8/6/20: 30 years of Financial Markets Manipulation

Students in my course Applied Investment and Trading in TCD would be familiar with the market impact of the differential bid-ask spreads in intraday trading. For those who might have forgotten, and those who did not take my course, here is the reminder: early in the day (at and around market opening times), spreads are wide and depths of the market are thin (liquidity is low); late in the trading day (closer to market close), spreads are narrow and depths are thick (liquidity is higher). Hence, a trading order placed near market open times tends to have stronger impact by moving the securities prices more; in contrast, an equally-sized order placed near market close will have lower impact.

Now, you will also remember that, in general, investment returns arise from two sources: 

1. Round-trip trading gains that arise from buying a security at P(1) and selling it one period later at P(2), net of costs of buy and sell orders execution; and 
2. Mark-to-market capital gains that arise from changes in the market-quoted price for security between times P(1) and P(2+).

The long-running 'Strategy' used by some institutional investors is, therefore as follows: 

Here is the illustration of the 'Strategy' via Bruce Knuteson paper "Celebrating Three Decades of Worldwide Stock Market Manipulation", available here: https://arxiv.org/pdf/1912.01708.pdf.

• Step 1: Accumulate a large long portfolio of assets;
• Step 2: At the start of the day, buy some more assets dominating your portfolio at P(1) - generating larger impact of your buy orders, even if you are carrying a larger cost adverse to your trade;
• Step 3: At the end of the day, sell at P(2) - generating lower impact from your sell orders, again carrying the cost.

On a daily basis, you generate losses in trading account, as you are paying higher costs of buy and sell orders (due to buy-sell asymmetry and intraday bid-ask spreads differences), but you are also generating positive impact of buy trades, net of sell trades, so you are triggering positive mark-to-market gains on your original portfolio at the start of the day.

Knuteson shows that, over the last 30 years, overnight returns in the markets vastly outstrip intraday returns. 

Per author, "The obvious, mechanical explanation of the highly suspicious return patterns shown in Figures 2 and 3 is someone trading in a way that pushes prices up before or at market open, thus causing the blue curve, and then trading in a way that pushes prices down between market open (not including market open) and market close (including market close), thus causing the green curve. The consistency with which this is done points to the actions of a few quantitative trading firms rather than

the uncoordinated, manual trading of millions of people."

Sounds bad? It is. Again, per Knuteson: "The tens of trillions of dollars your use of the Strategy has created out of thin air have mostly gone to the already-wealthy: 

• Company executives and existing shareholders benefi tting directly from rising stock prices; 
• Owners of private companies and other assets, including real estate, whose values tend to rise and fall with the stock market; and 
• Those in the financial industry and elsewhere with opportunities to privatize the gains and socialize the losses."

These gains to capital over the last three decades have contributed directly and signi ficantly to the current level of wealth inequality in the United States and elsewhere. As a general matter, widespread mispricing leads to misallocation of capital and human effort, and widespread inequality negatively a effects our social structure and the perceived social contract."

8/6/20: EIB Economics Rankings 2020

Nice present to be ranked 39th economist in the world this Monday morning: https://www.ieb.es/de-michael-porter-a-daniel-lacalle-descubre-a-los-100-economistas-mas-influyentes-del-mundo/ via IEB:

Thanks! As silly as such rankings might be... still worth a smile. :)

06/6/20: COVID19 Update: Global Cases and Deaths

For anyone deluding themselves that the COVID19 pandemic is going away, here are the latest global counts:

There is no amelioration in the rate of new detected infections. In fact, adjusting for volatility in daily figures, short term trend is close to the very recent historical peak.

Improvements in death counts are still persistent:

However, the above improvements have to be considered in lagged relationship to the increasing case counts, and being driven by the following longer term factors:

1. Improved speed of detection of COVID19 in population in advanced economies is resulting in earlier detection and earlier treatment of the disease, driving down deaths; and
2. Migration of the main clusters of growth in COVID19 detection from the advanced economies toward emerging markets results in greater weight in different (compared to the EU and US) methodologies for classifying deaths, which implies higher rates of deaths from other causes, underlying COVID19, and lower rates of deaths from COVID19.

No matter how you spin the data, current relaxation of economic and social restrictions will either have to be slowed down at the stages of opening up to international travel, or will result in higher risk of the second wave of infections.

06/06/20: COVID19 Update: US vs EU27 Comparatives

Things are going swimmingly in the 'best healthcare system in the World', aka the U.S. of A.:

Putting the above figure into different perspective:

And both deaths and news cases recorded are continuing to rise in the U.S. at a faster pace than in the EU27.

6/5/20: 99% of Police Violence Cases Go Unpunished: The Culture of Impunity

For those interested in the current events in the U.S., here is a data-driven background to police violence as a systemic problem: https://mappingpoliceviolence.org/.

Couple of key charts, focusing on systemic and broad reach of the issue:

The chart above appears to be in part impacted by significant outliers. However, I doubt that removing these will generate a strong enough relationship, especially a linear relationship, between the two data sets.

Another interesting feature of the data: "99% of killings by police from 2013-2019 have not resulted in officers being charged with a crime." Which, of course goes to the heart of the policy brutality problem being a systemic one: no one is held accountable. The Buffalo police department case, currently unfolding, is a perfect illustration. Read the details here: https://buffalonews.com/2020/06/05/57-members-of-buffalo-police-riot-response-team-resign/. In the nutshell, police officer gravely and unnecessarily injures an elderly unarmed and non-violent resident. This is done in witness of the entire squad and the media. Live, on camera. The injured person is displaying immediate signs of head trauma, noticed by the police squad. No one provide any help to him. Worse, one person attempting to do so is pushed away by his colleague. In response, and after massive outrage from the public (only after such outrage), the two police officers being directly involved in the alleged case of unwarranted violence, are placed on suspension, pending an investigation. 57 of their colleagues decide to stage a protest. This is a direct signal of not just defiance by the 57 police officers against the norms of any society and procedures of their own department, but a sign of their conviction that they are above any accountability for their actions. Circling back to the 99% reference, if you work in an environment where 99 of 100 cases of the use of deadly force are left un-addressed, you will act like a judge, a jury and an executioner, while expecting the rest of the society to slavishly adhere to your command and control.

There is a daily, and on some days, hourly, stream of news flow showing live abuses of their power by the police forces. The geography of these abuses does not appear to be well-defined by political voting: liberal and conservative-led states, counties and cities are all subject to this problem. Which indicates that the culture of non-accountability in police forces in the U.S. is not driven by politics, or at the very least, not driven by politics alone. If we are to seek remedies to the problem, we need to understand the underlying causes, first. In my opinion, marginal or methodological changes to the police forces operating manuals won't do the job here, because the cause of this problem is, in my opinion, institutional, not supervisory or compliance. There is a need to break the culture of non-accountability by the police, to remove the perception of police as being somehow above the ordinary resident, and to remove the power of police to shield themselves behind the wall of silence. We need robust and frequent prosecution of police officers involved in acts of brutality and ex excessive use of force, and we need to follow these prosecutions with pursuing criminally and administratively those of their colleagues who aid and abet them in these acts by silence, indifference, false 'solidarity' and non-reporting of crimes.

5/6/20: "Incredible" Jobs Report Meets Reality

Some updates on the jobs report this morning for the U.S.

Political reaction:

Reality bites:

New initial unemployment claims last week: 1,603,000. Putting this into perspective:

Which brings latest non-farm payrolls figures back to 1Q 2000 levels:

So, yeah, right, "tremendous" or put differently, we have 20 years worth of jobs destroyed. Non-farm payrolls increase of 2,509,000 is a good thing at the tail end of May, but the average weekly new unemployment claims increases from March 14 through May 30 currently stand at 3,527,650. This means the "tremendous" gains are just 71% of the weekly average losses.

Beware of morons brigades pushing the successories posters.

3/6/20: BRIC Composite PMIs for 2Q 2020

Having covered Manufacturing PMIs for 2Q 2020 for the BRIC economies here: https://trueeconomics.blogspot.com/2020/06/1620-3-months-of-covid19-impact-bric.html and Services PMIs here: https://trueeconomics.blogspot.com/2020/06/3620-bric-services-pmi-may-2020.html, time to update charts for Composite PMIs.

Brazil Composite PMI for 2Q 2020 is currently running at 27.3, the lowest on record, and marking a major decline on 46.9 reading in 1Q 2020. This implies that Brazil economy is currently registering sharply contractionary growth indicators in two consecutive quarters from the start of 2020. 

Russia Composite PMI for 2Q 2020 currently stands at 24.5, also a historical low, marking second consecutive quarter of sub-50 readings. The last time Russian quarterly PMIs were statistically significantly below 50.0 was in 1Q and 2Q 2014. 

India Composite PMI for 2Q 2020 is currently registering the sharpest downturn of all BRIC economies at 11.0, down from strongly expansionary 54.8 in 1Q 2020. This marks the sharpest fall-off on pre-COVID19 reading for any BRIC economy and signals that the Indian economy is effectively stoped functioning.

China is the only BRIC economy so far to show signs of post-pandemic recovery. China 2Q 2020 Composite PMI is currently running at 51.1 which is statistically above 50.0 marker, signalling weak, but positive expansion. Still, 51.1 marks the second slowest growth reading in the Chinese economy since 2Q 2016. 

As the chart above indicates, Brazil, Russia and India all are currently running 2Q 2020 Composite PMIs below the Global Composite PMI (which is at 31.25 as of the end of May), while China Composite PMI is running well-ahead of the Global Composite PMI.

3/6/20: BRIC Services PMI: May 2020

Services PMIs for BRIC economies are out today, so we can updated 2Q figures to include data for May. The latest monthly print imply slight moderation in the economic contraction in Brazil, India and Russia, with return to Services sector growth in China. This marks the first month since end of January with China posting positive growth in Services (reading of PMI above 50).

Brazil Services PMI was statistically unchanged in May at 27.6, compared to April 27.4 reading. Last time the Brazilian Services sectors posted PMI reading consistent with no contraction (at 50.4 - statistically zero growth) was back in February 2020. Current running average PMI for 2Q 2020 is at 27.5, marking the lowest reading on record.

Russia Services PMI was up from an absolutely disastrous 12.2 reading in April to a somewhat less disastrous reading of 35.9 in May. The index has been at at 37.1 in March. 2Q index reading so far is at 24.1, an absolute historical low, marking the second quarter in a row of sub-50 indicator readings, consistent with sharp contraction.

China Services PMI was the only BRIC Services indicator that managed to reach above 50 in May. May index at 55.0 was consistent with a major recovery momentum compared to 44.4 recorded in April. At 49.7, however, the 2Q figure is still outside positive growth territory.

India Services PMI continued to show fundamental weaknesses in the economy. May Services PMI reading of 12.6 was an improvement on April reading of 5.4, but 2Q 2020 reading is currently at 9.0. 1Q 2020 Services activity reading was at 54.1, implying that Indian services activity has literally stopped on the dime in April-May 2020.

Overall, BRIC 2Q 2020 Services PMI is currently at 35.7, down from 1Q 2020 reading of 44.9. 2Q 2020 is currently the lowest quarterly PMI reading for BRIC in history.



I have covered BRIC Manufacturing PMIs for May 2020 here: https://trueeconomics.blogspot.com/2020/06/1620-3-months-of-covid19-impact-bric.html.

2/6/20: COVID19 Update: Russia

Updating charts for COVID19 for Russia:

Noteworthy: Russia cases and death counts are now breaking out of the prior trend, both to the upside.

2/6/20: COVID19 Update: EU27 vs U.S.

Updating my charts comparing EU27 to U.S. experiences in the pandemic:

2/6/20: COVID19 Update: Worldwide Numbers

Updating through June 2, 2020 ECDC data:

Daily counts are accelerating on-trend with no trend inversion and close to historical peaks:

Death counts are lagging daily counts, but persistent decline in counts over the previous weeks has now been arrested:

While advanced economies are seeing sustained improvements in the cases counts and deaths counts reported daily, emerging and developing economies now lead new counts and new deaths growth.

Brazil has now overtaken Russia to take the second place in the world in the number of overall cases detected. The U.S. continues to lead.

1/6/20: COVID19 and European Banking

McKinsey research note on European banks' potential losses due to COVID19 is quite on the money:

With more than 1/3rd of European executives expecting "a muted recovery that would lead to sharp drops in banks’ revenue, a squeeze on their capital, and a hit on return on equity", European banks can expect revenues to drop by 40 percent plus, and ROE drop 11 percentage points in 2021.

And the problems are strategic. COVID19 is actually accelerating changes in customers' demand for services. "McKinsey’s European customer survey shows how customer behavior and needs have changed over the past month: digital engagement levels have climbed up to 20 percent, the use of cash has halved, 30 to 40 percent of customers have expressed a greater need for advice, while 20 to 40 percent want products to help them through the crisis.4 Pension shortfalls are a particular challenge with those close to retirement facing a very immediate problem."

Alas, European banks, especially those operating in the 2008-2014 crises-hit economies, such as Ireland, Italy, Spain and Portugal, are utterly unprepared for these shifting trends. I wrote about these problems in a series of two article for The Currency here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks and https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks.