Clinton Baker No Comments

Robots, Black Boxes & Algorithms…is the market wrong?

I for one have been long questioning the use of robots black boxes and algo’s in the financial markets. Is this still a fair market? These robots or algo’s can earn billions of dollars a year through buying and selling within milliseconds in array of financial instruments. For a quick analogy as to how much impact this type of environment effects even the most seasoned investors is staggering, there are many managers and just to name one you might know more publicly is carl Icahn. Carl and many other managers have underperformed the market the last 2 years running by around 10-20 percentage points per year. These are successful managers who have different styles and processes and have long been successful. As someone begs to differ, how is it possible that all these active managers have got stupid all at the same time? Is it that the markets wrong?

As others have stated and argued we are in one of the longest running bull markets in history with roughly over 3300 days without a 20% correction in the S&P500, plus the lowest interest rates ever seen. Many have not seen these trading conditions / environment before, period! There are many problems with these conditions created by robo advisers, but in this article I only want to address a few. The first being, that we no longer have price discovery in a free market and haven’t for sometime. It is crucial that fair value is determined by buyers and sellers and not machines with no intrinsic perception of real value. These robots and algo’s do not have any perception of price discovery or value. Most are programmed to buy or sell at certain prices or conditions regardless of value.

For example, the SNB is buying U.S. equities and has thus accumulated thousands of positions most of which are long U.S. equities. These securities are being bought on the basis that these are major holdings in ETF’s and have a certain market capregardless of their value. Not only are central banks buying stocks unheard of but doing so at an unprecedented level. When the SNB started buying (continuously) through 2015-2016 their positions where roughly $34 billion dollars a year into U.S. equities, they’ve kept buying and the amount roughly doubles from YoY through 2016-17.

What the SNB have done is let an algo lose and it just keeps buying! Apparently its even buying Iraqi equities because its programmed to do so through Cusip  but the programmers didn’t know that if the Cusip number is proceeded by a letter its not a U.S security but is traded in the U.S., thus the SNB has been buying Iraqi securities regardless of their real value or risk factor. The Swiss national bank used to be strongest banking system in the world until the effects of the financial crisis took its toll. The Swiss currency used to be backed by substantial gold holdings, now it seems the SNB or CHF is backed by the likes of FAANG holdings and such.

The Bank Of Japan have also been buying their stock market which is notoriously badly constructed, pumping billions into the Nikkei and such ETf’s. Again, this is unheard of and quite scary. Consider the fact that these central banks can basically print as much money as is needed.

My point to all this is, are we having the longest running bull market because the robots & algo’s are just buying this market without any perception of value? If one where to look at the weighting’s of the indexes and the amount of money that has flowed into ETF’s and equities in general it could produce a dangerous and unforeseen reaction if a correction starts to show through. The algo’s robots and black boxes could cause a serious liquidity problem and the market could sell off very aggressively. What would the central banks balance sheets look like after that and what levels could the markets sell off to?

One thing we can most likely be sure of is that the banks institutions and billionaires who profit from these super computers trading for them will put up one hell of a fight. Do you think there is something fundamentally wrong with this market if even the most successful seasoned not profit from these times? What would the market be like if you we all had robot advisers or algo’s to trade for us? Surely that model can not work? Let us know your thoughts.

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Clinton Baker No Comments

Dollar bills take over. Sorry I mean bears my bad….

So dollar has taken a whack of late providing some much need relief to dollar debt holders,I guess this wasn’t a surprise considering its impressive run. With the fed tightening and the US economic indicators showing signs of cooling or at least pointing toward more challenging times which has long been echoed throughput the financial community for many months, many have reconsidered such bullish or optimistic positions.

USD Weighted Basket

Bitcoin has smashed many expectations over the last few weeks hitting more than $2700 per coin, this all contributes towards a lower dollar. The lack of faith in the worlds #1 reserve currency may be fading or at least feeling some real pressure because some very interesting things have been occurring in the world of crypto currencies. For example the Winklevoss brothers tried to seek approval for the first ever Bitcoin ETF from the SEC. When the news began to circulate Bitcon rallied, but this was short lived once it was known the SEC rejected the Winklevoss Bitcoin ETF proposal and so began to trade lower in later sessions. However! News soon surfaced that the Sec would reconsider the Winklevoss brothers ETF proposal possibly pointing toward and actual approval of the 1st ever Bitcoin ETF by the United States authority body opening the floodgates to a new way of using cash. Baring in mind world governments are already doing a lot to ban cash.

Bitcoin Rally

Petro dollars and lack of also means added pressure for the dollar. OPECs members have again agreed to cut supply due lack of demand and high inventories further adding to the woes of the US dollar.

Crude Oil CFD

Also I belive the recent rally into european stocks is due to Macron winning the French election and not Marine LePen. I find the Eurozone such a fragile place at the moment due to such political turmoil and lack of confidence in the European Union that im not sure this rally can last long especially if the US economy shows conformation of slowing.

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