- EconMatters YTD Returns 2016 (Video)
By EconMatters
Here are EconMatters results for 2016, we actually struggled relatively speaking in the first quarter as we were still adjusting our strategies to bring down the vol risk in the portfolio, but after April with some slight adjustments, we have been kicking ass and taking names, and our equity curve graph (which will remain private) as it gives away some insight into our methodology to competitors, is just a beautiful piece of artwork and shall be framed at year end. Yes it is possible to still blow away the benchmarks!
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- Obama Enters Media Wars: Why His Recent Attack On Free Speech Is So Dangerous & Radical
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Control of the news media is an instrumental, key feature to any totalitarian government. In contrast, the primary reason this experiment known as the United States has lasted so long under relatively free conditions is due to the preservation of free speech (and press) via the First Amendment to the U.S. Constitution.
In case you haven’t read it in a while, here’s the text:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.
Nowhere in there do I see an exception for “conspiracy theories,” but apparently Constitutional scholar Barack Obama has an alternative interpretation.
As reported by AFP:
Pittsburgh (AFP) – President Barack Obama on Thursday decried America’s “wild, wild west” media environment for allowing conspiracy theorists a broad platform and destroying a common basis for debate.
Recalling past days when three television channels delivered fact-based news that most people trusted, Obama said democracy require citizens to be able to sift through lies and distortions.
“We are going to have to rebuild within this wild-wild-west-of-information flow some sort of curating function that people agree to,” Obama said at an innovation conference in Pittsburgh.
“There has to be, I think, some sort of way in which we can sort through information that passes some basic truthiness tests and those that we have to discard, because they just don’t have any basis in anything that’s actually happening in the world,” Obama added.
“That is hard to do, but I think it’s going to be necessary, it’s going to be possible,” he added.
“The answer is obviously not censorship, but it’s creating places where people can say ‘this is reliable’ and I’m still able to argue safely about facts and what we should do about it.”
The above may sound good on a superficial level to people with zero critical thinking skills, but even the most elementary analysis exposes it as the obvious and dangerous attack on free speech that it is. Let’s zero in on a few things he said in closer detail.
He describes the media environment as the “wild, wild west.” Kind of sounds like an environment in which people are free to say, publish or record whatever they want, and let the chips fall where they may. Seems consistent with the first amendment to me.
He notes that there needs to be “some sort of way in which we can sort through information that passes some basic truthiness tests and those that we have to discard.” This sounds good on the surface because, after all, who doesn’t want truth? The problem lies in the fact that governments can and do lie all the time about stuff of monumental significance. Let’s take the Iraq war for example. As I discussed in August’s post, Questioning Hillary’s Health is Not Conspiracy Theory:
Of course, the New York Times rendering judgment on those pushing conspiracy theories would be downright hilarious if it weren’t so sad. For example, the paper itself exhibited no such restraint when it came to peddling U.S. government conspiracies about Iraq in the run up to one of the most inhumane, unnecessary and destructive foreign policy blunders in American history. In fact, the paper was ultimately so embarrassed by its own behavior, it issued a statement in 2004 titled, FROM THE EDITORS; The Times and Iraq.
Meanwhile, there were millions of people in the “wild west” of opinion making yelling and screaming that the government was misleading the public about Iraq in order to go to war. So who got it right, the New York Times, or the wild, wild west?
If Obama had his way, those people who asserted that the public was being mislead into the Iraq war would have been dismissed as “conspiracy theorists” not worth paying attention to since they refused to agree with government “facts.” Obama’s position is such an obvious authoritarian slippery slope, one has to ask why he would dare go so far.
My view is that there is a full on panic occurring right now at the very top of America’s shadow government due to the fact that the public is no longer falling for corporate media propaganda. Once again, let’s turn to something I wrote in the post, Questioning Hillary’s Health is Not Conspiracy Theory:
As I look at the landscape in 2016 to-date, I observe emergent signs that alternative media is finally beginning to take over from the legacy mainstream media when it comes to impact and influence. The mainstream media (unlike with John McCain in 2008), had decided that Hillary Clinton’s health was not an issue and chose not to pursue it. Many in the alternative media world took a different position, and due to mainstream media’s failure to inform the American public for decades, the alternative media drove that issue to the top of the news cycle. That’s power.
This is an incredibly big deal, and the mainstream media intuitively knows what it means. It means a total loss of legitimacy, prestige and power. All of which is well deserved of course.
So here’s the bottom line. 2016 represents the true beginning of what I would call the Media Wars. Alternative media is now capable of driving the news cycle. Mainstream media now has no choice but to fight back, and fight back it will. It will fight back dirty. This is going to get very ugly, but by the time the dust has settled, I think much of the mainstream media will be left as a shell of its former self.
By ugly, I didn’t expect the President of these United States to so publicly and radically advocate in favor of free speech restrictions, but here we are.
Let’s conclude by tackling another portion of his talk, where he states, “the answer is obviously not censorship, but it’s creating places where people can say ‘this is reliable’ and I’m still able to argue safely about facts and what we should do about it.”
Who exactly is supposed to be granted the power to create such spaces and verify things as factual? We know that government lies all the time, yet when they lie, they present such falsehoods as fact. It is the duty of the people to decide what to believe and what not to believe. This is not the job of government, or anyone else for that matter.
Yes, it’s true that there’s an unbelievable amount of garbage out there on the internet, but yet we manage. What seems to be happening here with Obama is a not so subtle attempt to blame the rise of Trumpism on alternative media as opposed to the actual culprit, his oligarch coddling policies. It’s a sign of pathetic desperation from a man who has completely and utterly failed the American public while protecting the rich and powerful. It’s an ugly manifestation of an executive who cannot come to terms with the justified anger of a public who feels betrayed by him. Sure a compliant, preening and entirely propagandist media would make Obama feel a whole lot better about his miserable legacy, but we shouldn’t sacrifice the first amendment to achieve this.
For more on this topic, see:
Hillary Clinton Enters the Media Wars
- September Global Auto Sales Hit Record High Thanks To China's New Car Bubble
In recent months the US auto industry has been bombarded with a barrage of bad news: starting with Ford’s disastrous August sales when the company admitted “sales have reached a plateau“, continuing to the surge in delinquent subprime auto borrowers hitting nearly a 7 year high as the marginal creditworthy car buyers disappears, then noting the record $4,000 in industry-wide new car incentives in September as preventing a plunge in last month’s auto sales, and recalling last week’s downgrade of the US auto sector by Goldman which said that the US “cycle has peaked“…
…one would think that global auto sale would follow a similar downward trajectory. One would be wrong.
According to data by JPM, global auto sales jumped 3.5%m/m in September on the back of strong gains in July and August. The pace of sales now stands at an all-time high of 78.0 million units per month, annualized. In whole, auto sales jumped 16.2%ar in 3Q (%3m/3m basis). On a %3m change basis, the move is an even more impressive 27% annualized through September.
The first warning light, however, that this number is fake is that as JPM admits, it “contrasts with a more subdued pace of overall consumer goods spending, which is looking to have taken a breather starting in August.
The second warning is what we noted earlier in the week, when we reported that as one Chinese bubble has popped (again), namely the housing one, the country is now steering its consumers into the latest and greatest of Chinese asset bubbles: autos. JPM confirms as much warning that “China’s influence on the recent surge in auto sales is large and this suggests some caution is warranted in taking too large a signal.”
Actually it’s not a warning light: it’s a full bore siren. According to the latest data, of the impressive 4.4mn unit rise in global auto sales since June, China alone contributed for 84% of this global increase, or 3.7mn units.
How did China manage to blow such a major bubble so fast? JPM explains that as the largest auto sales market in the world, China witnessed a spur in auto sales over the past year. However, this is not due to organic demand, and is almost entirely to a tax cut (by half) on small engine cars implemented by the government in September 2015. Since the cut, China’s auto sales have increased by 33%. Think cash for clunkers on trillions of debt-funded steroids.
And just like in the aftermath of the financial crisis when China’s unprecedented debt growth spree kept the world comatose out of cardiac arrest, it is the massive Chinese demand impulse, which will shortly fade, that is pushing the world forward if only for the time being. As JPM admits, excluding China from its global aggregate paints a different picture. Auto sales in this group basically did not grow in 3Q. Much of the weakness came from the EM ex China group, where auto sales fell almost 5%ar in 3Q. DM auto sales also did not impress in 3Q with a modest 2%ar move up. Large declines in 3Q auto sales were seen in Japan, Sweden, Norway, Korea, Brazil, Russia, and Czech Republic, with Emerging markets and oil producers such as Brazil and Russia impacted the most.
Finally, here are JPM’s thoughts on the US:
Zooming in on the US, auto sales have stabilized over this year despite a solid gain last quarter. Year-to-date, auto sales are up only 1.4%. Nevertheless, at 17.7mn units (saar), US auto sales remain robust. And with the balance of auto loans peaking recently above $1 trillion, there are growing concerns about asset quality. For now, delinquency rates are low. However, given the 35% rise over the past four years in low-credit-score auto loans, the risks are increasing of a more serious deterioration in the event of an economic slowdown.
This is precisely the base-case scenario that prompted Goldman Sachs to downgrade the US auto sector and to warn that the US auto cycle has finally peaked. As for record global auto sales, the question now becomes how much longer China can carry the world on its shoulders as it redirects its bubble-creating might to yet another asset class, and how the global manufacturing base will respond when this latest bubble shortly bursts too.
- Statistician Warn Of "Systemic Mainstream Misinformation" In Poll Data
Submitted by Salil Mehta via Statistical Ideas blog,
Antagonism isn't perpetual
If you recently glanced at the polls and the election markets, then you would be forgiven to believe that a landslide election is looming. It's likely not, and the spreads have the potential to revert in surprising ways between now and Election Day. The drumbeat of negative news against Donald Trump may not cause further damage. We've discussed numerously, starting on October 11 and October 12, that Hillary Clinton's runaway spread would revert (here, here, here, here).
Of course that's a stand taken against a popular headwind, but also an opportunity to make money on an election bet that is mispriced. For example, when we wrote the reversion article, the betfair ask that Mr. Trump's popular vote could remain in the 40's% was only priced at 1:6 odds. Nate Silver's 538 site also reflected this, as shown below. But we -and other academic statisticians- knew that this was faux election probability, and advised thousands to remain vigilant against planned mainstream misinformation.
Incidentally, today's betfair bid is 20% higher; not many investments have risen 20% in just the past couple days. And the wager could explode to 500% profit, exposing how steeply deluded the polls have been. This article isn't merely about gambling, but goes to the heart of what makes polls different among one another, and across time. And what should we be cautious of when interpreting the information, while almost never reading (and sometimes not having access to) all the underlying probability details of the poll generation? In particular, we'll delve into the inconspicuous L.A. Times poll here, where for much of the past month they showed Donald leading Hillary. How did they come to that, and what value is there in paying attention to alleged outliers?
Recently the New York Times (NYT) wrote a piece that the USC/L.A. Times (LAT) poll was biased against Hillary Clinton by at least 4 percentage points, through the exaggerated sampling of one Black Chicago youth. The NYT thesis for sampling issues was not based on general theory at all, but only because the survey respondent was a feverish Donald Trump supporter. Apparently the LAT has always been a good pollster until this one Black man became a Trump supporter; now the LAT poll is suddenly comprehensively terrible. Right… Now the NYT was both smart and correct in pointing out the seeming anomaly, but also misdiagnosed the root cause of the puzzle.
The LAT should retain their entire sample, and not simply alter responses because the pollster doesn't like what he or she hears. Removing select responses has that same effect, and this is partly why mainstream pollsters have systematically unfavored Republicans in nearly 2/3 of elections in the past several decades, where there have been a meaningful surprise in the general election outcomes. And in every case where such a reversal of fate has led to an actual victory for the October polling-laggard, it was always a Republican who won. This should give everyone pause to consider the strength of these "scientific" polls. We can often see something be misrepresented, yet be masquerade as disciplined science.
Now the LAT pollster allows for some interesting statistical features that are not in other polls (many of which follow our blog). For example, it allows the survey participant to partially self-weigh their own response, and factors in his or her own prior voting record. These are worthy developments in most cases, including the case here of the 19-year old Black Trump supporter. Polling has to fill in a lot of gaps, particularly this year where there are a greater than normal number of undecideds and non-responders. This increases the error, not lessens it (per our viral article here read by >100 thousand including senior advisers of both parties). And the fact that most other polls do not scale their survey responders accordingly, equally leads to a higher than expected favorability (based only on momentum) for those who for now agree with Ms. Clinton more so than Mr. Trump.
Of course we know across all polls this year there is a perception that Hillary has an polling edge when it comes to "perceived" favorability or social desirability (it's been noted that 10-15% of people have lost a friend due to the 2016 election); though this conflates with the overall bias going back many decades and so it's unclear how much additional bias comes from that. But the NYT overestimates the overall edge that the LAT has if this one Black youth is completely off in his responses; it is only about 1-2 percentage points. Not enough to close the nearly 5-10 percentage point difference the LAT has with the rest of the mainstream polls. The NYT is correct that the overweighting by LAT may exist however, in that this one individual is weighted a little more relative to the typical person. But this does not negate the data point altogether. Does anyone credibly believe that not a single Black person is going to vote for Donald Trump?
The bottom line is that polls on the fringes (e.g., the LAT and to a lesser degree only the trends in the conservative-advocating Rasmussen both showing Mr. Trump leading for much of the past month) should be taken a little more seriously due to the informative value they provide in how the many undecideds and non-responders will ultimately vote. In historical polling data people tend to make up their mind for candidates, and rarely does it lead to further subtractions from current polling levels. It is doubtful therefore that somehow any new negative information about Donald would compel someone, at long last in these final weeks, to ultimately switch allegiances. And while the theory of poll of polls works great to reduce the variance of errors, it does nothing to counter any systematic errors we may see hurtling through in the current election cycle. This is a significant lesson that remains lost among political hacks keen to simply analyze the data.
Another note is that you should be wary of taking too seriously the political advice of people who so recently badly errored in the Primary elections! This is not to cast a spotlight on any one individual, since the entire field of data journalism just saw a catastrophic result over the past year. But it's clear from the polling and the prediction betting market levels that the grave lessons from the past have not yet been learned. This summer's Brexit vote was just another example of election-eve overconfidence by pollsters and bookies. But stateside we do see the promotion of false confidence on preposterous polling statistics. The media ratings pursuit must inherent some blame, since news demands easily digestible insight that crookedly beguiles their patrons. And if we expose the overshadowing uncertainty surrounding these election predictions, then no one would venture into paying further attention. Even more reason for you to pay some attention to the outlier polls, especially this year!
- Russia Slams "Unprecedented, Insolent" US Cyber Threats, Vows Retaliation
In a striking report released on Friday night by NBC, the Obama administration was reportedly “contemplating an unprecedented cyber covert action” (it remains unclear how the action is covert if Biden announced it to the world via an interview with Chuck Todd), a “wide-ranging clandestine cyber operation designed to harass and “embarrass” the Kremlin leadership”, in retaliation for alleged interference in the American presidential election, and has asked the CIA to draft plans for a “wide-ranging “clandestine” cyber operation designed to harass and “embarrass” the Kremlin leadership.”
As we reported last night, Vice President Joe Biden said that Washington is ready to respond to hack attacks allegedly conducted by Russia and designed to interfere with the upcoming US elections.
“Why haven’t we sent a message yet to Putin,” Chuck Todd, host of the “Meet the Press” show on NBC, asked Joe Biden.
“We are sending a message [to Putin]… We have a capacity to do it, and…”
“He’ll known it?” Todd interfered.
“He’ll know it. It will be at the time of our choosing, and under the circumstances that will have the greatest impact,” the US vice president replied.
The NBC sources did not elaborate on the exact measures the CIA was considering, but said the agency had already begun opening cyber doors, selecting targets and making other preparations for an operation. “Former intelligence officers told NBC News that the agency had gathered reams of documents that could expose unsavory tactics by Russian President Vladimir Putin”, NBC added.
To be sure, this “leak” of what effectively amount to a cyberwar warning was a calculated move meant to provoke further escalation in tensions between the two nations and a trial balloon to gauge Russia’s response. The response came this morning Putin’s spokesman Dmitry Peskov said that “US aggressiveness is growing, and threats to carry out cyberattacks against Russia are unprecedented” adding that Russia will take “precautionary measures.”
“The fact is, US unpredictability and aggression keep growing, and such threats against Moscow and our country’s leadership are unprecedented, because the threat is being announced at the level of the US Vice President,” Peskov told RIA Novosti cited by AFP. “Of course, given such an aggressive, unpredictable line, we have to take measures to protect our interests, somehow hedge the risks,” he said, adding that “such unpredictability is dangerous for the whole world.”
Kremlin aide Yuri Ushakov vowed Moscow would respond to any US cyber attacks, saying such threats were “borderline insolence”, the news agency said.
Accusations against Russia have become louder in recent days with WikiLeaks releasing thousands of “Podesta emails,” exposing Hillary Clinton’s connections to Wall Street and controversial views on Syria, among other things. Numerous left-leaning mainstream media outlets have been quick to accuse the Kremlin of teaming up with WikiLeaks, allegedly providing it with massive amounts of inside scoops to post. The evidence-free allegations have been denied both by Moscow and by WikiLeaks.
Responding to accusations last week, the Russian presidential press secretary mentioned that “tens of thousands of hackers” try to break into the sites of Russian officials on a daily basis, but this never prompted Moscow to point a finger at Washington.
- Obamacare Gives Middle Class A Choice: Buy A House Or Get Health Insurance
The following tweet from Great Stockpix captures not only the reason why the US economy continues to slow down as consumer spending across virtually every category deteriorates, as shown recently courtesy of Bank of America…
… but also distills the “choice” president Obama has given to the middle class: buy a house or get health insurance.
What I love about Obama is the choices he’s given me. I can buy a $400,000 house, OR I can have healthcare! Hope and Change baby!! pic.twitter.com/zdUY4sl7yl
— Great Stockpix (@Greatstockpix) October 12, 2016
* * *
Oh, and as a reminder, the next Obamacare “price shock” is due in just 15 days, at the worst possible time for Hillary Clinton: one week before the elections.
- Canaries 'In Extremis'
Submitted by Robert Gore via StraightLineLogic.com,
Nobody “important” will admit it until after the election, but the resumption of the depression is at hand.
Most people’s strongest memory of the last financial crisis was the September 2008 bankruptcy of Lehman Brothers. However, thirteen months prior to that, August 2007, two Bear Stearns’ mortgage hedge funds went bankrupt. That was the bell tolling for the housing market, the mortgage securities market, and—because of the leverage and the interconnections—the global financial system itself. The Dow Jones Industrial Average would not make its high for another couple of months, but for those who knew what they were looking for, the Bear Stearns’ bankruptcies signaled the impending reversal in financial markets and the economy.
Sometimes one has to see the big picture, and sometimes looking at a host of smaller pictures is more worthwhile. While housing and mortgage finance were the epicenters of the last crisis, there will probably be no single identifiable catalyst for the next one. Not because there are no central-bank sponsored debt-driven bubbles out there, but because there are so many of them, all over the world. Multiple coal mine canaries are in extremis and they’re sending the same message as the Bear Stearns’ bankruptcies did.
If the US real economy is not already in a recession, it’s on the verge.
Since 2014, the economy has lost 32,000 manufacturing jobs, while adding 547,000 food service jobs.
Factory orders have declined on a year-over-year basis for 22 straight months, the longest non-”official” recessionary streak in history.
As of August, the Cass Freight Index of transactions by large, non-bulk-commodity shippers has fallen year-over-year for eighteen straight months.
Orders for new long-haul trucks have been in a twenty-month downtrend, and orders last month were the worst for a September since 2009. Volvo Trucks North America, Freightliner (a unit of Daimler), Navistar, and Paccar have announced or implemented layoffs this year.
The Merchandise World Trade Monitor topped out in January, 2015 and July’s number takes it back to the reading for September 2014.
The world’s seventh largest container carrier, South Korea’s Hanjin, recently filed for bankruptcy. Closures and consolidation are the orders of the day for the remaining shippers. Bear markets, overcapacity, and gluts in a range of commodities, other raw materials, intermediate goods, and finished goods garnered a lot of headlines last year and early this year. The headlines have faded but not the underlying conditions. It will take years—far beyond the media’s attention span—and substantial pain before those conditions are remedied or even ameliorated.
Only in Wall’s Street’s bizarro world can the goods economy be dismissed as a small part of the overall economy, which is supposedly driven by finance and services. What does the finance industry finance and the service economy service? In many instances—this will come as no surprise to anybody but Wall Streeters—manufacturing, mining, oil extraction and refining, shipping and trade; all the sectors that are taking gas. Also no surprise: real economy deterioration affects finance and the rest of the service economy.
In August, commercial and industrial loans made by US banks fell for the first time since October 2010. The automobile sector has been a bright spot in the economy, but the lending, particularly subprime lending, that has fueled sales is unraveling. Delinquencies and defaults are rising for subprime auto loans. The delinquency rate is rising even for prime auto loans, although the absolute rate remains low. The aggregated earnings of companies in the S&P 500 have been down for five straight quarters, and will most likely be down for the quarter just ended. In 2015 and all but certainly for 2016, those companies have paid out more in share buybacks and dividends than they have earned.
US commercial bankruptcy filings were up 38 percent year-over-year in September. For the first nine months of 2016 they were up 28 percent from the same period in 2015. Bankruptcy is no longer confined to the oil patch and mining industry. Notably, filings by retailers and restaurants, two bulwarks of the service economy, are increasing. In the last two weeks, four restaurant chains have filed. Say good-bye to that industry’s stellar job growth.
The recovery since 2009, such as it is, has bestowed most of its meager blessings on those in the top 1 percent of income and wealth. Here’s another inescapable reality for Wall Streeters: a central bank exchanging its conjured-from-thin-air fiat debt scrip for the government’s thin-air fiat debt scrip does not, cannot, produce anything of real economic value. It drives down the interest rate on the government’s fiat debt and it provides a windfall for the 1 percenters who can borrow at low or negative rate and propel asset prices. For the rest of us it’s inconsequential at best, but generally deleterious.
The inconsequentiality of debt monetization is confirmed by the real world details enumerated above, which indicate the weakest so-called recovery on record is faltering and will soon end, if it has not already done so. There is, of course, no chance that even the faltering will be officially recognized before the election. SLL has maintained that the period since 2009 is merely an interlude in an ongoing depression, similar to respites during the Great Depression. By discouraging true savings, adding to the debt pile, and driving down the return on investment, debt monetization has hindered rather than helped the real economy. The anemic growth rate since 2009 is not despite skyrocketing government debt and soaring central bank balance sheets, but because of them. FDR and his hapless New Dealers would be proud.
Weakness is even percolating up to the rarified ranks of the 1 percent. Rents are falling and high-end real estate sales slowing in Silicon Valley, the Bay Area, New York, and Houston, formerly pockets of economic strength. The art market, especially for “art” that most of us don’t call “art,” has noticeably softened. The demand for luxury goods isn’t what it used to be, and many purveyors have issued revenue and profit warnings. Those markets have been propelled by Chinese, Russian, and Arab buyers, but home economies are facing challenges and they’re pulling in their horns.
The “donut” of the global economy is history’s greatest debt bubble, fueled by governments and central banks. The unimportant “hole” is whatever critical hot spot ultimately sends markets and economies down the drain. Who knows which crisis will be assigned the “blame” for the impending cataclysm. The odds-on-favorite is the looming European banking crisis, but here are plenty of other contenders—a pension fund or insurance company driven to insolvency by ZIRP and NIRP, Chinese debt, an upside break out in Middle Eastern or Ukrainian hostilities, political turmoil in Europe or the US—take your pick. No matter which possibility proves out, be prepared. Things will get very ugly, very fast.
- Europe Launches Largest "Cyber Wargame" In History As Threat Of Cyber Terrorism Looms
Just as the Obama administration announced plans to provoke a cyber war with Russia over their alleged ties to the hack of Hillary’s emails, Europe is launching the biggest “cyber wargame” in history to prepare for emergency responses to power cuts, banking outages etc. According to a press release posted by the European Union Agency for Network and Information Security (ENISA), the war games will include various scenarios including power outages and attacks on various national and governmental agencies.
Today marks the climax of this realistic scenario which thousands of experts from all 28 EU Member States, Switzerland and Norway are facing in Cyber Europe 2016 – a flagship activity organised every two years by ENISA, the EU Agency for Network and Information Security.
Cyber Europe 2016 (CE2016) is the largest and most comprehensive EU cyber-security exercise to date. This large-scale distributed technical and operational exercise started in April 2016, offering the opportunity for cybersecurity professionals across Europe to analyse complex, innovative and realistic cybersecurity incidents. On 13th and 14th of October ICT and IT security industry experts from more than 300 organisations, including but not limited to: national and governmental cybersecurity agencies, ministries, EU institutions as well as internet and cloud service providers and cybersecurity software and service providers will be called upon to mitigate the apex of this six-month long cyber crisis, to ensure business continuity and, ultimately, to safeguard the European Digital Single Market.
Cyber Europe 2016 paints a very dark scenario, inspired by events such as the blackout in an European Country over Christmas period and the dependence on technologies manufactured outside the jurisdiction of the European Union. It also features the Internet of Things, drones, cloud computing, innovative exfiltration vectors, mobile malware, ransomware, etc. The exercise will focus on political and economic policies closely related to cybersecurity. This also takes into account new processes and cooperation mechanisms contained in the Network and Information Security (NIS) Directive. For the first time, a full scenario was developed with actors, media coverage, simulated companies and social media, bringing in the public affairs dimension associated with cyber crises, so as to increase realism to a level never seen before in cybersecurity exercises.
Per ZD Net, the cyber war games were launched back in April and have been building up to a “major cyber security crisis with a series of fictional attacks on European digital networks.”
More than 700 security experts are battling a fictional cyber crisis featuring power cuts, drones and ransomware as part of the European Union’s biggest cyber defence exercise to date.
Cyber Europe 2016 kicked off back in April, as since then has been simulating the build up to a major cyber security crisis with a series of fictional attacks on European digital networks, culminating in this week’s finale, where security industry experts from more than 300 organisations work together “to ensure business continuity and, ultimately, to safeguard the European Digital Single Market.”
“Computer security attacks are increasingly used to perform industrial reconnaissance, lead disinformation campaigns, manipulate stock markets, leak sensitive information, tamper with customer data, sabotage critical infrastructures,” warns the scenario.
For the first time ever the European cyber war games will include a full suite of actors simulating media coverage as well as company and social media reactions.
ENISA said the exercise features the Internet of Things, drones, cloud computing, innovative exfiltration vectors, mobile malware and ransomware. For the first time, it said, a fully fledged story was developed with actors, media coverage, simulated companies and social media, so as to make the scenario as realistic as possible to those participating.
Because cyber defence is seen as an pressing international issue there are now a number of these large-scale exercises: NATO runs ‘Locked Shields’, which involves around 550 people across 26 nationalities, and is based in Tallinn. The US runs the ‘Cyber Guard’ event every year, which this year saw around 1,000 players dealing with a fictional attack on an oil refinery, power grids, and ports.
Depending on how far the Obama administration is willing to go with threats to launch a cyber attack against Russia we could have some very real data for ENISA to analyze in the not so distant future about how a country actually responds to a “cyber war.”
- The "World's Most Bearish Hedge Fund" Reveals Its Next Big Short
We have previously dubbed Shannon McConaghy’s Horseman Global the world’s most bearish hedge fund for one reason: as recently as a few months ago the fun had taken its net equity short position to an unprecedented -100%. At the end of September, it had modestly trimmed this short to a more modest -87.5%
What is perhaps just as impressive is that despite the fund’s massive bearish bias, if only in equities, it has managed to keep its YTD return virtually flat, with more profitable than unprofitable months so far in 2016. The offset? A whopping 66% gross long position in bonds.
And while we have recently documented Horseman‘s pessimistic outlook on Japan, when it comes to the most bearish hedge fund in the world there are shorts, and then there are shorts. In its latest, October, letter to clients the fund reveals what it believes may be just one example of the latter, having taken its exposure in the sector to a massive -20%, and what – if true – could be the next “big short” idea.
This is what Russell Clark, CIO of Horseman, said in its latest letter to clients:
You fund made 1.44% net this month, with gains from the short book and the currency book offset by losses from bonds.
“I know he is a good general, but is he lucky?” is apparently a quote from Napoleon. I often think about this quote when looking at the investment management industry. There are numerous successful fund managers who I have looked at and met, who I would describe as more lucky than good. There are far more fund managers I have met who I would describe as good, but unlucky. In fact, the market will almost by definition create more unlucky managers than lucky managers, as almost all jobs in fund management tended to be created at market tops.
This is quite well known, and it is why most investors are always try to invest where no one else is, in some bombed out sector that lacks excitement. While I understand this, it has two very major problems. Firstly, how can you be sure it’s totally bombed out? As my first boss pointed out to me, the difference between a stock that has fallen 80% and a stock that has fallen 90% is 50%. Secondly, liquidity at lows can mean you will not be able to exit for many years.
From my point of view, why don’t we try and do the opposite? Pick out sectors that have been fashionable with managers that have been in the right place at the right time, and then short sell what they own. It has two big benefits. First I find timing this to be much easier. And second, at the top of the market liquidity is plentiful. The only issue is you have to be able and willing to short sell.
So how do you pick a sector or strategy that is at the top of the cycle? Perhaps the best sign of all is a fund that has grown assets rapidly. In the US, I find funds that have reached 20bn in AUM from 5bn in AUM within one or two years are typically great places to look. I feel that when a fund manager grows that quickly, they are typically focusing on maximising management fees over performance.
So what funds have we been looking at recently. As detailed in my recent note on Japan based US REIT funds, these funds look particularly egregious to me. Furthermore, they are raising assets even though US REITs in Yen terms have gone nowhere in the last few years. I find this an exciting area to short, and we have taken this sector to 20% of the fund this month. I find there are a number of equity income funds that have also grown rapidly over the last few years, and I am looking carefully at their long positions for short ideas.
My other observations about fund management has been that investors are pulling out of active strategies and buying passive strategies. There are good reasons for this, as the unpredictable shifts in momentum in the markets have caused active fund management to underperform significantly. However, it feels to me that passive strategies have grown too fast too quickly. I think active fund management is about to have its day in the sun.
Given that the Horseman Global fund is short equities and long bonds, that is about as active as you can get. Or in other words, I am getting bullish on bearishness!
Clark then gives the following drilldown on the US REITs sold in Japan to justify his bearish stance:
This month profits came from the short portfolio, in particular from the European and Japanese banks, automobile and consumer staples sectors.The long portfolio incurred a modest loss.
In Japan one perk of getting old is a gift of a silver cup from the prime minister in the year you celebrate your 100th birthday. As the Japanese population is aging, almost 32,000 people were eligible to receive the gift this year, up 4.5% from last year, the government decided to present cups made of silver plate rather than sterling, this year, reducing total spending on the gifts.
The birth rate in Japan has been low for many years (1.4 per woman versus 1.9 in the US and the UK) and the country has very little immigration. As a result the population is ageing. According to the estimate by the Internal Affairs and Communications Ministry, the ratio of people 80 or older accounts for 7.9 percent of the total population, which is more than the entire population of Sweden. The National Institute of Population and Social Security Research forecasts that people aged 65 or older will account for 36.1 percent of the total by 2040. For more information on Japan’s depopulation please refer to Shannon McConaghy’s notes entitled ‘South West Japan Trip’. In our opinion depopulation is a major deflationary force as it suppresses domestic demand.
The generation of 21-year-olds entering the workforce is the first to have grown up in a broad state of deflation. Since their birth year in the 1995 residential land prices have fallen 47% including a fall over the last year. With the ratio of abandoned houses expected to rise from 16% to 28% by 2033 it is likely that land prices will continue to fall. With real estate making up 23% of the core consumer price index it is hard to see sustained inflation.
Deflation has also suppressed wage growth, with average monthly earnings falling 8% from Yen 315,000 in 1996 to Yen 289,000 in 2015, the most recent August data shows another decline in average monthly earnings YoY. In turn, tumbling expectations of future security have fuelled savings. A student from Tokyo recently interviewed by the FT said “I often surprise myself. I am more conservative than my grandmother, she lived in a time of war.” Another student said: “Deflation lives in our minds and has become normal. I am sure that if you gave me Y100,000 now, I would save 99 per cent of it.”
The Bank of Japan adopted ‘Quantitative Easing’ some 15 years ago. The resulting low domestic interest rates, have fuelled the ‘Carry Trade’, a strategy in which a Japanese investors seek foreign denominated assets that offer higher yields than domestic assets. But ‘Carry Trades’ are inherently unsustainable as they are founded on the belief that currency rates over time will not adjust back to reflect relative inflation and interest rate differentials. Examples include Japan’s overseas investments into Australian dollar assets before the Global Financial Crises which swiftly lost money as the currencies corrected.
US-Reits sold in Japan have seen large inflows from Japanese investors recently as they offer ~25% yields. In our opinion they are riskier than generally perceived, please refer to Russell Clark’s note entitled ‘Japanese US REIT funds and the buy case for Yen’ and ‘Japanese US REIT Fund – an update’. We expect Japanese fund flows into US REITS to reverse at some point. Over the past few weeks we have built a 17% short position in US REITS. We remain positive on the Japanese Yen relative to the US dollar as carry trades collapse.
While Horseman is clearly bearish on Japan, however, its biggest net short exposure remains in the US, where it has a nearly -40% net position.
Finally, while hardly known for its longs, here is the breakdown of the fund’s Top 10 long positions.
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