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

Our brief take on markets recently. Whats your thoughts?

So how are you finding the market?  Heres our brief take on things we are watching closely….  U.S. Markets are being squeezed higher over the past few weeks and we think it could either be short lived if the price action is anything to go by.  However, it could keep pushing onto and perhaps the S&P’s may reach 2300.  Although some areas of the U.S. economy suffered in this months data, slight upticks in some of the data also suggested some balance to the U.S. economy, however we do feel these are temporary and we are looking for more consistency.    We are watching markets closely as many of you will be doing over the coming months.  The $DXY seems to be tearing and then pulling back seeming as if it’s being kept on a leash for now.  Reports on the bond markets are looking increasingly creaky with negative rates and many are saying this environment is tuff as traders seek yield long term.  We should also say that we have heard reports that if things start to turn they will likely show in the bond market first.   The table listing the countries with negative real rate countries is scary and it could easily grow so keep your eyes peeled on the increasing war with rates in these ZIRP and NIRP zones throughout the world as $12 trillion of global debts embraces negative yielding territory.  Especially US yield curves!   Gold has been doing amazing things of late making moves from the lows of 1100’s and now holding these newer more recent highs of 1300-1350.  We’ve also heard some compelling cases from the likes of Jim Rickards and Brett Johnson (just to name two!), on why gold should be considerably higher, like much much higher around 15,000 oz or multiples of.  But!  Could that be the day we see the end of our financial system (this time) or the day central bank and governments actually let markets find price naturally and we finally get a recession?  We’ll be watching gold closely from here.  For now, there are too many ticking time bombs to mention that could give us that event because things are so pent up.  Two potential problems that we do feel are worth mentioning from an equity point-of-view are Deutsche Bank (EU) and Citi (US).  These two banks ( and there are others) as some of you may or may not of heard, have got trillions in derivatives on their books which pose a very real systemic threat should anything “untoward” happen, a great piece was written by Michael Lewitt here on Citi.  You can google around for many recent DB stories an make your own assessment.  Please remember we are not recommending these trades, we are just divulging some things we’re looking at closely at GT Trading.  Enjoy, good luck and please feel free to comment.