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A reminder on the extra market downside risk created by ETFs

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As a reminder in markets selling off in recent days, please find a report which touches on the extra volatility created by ETFs on the downside that amplifies market sell offs.

An excerpt of the report is as follows;

CEO Larry Fink of Blackrock, the world’s largest ETF creator, has made it clear that leveraged ETFs (at present 1.2% of total ETF AUM) have the potential to “blow up the whole industry one day.” The argument is that the underlying assets that provide the leverage (which tend to have less liquidity) could cause losses very quickly in volatile markets. To put this in perspective we looked at the Direxion Daily Fin Bull 3x (FAS) 3x leverage of the Russell 1000 Financial Services Index…The point Mr Fink is driving at is…the average daily return is closer to 10x (in both directions) than the 3x it is seeking to offer. This is post any market meltdown. On a daily basis the minimum and maximum has ended up being -1756x to 1483x of the index return, albeit those extremes driven by the law of small numbers of the return of the underlying index. Which suggests that in a nasty downturn the ETF performance of the leveraged plays could be well outside the expectations of the holders.

Stupidity is self regulating

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In HK over the past 7 days and it is fair to say that MiFID2 regulations are surplus to requirements. ‘Tis the season to highlight one’s own relevance. Nailed to the front door of most brokers are appeals to pester clients to vote in the Institutional Investor (II) survey.

Stupidity is self regulating. In a world which enforces  ‘know your client’ (KYC) rules, sell-side brokers use January to chase and destroy what little value added is left over. Sales people and research analysts pan handle them for II votes. Yes even the brokers ranked 13th plead  with clients to rate them as more useful than they really are.

So in reality, instead of trying to help clients make informed judgements to grow funds under management to increase the likelihood of trading liquidity, the broking  community wastes countless silver bullets trying to manipulate a survey that hopefully fools their upper management that the outlook is bright.

The ability to plunge new depths is growing. One analyst from Daiwa took a video of his dancing skills to put on YouTube as a way to gain attention to win votes. To his credit he came in 3rd ranked. Although one could argue his analytical acumen took a back seat to his moon walking.

However nothing beats my former sales colleague who entered the name of a mechanical monkey (named Monkey Marc) as M. Marc in an II type survey. Clients were only too happy to make him the #1 stock picker in Japan. It was only when they went to the award ceremony when the Survey host realized the joke was on them. It went a step further when it was discovered that M. Marc’s mechanical legs tapping on a numeric keyboard allowed him to actually be credited as the best stock picker.

While many in finance play themselves as the consummate professionals, perhaps it is now a given that the II survey now allows clients to consume entertainment without having to fill in lengthy compliance forms to justify it. As the title says – stupidity is self regulating!

LAPD officers prefer crime fighting to virtue signaling

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The LAPD has spent $10.2mn to save the planet with BMW i3 patrol cars. According to CBS “Sources say some [police] personnel are reluctant to use the electric cars because they can only go 80-100 miles on a charge. And the mileage logs we obtained seem to back that up. From April 2016 when the project started through August 2017, we found most of the electric cars have only been used for a few thousand miles. And a handful are sitting in the garage with only a few hundred on them.”

Of course an LAPD spokesperson defended the purchase to save the planet. Seems like those entrusted with law enforcement prefer practicality in the field rather than statements of virtue. Perhaps they should only be used on donut runs.

What next?

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The Queensland Government has decided to remove ‘gender’ from licenses going forward after ‘pressure’ from the LGBTI community.  In what can only be described as a politically correct own goal by the Dept of Transport & Main Roads, surely the best way to pander to all of those minorities would have been to offer the choice of the 63 genders that are available. Imagine the amount of tax dollars we can waste on new sensitivity training for police to make sure that the can ‘protect and serve’ feelings. Or maybe that is the aim to create more state jobs?

What is a poor highway patrol officer (usually operating alone) who pulls over a driver over for speeding on the highway to do? What if he thinks the driver is over the limit when questioning him/her/zie? The bearded driver who looks male can pull out the genderless card and accuse the officer of using the wrong pronoun and request that an LGBT police officer administer any breath test procedure. In fact the driver might just claim an injustice has been served.

So will highway patrols be forced to carry a male, female and LGBT officer on pursuits with a fourth ‘independent observer’ from the Australian Human Rights Commission to ensure that feelings of drivers aren’t hurt?

We keep on being told diversity is our strength. Indeed it would be true were it not for repeated state indoctrination. We only need to look at how celebrating diversity works in places like California where one can be jailed for simply using the wrong pronoun. Welcome to the slippery slope.

At least China has a policy in The Pacific

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Australian International Development Minister Concetta Fierravanti-Wells has attacked China’s aid to Pacific nations. Her argument was that China was lending funds to Pacific nations on unfavourable terms and constructing “useless buildings” and “roads to nowhere” in the region. Even if that were so, doesn’t this expose the Minister’s own inadequate policy? Shouldn’t she be preventing such activity by offering more favorable terms and better advice on infrastructure? Isn’t it China’s business to decide whether it deems such spending a waste?

Fierravanti-Wells said to The Australian,

You’ve got the Pacific full of these useless buildings which nobody maintains, which are basically white elephants … I’ve gone to islands and you’ll be driving along on some back road and all of a sudden you see this Chinese road crew building a road to nowhere and you think ‘hmm, what’s all that about’,”

It is all very well firing pot shots at China for its active Pacific policy but at least it has one. Indeed if the end result is that Pacific nations end up agreeing to China’s influence they do so willingly. The Minister can’t claim that these nations are not happy about the situation. Afterall had the ‘international development’ portfolio team done its homework it could see that China has pursued this policy for decades in Africa, Latin America, Pakistan and the Middle East. Who knew?

China has been a poster child of stepping up and filling the void left by The West. China understands that the nations we won’t deal with on the basis of human rights records, dictatorships and the like make perfect bed fellows which leads to even juicier returns provided said despots get the right ‘incentives’. China is not working to virtues.

How can we be surprised? UN sanctions are slapped on North Korea to bring it to heel. Two weeks later Chinese oil ships are trading with North Korea. No cleaner example of China’s disregard for world opinion. China is a master of strategy. It knows it will be stronger than the US in time. 20, 30 or 40 years  is of little concern. Just get the chess pieces in place. Find vulnerable or willing nations off the radar screen and show them love so they reciprocate in ways that strengthens Beijing’s policy directives.

There should be little surprise with this ‘transactional’ Australian government in allowing this state of affairs to occur. Because Tonga or PNG rate less important than China, Japan or the US in terms of trade dollars we apportion the same relative importance to their strategic value. That is about the level of the thinking.

China has the opposite view. It knows that buying influence in Port Moresby with new roads or bridges allows concessions where they really want them. Naval ports. The Chinese have already got East Timor to agree to a trading port which will accept ‘visits’ from PLA Navy vessels.

Our foreign policy is so poorly thought out that even Obama censured us for leasing a port to China! When we’re getting lessons from Obama on foreign policy what more proof do we want for the clueless ineptitude of our government? We’re too busy trying to bribe electorates with multi billion dollar submarine programs where the contractor isn’t even sure it can design what it promised, not to mention arriving in 50 years!

So the Minister best just understand the world we live in. With 5 prime ministers in 10 years is it any wonder we can’t formulate a coherent long term strategy? Australia can moan all it likes about China but its the smug nature of our political class who need to wake up. Complaining to PNG about it’s wealthy sugar daddy is unlikely to find a soothing voice if we offer nothing in return.

By the way, China will only be inspired to keep at it. If anything we’ve only highlighted how our of touch we are in responding and that must bring smiles all around.