The Trouble With Chasing Hot Strategies | Josh Brown

This should be blindingly obvious, but amazing how often it is ignored. Great post from Josh Brown at Reformed Broker:

How do most investors (and many advisors) select funds or strategies to allocate to? They look at what’s been working, learn the story and get long…….
And then mean reversion shows up – outperforming managers subsequently underperform, hot themes become over-loved, winning strategies become too crowded to offer excess returns. “No problem,” says the advisor, I’ve got six new ideas to replace the six ideas that are no longer working!”

It’s sad to say, but this is exactly how it works. I’ve been watching this for almost 20 years…….

Research Affiliates has an interesting pair of charts demonstrating this phenomenon in a new note from Rob Arnott, Jason Hsu and Co. They illustrate that increasing fund flows are a decent predictor of subsequent underperformance and that performance-chasing is destructive to returns across all types of investment products:

Research Affiliates

The Crisis of the Arab Nation-State

From Yezid Sayigh:

….the convergence of multiple factors over the past two decades or more has strained the ability of many Arab states to accommodate growing pressures within longstanding power balances, making the current phase of transition inherently far more dangerous for them. Most threatening have been the explosion of populations—generating a massive youth bulge, coupled with dwindling employment opportunities, productivity, and skills, ever-widening income disparities driven by crony economic liberalization and predatory privatization, and the erosion or dissolution of social pacts under the cumulative impact. The decline in disposable surplus wealth—especially net income from oil production, but also other forms of rent—has been so sharp, indeed, that even formerly privileged patronage networks and social constituencies have suffered.

…..incumbent rulers treat constitutional frameworks as entirely malleable, capable of being moulded and remoulded endlessly to meet the obvious purpose of maintaining and legitimizing their political power. But…. this approach no longer works. In this context, contests over access to social resources and economic opportunity have become increasingly bitter in a growing number of Arab states, reflected in the intensification of communal politics—sectarian, ethnic, regional, and tribal. It is proving impossible to restore even the kind of imposed false “social peace” that held Arab states and their societies together previously, even when significant numbers of people are ready to accept the old mix of coercion and co-optation again in order to regain a semblance of normalcy and stability.

Indeed, although the previous governing order has ceased to function or is on its way out in these states, replacing them with a new set of mini-states based on partition or cantons along communal lines may not offer a real solution. Sadly the initially hopeful experiences of Iraqi Kurdistan or South Sudan, for example, merely replicated the patterns they sought to break away from. This underlines that Arab states can no longer be reconstructed according to past blueprints, even when powerful external actors attempt to restore them. A world war turned the Ottoman Arab provinces into modern nation-states a century ago, but today they are being unravelled by many, highly localized wars that have yet to run their course. Their causes long predate the Arab Spring, which has been unfairly accused by some of bringing about this grim prospect, and will result in protracted conflict, instability, and a fundamental inability to reach a new socio-political equilibrium within many Arab societies for years to come.

Read more at:

Source: The Crisis of the Arab Nation-State-Carnegie Middle East Center – Carnegie Endowment for International Peace

….Discover what your enemy fears most by observing the means he uses to frighten you.

Eric Hoffer spent more than 10 years as a young man, homeless on Skid Row, before becoming a migrant worker, following the harvests in California. He later prospected for gold and worked as a longshoreman which he only quit at the age of 69. From these unlikely beginnings, Hoffer evolved into an acclaimed moral and social philosopher. He wrote 10 books, including the The True Believer (1951) and The Ordeal of Change (1963), and was awarded the Presidential Medal of Freedom before his death in 1983.

Eric Hoffer: Discover what your enemy fears most

Gold: Told you so

Gold broke short-term support at $1065/ounce, confirming another (primary) decline. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. Target for the decline is $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

The Gold Bugs Index, representing un-hedged gold stocks, still has to break primary support at 105. But this now appears inevitable.

Gold Bugs Index

Crude testing support at $40/barrel

Crude futures (Light Crude January 2016 – CLF2016) are headed for another test of primary support at $40/barrel. Breach is likely and would signal another decline, with a target of $30/barrel*.

WTI Light Crude January 2016 Futures

* Target calculation: 40 – ( 50 – 40 ) = 30

Global Fallout from China’s Industrial Slowdown

From Mark Spiegel at the Federal Reserve Bank of San Francisco:

The recent slowdown in China’s economic growth has caused a great deal of concern, particularly among global trade partners that export to China. On November 3, China’s President Xi Jinping announced that expected real GDP growth over the next five years would be no lower than 6.5%, which is one-half percentage point lower than the previous estimate. The industrial sector has been particularly weak as it has expanded by only 0.2% over the past year. In addition, imports to China continue to fall dramatically, as shown in Figure 1. Import values in October 2015 were almost 19% lower than they were in October of the previous year.

However, a number of analysts (for example, Lardy 2015) have argued that concern about the slowdown in the Chinese economy–and the associated reduction in Chinese imports–is overblown. Instead, they point to the resilience in the country’s service sector. This sector has indeed been a source of relative strength, with reported growth of 11.9% over the past four quarters.

In this Economic Letter, I show that the strength of China’s service sector is not likely to provide much support for gross exports from the rest of the world over the short term. The steep recent decline in China’s imports is consistent with the country’s growth pattern across different sectors. There has been a strong positive relationship between slower growth in gross imports and slower growth in industrial output over the past 15 years. However, imports and service outputs do not show a significant relationship. These results hold both for imports from non-commodity exporting advanced economies and for advanced and emerging market economies that export commodities to China. Therefore, from the rest of the world’s point of view, an increase in China’s service sector does not offset a similar magnitude decline in its industrial sector….

Read more at Economic Research | Global Fallout from China’s Industrial Slowdown

Ben Judah: The ruthlessness of Vladimir Putin

From Ben Judah, author of Fragile Empire: How Russia Fell In and Out Love With Vladimir Putin:

In the summer of 2012, Vladimir Putin returned as Russia’s president, after four years of playacting as a pliant prime minister. I spent time in St Petersburg trying to sift through his murky myth. Everyone who knew him, everyone who had worked with him – I wanted to track them down. My calls usually rang unanswered. When old voices picked up they abruptly hung up on hearing my requests. It was like chasing a ghost. The old, hard-bitten police chief who worked with him in St Petersburg in the 1990s was still a little stunned by Putin’s rise. “I thought he was just an insignificant official at the time.” The city’s town-hall orator, another former colleague of Putin’s, also remained baffled. “When he became president I threw open my photo album to see us together. But he wasn’t in a single one. He’d slipped out of every frame. I sometimes wonder if he even has a reflection in the mirror.”

….Putin acknowledges that the KGB evaluated him as a man with stunted emotions. His instructors concluded he was at risk, not of succumbing to the temptations of women or drink, but because of his pervasive “lowered sense of danger”. He was also classified as a man unhelpfully unsocial…. This, I fear, is what makes him so ruthless.

Read more at:Ben Judah: The ruthlessness of Vladimir Putin

What To Do About Debt | Project Syndicate

From Richard Kozul-Wright, author of Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Development:

Global debt has grown some $57 trillion since the collapse of Lehman Brothers in 2008, reaching a back-breaking $199 trillion in 2014, more than 2.5 times global GDP, according to the McKinsey Global Institute……

Much of the concern about debt has been focused on the potential for defaults in the eurozone. But heavily indebted companies in emerging markets may be an even greater danger. Corporate debt in the developing world is estimated to have reached more than $18 trillion dollars, with as much as $2 trillion of it in foreign currencies. The risk is that – as in Latin America in the 1980s and Asia in the 1990s – private-sector defaults will infect public-sector balance sheets….

Read more at What To Do About Debt by Richard Kozul-Wright – Project Syndicate

To paraphrase Liam McCurry:

Both terrorism and the media sell fear — and business is business.

Both terrorism and the media sell fear….

If you want to know what is happening in the world….

If you want to know what is happening in the world, don’t follow the news. News media nowadays is more about entertainment — attracting eyeballs — than about information. There is more coverage of Kim Kardashian’s sex life than analysis of major events. And if it bleeds it leads — the more shocking a story, the more eyeballs it will attract. Television and newspapers are full of coverage of the recent Paris attacks. The media and terrorism have evolved a mutually beneficial relationship.

Information on the other hand is boring and does not sell newspapers.

According to the WHO 153,000 people died yesterday. Most were from non-communicable diseases (104,000) with cardiovascular disease the top cause of death (20,000 from ischemic heart disease and 18,000 from stroke). Of the 33,500 deaths yesterday from communicable diseases, HIV accounted for 4000, the same number as diarrhoea, tuberculosis 2500 and malaria a paltry 1200. There were 13500 deaths from injury, the leading cause being road accidents (3500). Death from terrorism, fortunately, is too insignificant to even deserve a mention in the WHO tables.

Eradication of diarrhoea would have far greater impact than eradication of terrorism (which causes about 90 deaths/day according to a recent article in the SMH). And potable drinking water costs far less than bombs and missiles. Unfortunately it just doesn’t get enough media coverage to warrant attention.

….extracted from a discussion on Terror and Publicity.

Four key areas where Aussie investors must tread carefully

Andrew Starke quotes Guy Bruten, AllianceBernstein’s Senior Economist for Asia:

“In its latest statement on monetary policy, the Reserve Bank of Australia highlighted that we’re only about halfway through the adjustment in capital spending in mining,” said Bruten. “It’s gone from 8 per cent of GDP to around 5 per cent, and the central bank thinks it could fall to below 3 per cent.”

This suggests that more job losses will flow from the sector. There are concerns, too, about the tax revenue benefits of some resource projects as they move from the investment and construction phases to become fully operational……

“Against this background, we need to ask ourselves whether housing in 2016 will come to the economy’s rescue in the way it did in 2015,” said Bruten. “I am not among those who see a possible housing crash, but I don’t think we can afford to be complacent. “The last time it looked as though we might be heading for a housing crash was in 2003, when the background was very different – there was a very strong boost to the economy coming from commodities and from tax cuts, too.”

“…..The only certain thing about 2016 at this point is that it’s going to be another year of uncertainty.”

Read more at Four key areas where Aussie investors must tread carefully

Amy Winehouse: Back To Black (Acoustic)

Rock stars who died at the age of 27:

  • Brian Jones
  • Jimi Hendrix
  • Janis Joplin
  • Jim Morrison
  • Kurt Cobain
  • Amy Winehouse

What a waste. Most were alcohol/drug related.

More evidence that captured Russians were military intelligence officers

From Halya Coynash:

The court hearing on Nov 23 in the trial of two Russians captured in May 2015 in eastern Ukraine demonstrated yet again what an uphill battle the men’s defence lawyers will have to convince anybody that their clients, Yevgeny Yerofeyev and Aleksandr Aleksandrov, were not active Russian military intelligence officers [GRU]. Efforts at previous hearings to claim that the men had been pressured or even tortured into presenting themselves as GRU officers fail to explain why they told this to everybody, including their compatriots during one to one conversations.

….The men were visited in hospital on May 20 by representatives of the OSCE Monitoring Mission who pointed out that they spoke to them “without the presence of Ukrainian authorities” and that both had said that they were Russian military servicemen on a reconnaissance mission. They were also seen by the International Red Cross who did not express any concern.

Read more at More evidence that captured Russians were military intelligence officers ::

Die Zeit: It’s propaganda, stupid!

Maxim Eristavi, co-founder Hromadske International, tells what he has learned from being in the epicenter of the intense media warfare between Russia and the West:

First, word fights matter more than actual battlefields.

Propaganda is far worse than any usual media polarization. It ruins families, endangers lives, and starts and ends wars. I remember one Hromadske story from the epicenter of one of the biggest battles in the Eastern Ukrainian war. Our reporter went to the city of Debaltseve hours before it was captured by Russian and rebel forces. The town was shelled heavily back then. But, all interviewed locals were sure that the Ukrainian army was responsible, despite acknowledging that to do this they would have to shell their own positions in the downtown as well. The Ukrainian TV and radio was cut off here months ago.

Secondly, Russian propaganda isn’t designed to convince people.

What it does instead is radicalizing the society, pushing it to extremes and destroying the middle ground for any debates. And then you have a perfectly fertile soil for political manipulations on a grand scale. Let’s be clear: neither Russia, nor Eastern Ukraine are internet black holes like North Korea or Iran. People have access to almost all internet resources possible. In Russia an impressive 77% of the population have a stable internet access, and before the war Eastern Ukraine also had the biggest and most dynamic rate of new internet users after Kyiv. People are able to hear the other side’s point, they just don’t want to.

…..Fifth, the truth is never in between what Russian media and Western media report.

….Any educated person in the West knows that truth is always somewhere in the middle between two biases. So you would usually consume something from Russian media and then Western media and settle for the middle. This is well-understood by the Kremlin and they manage to use it perfectly by positioning their media as ‘an alternative voice’. So, by creating ridiculous parallel reality of lies and theatrics, they don’t expect you to believe in it. They instead create so much confusion that it shifts the middle further towards them.

The truth is always in between two biases, but never in between bias and pure lies.

Read more at Die Zeit: It’s propaganda, stupid! — Medium

NATO Confronts Russian Base on Turkey’s Border – Bloomberg View

From Josh Rogin:

The clash between Russia and Turkey is destabilizing, but the real destabilizing move was Putin’s decision to place a new power-projection and access-denial base just miles from a NATO country without any consultation. NATO chose not to deal with that dangerous situation for months. Now the alliance has no choice.

Read more at NATO Confronts Russian Base on Turkey’s Border – Bloomberg View

In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists.

One of my favorite quotes.

Eric Hoffer: In times of change….

Gold: The final nail

Gold respected its new resistance level after a brief retracement and is again testing short-term support at $1065/ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. Breach of support is likely and would provide further confirmation of a decline to $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

Spot silver has also broken long-term support, reinforcing the gold signal.

Spot Silver

The Gold Bugs Index, representing un-hedged gold stocks, is testing primary support at 105. Failure of support is likely and would be the final nail in the coffin (for gold).

Gold Bugs Index

The stronger Dollar is weakening demand for gold, with the Dollar Index testing resistance its 12-year high at 100. Rising 13-week Twiggs Momentum indicates a healthy (primary) up-trend. Breakout above 100 is very likely and would signal an advance to 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Richard Russell, Publisher of Dow Theory Letters, Dies at 91

From Bloomberg:

Richard Russell, who shared his technical analysis with subscribers through the influential Dow Theory Letters since 1958, has died. He was 91.

Richard published many interesting insights over the last half-century and contributed greatly to the field of investing.

Read more at Richard Russell, Publisher of Dow Theory Letters, Dies at 91 – Bloomberg Business