 52.88 cents on the dollar since the government was blocked from making a payment on its debt last month. That compares with a 11.6 percent plunge on its notes due in 2033 and an 8.3 percent rout on securities that mature in 2017.

KKR-Era Debt Is Displaced by Cheaper Bonds at TDC: Nordic Credit
Christian Wienberg – Bloomberg
TDC A/S (TDC) plans to sell new bonds at interest rates it says are likely to be much lower than those paid five years ago while it was owned by a group of private equity buyers including KKR & Co.

Central Banks

Carney Wins Economist Backing for Keeping Record-Low Rate
Jennifer Ryan and Andre Tartar – Bloomberg
Mark Carney’s justification for keeping the Bank of England’s benchmark interest rate at a record low has the backing of economists, according to a Bloomberg survey.
Sixty-seven percent of 33 respondents said there’s still enough slack in the economy to justify holding the key rate at 0.5 percent, where it’s been since March 2009. The BOE has put spare capacity at about 1 percent to 1.5 percent of gross domestic product.

***DA: The frothy London real estate market is either collateral damage or icing on the cake, depending on one’s exposure.

Federal Reserve’s vice-chair warns of long-term damage from recession
Reuters (via The Guardian)
The US and global recoveries have been “disappointing” so far and may point to a permanent downshift in economic potential, US Federal Reserve vice-chair Stanley Fischer said on Monday.
In an overview of the years since the 2007-2009 financial crisis and recession, Fischer said a slowing of US productivity, declining labour force participation and other factors may have scarred the United States’ ability to generate economic growth.

Singapore Says Emerging Nations Would Welcome Normal Fed Policy
Sharon Chen – Bloomberg
Emerging economies would benefit from more normal monetary policies globally including rate increases and an end to asset purchases sooner rather than later, given the side effects of the unconventional measures, Singapore’s central bank said.

Top Bank of England insurance regulator to move to Prudential
The Bank of England’s top insurance regulator, Julian Adams, is leaving to join major insurance group Prudential, in the second major departure from the central bank this week.

***DA: So it is not just in America where we have a revolving door between financial firms and those that regulate them.

Celebrating Greenspan’s Legacy of Failure
Barry Ritholtz – Bloomberg
On this day in 1987, Alan Greenspan became chairman of the Federal Reserve Board. This anniversary allows us to take a quick look at what followed over the next two decades. As it turned out, it was one of the most interesting and, to be blunt, weirdest tenures ever for a Fed chairman.
This was largely because of the strange ways Greenspan’s infatuation with the philosophy of Ayn Rand manifested themselves. He was a free marketer who loved to intervene in the markets, a chief bank regulator who seemingly failed to understand even the most basic premise of bank regulations.

***DA: History books will eventually be unkind to the central bankers of this era, but not yet. We are still in the middle innings of this ball game.

How the Fed Should Measure Inflation
Matthew Schoenfeld – Bloomberg
The Federal Reserve has repeatedly pointed to subdued inflation as a justification for carrying on with its extraordinary efforts to stimulate the U.S. economy. It should be paying much more attention to a trend that its inflationary gauge is missing: the tremendous run-up in the prices of all kinds of assets.
One need look no further than the stock market to see that something is awry. In 2013, U.S. equity prices rose 28.3 percent in inflation-adjusted terms, while the comparable pace of growth in the broader economy was only 2.2 percent. In other words, in real terms, equity prices grew almost 13 times faster than the economic activity required to justify them — the highest ratio since the abandonment of the gold standard in 1971. In 2014, the ratio is on track to exceed 5 for the third year in a row.


Funds ready to pay toward reform of FX-fixing system
Patrick Graham and Huw Jones – Reuters
Asset managers will agree to pay more for currency “fixing” services when they respond later this month to proposals by global regulators for reforms of foreign exchange benchmarks, industry sources said on Friday.

***DA: Cheaper in the long run than living with a broken system.

Libor to FX Cases Drive Surge in Teamwork With Regulators
Suzi Ring – Bloomberg
Britain’s financial markets regulator saw requests for assistance from agencies around the world jump 14 percent last year as investigations are increasingly global, according to a law firm study.
The Financial Conduct Authority received more than 1,000 requests for help in 2013 and nearly one in four came from the U.S., London-based law firm RPC LLP said based on data obtained through a Freedom of Information Act disclosure.

Dollar on Chopping Block as Investors Cut Risk
James Ramage – MoneyBeat – WSJ
Rising tensions in eastern Europe and the Middle East caught currency investors with macroeconomic strategies off guard this week, forcing them to cut positions that subsequently boosted the euro and weakened the dollar.

Currency trading drops in July lull as volatility slumps
Jemima Kelly – Reuters
Average daily volumes in the global foreign exchange market dropped by almost 14 percent in July, data from FX settlement system CLS showed, as traders took their summer breaks and as volatility approached historic lows.

***DA: Bye bye, volatility. See you in September, unless the world continues to destabilize.

BitBeat: Learning to Love a Boring Bitcoin Market
Michael J. Casey – MoneyBeat – WSJ
A flat-lining, stable market isn’t as headline-grabbing as the soaring climb that bitcoin experienced last fall or the precipitous decline it saw in the following four months.

Israel Investor Confidence Seen in Too-Strong Shekel
Gabrielle Coppola and Ye Xie – Bloomberg
For perhaps the best sign of how it’s been business as usual in Israeli markets since the fighting broke out in Gaza, look no further than the shekel.

Indexes & Index Products

Mantra of passive dominance is dangerous
José Luis Jiménez – Financial Times
Why has the rise of exchange traded funds and the death of traditional asset managers become the new mantra in asset management? In my view, it is due in large part to the huge amount of money that ETF groups and their cousins, as well as those who are promoting the efficient market hypothesis, are spending every day in marketing and advertising.

***DA: It is most dangerous to those who make their living off active investment.

Index trackers have taken off but risks remain
Emma Dunkley – Financial Times
Few investment classes have seen the meteoric rise experienced by exchange traded funds in just over a decade. Launched quietly in Europe as the dotcom bubble burst in 2000, ETFs – investment funds that are traded as shares – took off during the financial crisis and have now amassed over $450bn.

M&A indexes getting second look after torrent of deals
Yakob Peterseil –
With global M&A volume rising to its highest level since 2007, investors put more than twice as much money into event-driven strategies in the second quarter of 2014 as they did in the first quarter
Investors allocated more money this quarter to a hedge fund strategy that profits from mergers and acquisitions (M&A) activity than last quarter, even though most merger arbitrage strategies have underperformed the broader stock market so far this year.

Bill Gross’s Total Return ETF Allowed to Trade Derivatives
Mary Childs – Bloomberg
The U.S. Securities and Exchange Commission approved the use of derivatives in Pacific Investment Management Co.’s Total Return exchange-traded fund, allowing it to more closely track the world’s biggest bond mutual fund.


Hedge Funds Are Digging Gold Miners
Tatyana Shumsky And Rob Copeland – WSJ
All that glitters isn’t gold—at least for the investors who are eschewing the precious metal in favor of the companies that mine it. After years spent in the shadow of gold, miners are back in favor, driven by stronger earnings and cuts to mining costs.

Try Doing This With Your Fiat Currency: “Indian man creates $200,000 shirt made out of gold”
Climateer Investing
Well I suppose you could. And depending on the cotton content of the banknotes it might be more comfortable on a hot day in India. And easier to wash although maybe not easier to launder.

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