>>> Why Hedge Fund Hot Shots Finally Got Hammered

Why Hedge Fund Hot Shots Finally Got Hammered

http://davidstockmanscontracorner.com/why-hedge-fund-hot-shots-finally-got-hammered/
by David Stockman • September 5, 2015

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The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take. Many of them have been riding the bubble ever since Alan Greenspan got it going after the crash of 1987 and now not only claim to be investment geniuses, but also get downright huffy if the Fed or anyone else threatens to roil the casino.

Leon Cooperman, who is an ex-Goldman trader and now proprietor of a giant fund called Omega Advisors, is one of the more insufferable blowhards among these billionaire bubble riders. Earlier this week he proved that in spades.

It seems that his fund had a thundering loss of more than 10% in August during a downdraft in the stock market that the Fed for once took no action to counter. But rather than accept responsibility for the fact that his portfolio of momo stocks took a dive during a wobbly tape, Cooperman put out a screed blaming the purportedly unfair tactics of other casino gamblers:

Lee Cooperman, the founder of Omega Advisors, has joined the growing chorus of investors blaming last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.

Well now. Exactly how was Bridgewater counting the cards so as to cause such a ruction at the gaming tables?

In a word, Ray Dalio, the storied founder of the giant Bridgewater “All-Weather” risk parity fund, has been doing the same thing as Cooperman, and for nearly as many decades. Namely, counting the cards held-out in plain public view by the foolish monetary central planners domiciled in the Eccles Building.

To be sure, Dalio’s fund has had superlative returns and there is undoubtedly some serious algorithmic magic embedded in Bridgewater’s computers. But at the end of the day its all a function of broken capital markets that have been usurped and rigged by the Fed.

The only thing your need to know about the vaunted “risk parity” strategies that have served Bridgewater and their imitators so handsomely, and which have now aroused the ire of more primitive gamblers like Cooperman, is the graph below:
^SPX Chart

^SPX data by YCharts

The above, of course, is the Fed’s “wealth effects” printing press at work. There have been about 30 identifiable “dips” since the March 2009 low and every one of them have been bought by the casino gamblers. And for good reason.

The Bernanke Fed’s egregious, desperate and utterly unwarranted bailout of Wall Street at the time of the post-Lehman crash taught the gamblers a profound lesson. That is, they could be exceedingly confident that the Fed would keep the free money flowing at all hazards, and that it would resort to any price rigging intervention as might be necessary to keep the stock averages rising.

Indeed, never in all of history have a few ten thousand punters made so many trillions in return for so little economic value added. But what Dalio did in this context was to invent an even more efficient machine to strip-mine the Fed’s monumental largesse.

To wit, Bridgewater’s computers buy more stocks on the “rips”, when equity volatility is falling and prices are rising; and then on the “dips” they rotate funds into more bonds when equity volatility is rising and the herd is retreating to the safe haven of treasuries and other fixed income securities, thereby causing the price of the latter to rise.

In short, there is a payday in every type of short-run financial weather because Bridgewater’s computers are monetary sump pumps; they constantly purge volatility from the portfolio.

But here’s the thing. The above chart could never exist in an honest free market.

You couldn’t create algorithms to safely pump out volatility and milk the market on alternating strokes because the regularity of the waves on which it is based are not natural; they are the handiwork a central bank that has been taken hostage by the casino gamblers.

Nor is “hostage” too strong a word. In the days of Paul Volcker and William McChesney Martin anybody who even speculated about 80 months of ZIRP would have been assigned to the William Jennings Bryan school of monetary crankery.

As it happened, however, in the last few weeks the long reign of the global money printers has begun to sprout fractures. Over on the other side of the earth in China what had become a 20-year long $4 trillion cumulative “bid” for US treasuries and other DM fixed income securities has gone serious “offers”.

This will prove to be one of the great financial pivots of history. During the course of their stupendous inflation of China’s $28 trillion Credit Ponzi, the red suzerains of Beijing bought treasuries hand over fist and thereby kept their price rising and the volatility of the world bond market falling.

To be sure, this wasn’t charity for America’s debt besotted shoppers and governments. It was done in order to peg the RMB exchange rate and thereby keep its mercantilist export machine humming and the people grateful to their beneficent communist party rulers.

But at length it became too much of a good thing because every time the Peoples Bank Of China (PBOC) bought Uncle Sam’s debt it similtaneously expanded the internal banking system and supply of RMB credit. Moreover, after Beijing launched its madcap infrastructure building campaign in response to the the 2008 financial crisis the phony construction and investment boom which ensued attracted increasing waves of hot money from abroad, thereby inflating the domestic Chinese economy to a fever pitch.

In fact, the PBOC was forced to let the RMB slowly rise against the dollar to keep its banking system from becoming a financial runaway. But the steadily rising RMB drastically accelerated the inflow of foreign capital and speculative funds into the Chinese economy, thereby filling the vaults of the PBOC to the brim at more than $4 trillion early this year compared to a few hundred billion at the turn of the century.

China Foreign Exchange Reserves

But these weren’t monetary reserves in any meaningful or historic sense of the term; they were the fruits of an utterly stupid mercantilist trade policy and the conversion of a naïve old man, and survivor of Mao’s depredations, to the view that communist party power could be better administered from the end of a printing press than from the barrel of a gun.

But Mr. Deng merely unleashed a Credit Monster that sucked in capital and resources from all over the globe into a domestic whirlpool of digging, building, borrowing, investing and speculation that was inherently unstable and incendiary. It was only a matter of time before this edifice of economic madness began to wobble and sway and to eventually buckle entirely.

That time came in 2015—-roughly 30 years after Mr. Deng proclaimed it is glorious to be rich. So saying, he did not have a clue that a credit swollen simulacrum of capitalism run by communist apparatchiks was a doomsday machine.

In any event, what is happening in China now is that the speculators—-both domestic and foreign—–see that the jig is up. That is especially the case after Beijing’s incredibly botched effort to alleviate its massive corporate debt problem by inciting a $5 trillion stock market bubble that is now being blown to smithereens.

This has happened notwithstanding the party bosses sending out truckloads of cash to arrest the stock market’s collapse and then doubling down by sending fleets of paddy wagons to arrest any one who might be tempted into overzealous offers to sell what the PBOC is trying to buy. It means that confidence in the Red Ponzi has at last been shattered.

Accordingly, money is leaking out of China thru a thousand rivulets, by-ways and financial back alleys. To prevent the RMB exchange rate from plunging and thereby inciting even more capital fright and flight, the PBOC has shifted into reverse gear in a large, sustained and strategic way—-as opposed to tactical FX management—– for the first time since the putative miracle of red capitalism incepted.

Ray Dalio wasn’t counting on this because despite Bridgewater’s proficiency in concocting trading algorithms, its vaunted macroeconomics staff consists of standard issue Keynesians—-with a dash of Minskyites thrown in for good measure. Alas, they were not prepared for the possibility that Austrians have said is inevitable all along.

To wit, that Beijing’s experiment with Red Capitalism would eventually end in a crackup boom, causing the seemingly endless Red Bid for US treasuries to become a disruptive and unwelcome Red Offer to sell hundreds of billions of said paper and like and similar dollar/euro/yen liabilities.

To make a long story short, during the gyrations of August bond prices didn’t rise like they were supposed to when the stock market plunged by 12% to its Bullard Rip low at 1867 on the S&P 500. Accordingly, Bridgewater’s risk party portfolio became swamped with too much volatility on both the bond and equity side of Dalio’s big boat. So the algorithmic sump pumps went into over-time dumping stocks in order to drain the ship.

Consequently, Bridgewater wiped out its entire profits for the year in a few days during August, pushing the momo chasers like Cooperman into the drink in the process. Needless to say, the capsizing Big Boats in the casino are now firing at each other, but also lining-up for a full court press at the Eccles Building.

Ray Dalio has already said its time for QE4. He apparently realizes that the Fed’s big fat bid is needed to replace the missing Red Bid in the treasury market, and thereby get his risk parity algorithms working again.

At the same time, Goldman today sent out its chief economist to pronounce that today’s Jobs Friday report tipped the case to no rate increase at the Fed’s upcoming September meeting. Why we need an 81st month of ZIRP when 80 months so far have not succeeded, he didn’t say.

No matter. You can be sure of this. If the market holds above next week’s retest of the 1967 Bullard Rip low, the Fed will likely announce a “one and done” move in September, causing the casino to stage a short-lived, half-heated rally.

By the same token, if the market drops through the Bullard Rip low, the Fed will plead market instability and defer its 25 bps pinprick yet again, thereby causing the same short-lived half-hearted rally.

What won’t happen, however, is another leg higher in the phony bull market engineered by the Fed and its fellow- traveling central banks. That’s because the global “dollar short” is finally coming home to roost.

For nearly two decades the central banks of EM mercantilists have been buying treasury paper, as have the commodity producers and the petro-states. So doing they have helped the Fed drive the benchmark rate to absurdly non-economic levels.

That’s what happens when the printing press is used to generate $12 trillion of so-called FX reserves and $22 trillion of total footings for the consolidated monetary roach motels of the world, otherwise known as central banks and sovereign wealth funds.

In turn, this massive stash became the collateral for the private issuance of friskier dollar denominated corporate and sovereign credits throughout the EM world, thereby slacking the thirst for yield among desperate money managers.

But now China’s house of cards is cratering, causing economies to plunge throughout the worldwide China supply chain. Witness Brazil where industrial production is down 8% from a year ago, and slipping rapidly from there; or South Korea where exports have plunged by double digits.

Metaphorically speaking, dollars are hightailing back to the Eccles building. China and the petro-states are selling and off-shore dollar lenders are effectively making a margin call.

At length, both the epic bond bubble and the monumental stock bubble so recklessly fueled by the Fed and the other central banks after September 2008 will burst in response to the deflationary tidal wave now cresting.

Needless to say, that eventuality will be the death knell for the risk parity trade. It will cause the volatility seeking algos to eat their own portfolios alive.

Can the masters of the universe hanging around in the Hedge Fund Hotels say “portfolio insurance”?

Leon Cooperman and his momo chasing compatriots will soon be praying for an event as mild as October 1987.

Teleraph : Nouriel Roubini dismisses China scare as false alarm, stuns with opti

Nouriel Roubini dismisses China scare as false alarm, stuns with optimism

Economist describes alarmist reaction to the Shanghai stock market rout as 'excessive, unreasonable and irrational'

Nouriel Roubini has cast aside his mantle as the lugubrious "Dr Doom" of the global economy, scathingly dismissing market panic over China as "manic depressive" behaviour by ill-informed investors.
"China is not in free-fall," he told the Ambrosetti forum of world leaders on Lake Como.
Mr Roubini, a professor at New York University, described the alarmist reaction to the Shanghai stock market rout as "excessive, unreasonable and irrational".
The Shanghai bourse is largely closed to the rest of the world and is thinly owned by Chinese citizens, while the country's banking system is state-owned and therefore has the entire resources of the Communist regime to avert a financial meltdown.

While the equity collapse has been dramatic, the number of shares in private hands amounts to just 30pc of GDP, compared to 81pc on Wall Street in 1929 and 183pc in 2000.
Mr Roubini said global markets have swung with impetuous ferocity from complacency about Chinese uber-growth to "extreme pessimism", suddenly switching from talk of 7pc growth rates to 3pc or even zero, when in reality little has changed.

"None of this is happening. The slowdown in China is neither a hard landing or a soft landing, it's a bumpy landing. It could be better managed but growth is not likely to be worse than 6.5pc this year and 6pc next year," he said.
It is an unusual reversal of roles for the man known across the financial world as the prophet of the Lehman crash, almost invariably described by commentators as a perma-bear.
Mr Roubini, who also runs Roubini Global Economics, said the contractionay fiscal policies that have held back recovery across the developed world since 2008 are finally abating.
"Germany seems to have accepted the need for expansionary policies. The whole of fiscal policy in Europe is shifting," he said.
The pace of debt-deleveraging is slowing. Recovery in the US and the eurozone itself is gradually picking up.

Mr Roubini said Western markets have misunderstood the purpose behind China's move to shake up its exchange regime, mistakenly seeing it as the start of a steep devaluation that could send powerful deflationary shocks through the global economy.
This has not happened so far. The yuan has been strengthening over recent days as the central bank (PBOC) intervenes in the market to stabilize the rate, and premier Li Keqiang has vowed to keep the exchange broadly stable - in trade-weighted terms.
The yuan has lost just 2.2pc since the PBOC shock the world by ditching its dollar peg and switching to a managed float on August 11, setting off a minor earthquake and a full-blown correction on Wall Street and European stock markets.

Mr Roubini warned that the world economy remains fragile and said the European Central Bank was well-advised to open the door this week to yet more quantitative easing, if only as an insurance policy in case emerging markets spiral into crisis.
"The US Federal Reserve should wait and see if it is a temporary storm, and not a gathering storm. It may have to wait until May to raise rates, and the Bank of England may have to wait until the spring of next year," he said.
The expansion remains soggy on both sides of the Atlantic. The latest US jobs data show that non-farm payrolls rose by 173,000 in August, less than the 217,000 expected. The US manufacturing surveys are slipping, but are not yet flashing the sort of amber warning signals seen before the onset of the US recession in November 2007.
Lars Feld, a professor at Freiburg University and one of the official five "Wise Men" advising the German Chancellor, said the Fed has already waited too long to raise rates and risks repeating the errors of the last decade, when it incubated an asset bubble.
"The Fed is behind the curve. They should have increased rates in the first half of the year. Under the Taylor Rule (a measure of slack in the economy) it should have acted at the end of the last year. I fear we're in the same situation as under Alan Greenspan when monetary policy was too expansionary," he told The Telegraph at the Ambrosetti forum.
Yet Mr Feld said fast-moving events in China are very hard to assess, and are potentially dangerous - a worry shared by most experts at the conclave of opinion leaders.
"The more they liberalize the economy, the more they are going to lose their grip, and we're going to be in for an unpredictable time. This is what I am scared of," he said.

FT : Mario Greco, CEO, Generali: a change of gear in Italy

Mario Greco, CEO, Generali: a change of gear in Italy

Mario Greco, chief executive of Italy’s Generali, Eur­ope’s third-biggest in­surer by premiums, speaks softly but gives every sign of being ready to do battle. It is not surprising: after turning the company round over the past three years, he still faces residual scepticism, fresh challenges and outside expectations about how corporate Italy should act.
“This is a company that is coming back,” he insists of the insurer, whose share price has nearly doubled since he took the top job three years ago. A competitive road cyclist in his free time, he sits on the edge of his chair in Generali’s Milan headquarters, his foot persistently tapping as if reaching for unseen pedals.

“Generali is coming back from nowhere because we started from a very low level,” he says. “We are changing gear. We are finishing a turnround story and we are opening a value story, which is a significant change. To people who say ‘you haven’t fixed it’, [I say] ‘look at the numbers’.”
Mr Greco, who studied international economics in the US and started his career at McKinsey, is in the vanguard of a rising generation in Italian capitalism.
His pugilistic talk is new at the top of corporate Italy — but he is not alone. His fellow CEOs at the country’s leading companies, such as Intesa Sanpaolo, Telecom Italia, Eni and Enel, were all installed after the financial crisis and the eurozone sovereign crisis triggered share price crashes. All are confronting tough turnrounds at their respective businesses after the drubbing dealt by the crises. And all are faced with the task of restoring corporate Italy’s image in the outside world, marred by a long economic stagnation and a reputation for crony capitalism.
Mr Greco, 56, joined Generali from Zurich Insurance Group in the heat of the eurozone debt crisis. The board, in a typically bloody Italian board coup, had just ousted its chairman, Cesare Ger­onzi, and CEO, Giovanni Perissinotto, in swift succession after the insurer lost two-thirds of its value in five years.
Mr Greco’s appointment was significant because of the size of the group — Generali has €500bn in assets under management, a behemoth in a country dominated by small and midsized businesses — and its place in Italian corporate culture.
The insurer under its old guard was an example of the type of Italian crony capitalism that raises a red flag for foreign investors in the eurozone’s third-largest economy. Generali sat amid a web of cross-shareholdings, which in the good times gave it unmatched influence but in the crises became the network through which contagion spread fast.
Mr Greco has cut costs and slashed its shareholdings in companies that included Telecom Italia, selling nearly €4bn in assets to boost its capital.

“People bet I would make a capital increase three years ago — they can keep on making this bet,” he says. Mr Greco reiterates that he still has no intention to raise capital since the asset sales have boosted Generali’s economic solvency ratio, a key measure of financial strength, to 186 per cent at the end of 2014, more in line with its peers Axa and Allianz.
Mr Greco presents himself as a straight-talking numbers man, in a deliberate distinction from the avuncular manner of Italy’s older executives.
Generali aims to pay €5bn in dividends over the next four years compared with €900m last year. “We are now on a different journey to remunerate shareholders and increase the value of the company, and do that above the market average. This is completely new.”
Mr Greco may have dragged Generali’s governance and strategy into the 21st century but, like the leaders of many Italian businesses, he must now confront new problems spawned by technology and globalisation.
The International Monetary Fund warned earlier this year that the business models of European insurers are becoming unsustainable after a slump in interest rates. Mr Greco says he is prepared to deal with low bond yields “until 2018”. He is shifting Generali’s business mix to more fee-earning products to boost profits and away from life insurance, where setting up new contracts incurs heavy costs upfront. He also faces more competition arising from big data and is increasing spending on technology to better understand customer needs.
In addition, he has hired outsiders and foreigners to reflect Generali’s presence in more than 60 countries with 78,000 employees and 72m customers. He hired New Delhi-born, Cambridge and Harvard-educated Nikhil Srinivasan as chief investment officer, who is now Italy’s most prominent non-Italian executive.
His bet on new blood appears to have paid off. For 2014, Generali posted an investment return of 10 per cent on assets exceeding €400bn, which beat its peers, according to a report from research company Sanford Bernstein.
But for some analysts with the memory of eurozone crisis contagion still fresh, the focus remains on Generali’s €50bn of Italian government debt and €90bn of Italian liabilities, which remain a concern and a sign that the effects of its change may be superficial.

Mr Greco will have none of it. “The fact that we are strong in Italy, is this a sin? Is this a mistake? Is this something I have to feel regretful about? I don’t think it is,” he snaps, showing an exasperation shared by many of Italy’s executives about the perception of the country internationally. “This is one of the top 10 countries in the world by GDP. We make profits in Italy, we have high market share, Italy is growing,” he says.
Another exhalation of frustration greets a suggestion that Generali might provide credit to small and midsized businesses, since traditional bank lending has shrivelled during the downturn.
“Never, never,” he says of the popular idea among lawmakers that insurers such as Generali could disintermediate banks. “I have been very clear with everyone at a European level and a national level. We can’t help . . . It is not that we don’t want to . . . We cannot do things that we do not have the competence to do,” he says, his foot still urgently tapping out its staccato beat on the floor.
Like most of Italy’s new corporate class, Mr Greco was a supporter of 40-year-old reformist prime minister Matteo Renzi when he came to power 18 months ago. With his combative attitude, Mr Renzi was their political counterpart. Since then, business leaders’ affection has cooled as deep reforms have failed to materialise and the government growth target of 0.7 per cent this year is starting to look a stretch.
“We need much more reform as Europeans, and we need much more as Italians,” is all Mr Greco will say.
But he stresses that he wants to applaud Mr Renzi and his team for the ef­forts they have made to ask Italy’s corporate leaders how they can support them internationally, such as through trade missions. That this is a great step forward reflects as much as anything how broken Italy’s corporate system had become during 20 years of economic stagnation under its discredited political class of the right and left.
“The government is acting in a way where you can see that they are trying to help companies like ourselves. I feel that we are starting to have the support of the country,” Mr Greco says. “This is a simple thing but important. You feel you belong to a place.”

FT : EM turmoil and strong franc cast shadow over Swiss luxury industry

EM turmoil and strong franc cast shadow over Swiss luxury industry

It has been a tough year for Swiss watchmakers.

At home, they have had to cope with a surging Swiss franc, after the Swiss National Bank unexpectedly dropped its cap on the currency. Abroad, they have been hit by weakness in a number of key markets.

The biggest problems have come in Asia, where demand has faltered in China and Japan, and collapsed in Hong Kong. But other markets have also proved difficult: the gyrations of the rouble have hit Russian demand — and sales in the UAE, an increasingly important market, have declined.
“There has been a lot of turmoil and no one has any idea what will happen next,” says Aldo Magada, chief executive of Zenith, one of the French luxury group LVMH’s stable of brands. “There has been a loss of confidence among consumers in general because they don’t know what will happen with the economy.”
The net result is that the value of Swiss watch exports between January and July was SFr12.49bn ($13bn), 1.2 per cent below the level reached in the same period in 2014. The figures in July were particularly weak, with watch exports 9.3 per cent lower than the same month last year.
The slowdown is reflected in the results of Switzerland’s two biggest watch groups, Richemont and Swatch. The latter reported in July that its sales rose just 2.2 per cent in the first six months of the year. In May, Richemont said its sales in the first six weeks of its financial year, which runs from April to March, had been flat once currency fluctuations had been taken into account.
In response, analysts — whose predictions for growth in Swiss watch exports stood somewhere between 4 and 7 per cent at the beginning of the year — have been reining in their forecasts.
“I still assume there will be growth in the overall market this year, due to the pick-up in watch sales in the US and Europe, and continued purchases by Chinese customers abroad. But it will be muted,” says Jon Cox, an analyst at Kepler Cheuvreux in Zurich.

Others are less optimistic. “After the figures for July, the main question is whether the Swiss watch industry can grow at all this year,” says René Weber, an analyst at Bank Vontobel. “I think it will probably be flat.”
Analysts expect growth to be fastest in Europe, where a pick-up in domestic demand so far this year, allied with continuing purchases by Chinese tourists, has led to double-digit growth in a number of countries, including France and the UK. In the US, where sales are up 4 per cent, positive growth is also expected.
The main focus of industry executives and observers, however, is Asia. Even before the recent stock market turmoil, the slowdown in Chinese demand was rippling through the region and casting a shadow over the watch industry’s prospects. So far this year, Swiss watch exports to Hong Kong, the world’s largest watch market, are down 20.8 per cent. To China, the third largest, they are down 4 per cent and to Japan, the fifth largest, they are down 5.8 per cent.
The question is whether China’s recent stock market turbulence, which began in the summer, and intensified in August after the Chinese government devalued the renminbi, will make things worse.
“There is a close correlation between the value of real assets, such as the stock market, and the purchasing of high-end luxury goods. Overall, the volatility will have a damping impact on volumes,” says Mr Cox.
Others are not so sure. “When the stock market rose so dramatically over the past year, we didn’t see a surge in watch purchases, so I’m not sure that the fall in the market now will necessarily stop people from buying watches,” says Mr Weber.
Yet even if the stock market turbulence does not harm watchmakers too badly, the underlying slowdown in the Chinese economy — which was what prompted the government to devalue the renminbi — may have a longer-lasting effect.

This is particularly true in Hong Kong, long a popular destination for Chinese tourists. Inventories remain high in the territory, and Jean-Claude Biver, head of LVMH’s watchmaking business, said in August that Tag Heuer, one of its brands, would shut a store in one of the city’s main thoroughfares as a result of falling demand and high rental costs.
The other issue on Swiss watch executives’ minds is how to deal with the strength of the franc. The currency has risen more than 10 per cent against the euro since the SNB dropped its cap in January.
For any Swiss company with a cost base largely in francs and a portion of its sales in foreign currencies, the SNB’s decision raises problems. But it is particularly tricky for Swiss watchmakers, which have long touted production in Switzerland as a guarantee of quality. One obvious response — shifting production to cheaper countries — is not an option.
Swiss watchmakers have responded with a mixture of price cuts in Switzerland and price increases elsewhere, a process that has left some executives slightly frazzled.
“The first part of the year was a complete nightmare as far as price adaptations were concerned,” says Mr Magada. “We had to raise prices in the eurozone after the franc appreciation, raise them twice in Japan because of the yen and cut them in Hong Kong so that the prices there are still competitive with the prices in euros and dollars.”
However, some analysts say that, with the franc still strong, more adjustments may be needed. “The price increases in Europe were about 8 per cent on average, but they haven’t been enough to compensate for the margin erosion,” says Mr Weber.
“I think that another round of price increases is likely to try and make up the difference. We will probably see this by Baselworld next year at the latest.”
Despite these challenges, Swiss watchmakers can take heart from the fact that one much discussed threat has proved milder than expected. The launch of the Apple Watch in March was seen in some quarters as a danger to the industry — at least at the low end.
So far, however, it has been the makers of electronic watches that have borne the brunt of the impact. Although analysts still expect lower-end Swiss watch brands, such as Tissot, to be affected in the long run, for the industry as a whole smartwatches could prove as much an opportunity as a challenge.
“Apple’s move is helping to create a new segment, and some Swiss watchmakers are already moving in. Swatch has launched their fitness band, which undercuts the Apple Watch, and we will see others follow suit,” says Mr Cox.

FT : Size is not everything for talented portfolio managers

Size is not everything for talented portfolio managers

The industry is full of bloated, mediocre businesses with too many funds, says Jon Little

Fund management is a people business”; “our assets go up and down every day”. These are two of the most glib, overused phrases in the fund management business. What offends me is less their ubiquity than that those who use them have spent little, if any, time thinking what they mean.
Fund management has many peculiar characteristics but it is by no means unique. We no longer live in a society where most people earn a living making or building things.

For many of today’s workers, knowledge and skill are their crafts. Amid the four factors of production, labour is the most rewarded and prized. Yet many fund managers are wedded to outdated notions of what constitutes success and how businesses should develop and grow.
After the industrial revolution, scale and size were the goals of business. Growing bigger, producing and selling more, was the recipe for success. Greater scale means lower unit cost, leading to higher revenues and profits. However, this formula does not work for most people businesses, especially fund management operations.
Unfortunately, too many have been infected by the belief that growing in size and complexity somehow makes them better.
First, think about what it means to manage money actively. Done properly, it consumes every working hour of those rare souls who do it well. Managing a research-driven portfolio requires delving into multiple industries and understanding the dynamics of pricing, competition and strategy. It is hard, intellectually challenging and stimulating.
But stimulation is only part of it. Fund management is unusual in that success and failure are easily measurable. For those who care little about short-term results (the only decent managers as far as I am concerned), there is the excitement of unearthing something the market has missed, testing the theory, then taking a contrarian position that may, for months, seem to be a losing bet. Then the slow glow of being proved right and, more importantly, visible results in terms of published performance and higher profits for clients.
The satisfaction talented managers get is not, however, directly scaled to the size of their portfolio. Managing $5bn in large-cap equities is probably just as satisfying as managing $10bn or even $25bn. What is in the portfolio is what matters. Its size — within reason — is largely irrelevant.

Investment management businesses do not need to grow beyond a certain critical mass to be profitable. In fact, the optimum business would comprise an investment team, the largest group within the company, some support staff and just enough marketing and service staff to look after clients. Any functions would be just large enough to be effective. Unfortunately, this is rarely the case. The industry is full of bloated, mediocre businesses with too many funds and products and too many competing priorities.
In these companies I find the investment team has ceased to be the largest group of employees. Herein lies the issue. Sales people want to sell more product, marketing people want to expand client channels, product development people want to launch more product. These desires indirectly feed more expansion.
More product leads to more systems support; geographical expansion leads to greater compliance and IT support; more sales channels require more finance people. All of this leads to business complexity and a bigger HR team.
The business loses focus because suddenly there are employees whose success is judged by criteria that have little or nothing to do with investment performance or client outcomes. If the business is not growing constantly, they quickly become expensive and demotivated. At that point, even if it is sensible to restrict growth or close to new business, those responsible for running the company find it impossible to take these decisions.
The tragedy is that these bloated businesses are normally less profitable per employee and per dollar of revenue and find it harder to retain clients and investment staff. Put simply, every investment business should ask itself: “Would we be better off if we focused on managing money in one key asset class where we have a competitive advantage and ditched everything else?” The answer is yes.

(The Economist) Brazil’s disastrous budget : All fall down

Brazil’s disastrous budget

All fall down

Brazil is in an economic hole—and still digging

PLENTY of countries run deficits. And when recessions occur, loosening the public purse strings makes sense for many of them. But Brazil is not most countries. Its economy is in deep trouble and its fiscal credibility is crumbling fast.

The end of the global commodity boom and a confidence-sapping corruption scandal, after years of economic mismanagement, have extinguished growth. Brazil’s GDP is expected to contract by 2.3% this year. Fast-rising joblessness, together with falling real private-sector pay and weak consumption, are squeezing tax receipts. Meanwhile rising inflation, allied to a free-falling currency, means investors demand higher returns on government debt. The result is a budgetary disaster. This year a planned primary surplus (ie, before interest payments) has

Faced with the prospect of public finances slipping out of control, Brazil’s policymakers have stuck their heads in the sand. The 2016 draft budget sent to Congress this week by the president, Dilma Rousseff, builds in a primary deficit for the first time in the post-hyperinflation era (see article). The very legality of a budget with a primary deficit has been questioned: a fiscal-responsibility law passed in 2000 has long been interpreted as banning spending that outstrips receipts. But whatever the legal debate, the budget is calamitous.

First, Brazil would have to borrow to cover all its interest payments—a risk for a country with by far the highest real interest rates of any sizeable economy, at a time of recession and wider emerging-market jitters. Second, a primary deficit sends a bleak message about Brazilian economic management. Since the turn of the century Brazil’s government has been guided by three principles: a credible inflation target, a floating currency and primary surpluses, ideally large enough to bring public debt down. This “tripod” allowed it to move away from its hyperinflationary past, convinced ratings agencies to grant it an investment-grade badge and underpinned growth that propelled millions out of poverty. All this is now in jeopardy.

Ms Rousseff is not the only one to blame. She had hoped to run a primary surplus, despite the recession, by resurrecting a tax on financial transactions that was abolished in 2007. But her political weakness put paid to that plan. At just 8%, her public-approval rating has hit depths unplumbed by any previous Brazilian president, undermining her authority in Congress. Lawmakers are also angered by her finance minister’s attempts to rein in pork-barrel spending, and alarmed by a wide-ranging investigation into corruption at the state-controlled oil giant, Petrobras. Knowing that the new tax would be unpopular—and hoping to weaken Ms Rousseff further—they made it clear that they would block it.

Congress, Ms Rousseff’s advisers say, must now find a way to pay for the spending it refuses to cut. But it is stuffed with short-termists who are more concerned with lining their pockets than securing Brazil’s future. Many, both in the opposition and among her supposed allies, are wasting their energy trying to impeach Ms Rousseff, rather than finding a way to fix the budget. Unless this impasse is resolved quickly, business and consumer confidence will fall further and foreign investors will pull out. Brazil will be headed for a multi-year slump and a ratings downgrade.

Heaven can wait
So how might Brazil reach a primary surplus? By far the best solution would be to cut public spending, which accounts for more than 40% of GDP, much more than in other middle-income countries. Ms Rousseff has scaled back some discretionary spending, for example by promising to merge some ministries. But the 2016 budget includes plans to raise the minimum wage and many welfare payments by a whopping 10%. Congressional gridlock and a constitution that is chock-full of unaffordable spending commitments mean that only rarely have Brazilian governments managed to trim outgoings—and only under presidents endowed with remarkable political and leadership skills. Ms Rousseff falls far short of that ideal.

That leaves the sticking-plaster. The proposed financial-transaction tax would be, like so many Brazilian taxes, poorly designed and hard on growth. But it would still be better than ramping up spending with no way to pay for it. If not this tax, then some other is needed—and after that, the business of reforming Brazil’s greedy and profligate government.

(The Daily Beast) The Real Housewives of Ukraine

The Real Housewives of Ukraine

Despite revolution and war, Ukraine’s capital is a Mecca for glamorous young girls on the make. And there’s no shortage of eager sugar daddies.

Golden Vintage boutique is hidden in a private villa nestled among other townhouses in an elite district of Kiev called Pechorsky. There was no sign on the entryway, only the small letters “GV” on a security phone to let the visitor know she was at the right address. The boutique sells presents for Ukrainian gold miners—or more exactly, diggers. Inside, in dramatically decadent décor, a shopper can find forests of silk and velvet designer cocktail dresses, rows of Birkin, Hermes, and Channel purses, expensive diamond rings, necklaces, armies of Jimmy Choo and Christian Louboutin shoes, some covered with golden spikes. Almost all shoes had thick platforms or enormous heals, for beautiful long-legged Ukrainian girls to look even longer-legged.

That is not an ordinary shop. The items on sale were gifts that wealthy Ukrainian men, bankers, businessmen, or bureaucrats give their so called “girls of glamour,” their gold-diggers. Similar showrooms pop up all over Kiev these days, some in private houses or apartments. “Here is how it works,” the Golden Vintage shop assistant, Andriy, explained, full of smiles, unveiling the lifestyle secrets of the Ukrainian elite. “The girl normally asks two of her wealthy lovers for the same present, so one gift she can sell, and the other wear, not to offend any of the gift givers.” Andriy pulled out a box of Chanel shoes for $8,000—“adored, exclusive items”—and then a Marc Jacobs watch worth $300,000.

If only Andriy were a woman, he said, he would not mind wearing some of the most interesting clothes and shoes that the Golden Vintage offered. “Our clients are smart business ladies, they know that exclusive Marc Jacobs watch or every girl’s dream, a 25cm Birkin purse, will have great value in a year or two, so smart ladies ask for the right presents,” he said. At the time when Ukraine is mired in war, poverty, a flagging economy, its golden youth acted as if they were inhabiting an Eastern European Belle Époque.

The most shocking were the plastic surgeries.

Alena Loran, a 23-year-old kept woman, bought up ad-space on billboards for “spasibushechki,” or “little thank you” notes—for fur coats, cars, a pair of new red shoes, even for cash money. Then came the little thank you for her new lips, pink and pillowy, which Loran called her “dumplings.” She even appeared in “Casta,” a Ukrainian television series, about the golden youth of Kiev, and published her own book about a provincial girl coming to live in the capital to cheat and fool rich men. It was titled Alice in Wonderland. Loran soon had sugar daddies paying for sculpted cheekbones, eyelids and a sharper chin line. “Just two weeks ago, I had three plastic surgeries,” the diva confessed to The Daily Beast from the OK Bar in Kiev.

Loran blamed the Euromaidan Revolution for causing dark times for the Ukrainian elite. “The revolution did not clean away hypocrisy. When teachers make $100 a month, golden youth spend that on a drink; judging by the Instagram pictures, everybody is now in Monaco or Miami,” she said. “Kiev feels empty.” As for the movement that toppled the crooked Yanukovych government, she wanted nothing to do with it. “I am a girl thinking of my health, I had nothing to do on that square at -20 Celsius.”

It was indeed freezing cold on Kiev’s central Maidan Square when Lesia Litvinova, a well-known filmmaker pregnant with her fourth child, became a volunteer. She joined with the protestors on the square, and then, with three more friends, founded an air organization on Frolovskaya Street to help internally displaced persons, soldiers’ families—anybody who was in need. “Since then, I have not had time to go back to my normal life,” Litvinova told The Daily Beast in an interview at her headquarters last week.“We provide clothes, dishes, toys, and other necessary items for over 500 IDPs coming here every day.” Litvinova’s oldest daughter, a 15-year-old beauty, helped her mother tend to Ukraine’s needy. But Litvinova wasn’t resentful of the 1 percent-ers, gold-diggers in their gorgeous gowns and at their expensive beauty salons. “Some of these rich people contribute big money to volunteer centers,” she said.

Outside, Kiev stood in the full glamour of its green parks and golden cupolas. A place called Tsarsky (Royal) Sport Complex, a gym equipped with the most state-of-the-art and expensive Italian machines, invited Ukrainians to spend $2,500 a month on their health, outdoing New York’s Equinox gym by an order of magnitude. Still, some justified the extravagance as a way of moving on. “Even during these difficult times, business should not stop developing, our people should have ambitions, should choose what they live for, what they work and make money for,” Yekaterina Prokorova, a marketing manager, told The Daily Beast in an interview at Tsarsky. Prokhorova has formerly been a general manager at the Ramada Hotel in Donetsk, home for most international journalists who came to cover the war in the east. Tough, dangerous situations, dealing with armed rebels, made Prokhorova a Buddhist.

Back at the OK Bar, Alena Loran, the ideologist of Kiev’s gold diggers, was planning on writing a second book, instructing provincial girls like her (she arrived here nine years ago) to to be careful. “Ukrainian men are extremely spoiled by the constant flow of beauties their way,” she said. “The perfectly sculpted faces, after plastic surgeries, girls in designer brand clothes, with gorgeous skin and hair. To make a living on your beauty, one needs to be really smart. I want to protect the girls from making some mistakes I made.”