Guggenheim Says Chance of Recession in 24 Months Has Doubled

A question came up during the Student Investment Fund meeting this week: are we going to take some defensive position given the upcoming recession? At the meeting I showed how we are in a little better shape relative to our benchmark, the S&P 500, in terms of PE ratio, dividend yield, debt ratios, etc. However, the recession warning signs are increasing in number and magnitude. Perhaps we need to take other action such as protective puts. Another idea would be to “stay the course” but perhaps focus even more on value firms with a history of growing dividends. Or purchase high quality bonds in lieu of stocks this semester.

Hopefully the market holds up while we contemplate our strategy -or- our past picks prove resilient.

-Dr. Moore

Guggenheim Says Chance of Recession in 24 Months Has Doubled
https://www.bloomberg.com/news/articles/2019-04-09/guggenheim-says-chance-of-recession-in-24-months-has-doubled

Nope. There’s Still No Nominee for Secretary of Defense.

A multi-decade, multi-trillion dollar deficit-laden government budget proposal with increased defense spending in the absence of even a nominee for Secretary of Defense for over two months? Apologies for the run-on sentence. But, the number and combination of absurd factors is astonishing.

SMH

Nevertheless, I wonder if now is the time to overweight defense stocks or setup a bet on defense stock volatility?

-Dr. Moore

Nope. There’s Still No Nominee for Secretary of Defense.
https://www.bloomberg.com/view/articles/2019-03-12/trump-still-hasn-t-picked-a-mattis-successor-at-defense

The Gazillion-Dollar Standoff Over Two High-Frequency Trading Towers

I am not sure if “Gazillion” is a word, but this antenna war article is quite interesting. Read it if you care to gain perspective on how important locating a few hundred feet closer to an exchange is to increasing trading profits.

-Dr. Moore

The Gazillion-Dollar Standoff Over Two High-Frequency Trading Towers
https://www.bloomberg.com/news/features/2019-03-08/the-gazillion-dollar-standoff-over-two-high-frequency-trading-towers

Paul McCulley Sees Value in MMT; Larry Fink Calls It ‘Garbage’

“Results are mixed.” A refrain often heard in academia regarding widely debated theories. Is the stock market efficient, is the capital asset pricing model accurate, and what are the leading economic indicators? The answers to all these, perhaps with the exception of the CAPM, is “results are mixed.”

Now we can add the question, “is modern monetary theory correct?”, to the list of mixed result theories.

Perhaps MMT is another opportunity to apply dialectical reasoning:

Thesis: Modern monetary theory is correct.

Anti-thesis: Modern monetary theory is not correct.

Synthesis: modern monetary theory is not perfect but some aspects can be useful in guiding decisions for policymakers and investors.

The idea that deficit spending can continue unhindered without causing problems doesn’t sit well with me. In fact there is a book titled “This time is different eight centuries of financial folly ” that states every financial crisis was preceded by excessive levels of debt. The excessive debt, as referenced in that book with historical evidence, can be (has been) government debt corporate debt, and consumer debt.

So here we are today, in the United States cutting taxes but not necessarily cutting services to the same degree (which may be a good thing because the services may be needed), widening budget deficits, and increasing debt. Now, are we at the point of “excessive debt“? I don’t know but I hope that policy makers, corporations, and consumers proceed with caution.

-Dr. Moore

Paul McCulley Sees Value in MMT; Larry Fink Calls It ‘Garbage’
https://www.bloomberg.com/news/articles/2019-03-07/mmt-moment-pimco-veteran-mcculley-says-it-deserves-a-hearing

Bill Gross Is Right That It’s Tougher to Outperform

Making money (alpha), like other things, ain’t easy. This is yet another article that cites performance numbers of passive vs. active management in favor of passive management.

Perhaps it is the chase (for market-beating returns) and not the kill that excites active managers. This would be consistent with evolutionary psychology studies on dopamine levels in the brain before and after receiving a stimulus such as fruit juice.

On that note, may your stock picks “juice” your returns.

-Dr. Moore

Bill Gross Is Right That It’s Tougher to Outperform
https://www.bloomberg.com/view/articles/2019-03-04/bill-gross-is-right-about-alpha-getting-harder

Humans Take Over From Bots to Make ETF Trading Smoother – Bloomberg

Perhaps in the end, this move from bots to humans is so NYSE can make more money. Well, we all know that part is true. NYSE is a publicly traded company with a duty to maximize shareholder wealth. Precisely how this makes NYSE more money is up for discussion. I suspect the move from bots to humans facilitates wealth transfer from uninformed investors placing large trades at the beginning or end of day to the NYSE.

-Dr. Moore

https://www.bloomberg.com/news/articles/2019-02-28/bots-ousted-by-humans-in-nyse-plan-to-make-etf-trading-smoother?srnd=premium

NYSE Dumps Bots for Humans to Make ETF Trading Smoother

Rachel EvansFebruary 28, 2019, 6:23 AM PST
The New York Stock Exchange is preparing to hand human traders a bigger role making markets for exchange-traded funds.

The exchange plans to allow bond, commodity and currency ETFs to list on its main floor as soon as August, according to Douglas Yones, NYSE’s head of ETFs. Last year, regulators approved the proposal, through which individuals known as designated market makers, or DMMs, will oversee ETF trading.

Bourse Rivalry

NYSE Arca hosts the most ETFs by assets
Source: Bloomberg

The funds currently reside on the company’s NYSE Arca exchange, an electronic venue powered by algo-driven traders known as lead market makers. While these firms commit to offering the best prices for a large part of the day, the lack of human involvement can leave less traded products struggling if a large order hits just as trading begins or ends, or there aren’t enough liquidity providers making a market at any given time.

“With a designated market maker, you don’t have that issue, you have a person,” Yones said in an interview. “The unique floor model lends itself very well to some potential benefits for the world of ETFs.”

ETFs with around $430 billion under management will be eligible to shift to the NYSE floor from Arca, according to data compiled by Bloomberg. Another $300 billion of funds at other exchanges will also be able to relocate, while new ETFs can list directly on the main exchange.

DMMs have a regulatory responsibility to be there all day, and set aside capital to matching incoming orders. That could appeal to issuers of new or less liquid ETFs that want to insulate their funds from market dislocations.

Winners, Losers

For NYSE, opening its two-centuries-old exchange to ETFs could generate extra revenue, as it competes with Cboe Global Markets Inc. and Nasdaq Inc. for ETF listings. NYSE hasn’t yet published its fees to list on the main exchange instead of on NYSE Arca.

The exchange’s five DMMs also stand to gain from the uptick in volume that ETFs could generate. But lead market makers, or LMMs, the firms that currently oversee ETFs on the electronic Arca platform, could lose out. Neither Jane Street Group nor Susquehanna International Group are DMMs, yet together they oversee about a third of ETFs listed on NYSE Arca.

Although electronic traders can make markets on the floor, they are less visible than DMMs, which also control the price when an equity starts and finishes trading for the day. That could encourage some LMMs to set up DMM businesses, if a significant number of ETFs opt to list on the main venue.

Still, that’s some way off. Some 79 percent of ETF assets are in stock funds that aren’t eligible to join the main exchange due to so-called line of sight rules that prohibit derivative products from trading in view of their underlying components. But market makers do expect to see demand from funds that are eligible.

“A lot of issuers would love to have a DMM manage their listing,” said Ari Rubenstein, chief executive at GTS, a NYSE DMM that recently agreed to buy Cantor Fitzgerald LP’s ETF business. “They love it because there’s lots of liquidity, efficiency and transparency for their investors, and ETF issuers are attracted to that.”

— With assistance by Nick Baker

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Software Engineer Loses Life Savings in Quadriga Imbroglio

What about diversification? The old saying “don’t put all your eggs in one basket” surely would have prevented the loss of this person’s entire life savings. Well, at least he is young and has time to recoup. I’d like to ask him if he would invest in crypto again.

I hear proponents of crypto say things like “I’m betting on the technology,”(with little training or experience in software engineering and cryptography) “it can’t be hacked,” and “it is more secure than government backed dollars.” This sounds similar to the lies sold to people regarding diamonds “diamonds are forever,” “diamonds are scarce,” and “diamonds are an investment.”

Ironically, the same government that backs currency is needed to rule in the favor of those who lost money playing the crypto game – an “I don’t need you until I do” type situation.

-Dr. Moore

Software Engineer Loses Life Savings in Quadriga Imbroglio
https://www.bloomberg.com/news/articles/2019-02-09/software-engineer-loses-life-savings-in-quadriga-imbroglio