Submitted by Mike Shedlock via MishTalk.com,

Fed Governor Jerome Powell says “Signs of excesses are ‘isolated’. Asset Prices ‘not broadly unsustainable’“.

The Federal Reserve does not see“broadly unsustainable asset prices,” a senior U.S. central banker said Saturday, with financial excesses stemming from almost a decade of ultralow interest rates “isolated.”

 

In remarks as part of a panel discussion at the American Finance Association meeting, Fed Gov. Jerome Powell defended the central bank’s policy that has kept interest rates at historic lows since the financial crisis. The Fed pushed rates to zero in December 2008 and has only raised them only twice since, both in the past year.

 

The policy of low rates has helped the economy recover, and has helped strengthen the financial sector, he said. “By many measures the U.S. financial system is much stronger than before the crisis,” Powell said.

 

There are trade-offs, because low interest rates can have adverse impacts on financial markets in a number of ways, he said.“Low rates can lead to excessive leverage and broadly unsustainable asset prices — things that we watch carefully for and do not observe at this point.”

Missed Elephants

1. The Greenspan Fed missed the dotcom bubble
2. The Greenspan Fed and the Bernanke Fed missed the housing bubble
3. The Bernanke Fed and the Yellen Fed missed the asset bubbles now in progress

The only way to not see this bubble is to be willfully blind to economic fundamentals for the sole benefit of banks and the wealthy, to the detriment of everyone else.

And then there's Citadel's Ken Griffin...

“We are now more levered in corporate America than ever before”

Which - is a fact!

Last May we reported that, after years of railing against Citadel's dominant position at the intersection of HFT trading and retail orderflow - Citadel was recently found to be the largest private US trading venue - Federal authorities were investigating the market-making arms of Citadel LLC and KCG Holdings looking into the possibility that the two giants of electronic trading are giving small investors a poor deal when executing stock transactions on their behalf.

As a reminder, Citadel is so big and its own private stock-trading platform is so large that, if it were an official exchange recognized by the Securities and Exchange Commission, it would one of the largest registered exchanges in the United States - bigger than Nasdaq. Citadel Execution Services, the firm’s wholesale market-making unit, recently executed 35% of all trades by retail investors in U.S.-listed stocks.

It was this retail trading giant that authorities were probing, and specifically looking at internal data concerning the firms’ routing of customer stock orders through exchanges and other trading systems, to see whether they are giving customers unfavorable prices on trades in order to capture more profit on the transactions.

In other words, the DOJ is looking into whether Citadel is frontrunning its clients, something we have claimed for years.

So what would happens if the DOJ did find what has been obvious to most market participants for years, namely that Ken Griffin's firm was frontrunning retail orderflow fore years?

As we summarized at the time, if authorities do move ahead, they would be marching forcefully into the debate over high-speed trading. Critics of HFT, such as this website, have alleged that firms with the fastest trading technology are using speed to manipulate stock prices, giving investors a raw deal. The industry counters that its technology delivers cheaper and more transparent trades to investors.

It also delivers guaranteed profits to itself, because while on one hand Citadel is a massive market-maker, responsible for the biggest portion of retail flow traffic, on the other it happens to be the most leveraged hedge fund in the world in terms of regulatory to net assets.

* * *

Or maybe nothing at all. Because fast forward to today, when without much fanfare at all, Citadel announced it would pay $22.6 million to settle allegations that it "misled clients about pricing trades", a euphemism for it was frontrunning its clients.

The Securities and Exchange Commission, soon to be run by a former deal lawyer who was particularly close to Goldman Sachs, said in a statement on Friday that Citadel, without admitting or denying the findings, had agreed to pay $5.2m disgorgement of ill-gotten gains, plus interest of $1.4m, in addition to a $16m penalty.

The SEC found precisely what we had said all along: that the company's business unit handling retail suggested to its broker-dealer clients that it would internalize retail orders to provide the best price, but it used algorithms that failed to perform the task from 2007 to 2010; i.e. Citadel was actively trading against the best interests of its clients, and adverse in its own best interests.

"These two algorithms represented a small part of Citadel Securities' internalization business, but they nevertheless affected millions of orders placed by retail investors because of Citadel Securities' large role in that market," said Robert Cohen, co-chief of the SEC enforcement division's market abuse unit.

Citadel, which has since discontinued use of the algorithms, said in a statement Friday that it takes legal compliance "very seriously." 

Today, Citadel Securities resolved an issue related to the adequacy of certain disclosures from late 2007 to January 2010. We take very seriously our obligations to comply fully with all laws and regulations. As the market leader we are committed to providing superior service and execution quality to our clients each and every day.

To those who want to see a Citadel internalizer algo in action, we recommend you read the following article by Nanex' Eric Hunsader, who explains the entire process: "Retail Trades Disadvantaged by Direct Feeds  Internalizers buy at the direct feed price, sell to retail at the SIP feed price."

With storm clouds already building above the hedge fund industry, which as reported last night posted deplorable results in 2016 as only 32% of fundamental and quantitative funds outperformed their benchmarks according to JPM data - the worst performance this decade - leading to the largest redemption requests since the financial crisis, as over $100 billion was withdrawn from the industry last year, the latest shock to hedge fund investors, already displeased with underperforming the S&P for years, is the realization that they also pay for many if not all hedge fund expenses, resulting in substantial payments over and above those envisioned by the conventional 2 and 20% model.

The reason for their confusion and/or anger is simple: as Reuters points out, some of the more prominent hedge funds such as Citadel LLC and Millennium Management LLC charge clients for such costs through so-called "pass-through" fees, which can include everything from a new hire's deferred compensation to travel to high-end technology. And it all adds up with investors often paying more than double the industry's standard fees of 2% of assets and 20 percent of investment gains, which in light of recent performance has already infuriated countless investors leading to a historic outflow from active to passive managed funds.

Clients of losing funds last year, including those managed by Blackstone Group LP's Senfina Advisors LLC, Folger Hill Asset Management LP and Balyasny Asset Management LP, likely still paid fees far higher than 2 percent of assets.

Other funds, which at least made money, such as Millennium, the $34 billion New York firm led by billionaire Israel Englander, charged clients its usual fees of 5 or 6% of assets and 20 percent of gains in 2016, according to a person familiar with the situation. The charges left investors in Millennium's flagship fund with a net return of just 3.3 percent.

Clients of other shops that made money, including Paloma Partners and Hutchin Hill Capital LP, were left with returns of less than 5 percent partly because of a draining combination of pass-through and performance fees.

In some cases the pass-throughs fees have been truly egregious, and nowhere more so thatn for Ken Griffen's Citadel, which recently settled accusations it was frontrunning its clients using various HFT scheme. The $26 billion Chicago hedge fund charged pass-through fees that added up to about 5.3 percent in 2015 and 6.3 percent in 2014, according to another person familiar with the situation. Charges for 2016 were not finalized, but the costs typically add up to between 5 and 10 percent of assets, separate from the 20 percent performance fee Citadel typically charges.

And considering that Citadel's flagship fund returned 5% in 2016, far below its 19.5% annual average since 1990, it means investors likely ended up with nothing.

As Reuters notes, in 2014, consulting firm Cambridge Associates studied fees charged by multi-manager funds, which deploy various investment strategies using small teams and often include pass-throughs. Their clients lose 33% of profits to fees, on average, Cambridge found. In recent years the number has been far greater due to even more subdued returns. Surprisingly, the report found that  funds would need to generate gross returns of roughly 19 percent to deliver a 10 percent net profit to clients. In other words, in a world in which single-digit Hedge Fund returns are becoming the norm, when one nets out all the expenses, investors end up with nothing.

* * *

To be sure, this pass through structure is nothing new, and investors have for years tolerated similar charges; but they did so because of high net returns. However, due to ongoing performance lately, LPs are getting angry. 

Defenders of the expenses, which can be used to cover any costs, from bar tabs, to private jet fees, to bonuses, say they are necessary to keep elite talent and provide traders with top technology. They said that firm executives were often among the largest investors in their funds and pay the same fees as clients. Citadel has used pass-through fees for an unusual purpose: developing intellectual property. The firm relied partly on client fees to build an internal administration business starting in 2007. But only Citadel's owners, including Griffin, benefited from the 2011 sale of the unit, Omnium LLC, to Northern Trust Corp for $100 million, plus $60 million or so in subsequent profit-sharing, two people familiar with the situation said.

Meanwhile investor frustration is showing. According to a 2016 survey by consulting firm EY, 95% of investors prefer no pass-through expense. The report also said fewer investors support various types of pass-through fees than in the past.

"It's stunning to me to think you would pay more than 2 percent,"said Marc Levine, chairman of the Illinois State Board of Investment, which has reduced its use of hedge funds. "That creates a huge hurdle to have the right alignment of interests."

Precisely, which is also why investors pulled $11.5 billion from multi-strategy funds in 2016. Redemptions for firms that use pass-through fees were not available.

"High fees and expenses are hard to stomach, particularly in a low-return environment, but it's all about the net," said Michael Hennessy, co-founder of hedge fund investment firm Morgan Creek Capital Management.

Unfortunately for many hedge funds, the "net" is shrinking with every passing year, which is why most hedge funds have bet their careers on 2017 as the make or break year as a result of what they hope will be a surge in stock "dispersion." If it does not happen, the Netflix sequel of Billions may as well be called Millions.

Regular readers remember how, when we first reported around the time of our launch eight years ago that central banks buy stocks, intervene and prop up markets, and generally manipulate equities in order to maintain confidence in a collapsing system, and avoid a liquidation panic and bank runs, it was branded "fake news" by the established financial "kommentariat." What a difference eight years makes, because today none other than the WSJ writes that "by keeping interest rates low and in some cases negative, central banks have prompted some of the most conservative investors to join the hunt for higher returns: Other central banks."

To be sure, nothing that the WSJ reports is news to our readers, who have known for years how central banks overtly, in the case of the BOJ, PBOC and SNB most prominently, and covertly, as the infamous "leave no trace behind" symbiosis between the NY Fed and Citadel, however we find it particularly enjoyable every time the financial paper of record reports what until only a few years ago was considered "conspiracy theory", and wonder what other current "fake news" will be gospel in 2020.

Meanwhile, for those few who are still unfamiliar, this is how central banks who create fiat money out of thin air and for whom "acquisition cost" is a meaningless term, are increasingly nationalizing the equity capital markets. As the WSJ puts it "these central banks care relatively little about whether such investments make profits or losses—though they can matter politically—because they can always print more of their currency. So risk is less important, analysts say." And since risk was no longer part of the equation, leaving only return, central banks started buying stocks.

“When yields started to get really low and closer to zero in 2014, we decided to start equity investments,” said Jarno Ilves, head of investments at the Bank of Finland, who said he plans to increase his allocation to stocks.

But if you think the farce is bad now, wait until next year. According to a recent study by Invesco on central- bank investment which polled 18 reserve managers, some 80% and 43% of respondents to questions on asset allocation said they planned to invest more in stocks and corporate debt, respectively. Low government-bond returns were behind the moves to diversify, said 12 out of 15 respondents, while three declined to answer.

So between central banks outbidding each other to buy "risky" assets with "money" that is constantly created at no cost, very soon all other private investors will be crowded out but not before every stock is trading at valuations that even CNBC guests won't be able to justify.

The good news is that instead of focusing on Ultra High Net Worth clients, a desperate for revenue Wall Street can just advise central banks on which stocks to buy.

The shift has significant implications for markets and the global economy, analysts say. Many central banks are hiring outside managers to handle the nontraditional assets in their portfolios, presenting an opportunity to a financial industry struggling with stagnant revenue growth.

 

“We see more and more appetite by central banks for riskier strategies,” said Jean-Jacques Barberis, ‎who manages central-bank money for Amundi, Europe’s largest asset manager.

The bad news, is that as more people realize that a free "market" now only exists in textbooks, and that Soviet-style central planning is the only game in town, confident in price formation will evaporate, in turn pushing even more market participants out of the quote-unquote market, until only central banks are left bidding on each other's otherwise worthless stock certificates.

At the same time, efforts to invest reserve funds more broadly mean that more markets will be subject to what some critics describe as central-bank distortion, as large and often price-insensitive buyers run the risk of driving up prices and reducing prospective returns for other market participants.

For virtually all central banks, however, the grotesque central planning shift of the past decade means that instead of engaging in monetary policy, the world's central banks are now activist hedge funds, who are focused first and foremost on "investment management":

The South African Reserve Bank’s growing piggy bank drove it to switch “from being a liquidity manager to focusing on investment management,” said Daniel Mminele, its deputy governor.

 

In the third quarter of 2016, global foreign-exchange reserves totaled $11 trillion, according to the International Monetary Fund, up from $1.4 trillion at the end of 1995.

But in the world of central bank hedge funds, no other bank comes even remotely close to the (publically-traded) Swiss National Bank, which has taken risky investing to a whole new level.

In 2013, the SNB opened a branch in Singapore to manage its Asia-Pacific assets, which as of 2015 include emerging-market equities and Chinese government bonds. It was a necessity, since the SNB now manages a mammoth 645 billion franc ($643 billion) in foreign reserves, a pile that grew as the bank tried to push down the value of its currency in a bid to fight deflation and help exporters.

 

In 2009, equities only made up 7% of the SNB’s reserves, four years after it started buying them. Now they are 20%, including investments of $1.7 billion in Apple Inc., $1.08 billion in Exxon Mobil Corp., and $1.2 billion in Microsoft Corp., according to third-quarter Securities and Exchange Commission filings.

Having bought hundreds of billions in equities carries risks even for central banks, if only on paper: in 2015, the SNB booked a loss of 23.3 billion francs, when officials stopped maintaining a ceiling on the value of their currency. As the currency jumped by as much as 22% against the euro, the value of their foreign assets fell. Last year, it offset those losses with a 24 billion-franc profit, as its equity investments paid off.

Others did not fare quite as well: "the Czech National Bank started buying stocks in June 2008 just before the financial crisis. The subsequent stock market crash wiped out a third of its equity investment that year, then roughly 2.5% of its total reserves."

* * *

By now it is common knowledge that central banks openly intervene in markets, the most vivid and recent example of which is the BOJ, which as of this moment owns two-thirds of all Japanes ETFs...

... and at the current rate of expansion, within a few years the world's monetary authorities who are tasked with "financial stability", will have acquired a majority of the world's equity tranche, effectively nationalizing it. We bring it up in light of recent ridiculous allegations that "Russia hacked the US elections" - we wonder, will the liberal press blame the USSR after it dawns upon the world's intrepid press that while it was busy comparing the Obama and Trump crowds, the world's greatest wealth transfer was taking place right below everyone's nose.

Lt. Gen. H.R. McMaster

In a brief statement from Mar-a-Lago, President Trump said on Monday that Lieutenant General Herbert Raymond McMaster would be his new national security adviser, again turning to the U.S. military to play a central role on his foreign policy team. Trump also named Keith Kellogg, a retired U.S. Army General who has been serving as the acting national security adviser, as chief of staff to the National Security Council.

Speaking to reporters in West Palm Beach where he spent the weekend, Trump said John Bolton, a former U.S. ambassador to the United Nations, would serve the administration in another capacity. Trump spent the weekend considering his options for replacing Flynn. His first choice, retired Vice Admiral Robert Harward, turned down the job last week.

BREAKING: Trump picks retired Gen. H.R. McMaster as next national security adviser https://t.co/BHiYnKtXJe

— NBC News (@NBCNews) February 20, 2017

     McMaster is a highly regarded military tactician and strategic thinker, but his selection surprised some observers who wondered how McMaster, who is known for questioning authority, would deal with a White House that has not welcomed criticism, Reuters wonders.  He replaces a Trump loyalist. Michael Flynn, a retired Army lieutenant general, was fired as national security adviser on Feb. 13 after reports emerged that he had misled Vice President Mike Pence about speaking to Russia's ambassador about U.S. sanctions before Trump's inauguration.

McMaster, 54, is a West Point graduate known as "H.R.," with a PhD in U.S. history from the University of North Carolina at Chapel Hill. He was listed as one of Time magazine's 100 most influential people in 2014, partly because of his willingness to buck the system. A combat veteran, he gained renown in the first Gulf War - and was awarded a Silver Star - after he commanded a small troop of the U.S. 2nd Army Cavalry Regiment that destroyed a much larger Iraqi Republican Guard force in 1991 in a place called 73 Easting, for its map coordinates, in what many consider the biggest tank battle since World War Two.

As one fellow officer put it, referring to Trump's inner circle of aides and speaking on condition of anonymity, the Trump White House "has its own Republican Guard, which may be harder for him to deal with than the Iraqis were." The Iraqi Republican Guard was ousted dictator Saddam Hussein's elite military force. As Reuters adds, McMaster's fame grew after his 1997 book "Dereliction of Duty" criticized the country's military and political leadership for poor leadership during the Vietnam War.

* * *

According to Foreign Policy'sThomas Ricks says, picking McMaster is not a bad thing.       

I’ve known him since he was major. He’s smart, energetic, and tough. He even looks like an armored branch version of Harward. (That’s him, working out with a punching bag in Iraq, in the foto. I took it in the citadel in downtown Tell Afar one sunny winter day about 10 years ago.) (Btw, Harward was scheduled to appear on ABC’s “This Week” yesterday morning, but backed out an hour before airtime. )

 

Once Trump was turned down by Harward, it became more likely that he would turn to the active duty military for his 3^rd pick for the job. McMaster is among the best of them out there. For his Ph.D. dissertation, he wrote one of the best books on the Vietnam War, Dereliction of Duty: Johnson, McNamara, the Joint Chiefs of Staff, and the Lies That Led to Vietnam.

 

He has good combat experience, he was a good trainer, and he led the 3^rd Armored Cavalry Regiment well in his deployment to Iraq, most notably in pacifying Tell Afar, to the west of Mosul.

I wrote about his operations there in my book The Gamble. I am traveling so I don’t have it with me, but I remember him telling his soldiers that understanding counterinsurgency really wasn’t hard: “Every time you disrespect an Iraqi, you’re working for the enemy.” They even had “Customer Satisfaction Forms” that detainees were asked to fill out upon release: Were you treated well? How was the food? What could we do better?

 

There are two big differences between him and Harward: First, he is on active duty. (Though the Army inexplicably couldn’t find a four star job for him, and had told him to plan to retire later this year.) Second, his wife won’t kill him if he takes the job, as Harward’s wife might have.

 

That said, the basic problems remain. To do the job right, McMaster needs to bring in his own people. And it remains unclear if he can get that.

As for relations with the Pentagon: McMaster knows Mattis, but not well. (They both spoke at a conference at the University of North Carolina in April 2010.) But they are similar people and will respect each other.  Ricks adds that he did an informal poll of people who have worked for McMaster, asking if they would be willing to follow him to the National Security Council staff. To a surprising degree, they replied, Yes, they would. That’s an indication of loyalty to and confidence in him.

* * *

Herbert Raymond "H.R." McMaster's full public bio is below:

Herbert Raymond "H. R." McMaster (born July 24, 1962 in Philadelphia, Pennsylvania) is an American soldier, and a career officer in the U.S. Army. His current assignment is Director, Army Capabilities Integration Center and Deputy Commanding General, Futures, U.S. Army Training and Doctrine Command. His previous assignment was commander of the Maneuver Center of Excellence at Ft. Benning, Georgia. McMaster previously served as Director of Combined Joint Interagency Task Force-Shafafiyat (CJIATF-Shafafiyat) (Transparency) at ISAF (International Security Assistance Force) Headquarters in Kabul, Afghanistan. He is known for his roles in the Gulf War, Operation Iraqi Freedom, Operation Enduring Freedom, and his reputation for questioning U.S. policy and military leaders regarding the Vietnam War.

McMaster graduated from Valley Forge Military Academy in 1980, where he served as a company commander with the rank of cadet captain. He is a 1984 graduate of West Point, where he played rugby.

He holds Master of Arts and Ph.D. degrees in American history from the University of North Carolina at Chapel Hill, and authored a thesis critical of American strategy in the Vietnam War, which is detailed in his 1997 book Dereliction of Duty.It harshly criticizes high-ranking officers of that era, arguing that they inadequately challenged Defense Secretary Robert McNamara and President Lyndon Johnson on their Vietnam strategy. The book is widely read in Pentagon circles and is on the official reading list of the Marine Corps.

Early Career

His first assignment after commissioning was to the 2nd Armored Division at Fort Hood, where he served in a variety of platoon and company level leadership assignments with 1st Battalion 66th Armor Regiment. In 1989, McMaster was assigned to the 2nd Armored Cavalry Regiment at Warner Barracks in Bamberg, Germany, where he served until 1992, including deployment to Operation Desert Storm.
During the Gulf War in 1991 he was a captain commanding Eagle Troop of the 2nd Armored Cavalry Regiment at the Battle of 73 Easting. During that battle, though significantly outnumbered and encountering the enemy by surprise as McMaster's lead tank crested a dip in the terrain, the nine tanks of Eagle Troop destroyed over eighty Iraqi Republican Guard tanks and other vehicles without loss, due to the Abrams tank being state-of-the-art armored technology while the Iraqi equipment included grossly outdated T-62s and -72s of the Soviet era as well as similarly dated Type 69s of Chinese manufacture.

"At 4:10 p.m. Eagle Troop received fire from an Iraqi infantry position in a cluster of buildings at UTM PU 6801. Eagle troop Abrams and Bradleys returned fire, silenced the Iraqi guns, took prisoners, and continued east with the two tank platoons leading. The 12 M1A1 tanks of Eagle Troop destroyed 28 Iraqi tanks, 16 personnel carriers and 30 trucks in 23 minutes with no American losses. At about 4:20 Eagle crested a low rise and surprised an Iraqi tank company set up in a reverse slope defence on the 70 Easting. Captain McMaster, leading the attack, immediately engaged that position, destroying the first of the eight enemy tanks to his front. His two tank platoons finished the rest. Three kilometers to the east McMaster could see T-72s in prepared positions. Continuing his attack past the 70 limit of advance, he fought his way through an infantry defensive position and on to high ground along the 74 Easting. There he encountered and destroyed another enemy tank unit of eighteen T-72s. In that action the Iraqis stood their ground and attempted to maneuver against the troop. This was the first determined defense the Regiment had encountered in its three days of operations. Still, the Iraqi troops had been surprised because of the inclement weather and were quickly destroyed by the better trained and better equipped American troops."

McMaster was awarded the Silver Star. The battle features in several books about Desert Storm and is widely referred to in US Army training exercises. It also receives coverage in Tom Clancy's 1994 popular non-fiction book Armored Cav. McMaster served as a military history professor at West Point from 1994 to 1996, teaching among other things the battles in which he fought. He graduated from the United States Army Command and General Staff College in 1999.

Later Career

From 1999 to 2002, McMaster commanded 1st Squadron, 4th Cavalry Regiment, and then took a series of staff positions at U.S. Central Command (USCENTCOM), including planning and operations roles in Iraq.

In his next job, as lieutenant colonel and later colonel, McMaster worked on the staff of USCENTCOM as executive officer to Deputy Commander Lieutenant General John Abizaid. When Abizaid received four-star rank and became Central Command's head, McMaster served as Director, Commander's Advisory Group (CAG), described as the command's brain trust.

In 2003 McMaster completed an Army War College research fellowship at Stanford University's Hoover Institution.

In 2004, he was assigned to command the 3rd Armored Cavalry Regiment (3rd ACR). Shortly after McMaster took command the regiment deployed for its second tour in Iraq and was assigned the mission of securing the city of Tal Afar. That mission culminated in September with Operation Restoring Rights and the defeat of the city's insurgent strongholds. President Bush praised this success, and the PBS show Frontline broadcast a documentary in February, 2006 featuring interviews with McMaster. CBS' 60 Minutes produced a similar segment in July, and the operation was the subject of an article in the April 10, 2006 issue of The New Yorker.

Author Tim Harford has written that the pioneering tactics employed by 3rd ACR led to the first success in overcoming the Iraqi insurgency. Prior to 2005, tactics included staying out of dangerous urban areas except on patrols, with US forces returning to their bases each night. These patrols had little success in turning back the insurgency because local Iraqis who feared retaliation would very rarely assist in identifying them to US forces. McMaster deployed his soldiers into Tal Afar on a permanent basis, and once the local population grew confident that they weren't going to withdraw nightly, the citizens began providing information on the insurgents, enabling US forces to target and defeat them.

McMaster passed command of the 3rd Armored Cavalry Regiment on June 29, 2006 and joined the International Institute for Strategic Studies in London, as a Senior Research Associate with a mandate described as "conducting research to identify opportunities for improved multi-national cooperation and political-military integration in the areas of counterinsurgency, counter-terrorism, and state building", and to devise "better tactics to battle terrorism."

From August, 2007 to August, 2008 McMaster was part of an "elite team of officers advising US commander" General David Petraeus on counterinsurgency operations while Petraeus directed revision of the Army's Counterinsurgency Field Manual during his command of the Combined Arms Center. Petraeus and most of his team were stationed in Fort Leavenworth at the time but McMaster collaborated remotely, according to senior team member John Nagl.

Career as General Officer

McMaster was passed over for promotion to Brigadier General in 2006 and 2007, despite his reputation as one of "the most celebrated soldiers of the Iraq War." Though the rationale for promotion board decisions is not made public, it is generally agreed that McMaster was held back because of his tendency to argue against the status quo. It should be noted that McMaster was the second person in his 1984 West Point Class to be promoted to Brigadier General behind only William Rapp and the third in the entire 1984 Year Group. No officers from later year groups are senior to him except for Special Corps officers, e.g. Medical and Judge Advocate General Corps. This should call into question the assertion that he was ever "passed over" for promotion.

McMaster was selected for Brigadier General on the 2008 promotion list. Secretary of the Army Pete Geren had requested General Petraeus to briefly return from Iraq to take charge of the promotion board as a way to ensure that the best performers in combat received every consideration for advancement, and it is generally acknowledged that Petraeus's presence ensured that McMaster was among those selected.

In August, 2008 McMaster assumed duties as Director, Concept Development and Experimentation (later renamed Concept Development and Learning), in the Army Capabilities Integration Center (ARCIC) at Fort Monroe, Virginia, part of U.S. Army Training and Doctrine Command. In this position McMaster was involved in preparing doctrine to guide the Army over the next ten to twenty years. He was promoted on June 29, 2009.

In July 2010 he was selected to be the J-5, Deputy to the Commander for Planning, at ISAF (International Security Assistance Forces) Headquarters in Kabul, Afghanistan. Additionally, McMaster directed a joint anti-corruption task force (CJIATF-Shafafiyat) at ISAF Headquarters.

As with his promotion to Brigadier General, McMaster was the second member of his 1984 West Point class behind William Rapp to be selected for promotion to Major General and all six Year Group 84 officers selected that year were promoted within 2 months of each other. Rapp was selected the previous year and was the only Line Year Group 84 officer selected that year. Army Chief of Staff General Martin Dempsey called McMaster "probably our best Brigadier General."

McMaster was nominated for Major General on January 23, 2012. In April, 2012 he was announced as the next commander of the Army's Maneuver Center of Excellence (MCoE) at Ft. Benning. On June 13, 2012 McMaster assumed command of the MCoE and was promoted to Major General in a ceremony at Ft. Benning with a date of rank of 2 August 2012.

On February 18, 2014 Defense Secretary Chuck Hagel announced the nominations of four officers for promotion to Lieutenant General, including McMaster, who was selected to become Deputy Commander of the Training and Doctrine Command and Director of TRADOC's Army Capabilities Integration Center.

"It is heartening to see the Army reward such an extraordinary general officer who is a thought leader and innovator while also demonstrating sheer brilliance as a wartime brigade commander," retired Army Gen. Jack Keane, a former Army vice chief, said of the promotion.

In April 2014, Maj General McMaster made Time magazine's list of 100 most influential people in the world. He is hailed as "the architect of the future U.S. Army" in the accompanying piece written by retired Lt. Gen. Dave Barno, who commanded U.S. and allied forces in Afghanistan from 2003 to 2005.

"Major General Herbert Raymond McMaster might be the 21st century Army's pre-eminent warrior-thinker," Barno wrote. "Recently tapped for his third star, H.R. is also the rarest of soldiers—one who has repeatedly bucked the system and survived to join its senior ranks."

McMaster is cited for his "impressive command and unconventional exploits in the second Iraq war," Barno wrote.

In July 2014 McMaster was promoted to Lieutenant General and began his duties at the Army Capabilities Integration Center.

A prominent 47-year-old hedge fund trader was killed when he jumped from a luxury apartment building on Manhattan's Upper West Side, in an apparent suicide, authorities told the NY Post.

Kevin Bell, most recently head of Credit Risk at Arrowgrass Capital, jumped from a ninth-floor kitchen window at the Apthorp building on West End Avenue near West 79th Street around 7:20 a.m. He landed on scaffolding that was set up in front of the building and was pronounced dead at the scene.

Bell left a note indicating he had been depressed, the source said. He had a history of depression, the source added.

According to the NY Post, Bell left behind a wife and two daughters. His family was at home when he jumped, according to the source. “The family is hysterical. He was under a lot of meds. He did not give a specific reason why he jumped, but he was depressed,” the source said.

Bell, a graduate of Duke University, worked at Arrowgrass Capital Partners, where he was head of credit risk, according to his LinkedIn page. Arrowgrass managed $4.5 billion as of mid-2016. It is run by former Deutsche Bank traders Henry Kenner and Nicholas Niell, and in 2015 had been stocking its ranks with Saba alumni after losing several employees in its credit-trading group in April. The firm focuses on strategies including corporate distressed assets in the U.S. and Europe.

Prior to Arrowgrass, Bell worked at various prominent hedge funds and banks including Saba Capital, Citadel, Citigroup and Deutsche Bank.

“We are deeply saddened that our friend and colleague Kevin Bell has passed away today. We extend our sympathies and condolences to his family,” Arrowgrass spokesman Nick Lord told The Post in a statement from the UK.

A building worker said some residents saw the man’s body. “A couple of our residents reported hearing a thud,” the worker said. “The daughter of a tenant looked out the window and she told her mother there was a man lying down on the scaffolding.”

The worker said the mother saw the body and notified building workers.

“He was bleeding,” the worker said. “Some of the residents are pretty shaken up.”

Based on resident reports, this is not the first suicide at the building: a man who works in a nearby doctor’s office was stunned about the suicide. “Oh my God, another one?” he said in disbelief. “Somebody committed suicide a few months ago … on the other side of the building. I can’t believe it, it’s almost exactly the same thing, but just around the side.”

Among the Apthorp building’s famed tenants were Al Pacino, Sydney Poitier and singer and Oscar-winning actress Jennifer Hudson. The building, which is modeled after the Palazzo Pitti in Florence, is listed on the National Register of Historic Places and takes up an entire city block, from Broadway to West End Avenue between 78th and 79th streets.

It was unknown as of this writing if Bell's alleged depression had been impacted by recent market performance.

Via Disobedient Media

On March 1st, 2017, the New York Post reported the suicide of Kevin Bell, head of credit risk at British hedge fund Arrowgrass Capital Partners LLP. He had previously worked at Saba Capital Management, Citadel Investment group, Citigroup and Deutsche Bank, according to his Linkedin page. An investigation into Arrowgrass Capital Partners in the aftermath of his death has revealed that Arrowgrass was connected to think tanks tied to DNC propaganda chief David Brock, has ties to a number to individuals and corporations with histories of fraudulent financial activity and uses a web developer which appears to be a shell company. Mr. Bell's suicide provides a glimpse into a more shadowy element of the finance world where the line between legitimate business and organized crime becomes increasingly thin.

I. Number Of Arrowgrass Employees Had Come From Sabu Capital Management, Arrowgrass Is Connected To Establishment-Run Think Tanks

Arrowgrass Capital Partners appears to have had a number of employees present at their firm who had recently come from Sabu Capital Management. In November 2015, Bloomberg reported that Paul Andorio, a former partner at Sabu, was joining Arrowgrass to work alongside Bell in credit risk. Andorio was one of multiple former Sabu employees who had recently moved to Arrowgrass after the firm had lost several employees in its credit trading group.

The presence of multiple former employees from Sabu at Arrowgrass is interesting given the colorful history of Sabu's founder. Boaz Weinstein is a chess and gambling savant turned hedge fund manager. Weinstein has achieved a legendary status in the financial world, although his career has been marked by controversy. In 2012, the New York Times reported that Weinstein was one of a number of traders who benefitted from a "hunch" about multi-billion dollar losses incurred by JP Morgan after a number of bad transactions that were booked through its London branch. Mr. Weinstein was also accused of fraud in 2015 by Canada's Public Sector Pension Investment Board (PSP Investments) after Saba Capital reduced the value of PSP's portfolio right before paying out on a redemption request, marking the value back up shortly after the money was cashed out.

Weinstein's connections to the world of organized crime were revealed when it emerged that he was a member of a private, high stakes poker group along with billionaire and Avenue Capital Group cofounder Marc Lasry. In 2013, Lasry was forced to withdraw his name from a list of contenders for Obama's U.S. Ambassador to France when it emerged that the FBI was sniffing around his "close friendship" with Illya Trincher. Trinchner, an alleged Russian mobster, was arrested along with three dozen others in connection with a $100 million betting and money-laundering scheme that included Hollywood personalities accused of facilitating illegal gambling events for celebrities such as Tobey Maguire, Matt Damon, and Leonardo DiCaprio and was laundering money through a Carlyle hotel art gallery. Lasry's Avenue Capital Group has teamed up with Donald Trump in the past as Trump attempted to navigate the mob-controlled gambling scene in Atlantic City. Weinstein's various connections to crime figures and his penchant for courting accusations of fraud raise questions about why Arrowgrass was bringing on so many employees from Sabu Capital Management in the years before Mr. Bell's suicide.

The head of Arrowgrass Capital Partners, Michael Edwards, is also affiliated with centrist think tank Third Way. Despite its purported mission to return politics to a more neutral, middle of the road environment, Third Way recieves most of its funding from Wall Street donors and in effect serves as little more than an outlet for ideas which promote the interests of their donors. Third Way and other special interest-supported figures such as David Brock have been widely panned by the media for promoting censorship and propaganda instead of substantive ideas. Brock has directly involved Third Way in conferences held with donors in the past and is utilizing Third Way employees in efforts to help the DNC regain power in the 2018 congressional elections.

II. Arrowgrass' Web Developer Appears To Be Front Organization

In addition to having ties to firms with suspicious connections, the group providing online support for Arrowgrass appears to be a front organization, listing an address that leads to a small, nondescript building as its office despite having a multitude of large name clients in finance. Arrowgrass' website lists CAPTEC Systems as its web developer. CAPTEC's other clients include several Swiss accounts such as Argentière Capital, set up in 2013 by J.P. Morgan’s former global head of prop trading Deepak Gulati, and LindenGrove Capital. LindenGrove was founded by Borut Miklavcic, the former head of global inflation trading business at the infamous Lehman Brothers who also began his career at JP Morgan.

An examination of the listed address on CAPTEC Systems' website leads to a small structure in Oxford, England that does not even feature CAPTEC's logo on the exterior. The nondescript, ramshackle building is odd given CAPTEC's role as a web developer for several multibillion dollar corporations.

The apparent anomalies with Arrowgrass' web developer and its connections to various Swiss groups run by individuals tied to companies involved in the 2008 financial crisis creates questions about what appears to be either a front company with no real place of business or CAPTEC's attempt to conceal the true location of their office.

It is not clear what caused Mr. Bell to take his own life earlier this month, although in 2015 a deal with Foundation Capital to buy Deutsche Bank’s stake in Arrowgrass Capital came undone amid speculation that Arrowgrass' principals did not wish to dilute their ownership, and that the head executive of Foundation was facing a contempt-of-court order over debts he owed to Los Angeles based City National Bank. While an anonymous source informed the New York Post that Bell was depressed, Arrowgrass' use of an apparent shell company for their web development and the presence of a number of employees at Arrowgrass from Sabu Capital Management raises concerns given the accusations of fraud that have been levied against the group and their founder's connections to figures involved in organized crime.

Was today the Yellen Fed's Irrational Exuberance moment?

It started off so well: the blistering ADP payrolls report, the highest in over two years (despite disappointing PMI and ISM reports), sent stocks soaring off the bat with the Dow jumping nearly 200 points higher, rising as high as 20,887, and the S&P knocking on the all time high 2,400 door again, and AMZN to new all tim highs, and making some wonder if the reflation trade had returned.

It was not meant to be, because while it took the market some time to digest the Fed's minutes, the FOMC delivered one of its loudest warnings to date that it was focusing not so much on inflation or employment, but was seeking to deflate what even "some members" of the FOMC agree is a stock bubble, warning that stock prices are "quite high", and warning that its forecasts face "downside risks" if "financial markets were to experience a significant correction."

From the Minutes:

"A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures."

Then, more ominously, this:

... a number of participants remarked that recent and prospective changes in financial conditions posed upside risks to their economic projections, to the extent that financial developments provided greater stimulus to spending than currently anticipated, as well as downside risks to their economic projections if, for example, financial markets were to experience a significant correction.

It took algos a while to process what the Fed was really saying, which is why while the dollar briefly spiked to the day’s highs in kneejerk reaction to the minutes, it then surrendered all gains and then some after the minutes showed most officials backed a policy change that would begin shrinking the central bank’s balance sheet, as wellas warn explicitly about valuations. 

The weakness in the dollar meant that everyone's favorite market-influencing carry pair would likewise suffer, and after breaking out above 111, the USDJPY tumbled as low as 110.70 once again threatening the key 110 support level.

Of course, with both the dollar and USDJPY tumbling, it was gold's turn to shine and it did just that, surging virtually uninterrupted since its post-minutes kneejerk selloff.

Oil did not help, because after rising to multi-week highs this morning, WTI promptly tumbled after the DOE not only rejected yesterday's API draw report, but showed yet another record in commercial oil stocks coupled with the latest weekly increase in US crude production. The result: crude slumped back under $51, once again driving a dagger through the heart of the reflation trade.

Across the rates complex, if it was the Fed's intention to orchestrate a smooth selloff, it failed: having failed to selloff earlier in the day as RBC discussed, yields briefly spiked higher after the Minutes only to eventually grind to session lows.

As for stocks, with the most shorted universe soaring in early trading, dragging the Russell higher, this too was pummeled on all sides after the Fed's stark warning, prompting an accelerated liquidation of the most overvalued stock group, as shorts reasserted themselves.

Not even that poster child of the Fed's latest bubble, Amazon, could withstand the selling and after hitting all time highs in early trade, was aggressively sold off.

To be sure, the selloff could have been far worse if it wasn't for some aggressive buying programs, emanating perhaps from the NY Fed's arms-length market market Citadel, or some other central bank, which nonetheless was unable to prevent the day's substantial gains from becoming losses.

In fact, the sharp move lower, which wiped out more than 200 points from the DJIA, was the sharpest intraday reversal in 14 months. And yes, for those asking, the Dow Jones closed at the lows. We need to check but this may be the first time in many years the DJIA has done this Minutes day.

In short: today was a mess for the bulls, although it could have been much worse. However with the reflation trade now hobbled again, with Trump set to meet Xi perhaps unleashing another diplomatic fiasco, with payrolls looming - and after today's ADP number, Friday can only disappoint - there is a slew of downside risks on the immediate horizon, coming at a time when the Fed itself is warning that the S&P is too damn high. And in this painfully illiquid market, all that it would take is for someone big to start selling.

Of course, everyone knows that the Fed will not let stocks drop too low before it re-engages the QE4 "jawbone" machine. The only question is "how low is too low"...

Authored by Chris Martenson via PeakProsperity.com,

Writing from the road... 

Author Vince Lanci on marketslant.com

We have written many times about manipulation in this column. We seek justice and fairness in the markets that we continue to consider "free". First some thoughts on the trail of trader-speak I've been pouring over recently.

The takeaway is this: getting over the circumstantial evidentiary bar to be permitted to get to discovery was a big deal. Rosa Abrantes has done much to get these cases as far as she has. But now, forensic work at the operational level is needed. And it just is not easy to prove the cases. Now, even with chats and trade logs, the facts can almost never be known.

Within the constraints of our legal system, it is much harder to prove manipulation then the plaintiffs would have you think. This refers to the precious metals cases, the current FX cases, and the pending treasury cases.

We are now at the discovery level, thousands of documents with chats and messages back-and-forth between traders are available for the plaintiffs to review. This is great. But can the lawyers understand intent from written words?

He was just kidding! Can you prove otherwise?

PROVING INTENT IS NOT EASY

This is because the facts needed to prove "intent" are in the traders heads. And without intent you cannot win. 

In the three legged stool that is the legal system, intent is hardest leg to establish. I think "means, and opportunity" are the other 2.

Trader conversations are not prose, to say the least. It is near impossible without inflection and confirmation in chats to determine, or differentiate sarcasm from sincerity. How can one divine intent from a chat where a trader alternately asserts he's infallibly correct in an opinion, and then laughs at himself for having such an outrageous opinion? No, the burden of proof that the plaintiffs must satisfy is very difficult in this circumstance. 

Note my own spelling in these very articles that the Soren K group posts. My own trading messages were difficult to translate let alone divine my intent. Frequently brokers would object to my horrible typing. I would respond with

"My misspelling is protection against your execution error. If you mess up I can always blame you for not clarifying." I would then follow that with a LOL.

Was I joking? How can you tell? Frankly, I was truly sloppy and not detail oriented. But it also served to me as a hedge against what sometimes was poor service. I insisted on clarification. This was one way I got it.

PERSONAL EXPERIENCE SAYS TRUTH WITHOUT FACTS LOSES

In one instance I was subject to an eight hour deposition regarding a manipulation case in natural gas options. It Involved a major bank in Canada, a major energy exchange, a multibillion-dollar hedge fund, a new electronic trading platform, and traders who executed on that platform of which I was one.

I was a material witness and wasn't a party to either side of the prosecution. But I ended up essentially being an expert witness because of the questions asked by one excellent attorney.

It was clear that they were not able to divine intent at the trading and forensic level of other participants in that scandal. They sought evidence of manipulation between the hedge fund and a bank employee. There was none to be found in the trades, or chats as damning as they may have been in appearance.

It was that day that I learned in the legal world, conditional probability and narrative do not hold up when there are no facts to back it up. TRADERS USE CONDITIONAL PROBABILITIES TO MAKE DECISIONS IN UNCERTAINTY. JUDGES RISK NOTHING. IT ALL COMES DOWN TO FACTS. WITHOUT FACTS, A CASE GETS SETTLED ON THE COURT STEPS. And the facts proving intent were in the peoples' heads. Short of a download of their brains the cases cannot be won easily.

It was made obvious to me later by my own attorney that the focus should've been on something entirely different then the line of questioning being asked.

His advice was meant to let me know that if something was going on it would've been impossible for them to divine it from trying to figure out what traders are doing and why they're doing it.

The plaintiffs actually settled days later in part most likely because of the information given during my testimony. Ironically months before my deposition, one of the prosecuting law firms' consultants tried to hire me for their case. They actually called me seeking me as an expert witness. First question to me was:

Can you ever lose money by selling American Options and buying financial look alikes?

I shit you not. This was their angle to prove that the EOO trades their clients' trader had done were fraudulent from the get-go as not even being real trades. That trader was under the bus before the case started. And theexchange would have been next I bet if they were proven right.

My response was "I am qualified to do this, but if you check your list I'm a material witness in the case as I participated in the trades." Based on their discovery interview on me, I now know that case would have ended differently had they been able  to translate, correlate and corroborate trades to chats.

HFT IS EASIER TO PROVE

It is actually easier to prove intent in HFT cases. And that is because the programming used is essentially a trader's intent in code. Programmers write down exactly what the trader wants to do!

But that won't happen as long as it is run by bigger players. Mike Coscia was an impediment to other bigger firms' HFT rigging. Ask NANEX's Eric Hunsader. Once you get a hold of a firm's programmer, intent is easily proven. This is why you will increasingly hear form firms like Goldman and Citadel:

 "The programmer is privy to proprietary secrets and cannot be deposed."

Secrets as in "INTENT TO SPOOF"?

CHATS DO NOT PROVE INTENT

Reviewing some of the Gold and FX conversations, even in context of the actions, is not such an easy proof of manipulation as the prosecutors would have you believe. It seems to me that the plaintiffs have a less than 50/50 chance of conviction and will settle on the court steps if they scare the defendants sufficiently.

Deutsche bank in our opinion was a fluke. A fluke because they had much bigger fish to fry with the DOJ. Why else would a bank walk away from its London precious metals vault only two years after opening?

LOST IN TRANSLATION

The Gold, Silver, Fx and now the Treasury manipulation cases are not easily proven using facts. And our legal system just does not burn witches without proof anymore. Having been a material and expert witness in these type things, the accusers are not usually prepared for the arcane speech traders use.

Just as when a lawyer says "res ipse loquitor", a trader can say, "it's going down, I guarantee it! Lol." And no one an KNOW what he really intended. How can the plaintiff prove that the LOL is him not mocking himself?

Often times it is self recognition of his own failure, hubris, and ego. This, as opposed to him laughing at some unsuspecting victim. So, given this, how can the plaintiffs pretend to know what goes on in the traders mind? There is lexicon, trader sarcasm, wishful thinking as opposed to willful manipulation, and the old adage that "no one is bigger than the market."

FACTOIDS ARE NOT FACTS

Point here is that to win, all the defense has to do is make it clear that no one can know what the words written were intended to convey. In a legal system that needs facts, and where those facts are in the heads of the chat writers, it is not a slam dunk to get the evidence recognized as fact and not interpretation of what we feel a person may or may not have intended.

Lacking expert forensic preparation that links and correlates the chats with time stamped subsequent actions, all the plaintiffs will likely get is conjecture and muddied waters.  Facts will not be proven we bet. Not without narrative and contradictions found in discovery process. A ton of circumstantial material will not substitute for a real fact.

And unless litigators can prove contradiction of deposed traders on the stand between what they wrote, their actions, and what they say in discovery, the case is not easily won. Read what Matt Levine has to say on the topic below. 

Vince Lanci.

Vlanci@echobay.com

Twitter @vlancipictures

Marketslant Articles

Trader chats.

by Matt Levine.

My basic theory of post-crisis financial scandals is that the main illegal thing that traders do is send each other dumb emails and chat messages. So many of these scandals are hard to describe in objective terms.

The Libor scandal was about submitting fake numbers in Libor surveys, but even non-scandalous Libor submissions were pretty fake, so the only way to distinguish the bad fakes from the good ones was by finding chat messages saying things like "LOWER MATE LOWER !!" What was scandalous in the foreign-exchange-fixing scandal was that banks traded ahead of customer orders, but that was also legal; what was illegal was the dumb chats between those banks sharing customer information. The chats and emails are evidence of substantive illegality -- illegal collusion, manipulation, etc. -- but also display an attitude.

If they were written in dull legalese, they would have created much less of a reaction; regulators might not even have noticed the problem. But they weren't; they were filled with obscenity, slang, misspelling, and promises of Champagne, all of which tend to enrage prosecutors and juries and the public.

Anyway I enjoyed this story about the irreducible atomic unit of dumb trader chat: A five-word message to a rival banker was enough to cost former Citigroup Inc. trader David Madaras his job as the bank fought to appease regulators probing the foreign-exchange scandal engulfing the industry.

Citigroup’s Timothy Gately disclosed the message on the first day of Madaras’s employment lawsuit in London Tuesday. The executive said the April 2011 chat constituted gross misconduct and firing Madaras was the only appropriate sanction. "he’s a seller/fking a," Madaras told a rival trader who had just disclosed the identity of a client, Gately said in a filing prepared ahead of the hearing.

That chatroom message "validated an external trader’s disclosure of a client name," Gately said in the filing. The first three words -- "he's a seller" -- are substantive misconduct, disclosing a client's order to a competitor, and enough to get you fired in an atmosphere of heavy scrutiny of that sort of thing.

The next two -- "fking a" -- are substantively superfluous, but you can't have a scandalous trader chat without obscenity and misspelling. You can't imagine a trader actually being fired for typing "he's a seller," but of course one was fired for typing "he's a seller/fking a." This is partly a matter of psychological makeup -- how could the traders resist cursing? -- but it might also be a matter of technology. What search, what flags, brought that chat to the executives' attention? Does compliance monitor every time traders type "he's a seller"? (Presumably they type that a lot!) Or is there a search for "fking," and other variant spellings, that triggers review?

Last week we showed a fascinating statistic demonstrating just how poor market breadth has been in the latest push higher by the S&P: according to Goldman, as of May 10, just 10 companies have been responsible for half, or 46% to be exact, of the entire S&P's rally YTD. 

And with the 13-F reporting period now over, we now know the reason why just six tech stocks were reponsible for the majority of the S&P's upward surprise YTD - virtually every prominent hedge fund piled into them. The breakdown presented below, courtesy of Bloomberg, reveals just how urgent the scramble for "growth" was in the first quarter.

As Bloomberg adds, with an average gain of 26% , "it’s hard to overstate the influence of just six stocks on the U.S. stock market in the first quarter: Facebook Inc., Apple Inc., Amazon.com Inc., Microsoft Corp., Alphabet Inc. and Netflix Inc."

Here’s where some of the best-known hedge funds stood on the companies according to filings covering positions on March 31.

Facebook (FB)

Top new buy:

• Corvex (+850,000)

Boosted stake:

• Adage (+822,100)
• Citadel (+4,289,917)
• Lansdowne (+899,846)
• Melvin (+963,021)
• Moore (+850,492)
• Omega (+194,100)
• Point72 (+2,020,400)
• Pointstate (+2,564,100)
• Renaissance Tech (+2,141,800)
• Ruane Cunniff (+300,000)
• Soros (+284,400)
• Tiger (+338,396)

Cut stake:

• Sylebra (-358,944)

Top exit:

• Airain (-229,332)

* * *

Apple (AAPL)

Top new buy:

• Moore (+255,000)

Boosted stake

• Adage (+140,600)
• Berkshire (+75,881,454)

* * *

Amazon (AMZN)

Top new buy:

• Melvin (+251,084)
• Moore (+58,183)
• Renaissance (+329,255)

Boosted stake:

• Lansdowne (+35,525)
• Pointstate (+265,878)

Cut stake:

• Viking (-535,762)

Top exit:

• Soros (-28,100)

* * *

Microsoft (MSFT)

Top new buy:

• Moore (+1,190,000)

Boosted stake:

• Pointstate (+2,758,200)
• Viking (+7,068,972)

Top exit:

• Renaissance Technologies (-2,368,100)

* * *

Alphabet (GOOGL)

Boosted stake:

• Moore (+47,860)
• Omega (+19,440)
• Pointstate (+267,500)

Cut stake:

• Lansdowne (-99,638)
• Tiger Global Management (-97,750 and -67,800 GOOG)
• Viking (-388,219 and -4,017 GOOG)

Top exit:

• Airain (+14,612 and -12,577 GOOG)
• Soros (+1,300 and -20,200 GOOG)

* * *

Netflix (NFLX)

Top new buy:

• Omega (+77,700)
• Lansdowne (+30,164)
• Tiger (+429,000)

Boosted stake:

• Tybourne (+590,966)

Cut stake:

• Melvin (-175,000)
• Viking (-556,280)

Source: Bloomberg

Last week news emerged that as a result of the deteriorating local economy, coupled with a plunge in hedge fund profits, the capital of Connecticut - Hartford - was preparing for bankruptcy. Among the reasons cited by Department of Revenue Services Commissioner Kevin Sullivan was that wealthy people are “dramatically less wealthy than they were before.”

It turns out that, at least relatively speaking, he was correct.

According to the latest annual ranking by Institutional Investor's Alpha magazine, the woes that have plagued hedge fund LPs who have paid 2 and 20 (or 1 and 10 as the case may ) for seven consecutive years of market underperformance have finally spread to management and in 2016 the 25 top paid hedge fund managers made a combined $11 billion. Although that sounds like a lot, it's actually the lowest total since 2005, when the top 25 earned just $9.4 billion. It's also just a little over half of what the top 25 managers earned just three years ago, when they reaped a total of $21.2 billion.

The average top earner made $440 million in 2016. The median earner made $250 million, the lowest since 2011, when the median earner made $235 million.

Surprisingly, even in 2008, when the stock market and many hedge funds were down by large-double-digit percentages, the highest earners made more money as a group: $11.6 billion.

To qualify for the top 25 this year, managers needed to earn "only" $130 million, the lowest floor since 2011, when a manager required $100 million to make the list. Last year's comparatively lower numbers underscore the  dichotomy of the hedge fund industry in 2016.

And while data scorekeepers like HFR talked up the fact that the average hedge fund had its best year since 2013, that does not accurately portray what really happened on a fund-by-fund level. Rather, there has been a group of managers that enjoyed strong double-digit gains last year. However, looking beyond this top-performing group reveals that a significant proportion of the largest hedge fund firms - those whose principals are more likely to make the most money - either suffered small losses or eked out low-single-digit gains.

As has been the case in recent years, in 2016 compensation was led by the quants who have been least impacted by the death of fundamental analysis in a centrally-planned market. 

RenTec's James Simons topped the table for the second year in a row, earnings $1.6 billion, down only $100 million from the previous year, after his two main funds posted double digit returns. In second place was Bridgewater's Ray Dalio, which manages around $160bn in assets for 350 institutional clients, with earnings of $1.4 billion.  As the FT notes, the popularity of the computer-driven funds helped the quants rack up their eighth consecutive year of inflows in 2016, doubling their assets since 2009 to $918 billion, according to Hedge Fund Research.

After the top two earners, the ranking amounts drop considerably: two more quants filled out the third and ourth spot: Two Sigma founders John Overdeck and David Siegel, who each made $750 million. Last year their Compass Fund rose by double digits. Continuing a trend from the previous year, quantitatively focused firms, so called because they mostly or totally rely on computers to make their investment decisions, were among the big winners in 2016. The four highest earners on this year's ranking hail from quant firms.

A total of13 managers from last year's "Rich List" are among the top 25 earners this year; with several of qualifying even though they posted their worst results in several years. They include Kenneth Griffin of Citadel, the top earner in last year's ranking, who slipped to 6th place after his total earnings fell by about 65%. In 2016, Citadel's main multistrategy funds, Wellington and Kensington, rose a little more than 5 percent, their smallest gain in eight years.

Notably, some of the best-known names in the industry, including Bill Ackman, John Paulson and Eddie Lampert failed to make the list.

Among those missing in the Top 25 this year but qualified for last year's top ranking, four are from firms headed by so-called
Tiger Cubs that lost money on their long-short funds in 2016.
They include Chase Coleman of Tiger Global Management, Andreas Halvorsen and Daniel Sundheim of Viking Global Investors, and Stephen Mandel Jr., of Lone Pine Capital. As a result, this
is the first time since 2010 that no one with ties to Julian Roberton's Tiger Management qualified for
the top 25 ranking. 

Just to put these earnings in context, even the lowest-ranking manager on Alpha magazine’s expanded top-50 list made more money in 2016 than any big United States bank executive, including Jamie Dimon of J. P. Morgan, Lloyd Blankfein of Goldman Sachs and James Gorman of Morgan Stanley, all of who have been criticized for their big paychecks.

Authored by M.K.Bhadrakumar via The Strategic Culture Foundation,

When President Donald Trump received President Recep Erdogan on Tuesday at the White House, his legendary deal-making prowess was be on trial.

Trump has not been in a tearing hurry to receive Erdogan. During the first 100 days of his presidency, Trump received the leaders of Israel, Egypt, Saudi Arabia, UAE, Jordan (twice), Iraq and Palestine. Yet, none of them belongs to a Nato member country and or is a crucial “swing” state in Trump’s messianic war against ISIS, as Turkey is.

Or, was it Erdogan’s growing friendship with Russian President Vladimir Putin that discouraged Trump?But then, Trump greeted Egypt’s President Abdel Fattah el-Sisi in the White House as an old ally.

Clearly, the only good reason could be that Trump deliberately decided that there is a time for everything – even for meeting Erdogan. Trump thoughtfully let the Turkish referendum on constitutional reform run its course first. Trump now has the answer.

Erdogan extracted a “yes” vote in the referendum alright, and is set to concentrate executive power in his hands, but, paradoxically, he is a wounded man, having lost the referendum vote in all major cities, especially Istanbul, which has been his citadel. Erdogan barely scraped through.

On the other hand, an invigorated German-French axis following the resounding election victory of Emmanuel Macron means that a consolidated EU pressure is building on Erdogan to curb his authoritarian drift. Erdogan knows that a rupture of Turkey’s ties to the West would have grave economic and political consequences.

Meanwhile, if Erdogan had calculated that he could play off the US and Russia, that is also not to be. Trump simply outflanked him by opening a line to Putin regarding Syria before he met Erdogan.

Erdogan has been naïve. The Kremlin won’t risk annoying Trump. Détente with the US is an overriding concern for Russia.

All things taken into account, therefore, Trump did the right thing to meet Erdogan in the fullness of time. Trump’s decision to sign the executive order allowing the Pentagon to transfer heavy weapons to the Kurdish militia on the eve of Erdogan’s visit underscores it.

Trump is looking for a quick victory in Raqqa. The liberation of Raqqa will be prime time news in America. Who’d pay attention anymore to “a showboat” such as James Comey when the pictures are beamed from Raqqa into the living rooms of America?

The Pentagon commanders estimate that the Kurdish militia with US air support will liberate Raqqa successfully and swiftly. Indeed, latest reports suggest that the Kurdish militia has reached within two kilometers of Raqqa city limits.

Simply put, Erdogan who was hoping to dissuade Trump from aligning with the Kurds will now have to discuss concerns over post-liberation Raqqa. The ground beneath Erdogan’s feet has dramatically shifted.

He still can resort to strategic defiance by resorting to air strikes against the Kurdish militia, similar to the attacks staged by the Turkish air force on April 25 on the town of Sinjar (Iraqi Kurdistan) and on targets in the Karachok Mountains (northeastern Syria).

However, the US and Russian deployments to the Kurdish cantons in northern Syrian show that both Washington and Moscow have factored in such a possibility and have a tacit understanding that only their physical presence might act as a deterrent against Erdogan’s adventurism.

This opens up a tantalizing prospect – US and Russia having an unwritten division of labor to “tame” Erdogan. The Russian diplomacy has shown masterly skill in shepherding Turkish policies away from covert backing for extremist groups toward new directions that help to end the fighting in Syria. The Russia-US cooperation in Syria drastically curbs Erdogan’s elbow room.

What are Erdogan’s options? Trump has put him out of business since the US is no longer using Turkish proxies to push the “regime change” agenda in Syria. American retrenchment affects Saudi and Qatari policies, too.

Besides, Erdogan will be wary of provoking Trump. Apart from the discord over the extradition of Islamist preacher Fetullah Gulen, the US is keeping under detention the top executive of Halkbank Mehmet Hakan Attila whom it implicates in the sensational criminal case (which is also linked to Erdogan’s immediate family members) regarding abuse of the US financial system to conduct fraudulent transactions on behalf of Iranian entities.

Will Erdogan retaliate by shutting down Incirlik air base? Such a possibility exists, but remains unlikely. At any rate, Washington is focused on the liberation of Raqqa, and access to Incirlik is a secondary issue at the moment.

The bottom line is that Erdogan is running out of options and may be coming under pressure, finally, to (re)open his own channels to the Kurdish groups. Indeed, Turkey got along well with the leadership of Iraqi Kurdistan and a similar deal can be worked out with Syrian Kurds.

Being the consummate pragmatist that he is, Erdogan may well decide to pick up the threads of the peace process with the Kurds from where he summarily left them in 2015 due to compulsions over forthcoming electoral battles culminating in the March referendum to transform Turkey into a presidential system.

Significantly, Erdogan has reacted with extraordinary restraint to the Pentagon move to arm Kurds in Syria. He is mulling over his options. Trump can encourage him to seek a deal with Kurds. It may not be the mother of all deals, but a historic deal nonetheless, which will go a long way to stabilizing Syria and the wider Middle East.

Every year, the world's richest and most powerful business executives, bankers, media heads and politicians sit down in some luxurious and heavily guarded venue, and discuss how to shape the world in a way that maximizes profits for all involved, while perpetuating a status quo that has been highly beneficial for a select few, even if it means the ongoing destruction of the middle class. We are talking, of course, about the annual, and always secretive, Bilderberg meeting.

And just like last year's meeting in Dresden, the primary topic on the agenda of this year's 65th Bilderberg Meeting which starts today and ends on Sunday, is one: Donald Trump.

Ironically, this year "the storm around Donald Trump" as the SCMP puts it, is not half way around the world, but just a few miles west of the White House, in a conference centre in Chantilly, Virginia, where the embattled president will be getting his end-of-term grades from the people whose opinion actually matters: some 130 participating "Bilderbergs".

The secretive three-day summit of the political and economic elite kicks off Thursday in heavily guarded seclusion at the Westfields Marriot, a luxury hotel a short distance from the Oval Office.

As of Wednesday, the hotel was already on lockdown and an army of landscapers have been busy planting fir trees around the perimeter, to try protect "coy billionaires and bashful bank bosses" from prying lenses and/or projectiles.  Perched ominously at the top of the conference agenda this year are these words: “The Trump Administration: A progress report”.

So is the president going to be put in detention for tweeting in class? Held back a year? Or told to empty his locker and leave? If ever there’s a place where a president could hear the words “you’re fired!”, it’s Bilderberg.

Sarcasm aside, the White House was taking no chances, sending along some big hitters from Team Trump to defend their boss: national security adviser, HR McMaster; the commerce secretary, Wilbur Ross; and Trump’s new strategist, Chris Liddell (curiously, neither Gary Cohn nor Steven Mnuchin will be there although the controversial new Chairman of Goldman Sachs International, Jose Barroso will be present). Could Trump himself show up to receive his report card in person: we are confident he will tweet all about it... which is probably why he will never be invited.

Stil, none other than Henry Kissinger, the gravel-throated kingpin of Bilderberg, visited the White House a few weeks ago to discuss “Russia and other things”, and certainly, the Bilderberg conference would be the perfect opportunity for the most powerful man in the world to discuss important global issues with Trump.

Sarcasm aside, what are among the "Trump agenda" items to be discussed?  The publicly list is as follows:

• The Trump Administration: A progress report
• Trans-Atlantic relations: options and scenarios
• The Trans-Atlantic defence alliance: bullets, bytes and bucks
• The direction of the EU
• Can globalisation be slowed down?
• Jobs, income and unrealised expectations
• The war on information
• Why is populism growing?
• Russia in the international order
• The Near East
• Nuclear proliferation
• China
• Current events

The US president’s extraordinary chiding of NATO leaders in Brussels is sure to be first and foremost on the Bilderberg discussing panel. The Bilderbergers have summoned the head of Nato, Jens Stoltenberg, to give feedback. Stoltenberg will be leading the snappily titled session on “The Transatlantic defence alliance: bullets, bytes and bucks”. He’ll be joined by the Dutch minister of defence and a clutch of senior European politicians and party leaders, all hoping to reset the traumatised transatlantic relationship after Trump’s galumphing visit.

As the Guardian puts it, the guest list for this year’s conference is a veritable “covfefe” of big-hitters from geopolitics, from the head of the IMF, Christine Lagarde, to the king of Holland, but perhaps the most significant name on the list is Cui Tiankai, China’s ambassador to the US.

According to the meeting’s agenda, “China” will also be discussed at a summit attended by Cui, the US commerce secretary, the US national security adviser, two US senators, the governor of Virginia, two former CIA chiefs and any number of giant US investors in China, including the heads of the financial services firms the Carlyle Group and KKR. And for good reason: as last night's PMI numbers showed, the Chinese economy - the global growth dynamo - is finally contracting. If China goes, the rest of the world will follow. 

Additionally, the boss of Google Eric Schmidt, who warned in January that Trump’s administration will do “evil things”, is expected to attend, too. The executive chairman of Alphabet, Google’s holding company, has just come back from a trip to Beijing, where he was overseeing Google AI’s latest game of Go against humans. He declared it “a pleasure to be back in China, a country that I admire a great deal”. It’s possible three days spent chatting to the Chinese ambassador could even be good for business.

Several journalists are participating in this year’s forum, including London Evening Standard editor George Osborne and Cansu Camlibel, the Washington bureau chief for Turkey’s Hurriyet newspaper. But per convention, news outlets are not invited to cover the event.

“There is no desired outcome, no minutes are taken and no report is written,” the group stated. “Furthermore, no resolutions are proposed, no votes are taken, and no policy statements are issued.”

Ex-deputy secretary of state William Burns and former deputy assistant secretary of defence Elaine Bunn, both Obama-era officials, will also attend. Burns, the current president of the Carnegie Endowment for International Peace, has warned that Trump “risks hollowing out the ideas, initiative and institutions on which US leadership and international order rest.”

With one of the agenda items titled simply enough "can globalisation be slowed down?" it is no surprise that anti-globalisation protesters have already descended on the location of the meeting.

* * *

Below is a full list of this year's participants:

CHAIRMAN

• Castries, Henri de (FRA), Former Chairman and CEO, AXA; President of Institut Montaigne

 
PARTICIPANTS

• Achleitner, Paul M. (DEU), Chairman of the Supervisory Board, Deutsche Bank AG
• Adonis, Andrew (GBR), Chair, National Infrastructure Commission
• Agius, Marcus (GBR), Chairman, PA Consulting Group
• Akyol, Mustafa (TUR), Senior Visiting Fellow, Freedom Project at Wellesley College
• Alstadheim, Kjetil B. (NOR), Political Editor, Dagens Næringsliv
• Altman, Roger C. (USA), Founder and Senior Chairman, Evercore
• Arnaut, José Luis (PRT), Managing Partner, CMS Rui Pena & Arnaut
• Barroso, José M. Durão (PRT), Chairman, Goldman Sachs International
• Bäte, Oliver (DEU), CEO, Allianz SE
• Baumann, Werner (DEU), Chairman, Bayer AG
• Baverez, Nicolas (FRA), Partner, Gibson, Dunn & Crutcher
• Benko, René (AUT), Founder and Chairman of the Advisory Board, SIGNA Holding GmbH
• Berner, Anne-Catherine (FIN), Minister of Transport and Communications
• Botín, Ana P. (ESP), Executive Chairman, Banco Santander
• Brandtzæg, Svein Richard (NOR), President and CEO, Norsk Hydro ASA
• Brennan, John O. (USA), Senior Advisor, Kissinger Associates Inc.
• Bsirske, Frank (DEU), Chairman, United Services Union
• Buberl, Thomas (FRA), CEO, AXA
• Bunn, M. Elaine (USA), Former Deputy Assistant Secretary of Defense
• Burns, William J. (USA), President, Carnegie Endowment for International Peace
• Çakiroglu, Levent (TUR), CEO, Koç Holding A.S.
• Çamlibel, Cansu (TUR), Washington DC Bureau Chief, Hürriyet Newspaper
• Cebrián, Juan Luis (ESP), Executive Chairman, PRISA and El País
• Clemet, Kristin (NOR), CEO, Civita
• Cohen, David S. (USA), Former Deputy Director, CIA
• Collison, Patrick (USA), CEO, Stripe
• Cotton, Tom (USA), Senator
• Cui, Tiankai (CHN), Ambassador to the United States
• Döpfner, Mathias (DEU), CEO, Axel Springer SE
• Elkann, John (ITA), Chairman, Fiat Chrysler Automobiles
• Enders, Thomas (DEU), CEO, Airbus SE
• Federspiel, Ulrik (DNK), Group Executive, Haldor Topsøe Holding A/S
• Ferguson, Jr., Roger W. (USA), President and CEO, TIAA
• Ferguson, Niall (USA), Senior Fellow, Hoover Institution, Stanford University
• Gianotti, Fabiola (ITA), Director General, CERN
• Gozi, Sandro (ITA), State Secretary for European Affairs
• Graham, Lindsey (USA), Senator
• Greenberg, Evan G. (USA), Chairman and CEO, Chubb Group
• Griffin, Kenneth (USA), Founder and CEO, Citadel Investment Group, LLC
• Gruber, Lilli (ITA), Editor-in-Chief and Anchor "Otto e mezzo", La7 TV
• Guindos, Luis de (ESP), Minister of Economy, Industry and Competiveness
• Haines, Avril D. (USA), Former Deputy National Security Advisor
• Halberstadt, Victor (NLD), Professor of Economics, Leiden University
• Hamers, Ralph (NLD), Chairman, ING Group
• Hedegaard, Connie (DNK), Chair, KR Foundation
• Hennis-Plasschaert, Jeanine (NLD), Minister of Defence, The Netherlands
• Hobson, Mellody (USA), President, Ariel Investments LLC
• Hoffman, Reid (USA), Co-Founder, LinkedIn and Partner, Greylock
• Houghton, Nicholas (GBR), Former Chief of Defence
• Ischinger, Wolfgang (INT), Chairman, Munich Security Conference
• Jacobs, Kenneth M. (USA), Chairman and CEO, Lazard
• Johnson, James A. (USA), Chairman, Johnson Capital Partners
• Jordan, Jr., Vernon E. (USA), Senior Managing Director, Lazard Frères & Co. LLC
• Karp, Alex (USA), CEO, Palantir Technologies
• Kengeter, Carsten (DEU), CEO, Deutsche Börse AG
• Kissinger, Henry A. (USA), Chairman, Kissinger Associates Inc.
• Klatten, Susanne (DEU), Managing Director, SKion GmbH
• Kleinfeld, Klaus (USA), Former Chairman and CEO, Arconic
• Knot, Klaas H.W. (NLD), President, De Nederlandsche Bank
• Koç, Ömer M. (TUR), Chairman, Koç Holding A.S.
• Kotkin, Stephen (USA), Professor in History and International Affairs, Princeton University
• Kravis, Henry R. (USA), Co-Chairman and Co-CEO, KKR
• Kravis, Marie-Josée (USA), Senior Fellow, Hudson Institute
• Kudelski, André (CHE), Chairman and CEO, Kudelski Group
• Lagarde, Christine (INT), Managing Director, International Monetary Fund
• Lenglet, François (FRA), Chief Economics Commentator, France 2
• Leysen, Thomas (BEL), Chairman, KBC Group
• Liddell, Christopher (USA), Assistant to the President and Director of Strategic Initiatives
• Lööf, Annie (SWE), Party Leader, Centre Party
• Mathews, Jessica T. (USA), Distinguished Fellow, Carnegie Endowment for International Peace
• McAuliffe, Terence (USA), Governor of Virginia
• McKay, David I. (CAN), President and CEO, Royal Bank of Canada
• McMaster, H.R. (USA), National Security Advisor
• Micklethwait, John (INT), Editor-in-Chief, Bloomberg LP
• Minton Beddoes, Zanny (INT), Editor-in-Chief, The Economist
• Molinari, Maurizio (ITA), Editor-in-Chief, La Stampa
• Monaco, Lisa (USA), Former Homeland Security Officer
• Morneau, Bill (CAN), Minister of Finance
• Mundie, Craig J. (USA), President, Mundie & Associates
• Murtagh, Gene M. (IRL), CEO, Kingspan Group plc
• Netherlands, H.M. the King of the (NLD)
• Noonan, Peggy (USA), Author and Columnist, The Wall Street Journal
• O'Leary, Michael (IRL), CEO, Ryanair D.A.C.
• Osborne, George (GBR), Editor, London Evening Standard
• Papahelas, Alexis (GRC), Executive Editor, Kathimerini Newspaper
• Papalexopoulos, Dimitri (GRC), CEO, Titan Cement Co.
• Petraeus, David H. (USA), Chairman, KKR Global Institute
• Pind, Søren (DNK), Minister for Higher Education and Science
• Puga, Benoît (FRA), Grand Chancellor of the Legion of Honor and Chancellor of the National Order of Merit
• Rachman, Gideon (GBR), Chief Foreign Affairs Commentator, The Financial Times
• Reisman, Heather M. (CAN), Chair and CEO, Indigo Books & Music Inc.
• Rivera Díaz, Albert (ESP), President, Ciudadanos Party
• Rosén, Johanna (SWE), Professor in Materials Physics, Linköping University
• Ross, Wilbur L. (USA), Secretary of Commerce
• Rubenstein, David M. (USA), Co-Founder and Co-CEO, The Carlyle Group
• Rubin, Robert E. (USA), Co-Chair, Council on Foreign Relations and Former Treasury Secretary
• Ruoff, Susanne (CHE), CEO, Swiss Post
• Rutten, Gwendolyn (BEL), Chair, Open VLD
• Sabia, Michael (CAN), CEO, Caisse de dépôt et placement du Québec
• Sawers, John (GBR), Chairman and Partner, Macro Advisory Partners
• Schadlow, Nadia (USA), Deputy Assistant to the President, National Security Council
• Schmidt, Eric E. (USA), Executive Chairman, Alphabet Inc.
• Schneider-Ammann, Johann N. (CHE), Federal Councillor, Swiss Confederation
• Scholten, Rudolf (AUT), President, Bruno Kreisky Forum for International Dialogue
• Severgnini, Beppe (ITA), Editor-in-Chief, 7-Corriere della Sera
• Sikorski, Radoslaw (POL), Senior Fellow, Harvard University
• Slat, Boyan (NLD), CEO and Founder, The Ocean Cleanup
• Spahn, Jens (DEU), Parliamentary State Secretary and Federal Ministry of Finance
• Stephenson, Randall L. (USA), Chairman and CEO, AT&T
• Stern, Andrew (USA), President Emeritus, SEIU and Senior Fellow, Economic Security Project
• Stoltenberg, Jens (INT), Secretary General, NATO
• Summers, Lawrence H. (USA), Charles W. Eliot University Professor, Harvard University
• Tertrais, Bruno (FRA), Deputy Director, Fondation pour la recherche stratégique
• Thiel, Peter (USA), President, Thiel Capital
• Topsøe, Jakob Haldor (DNK), Chairman, Haldor Topsøe Holding A/S
• Ülgen, Sinan (TUR), Founding and Partner, Istanbul Economics
• Vance, J.D. (USA), Author and Partner, Mithril
• Wahlroos, Björn (FIN), Chairman, Sampo Group, Nordea Bank, UPM-Kymmene Corporation
• Wallenberg, Marcus (SWE), Chairman, Skandinaviska Enskilda Banken AB
• Walter, Amy (USA), Editor, The Cook Political Report
• Weston, Galen G. (CAN), CEO and Executive Chairman, Loblaw Companies Ltd and George Weston Companies
• White, Sharon (GBR), Chief Executive, Ofcom
• Wieseltier, Leon (USA), Isaiah Berlin Senior Fellow in Culture and Policy, The Brookings Institution
• Wolf, Martin H. (INT), Chief Economics Commentator, Financial Times
• Wolfensohn, James D. (USA), Chairman and CEO, Wolfensohn & Company
• Wunsch, Pierre (BEL), Vice-Governor, National Bank of Belgium
• Zeiler, Gerhard (AUT), President, Turner International
• Zients, Jeffrey D. (USA), Former Director, National Economic Council
• Zoellick, Robert B. (USA), Non-Executive Chairman, AllianceBernstein L.P.

Natrually, the secretive nature of the group has given birth to conspiracy theories. Some have claimed that the Bilderberg is a group of rich and powerful kingmakers seeking to impose a one world government. Whether that is true remains in the eye of the beholder, however one thing is clear: as the graph below shows, the members are connected to virtually every important and relevant organization, media outlet, company and political entity in the world.

With the world's most mysterious, and profitable, quant fund - Renaissance Technologies - recently finding itself in an unfamiliar place: under the harsh public spotlight, and worse - in the context of its co-CEO Robert Mercer's questionable political support of Donald Trump - we wondered one month ago how long before regulators start sniffing around to uncover the "secret sauce" that has generated some $60 billion in profits for LPs of the giant money-making machine. The answer: a few weeks.

According to the NY Post, regulators from the Commodity Futures Trading Commission are probing the "secret trading code" at RenTec run by Democrat, and Hillary Clinton supporter, James Simons and Republican and Trump's most influential financial backer, Robert Mercer.

The CFTC has reportedly asked to dig into the trading software at the $65 billion hedge fund, "James Rowan, the fund’s chief operating officer, told an audience of hedge fund managers on Tuesday in New York, according to two people who were in the audience." But, like every other secretive quant fund, RenTec is pushing back against the CFTC’s request out of fear that the code will “leak,” Rowan told the managers, according to those present.

Jonathan Hitchon, chief operating officer of quantitative hedge fund Two Sigma, which manages an estimated $40 billion, was also on the panel echoing Rowan’s concerns. Hitchon is on the board of the Managed Funds Association, which called out the CFTC for “overreaching in its authority” in a letter sent last month.

The push by the CFTC to expose the trading code of the world's most popular quant fund comes as a time when investors are increasingly on edge about the threat of passive investing in a one-way market, with lingering questions about what might happen if all the quants start selling at the same time.

The pushback by Simons’ firm is the latest sign that the government is plowing into so-called “quant funds,” which use highly technical trading algorithms to try to beat the market. It is a growing area in the hedge fund space as more hedge funds, including Steve Cohen’s Point72, are increasingly hiring more developers to build algorithms.

 

These algorithms are often black boxes, and are so complicated that it would be nearly impossible to figure out what they’re designed to do, or why they do it.

As long-time readers will recall, back in 2009 Zero Hedge led a brief campaign seeking to unveil the mystery inside either Medallion or RIEF B, which however failed to penetrate RenTec's unbreakable armor. Now it is the CFTC's turn: "regulators are concerned there could be an illegal trading practice, like creating fake orders to move the prices of illiquid stocks, which is known as spoofing."

To be sure, it's not just RenTec that is on edge. The post notes that last year the CFTC "first outlined the regulations that would allow it to scrutinize hedge funds’ algorithms. Other major funds, like Citadel and Two Sigma, slammed the proposal, saying that sharing the code made it more likely it could fall into the wrong hands."

Even the CFTC admitted last year that there are problems with its plan to require quant funds to share code.

“This requirement has garnered an enormous amount of attention from market participants concerned with the prospect of handing over highly valuable, proprietary business source code to an agency of the US government that has an imperfect record as a guardian of confidential information,” CFTC Commissioner Christopher Giancarlo said in September.

Meanwhile, despite its pushback, Renaissance is complying with the CFTC’s request for the code, "and is exploring ways it can share the code in a secure setting but not have it left sitting on a CFTC file where it could be vulnerable to hacking and being leaked, Rowan said."

The problem, as RenTec and traders know, is that once the "black box" ends up in the hands of regulators, it is as good as public. Which is why in 2009, Goldman went ballistic when Sergey Aleynikov allegedly stole the bank's quant trading code, and was promptly arrested and spent time in prison, even though he has twice acquitted of the charge, though he’s still facing charges on an appeal. That code was Goldman’s “secret sauce,” New York District Attorney Cyrus Vance Jr. charged in 2012.

Whether or not RenTec's most valuable asset leaks in the public, here, for those interests, is the public breakdown of RenTec's top equity positions as of March 31.

The hedge fund industry is finding itself in increasingly dire straits as persistently weak returns and the advent of low-cost investing have forced more and more funds to shut down. So, it's unsurprising that, amid this steadily worsening backdrop, more traders are heading for the exits. But where are the heading? Increasingly, more traders are moving back from where they came - i.e. the big banks, which expect to see a boost in trading revenue as President Donald Trump has vowed to dial back postcrisis regulations that forced banks to wind down their prop desks.

In recent months, a number of high-profile hedge fund names have made the leap back to banking, according to Bloomberg.

“This month, Barclays Plc hired Chris Leonard, a founder of two hedge funds in the decade since he left JPMorgan Chase & Co., to turn around U.S. rates trading. At the end of last year, ex-bankers Roberto Hoornweg and Chris Rivelli, both of Brevan Howard Asset Management, left that London hedge fund for banks.

 

Recruiters say these moves and others aren’t just the usual attrition: banks in New York and London are interesting employers again a decade after the financial crisis, and may get involved in more proprietary trading if President Trump eases regulatory burdens. There’s also another factor: many macro funds just don’t make money anymore.

 

One recruiter says he expects defections to increase over the next nine months.

 

“In the last quarter of the year or first quarter of 2018, you will find more people leaving the hedge funds to join banks to run proprietary money,” said Jason Kennedy, chief executive officer of the Kennedy Group in London, which hires for banks and hedge funds. “The banks will become more attractive in terms of jobs and pay.”

The Trump administration has struggled to pass elements of its agenda - most notable its plan to repeal and replace Obamacare. And it only recently scored a partial victory on its immigration ban. Yet financial deregulation is one area where the Trump agenda is moving inexorably forward. On June 13, Treasury Secretary Steven Mnuchin issued a report – the first in a series that will detail how the administration plans to proceed with paring back post-crisis regulations.  Some of the more notable proposals in the highly-anticipated report include: adjusting the annual stress tests, easing trading rules (i.e., gutting the Volcker Rule), and paring back the power of the watchdogs- like the Consumer Financial Protection Bureau. Unlike the administration’s health-care plans, these measures enjoy broad support among Republicans.

Meanwhile, hedge funds are finding it increasingly difficult to compete for top talent.

"...the bar within the hedge-fund world has increased dramatically over the last year,” Kennedy said.

 

Hedge funds, stung by years of underperformance and revolts from investors, are increasingly under pressure to dump their traditional 2 percent management and 20 percent performance-fee model, curtailing their ability to hire and retain talent. Louis Bacon’s Moore Capital Management, Tudor Investment Corp., Och-Ziff Capital Management Group LLC, Canyon Capital Advisors and Brevan Howard were among money managers who cut fees last year. More hedge funds shuttered last year than started, a trend that continued in the first quarter of 2017, according to data from Hedge Fund Research Inc.

 

“It is not surprising that traders are looking for a safe haven, and if banks have more room to operate these moves could make sense,” said John Purcell of Purcell & Co., a London-based executive recruitment firm."

The unprecedented easy money policies adopted by the world's largest central banks in the aftermath of the crisis have hurt macro funds' profits by suppressing two-way volatility.

“Tim Sharp made the move back to the sell side even earlier, and says banks now have attractive niche trading businesses and many are nearly done downsizing. He joined Credit Suisse Group AG in July 2015 after less than a year running money at BlueCrest Capital Management LLP, the firm led by Michael Platt. At the end of that year, Platt’s firm, once among Europe’s largest hedge funds, announced it would return about $7 billion of the $8 billion it managed.

 

“It’s very difficult for macro funds," Sharp said in an interview. “Central bank policies have crushed volatility and reduced opportunities, and also it’s survival of the fittest.”

 

Sharp, who is now a director at Credit Suisse, left BlueCrest a few months after the Swiss central bank’s shock decision to remove its currency cap, which caused losses at several firms.

 

"Macro as an overall strategy has recently experienced a prolonged phase of lackluster returns, triggering a number of unwinds at big shops," said Nicolas Roth, co-head of alternative assets at Geneva-based Reyl & Cie.”

As Bloomberg explains, the flow of traders back into banking is a reversal of a trend that began in 2008, when banks, reelingfrom the crisis, saw an exodus of traders move to the buy side as many hoped to cash in on the postcrisis recovery. The advent of the Volcker rule forced banks to wind down their prop trading desks, spurring even more defections. Another factor: the rising cost of regulatory compliance is making it increasingly expensive to start a hedge fund.

"Hedge funds were booming. In 2009, hedge funds gained almost 20 percent, their best yearly performance since 1999, according to the HFRI Fund Weighted Composite Index; a year later, they returned 10.3 percent.

 

While macro strategies raised $13.8 billion in the first five months of this year, the most of any trading strategy tracked by eVestment, investors are disappointed by their returns. Traders wagering on currencies and rates continue to struggle, even as peers are showing signs of recovering from their multi-year funk.

 

Andrew Law’s Caxton Associates lost 8 percent this year through May and told clients that it’s slashing performance and management fees. Paul Brewer’s hedge fund Rubicon Global Fund plunged about 27 percent this year, hurt by wrong-way currency wagers, people said earlier this month.

 

It’s also more expensive to start a hedge fund than it was, because of the difficult capital raising environment and rising cost of regulatory compliance.

 

“Some macro traders are returning to the sell side, maybe in a hope that a Dodd-Frank rollback will re-open proprietary trading activity,” Roth said."

Here’s a breakdown of other personnel moves, courtesy of Bloomberg.

• Anthony Kemp returned to Morgan Stanley at the beginning of May from Stone Milliner Asset Management, which he joined in summer 2015
• Alex Silverman left Citadel to join Morgan Stanley in New York at the end of March 2017
• Dipak Shah joined Citigroup Inc. as director in October 2016 from Capula Investment Services after previously working at Goldman Sachs Group Inc.
   

Last night, unofficial comments from sources were framing the flash crash event as  a 'glitch' and  they were  ' all over' solving it. This implies there was no person or fat fingered banker spoofing the market. It also implies that the "problem" was electronic. Indeed we think it was. But electronic in what way?

Here is an excerpt from our original coverage as it happened

5 Minutes and 10% lower

Close up of 5 minute Futures chart with a low of $14.34

  

Spot Silver dropped 6% before snapping back. 

 

Best we can tell, after the CME reopen of futures someone or some THING sold approximately 8,200 contracts into the market in a 5 minute period.

The market immediately snapped back giving the impression this was possibly not an intended trade. But anyone who says  they do know what happened at this point is just speculating.

Was it a predatory algo(s) that sold faster than CME's own servers could react by putting up bids on its own electronic book?  That would be a predatory entity that is now expanding its abilities to overload the very servers that update order books. Perhaps inadvertantly, but there you have it. If that were the case, then the weapon is now bigger than the market.

Perhaps a new algo was unleashed for testing and did glitch, selling when it shouldn't have. If that is the case, than some geek is getting his butt chewed.

Back  to the rebalancing of a specialist book idea. As ludicrous as this sounds, it is not unheard of. If you are old enough, you will recall that specialists had the right to stop equity markets and halt trading until they rebalanced  order books. In effect, their order flow was coming in faster than they could handle.

In fact, the CME did halt trading for 10 seconds last night, presumably to address this 'glitch' as people are calling it. This is not unlike the old days when specialists  used to stop markets to rebalance their order books.

10 second halt in Comex Silver Futures at 19:06:38 $SI_F

— Eric Scott Hunsader (@nanexllc) July 6, 2017

And the result was a negation of prices below where presumably the"glitch" started. 

update pic.twitter.com/KOMPVt96XW

— Ryan Paisey (@RyanPaisey) July 6, 2017

This is conjecture, but not a wild one.  If a group of competing algos were  stop hunting during thinly traded markets as they commonly do, then it is conceivable  that their races to sell- trigger stops-cover (rinse  repeat) could have created a snowball  effect of  self reinforcing momentum.

Imagine a Citadel, DeShaw and Six Sigma algo fest where one triggered the others own sell signals. The  resultant race to the bottom could be  enough to make any exchange order book struggle to update itself to absorb the nanosecond deluge of selling. 

What we do know is that CME announced it was adjusting all trades below $15.54 to be raised to that price. This is an admission of either an electronic glitch likely exposed by a predatory algo or algos  intentionally stop fishing, a new algo that was tested and failed miserably, or a human who typed in the wrong price, ignored repeated terminal safeguards and sold down to $1434.

In 2 of the above possibilities, the glitch would be  the result of prices being distorted  faster than CME's own servers could rebalance. And raising the flow of the selloff would seem  to indicate that is likely. This would  be the right thing to do especially if resting orders did not get filled between the low of $14.34 and the new adjusted  low of $15.54. We applaud  CME for doing this.

But equally troubling is what that in turn implies. Specifically, that predatory algos are either indifferent to the collateral damage they do the very bourse that supports them, gives them a way to make a living, and likely rebates them for volumes. Or something worse we do not speculate on here.

Assuming it is the former, then CME  must protect its franchise. For this type of increasing activity is undermining the integrity of its markets. And while the physical is good, paper is bad crowd would rejoice at this as further confirmation of the lack of claim futures has on the  pricing mechanism of metals, it would be tragic; for the integrity of all markets in precious metals  would then be in trouble as all transparency would be suspect.  

We want CME to fix  it if it is somehow broken, punish those who are predatorily undermining markets and relying on their tech to make money with no regard to the market structure itself and possibly directly attacking the very order book infrastructure  CME protects. if you truly want free markets, then  you want this fixed.

Otherwise you may be a luddite hoping for fat middle aged men on the LME with flags  and cigars determining prices for  your Gold. it is a capitalistic and a moral imperative for this to  be addressed and stopped. This is a war of escalating arms. And when there  is no one left to spoof on exchanges because people  are afraid to leave resting orders because those orders will get filled surreptitiously or traded through unfilled,  then  the exchanges  are at risk of being destroyed from the inside out. 

?

Excellent live charts   HERE

From a zerohedge commenter who is obviously experienced in the way of the Algo.  He may not be right in this case, but he is spot on in how the mechanism works.

No one "dumped" 450mm notional. When a large stop was triggered the algos immediately went to work and ran the weak handed bids and overnight stops..... they sold it and bought it the whole way down, fighting each other the entire way. Citadel, two sigma, and deshaw etc... it's not a level playing field.... look at CL tonight! Two stop hunts triggered but not enough

And there you have it. in a matter of seconds thousands of contracts traded electronically, much of the price action was removed, and  there may have been a glitch somewhere but with whom we do not know. Confidence restored. 

In any event we cannot know what happened. This  is because we are not privy to facts. And that encourages  speculation. So, if one wants rumours to stop,  one must give unvarnished truth as to what happens. To not do so is to risk market integrity. It is also to invite nonsensical speculation that somehow the algo  and the bourse are  codependent to the point that revealing the unintended but real problem will also reveal the conflict that our political bettors have  enabled with their complete  ignorance of markets. 

if our sentences are more run on than usual, please forgive us. it  was along night.

- Soren K.

When taxi and bus drivers take journalists into Syria via the Beirut-Damascus Highway these days, there's a common greeting that has become a kind of local tradition as the drivers pull into their Damascus area destinations. They confidently tell their passengers: "welcome to the real Syria." Local Syrians living in government areas are all too aware of how the outside world perceives the government and the cities under its control. After years of often deceptive imagery and footage produced by opposition fighters coordinating with an eager Western press bent on vilifying Assad as "worse than Hitler", many average Syrian citizens increasingly take to social media to post images and scenes of Syria that present a different vision: they see their war-torn land as fundamentally secular, religiously plural, socially tolerant, and slowly returning to normalcy under stabilizing government institutions.

As the most intense phase of fighting in Aleppo was unfolding in 2016, veteran journalist Stephen Kinzer took to the editorial pages of the Boston Globe to remind Americans that the media has created a fantasy land concerning Syria. Kinzer painted a picture quite opposite the common perception:

Coverage of the Syrian war will be remembered as one of the most shameful episodes in the history of the American press... For three years, violent militants have run Aleppo. Their rule began with a wave of repression. They posted notices warning residents: “Don’t send your children to school. If you do, we will get the backpack and you will get the coffin.” Then they destroyed factories, hoping that unemployed workers would have no recourse other than to become fighters. They trucked looted machinery to Turkey and sold it...

 

The United States has the power to decree the death of nations. It can do so with popular support because many Americans — and many journalists — are content with the official story.

Now, during the first summer of relative calm Aleppo residents have seen in over four years of grinding conflict, the city commonly referred as "the jewel of Syria" is once again rising from the ashes. Foreign journalists are also accessing places like East Aleppo and the heart of the walled 'old city' for the first time. Some few honest correspondents, unable to deny the local population's spirit of hopefulness and zeal with which they undertake rebuilding projects, acknowledge that stability and normalcy have returned only after the last jihadists were expelled by the Syrian government and its allies.

Aleppo orchestra concert, Summer 2017/via Sarah Abdallah

A Western press and political class which generally mourned the liberation of the city from al-Qaeda groups like Nusra (AQ in Syria), calling government actions a 'massacre' and 'genocide', now finds a reality that can't be ignored or denied: Aleppines are returning to ravaged parts of the city to rebuild, they are enjoying nightlife, going to music concerts, staying out late at cafes; families are swimming at local pools, women are strolling around in t-shirts and jeans free of the oppressive Wahhabi fighters that once ruled parts of the city.

Kinzer's Boston Globe piece further concluded that the entire web of assumptions on Syria woven by the media and fed to the public over the years were "appallingly distant from reality" and warned that these lies are "likely to prolong the war and condemn more Syrians to suffering and death." As new photos continue to emerge of the real Aleppo and the real Syria it is essential to revisit the most destructive among the lies that have helped serve to prolong this tragic and brutal war.

Aleppines didn't want to live under Wahhabi Islamist rule

Andalusia Swimming Pool in Aleppo, Summer 2017/via Syria Daily

According to multiple eyewitness reports and studies, the story of how war entered Aleppo's environs was not primarily one of mass public protests and government crackdown, but of an aggressive jihadist insurgency that erupted suddenly and fueled from outside the city. According to then Indian ambassador to Syria, V.P. Haran (Amb. to Syria from 2009 to 2012), Aleppo on the whole was unwillingly dragged into the war after remaining silent and stable while other cities raged. In an interview which detailed his own on-the-ground experience of the opening years of war in Syria, the ambassador said:

Soon parts of Latakia, Homs and Hama were chaotic but Aleppo remained calm and this troubled the opposition greatly. The opposition couldn’t get the people in Aleppo to rise up against the regime so they sent bus loads of people to Aleppo. These people would burn something on the streets and leave. Journalists would then broadcast this saying Aleppo had risen.

Why did it take until July 2012 - well over a year since conflict in Syria began - for Aleppo to see any fighting? Why did residents not "rise up" against the government?

The answer is simple. The majority of Syrians, whether Sunni, Shia, Alawi, Christian, Kurd, or Ismaili, are sane individuals – they’ve seen what life is like under the “alternative” rebel rule marked by sharia courts, smoke and alcohol bans, public floggings, street executions, desecration of churches, and religious and ethnic cleansing of minorities. They recognize that there is a real Syrian national identity, and it goes beyond mere loyalty to the current ruling clique that happens to be in power, but in Syria as a pluralistic Levantine society that rejects Saudi style theocracy.

Rebuilding Aleppo, Summer 2017. Latin Parish of St. Francis/via Sarah Abdallah

The kind of religious and cultural pluralism represented in the liberal democracies of the West are present in Syria, ironically, through a kind of government-mandated “go along, get along” policy backed by an authoritarian police state. One can even find Syrian Jews living in the historic Jewish quarter of Damascus’ walled old city to this day.

Syrian urban centers have for decades been marked by a quasi-secular culture and public life of pluralist co-existence. Aleppo itself was always a thriving merchant center where a typical street scene would involve women without head-coverings walking side by side with women wearing veils (hijab), cinemas and liquor stores, late night hookah smoke filled cafés, and large churches and mosques neighboring each other with various communities living in peaceful co-existence. By many accounts, the once vibrant secular and pluralist Aleppo is now coming back to life (and largely never left government-held West Aleppo).

"Moderates" did not "liberate" Aleppo, but gave cover to an ISIS and al-Qaeda invasion

Image: "moderate" rebels mock a Christian government soldier—This photo was originally posted online by a Swedish based terror group in Syria after the Summer 2013 rebel offensive against the Menagh airbase near Aleppo. A rebel fighter mocks a captured Christian government soldier’s cross. Another photo posted in the original set reveals that the soldier was later tortured by being crushed with a large rock on his chest as he lay on his back.

One of the most under reported and least understood events surrounding the history of how all of Aleppo province and the Northern Syria region became a hotbed of foreign jihadists is the fall of the strategically located Menagh airbase near Aleppo. As a Reuters timeline of events indicates:

In early 2012 rebels take control of the rural areas northwest of Aleppo city, besieging the Menagh military air base and the largely Shiite towns of Nubl and Zahra.

After a lengthy siege of Menagh, the base finally fell to jihadist factions under the command of the US-backed Free Syrian Army (FSA) in August of 2013. This event was key to rebel fighters gaining enough territory to cut off the Aleppo-Damascus Highway, which allowed them to encircle all of Aleppo for much of that year. But a little known yet hugely important detail of the Menagh episode is that rebels only got the upper hand after being joined by ISIS suicide bombers commanded by Omar the Chechen (ISIS' now deceased most senior military commander). The fall of this government base is what opened a permanent jihadi corridor in the North, allowing terrorists to flood the area. The commander for the operation was US Ambassador Robert Ford's personal friend, Col. Abdel Jabbar al-Okaidi, who was head of the US and UK funded Revolutionary Military Council of Aleppo (FSA). Okaidi worked in tandem with ISIS military commander Omar the Chechen and his crew for the operation - all while being supported by the United States and Great Britain.

Concerning US-backed Okaidi's close relationship to the ISIS faction in the summer of 2013, there is actually video evidence and eyewitness testimony (US Ambassador Ford himself later admitted the relationship to McClatchy News). Amazingly, the video, titled “US Key Man in Syria Worked Closely with ISIL and Jabhat al Nusra” never had very widespread public distribution, even though it has been authenticated by the top Syria expert in the U.S., Joshua Landis, of the University of Oklahoma, and author of the hugely influential Syria Comment. Using his Twitter account, Dr. Landis commented: “in 2013 WINEP advocated sending all US military aid thru him [Col. Okaidi]. Underscores US problem w moderates.”

The video, documenting (now former) U.S. Ambassador Robert Ford’s visit to FSA Col. Okaidi in Northern Syria, also shows the same Col. Okaidi celebrating with and praising a well-known ISIS commander, Emir Abu Jandal, after conducting the joint Menagh operation. In an interview, this U.S. “key man” at that time, through which U.S. assistance flowed, also praised ISIS and al-Qaeda as the FSA’s “brothers.” Abu Jandal was part of Omar the Chechen's ISIS crew assisting the FSA. Further video evidence also confirms Omar the Chechen's role at Menagh. The videos also show Okaidi proudly declaring that al-Nusra (Al-Qaeda in Syria) makes up ten percent of the FSA. The FSA was always more of a branding campaign to sell the rebels as "moderates" to a gullible Western media than a reality on the ground; it was a loose coalition of various groups espousing militant jihad with the end goal of establishing an Islamist polity in Syria.

Foreign fighters flooded Aleppo Province. The U.S. State Department’s own numbers: read the full report at STATE.GOV

In the end, terror groups like ISIS enjoyed a meteoric rise in Syria due to US government and media support for these so-called "moderate rebels" - all entities which collectively sought regime change at all costs - even the high cost of mass civilian death and suffering that inevitably results from unleashing an insurgency in urban areas.

The Syrian Army and government were never "Shia" or sectarian-based

Al Aziziyah neighborhood in Aleppo/via Syria Daily

The Arab Spring narrative was the ideological lens through which experts initially pit the oppressive supposedly “Alawite/Shia regime” against a popular uprising of Syria’s majority Sunnis. As Sunnis make up about 70% of Syria’s population, it was simply a matter of numbers, and of time. But this view proved overly simplistic, and according to one little known West Point study, utterly false. It was commonly assumed that the Syrian Army was a hollowed out Alawite institution with its Sunni conscripts apprehensively waiting for the right moment to defect to the rebel side. This was the fundamental supposition behind years of repetitious predictions of the Assad regime’s impending collapse, and predicated upon a view of the Syrian military as a fundamentally weak and sectarian institution. But West Point's 2015 study entitled Syria’s Sunnis and the Regime’s Resilience concluded the following:

Sunnis and, more specifically, Sunni Arabs, continue to make up the majority of the regular army’s rank-and- file membership.

The study's unpopular findings confirmed that the Syrian Army, which has been the glue holding the state together throughout this war, remains primarily a Sunni enterprise while its guiding ideology is firmly nationalistic and not sectarian.

The highest ranking Syrian officer to fall victim to rebel attack was General Dawoud Rajiha, Defense Minister and former chief of staff of the army, in a major 2012 bombing of a Damascus national security office. General Rajiha was an Orthodox Christian. Numerous Christians and officers of other religious backgrounds have served top positions in the Syrian Army going back decades - a reflection of Syria's generally nationalist and religiously tolerant atmosphere.

Mainstream press did not report from Aleppo, but was hundreds of miles away.

Outside the Citadel of Aleppo: life returning to normal, Summer 2017/via Syria Daily

The heavily populated urban areas of Syria continue to be held by the government. But most reporting has tended to dehumanize any voice coming out of government held areas, which includes the majority of Syrians. The war has resulted in over 6.5 million internally displaced people - the vast majority of which have sought refuge in government territory. 

The fact remains that there are some popular figures in the establishment media and analyst community who speak and write frequently about Syria, and yet have never spent a significant amount of time in the country. Throughout much of the war they've primarily reported from Western capitals - thousands of miles away - or, if they are in a Middle East bureau, without ever leaving the safety of places like Beirut or Istanbul. Fewer still have the necessary Arabic language skills to keep pace with local and regional events. Some have never been to Syria at all. They become willing conduits of rebel propaganda beamed through WhatsApp messages and Skype interviews, which was especially the case when it came to the battle for Aleppo. That much of the world actually considers these people as authorities on what’s happening in Syria is a joke – it’s beyond absurd.

Outdoor concert venue and Aleppo springs back to life, Summer 2017/via Maram Kasem

We are hopeful that the jihadist menace will be fully expelled and that the international proxy war which has taken so many lives and reduced much of a beautiful nation to rubble will finally come to an end. Aleppines and other Syrians are rebuilding - they are optimistically preparing for the future. Welcome to the real Aleppo.

Final national exams just before summer 2017/via Syria Daily

The woes for hedge funds continued in the second quarter, and nowhere more so than among the macro fund community, which posted its worst first half since 2013, losing 0.7% , and according to Hedge Fund Research have returned just 1% annually in the past five years, in an investing world which no longer makes much sense courtesy of central bank intervention. Most impacted by this revulsion against the active investing community has been none other than Paul Tudor Jones, whose investors are increasingly deserting him according to Bloomberg, which reports today that clients yanked 15% of their assets from his main BVI fund in the second quarter, leaving AUM at just $3.6 billion, roughly half from a year ago.

Jones, whose BVI Global Fund is down 1.9% through July 21, has been taking aggressive steps to revive his firm, including reducing fees and headcount. As revenue at Tudor declined, Jones last month sold the firm’s 43-acre Greenwich, Connecticut, headquarters’ property. Tudor then said it plans to move to a location in lower Fairfield County that’s more convenient to New York City, where the firm has offices. It is probably also cheaper. One year ago, Jones also dismissed 15% of his employees. He has told clients he will manage a larger chunk of their money and has encouraged his portfolio managers to take more risk. Jones has also leaned on quantitative tools to help with trading, including introducing technology that replicates the bets of his best managers.

Finally, Tudor has this year reduced its management fee to between 1.75% and 2.25% while taking a 20% cut in profits, after decades of being one of the most expensive hedge funds. The firm had once charged management fees as high as 4% for some clients, and a performance fee of as much as 27% for others, Bloomberg reports.

Alas, so far these "aggressive steps" have failed to yield results. Jones, 62, and his peers including Brevan Howard's Alan Howard and, of course, John Paulson, are experiencing a "punishing shift":

The old guard who shot to fame in the 1980s and 1990s are foundering, while a younger set of managers are making money, hiring and attracting new investments. The veterans are finding it’s no easy feat to replicate stand-out profits of yesteryear, when markets were more opaque and less efficient.

One can debate whether markets were less efficient then compared to now, but one thing is certain: icons such as PTJ have failed to find their groove in a world where central banks have injected $15 trillion in liquidity. Aside from BVI Global, Tudor also manages a fund tied to the performance of multiple teams of managers, an event-driven portfolio, and individual accounts. In total, the firm now has just under $8 billion in assets, compared with $14 billion in June 2015 according to Bloomberg.

Meanwhile, Tudor employees have also defected along with clients.

Global rates money manager Adam Grunfeld quit in May after nine years and is set to join Element Capital, the macro fund run by 42-year-old Jeff Talpins. Zorin Finkelsen and Dudley Hoskin left to join Balyasny Asset Management. Other departures have included risk-management chief Joanna Welsh, who departed for Ken Griffin’s hedge fund Citadel last year. Separately, money manager Dan Pelletier took a sabbatical to design quantitative tools for trading, people with knowledge of the firm said. Pelletier, who had worked at Tudor for nine years, couldn’t be reached for comment.

Jones' recent troubles are a humiliating fall from grace for the once-storied investor, whose main BVI Global Fund produced average annual gains of about 26% from 1987 through 2007. However, since 2008 his annual average return has slid to about 4.7% with results turning increasingly more negative in recent years.

In his biggest losing bet - so far - Jones banked on macro making a comeback. Last year he said central bank policies, which have suppressed volatility and encouraged more government debt, will backfire and macro strategies will profit when the debt bubble bursts. So far that hasn’t materialized.

Brian Sack may be rolling in the green these days thanks to his current employer, quant behemoth D.E. Shaw, but before Sack was trading the market, he was the market (which also explains his rather seamless transition to the private sector), in his capacity as head of the New York Fed's Markets Group, also known as the "Plunge Protection Team", and also managed the FederalReserve's System Open Market Account, i.e. he ran the daily POMO which was the basis of QE1 through QE3.

While Sack was replaced as head of the infamous Markets group in Jun 2012, replaced by the current head, academic Simon Potter, it was Sack whose daily interventions in the bond market and periodic "communications" with a certain group inside Citadel, set the groundwork for the biggest, and most artificial market rally in history. It to think it only cost the Federal Reserve $4.5 trillion to preserve the illusion of the "Wealth effect"...

Anyway, the reason we bring up this "blast from the past"name, is because in its latest Top of Mind periodical, (p)reviewing the Fed's balance sheet unwind, Goldman's Allison Nathan has conducted an extensive interview with none other than the man who made price discovery, efficient markets, and basically capitalism, a thing of the past.

So what does Brian have to say? Well, a lot of thing (see below), but the punchline is his answer when asked if the Fed will buy other assets besides bonds, i.e., stocks, ETFs and the like:

Q. Would it make sense for the Fed to purchase a broader range of assets in the event of a future downturn, as Fed Chair Janet Yellen suggested in a speech last year?

 

Purchases of Treasuries and agency-backed securities—the primary assets that Congress has so far authorized the Fed to buy—have the advantage of allowing the Fed to affect the market price of interest rate risk without taking on any credit risk. Purchasing a wider set of assets—as do some other central banks—might enable the Fed to have a larger effect on financial conditions and promote faster recoveries. But it would also involve putting more taxpayer money at risk and having an imprint on a wider set of risk premiums in the market. So there is a tradeoff involved that Congress would ultimately have to consider.

Translation: the Fed is ready to start buying everything at the flip of a switch. It just needs Congressional approval

Here is Goldman's entire interview with the former Markets group head.

* * *

Brian Sack is Director of Global Economics at the D. E. Shaw group. Prior to joining the D. E. Shaw group in 2013, he was an Executive Vice President at the Federal Reserve Bank of New York (FRBNY), where he served as head of the FRBNY's Markets Group and managed the Federal Reserve's System Open Market Account portfolio from 2009 to 2012. Below, he reflects on the experience with the Fed’s asset purchase programs and argues that the Fed should maintain a relatively large balance sheet and be willing to deploy it as a policy tool during future downturns.

Allison Nathan: You were involved in both establishing quantitative easing (QE) as a policy concept and implementing it after the financial crisis. Looking back, how important was QE to the economic recovery?

Brian Sack: QE proved to be a critical policy tool. Without it, the economic recovery would have been slower, and there would have been a greater risk of the economy getting stuck in a deflationary trap. Given that the Fed's traditional policy instrument, the federal funds rate, was constrained by the zero bound, it was very important for the Fed to convey that it still had an instrument that it would actively use to pursue its economic objectives. I think that message had very meaningful effects on expectations for the economy and on financial conditions in a way that ultimately supported the recovery.

Allison Nathan: Can we really call QE a success, given that inflation remains below the Fed’s target?

Brian Sack: It’s true that inflation has been disappointing. That being said, the low level of inflation today, if anything, highlights how important it was for the Fed to have been responsive with this policy instrument. If the Fed had sat on its hands and allowed a much more sluggish recovery, I think the problem of low inflation would have been more severe.

Allison Nathan: Through what channel did QE impact the economy most?

Brian Sack: In my view, QE worked primarily through the portfolio balance channel. By reducing the amount of duration risk that would have otherwise been in the market, QE pushed down the term premium for longer-term securities, thereby reducing those interest rates. As investors sought to substitute into other securities, there were positive knock-on effects to broader financial conditions. There may have also been some effect through the signals that QE provided about the path of the federal funds rate, but my intuition is that it was less important than the portfolio balance channel, especially considering that the Fed was separately providing explicit guidance on its policy rate over much of this period.

Allison Nathan: In retrospect, is there anything that the Fed should have done differently?

Brian Sack: The Fed could have perhaps defined its policy reaction function for the balance sheet more clearly. Over the earlier QE programs, the Fed’s purchases moved in very large, discrete steps. In retrospect, it might have been better to move in more moderate steps with more frequent adjustments to economic conditions, as that could have helped markets and the public better understand how the Fed intended to set this policy instrument. When market participants are able to understand and anticipate central bank actions, monetary policy tends to be more effective. The Fed ended up moving in that direction during QE3, but it arguably could have done so sooner. That said, I would note that the Fed was launching a new policy instrument and that this innovation was taking place under challenging circumstances. So, in my view, debating whether the exact implementation of the tool was optimal is much less important than the Fed’s overall decision to actively  use the tool.

Allison Nathan: What will it mean for the economy and for markets to put balance sheet expansion into reverse? Are you concerned that normalization could prove disruptive?

Brian Sack: We should expect the portfolio balance effects that I discussed earlier to reverse, which means that the term premium should face some upward pressure. However, there are several reasons to think that the adjustment will not be sizable or disruptive. First, QE effects tend to occur when expectations shift, not when the actual portfolio flows happen. In this case, the Fed has already communicated the plan for shrinking its balance sheet, so a decent share of the impact should be behind us. Second, the decline in asset holdings is set to take place in a gradual and predictable manner, so the Fed has successfully made this adjustment relatively “boring.” And third, even once the Fed shrinks the balance sheet, the market will know that QE is an ongoing, viable tool. The prospect that the balance sheet is likely to increase again if needed could act to hold down the term premium today.

Finally, I'd note that many fundamental factors are also holding down the term premium, including low inflation expectations and the beneficial correlation that Treasury securities have with risky assets. If these factors were to shift in a manner that amplified upward pressure on the term premium, the market outcome could be more disruptive. But that would involve a fairly meaningful shift—such as sharply higher inflation expectations—which seems unlikely at the moment.

Allison Nathan: Could there be any unintended spillovers from the interaction between Fed normalization and the ECB’s eventual tapering of asset purchases?

Brian Sack: I do think there are important spillovers across global markets and that the global policy environment has helped keep longer-term US interest rates low. If other central banks adjust their balance sheets in the same direction, the increase in supply and the associated effect on the term premium could end up being larger than expected. That doesn't mean we'll necessarily have an abrupt or disruptive market outcome; it just means that whatever supply effect we were anticipating would be turned up to some degree. Of course, at this point, the ECB is only considering stopping the expansion of its asset holdings, not shrinking them, and the market is already anticipating these policy shifts. So I don’t see a great risk of a disruptive outcome in the short run.

Allison Nathan: You are in favor of the Fed maintaining a fairly large balance sheet in the longer run. What advantages do you see to that approach?

Brian Sack: I published a proposal in 2014 with Joe Gagnon saying that the Fed should operate a floor system with a meaningful role for the reverse repo facility, while maintaining a large balance sheet. The idea was that this framework would keep overnight market interest rates near the interest rate that the Fed pays to financial institutions. We argued that such a system would give the Fed effective control of interest rates and would be operationally simpler than the prior framework. It would also make the financial system more robust by helping satiate the private sector’s substantial demand for short-term, risk-free assets. To date, our experience with the floor system has been very positive, reflecting all of these advantages. I expect the Fed to decide to maintain this type of system in the longer run, and hence I doubt its balance sheet will ever fall below $3tn in assets.

Allison Nathan: Some market observers take the opposite view, arguing that the Fed should shrink its balance sheet to pre-crisis levels based on concerns that the floor system leaves the Fed with too large a footprint on the markets, or that having a large balance sheet could compromise the Fed’s independence, among other arguments. Is there merit to any of these concerns?

Brian Sack: I generally disagree with these views. I think the footprint argument is exaggerated, since the balance sheet simply transforms one type of government asset—a long-term Treasury security—into another type of government asset— bank reserves or reverse repos. Many of the other arguments in favor of a smaller balance sheet seem to be driven by nostalgia for the way things used to be or by concerns about political pressure from having a larger balance sheet. To me, it would be a shame to allow any of those considerations to stand in the way of arriving at the most effective, efficient, and robust operating framework for the Fed.

Allison Nathan: You mentioned that the balance sheet— once considered an unconventional policy option—should now be considered a viable tool...?

Brian Sack: Yes. The Fed initially proceeded with asset purchases in a very careful manner, which made sense given that we were in uncharted territory. But I think we’ve learned that many of the potential costs associated with QE ended up being more benign than initially feared by some observers. What’s more, the Fed has now demonstrated control over the policy rate even with a large balance sheet. Based on that experience, I think that the Fed should be more comfortable using the balance sheet when it is unable to achieve adequate policy accommodation by lowering the federal funds rate. In my view, there is a strong chance that the Fed will have to turn to asset purchases again when the next substantial economic downturn occurs, considering that the neutral level of the federal funds rate has fallen notably.

Allison Nathan: Would it make sense for the Fed to purchase a broader range of assets in the event of a future downturn, as Fed Chair Janet Yellen suggested in a speech last year?

Brian Sack: Purchases of Treasuries and agency-backed securities—the primary assets that Congress has so far authorized the Fed to buy—have the advantage of allowing the Fed to affect the market price of interest rate risk without taking on any credit risk. Purchasing a wider set of assets—as do some other central banks—might enable the Fed to have a larger effect on financial conditions and promote faster recoveries. But it would also involve putting more taxpayer money at risk and having an imprint on a wider set of risk premiums in the market. So there is a tradeoff involved that Congress would ultimately have to consider.

Allison Nathan: Economists like Larry Summers have argued that Fed purchases of long-term government debt would have been more effective at holding down the term premium if the Treasury had not increased the maturity of its debt issuance at the same time. Should there be more communication or coordination between the Fed and the Treasury? Or would that damage Fed independence?

Brian Sack: Debt management decisions can affect financial conditions in the same way as QE; they both change the supply of duration in the market. And decisions by debt managers can at times work at cross-purposes to QE decisions by the central bank. We at the Fed were certainly aware of that throughout the post-crisis period. However, I don't see a need for policy coordination in most circumstances. The Treasury makes debt management decisions with a set of goals that differ from those of the Fed; and the Fed can take those decisions as given and set an appropriate path of QE around them.

However, there is clearly a need for communication. For example, the market effects of Fed balance sheet runoff will depend on what maturities the Treasury intends to issue to replace those holdings. And the Treasury needs to have a sense of the Fed's runoff plan as it decides how to fund the government. So certainly that type of communication should take place, and I have a hard time believing that those communications somehow impair the independence of the Fed, given that the Fed's mandate is clear.

Allison Nathan: What has been the most important lesson from the Fed’s experience with QE? Is it applicable to other central banks still conducting asset purchases?

Brian Sack: We learned that asset purchases have clear benefits and limited costs. I think a key lesson for all central banks is that if they see QE as a viable policy instrument, it's important to communicate that it will be used when the circumstances call for it. That will allow markets to price central bank actions further in advance and with greater accuracy, which would only make the policy more effective.