Despite the expert guidance of one Ben Bernanke, the world's once most levered hedge fund, Citadel, is reportedly returning money to some global hedge-fund clients.

Bloomberg reports that Ken Griffin’s Citadel LLC is forcing out some of the clients in one of its multistrategy hedge funds as it seeks to tighten up its investor base, according to people with knowledge of the matter.

The timing is intersting as Citadel’s move comes amid a revival of interest in hedge funds.

Hedge funds raised $13.4 billion in August, the second-largest monthly amount in two years, boosting net inflows for the year to $39 billion, according to data provider eVestment.

 

This marks a turnaround from 2016, when investors pulled $112 billion amid mediocre performance.

Bloomberg reports that some of the investors, particularly funds-of-funds, will receive all their money back from the Citadel Kensington Global Strategies Fund by the end of the year, the people said, asking not to be identified because the information is private.

Others will get back a portion of their investment, one of the people said.

In an obvious attempt to quell any anxiety, a spokesperson reassured this is standard operating procedure, as hedge funds sometimes return part of their capital because managing too much money can hurt performance.

“We have routinely made profit distributions, in whole or in part, across a number of our funds over the past 20 years,” Zia Ahmed, a spokesman for Citadel, which oversees $27 billion, said by email.

Notably performance has not been dreadful. Citadel’s main Wellington and Kensington funds gained 9.2 percent this year through August. Its Global Equities Fund was up 6.8 percent.

Still, we don't feel too bad for Mr. Griffin after hauling in $600 million last year...

The dollar rally paused on Friday and looked poised to finish its best weekly gain of the year with a whimper, when in a repeat of the Thursday session the, Bloomberg dollar index first rose more than 0.1% during Asia hours before slumping around the European open as month and quarter-end flows came into play again.

U.S. stock-index futures were little changed as investors awaited data on personal spending, which however is likely to be distorted by Hurricanes Harvey and Irma, while both European and Asian shares were in the green. European equities drifted higher, headed for the best month this year, while stocks in Asia also followed the S&P 500 higher earlier. Treasuries were steady after a selloff that saw yields jump 18 basis points this week, the most since Donald Trump’s U.S. election victory in November. Emerging-market assets rallied, with stocks rising and most currencies strengthening against the greenback.

After an initial bout of euphoria over Trump’s tax plan - which still needs approval from Congress although it currently lacks detail, leaving investors guessing which parts of the package will be prioritized by the administration - the renewed "Trump trade" paused as profits were taken on some of the recent reflation trades. Though with the chances of higher U.S. interest rates by the end of the year now at about 65%, they have driven equities higher and taken money out of gold, which was on track for its worst month this year, suggesting that the Fed has once again failed to send a tightening message to markets.

“Trump’s fiscal package continues to drive markets,” said Societe Generale analyst Guy Stear. “U.S. bond yields have climbed both as a direct response to tax cut fears and as the market’s wider risk appetite returned.” He said the sharp rise in 10-year Treasury yields, which hit a two-month high of 2.36% on Thursday, was driving the dollar higher.

The euro swung between gains and losses around a pivotal level as supportive month- and quarter-end flows were countered by choppy trading. European data underscored the region’s economic recovery with German unemployment fallling to a record low in September, bolstering the ECB case to tighten and reduce asset purchases in coming months. The EUR traded within 0.2 percent of the psychologically significant $1.1800 level in London trading. Though the euro is headed for its first monthly drop since February, it is still up for a third quarter, a performance not seen in more than three years. As such, the EUR/USD reversed its drop and rose 0.1% to 1.1801. European exporters were helped in the early session by the dip in the Euro, and nudged the pan-European STOXX 600 index up to a two-month high, while Europe's miners were green across the board in reflex to Chinese action.

This morning in Asia, markets are trading broadly higher. Note the Chinese markets  will be closed for a week from next Monday given their Golden week holidays. Asian shares regained some poise after several days of declines, with the MSCI index of Asia-Pacific shares ex Japan bounding 0.4%, but still down 1.7% for the week so far. For the quarter, it looked set to gain 4.7%. Chinese H shares capped their biggest monthly loss this year, despite edging higher Friday ahead of national holidays. The Hang Seng China Enterprises Index closes up 0.3% for monthly loss of 3.4%, the worst since December. The Hang Seng Index rose 0.5%; posts first monthly decline this year, down 1.5%; for 3Q, the gauge climbs 7% and it remains Asia’s best performing major index this year. The MSCI China Index rallied 0.5% oon Friday, posting its ninth monthly gain and +0.3% in September. The ASX 200 (+0.2%) and Nikkei 225 (-0.03%) were both initially subdued as energy weighed on Australia after crude prices fell over 1%, while Japanese sentiment was dampened from the prior day’s currency strength and as participants digested a deluge of mixed data releases. However, markets recovered alongside a jubilant China where Hang Seng (+0.5%) and Shanghai Comp. (+0.3%) were underpinned on retailer optimism ahead  of the National Day holiday and as financials benefitted after the banking regulator confirmed it is studying plans to further open up the industry

As a result, Euro zone stocks hit their highest in three months, on track for a quarterly gain after falling back in the second quarter. That helped push world stocks up 0.14% , with MSCI’s all-country world index, which tracks shares in 46 countries, gaining for 11 consecutive months - its longest winning run since 2004.

Meanwhile, GBP saw some added volatility amid the aforementioned month-end flow, alongside comments from BoE’s Carney with the Governor noting that the committee has seen a downtick in productivity due to Brexit uncertainty. GBP/USD slumped as low as -0.5% to 1.3353 first after BOE’s Carney said he is thinking about "taking foot off the accelerator", it then jumped back above 1.3400 as he reiterated that rates may rise in coming months, in a limited and gradual pace, only to drop once again following weak eco data showing the current account deficit ballooning to GBP 23bln, while GDP for the second quarter was revised down to 1.5 percent from a previous estimate of 1.7 percent as service sector output fell -0.2%. Swedish krona slid as Stefan Ingves appointed to a third term as Riksbank governor.

Over the weekend, investors will be keeping a close eye on the Spanish region of Catalonia, where separatist groups urged supporters to defy efforts to block an independence referendum on Sunday.

"At the moment, there is no significant market impact from the tensions, but if the Catalan police and the Spanish police are standing there in front of the polling stations and discussing whether to block the station or not, this will be an issue,” said DZ Bank strategist Sebastian Fellechner.

In euro zone bond markets, lower-than-expected German inflation data released on Thursday led many to speculate that the corresponding figure for the bloc as a whole, due on Friday, would also disappoint. Germany’s 10-year yield declined two basis points to 0.46 percent. Britain’s 10-year yield declined two basis points to 1.33 percent, the largest drop in almost three weeks. The yield on 10-year Treasuries climbed less than one basis point to 2.31 percent.

In commodities, it's been a quiet morning in commodities with WTI and Brent crude showing a slight pullback from some of the losses seen late yesterday. WTI looking to make a retest back to USD 52, after rejecting the break above the 1 week high. Precious metals have been led by risk flow, as month end unwinds are evident, with a bid seen through the European morning following the bearish September. Gold consolidates back in summer levels, back within pre- August 25th highs.  Gold, under pressure due to the stronger dollar, was set for its biggest monthly fall of the year. The metal was last all but flat at $1,287 an ounce.

Market Snapshot

• Dow, E-Mini S&P 500 and E- Mini Nasdaq 100 futures little changed
• S&P 500 +0.1% to a fresh record-high at 2,510.06 on Thursday
• VIX Index increases 0.7%, ending 3-day decline... for now
• Gold spot up 0.1% to $1,288.70
• U.S. Dollar Index up 0.02% to 93.11
• WTI crude down 0.1% to $51.53, Brent unchanged at $57.41
• STOXX Europe 600 up 0.02% to 386.42
• MSCI Asia up 0.4% to 161.21
• MSCI Asia ex Japan up 0.6% to 529.56
• Nikkei down 0.03% to 20,356.28
• Topix down 0.08% to 1,674.75
• Hang Seng Index up 0.5% to 27,554.30
• Shanghai Composite up 0.3% to 3,348.94
• Sensex up 0.7% to 31,508.30
• Australia S&P/ASX 200 up 0.2% to 5,681.61
• Kospi up 0.9% to 2,394.47
• German 10Y yield fell 2.5 bps to 0.454%
• Euro up 0.1% to $1.1799
• Brent Futures up 0.4% to $57.61/bbl
• Italian 10Y yield fell 2.9 bps to 1.829%
• Spanish 10Y yield fell 1.6 bps to 1.61%

Bulletin Headline Summary from RanSquawk

• GBP sees some pressure as UK GDP misses
• European Equities marginally higher on the final trading session of the quarter
• Looking ahead, highlights include US PCE, Personal Spending, Chicago PMI and a slew of Central Bank Speakers

Top Overnight News

• U.S. regulators are planning to release American International Group Inc. from the special government oversight ordered for the insurer after its central role in the 2008 financial crisis
• Deutsche Bank had its long-term credit grade cut one level by Fitch Ratings late Thursday, which said the lender will take longer to revive growth under a turnaround plan unveiled in March
• Ken Griffin’s Citadel LLC is returning capital to some of the clients in one of its multi-strategy hedge funds as it seeks to tighten up its investor base
• Iron ore is down 20 percent in September, putting it on course for the first back-to-back quarterly loss since 2015, and there’s rising concern that the final three months of the year may bring further declines
• London house prices posted their first annual decline since the financial crisis
• U.K. 2Q GDP rises 0.3% q/q in line with previous estimate
• Euro-zone September inflation comes in at 1.5%, below consensus of 1.6%. Core CPI also below consensus at 1.1%
• Uber CEO Will Meet With London Regulators Over License Ban
• U.S. equity funds see outflows of $7.6b in week to Sept. 27, largest in
  14 weeks, BofAML strategists write in note, citing EPFR Global data
• “If the economy continues on this track it’s been on -- and all indications are that it is -- then in the relatively near term, you could expect interest rates to increase,” BOE Governor Mark Carney says in an interview on BBC Radio 4
• Chinese Premier Li Keqiang is set to keep his seat on the Politburo Standing Committee at an upcoming meeting of the party congress next month, South China Morning Post reports
• German unemployment slid to record low in September in a sign that Europe’s largest economy will continue to expand on the back of domestic spending while August unadjusted retail sales expanded 2.8% y/y vs est. +3.2%

Asia equity markets were positive on what was a range-bound day heading into quarter-end and after a similar close on Wall St, where the S&P 500 eked another fresh record. ASX 200 (+0.2%) and Nikkei 225 (-0.03%) were both initially subdued as energy weighed on Australia after crude prices fell over 1%, while Japanese sentiment was dampened from the prior day’s currency strength and as participants digested a deluge of mixed data releases. However, markets then recovered alongside a jubilant China where Hang Seng (+0.5%) and Shanghai Comp. (+0.3%) were underpinned on retailer optimism ahead  of the National Day holiday and as financials benefitted after the banking regulator confirmed it is studying plans to further open up the industry. 10yr JGBs were modestly higher on mild short covering and with the BoJ present in the market for JPY 710bln of JGBs ranging from the belly to the super-long end. BoJ Summary of Opinions for September 20th-21st meeting stated Japan's economy is expanding moderately and the best way to achieve the price goal is to patiently maintain current easy policy. There was also an opinion that the BoJ needs to ease policy further to support demand due to expected impact from scheduled sales tax hike.

• Japanese National CPI (Aug) Y/Y 0.7% vs. Exp. 0.6% (Prev. 0.4%); Core CPI Y/Y 0.7% vs. Exp. 0.7% (Prev. 0.5%).
• Japanese Industrial Production (Aug P) M/M 2.1% vs. Exp. 1.8% (Prev. -0.8%); Y/Y 5.4% vs. Exp. 5.2% (Prev. 4.7%)
• Japanese Retail Sales (Aug) M/M -1.7% vs. Exp. -0.5% (Prev. 1.1%); Y/Y 1.7% vs. Exp. 2.5% (Prev. 1.8%)

PBoC refrained from open markets operations today. PBoC set CNY mid-point at 6.6369 (Prev. 6.6285) Chinese Premier Li is said to remain in position for another term, according to Hong Kong press reports.

Top Asia News

• China Uber-Rich Prompt Haitong to Build Hong Kong Private Bank
• BOJ Keeps October Bond Purchase Ranges Unchanged From September
• S&P Estimates China’s Debt Will Expand 77% by 2021
• Cryptocurrency Exchanges Get Nod to Operate in First for Japan
• After Panda Bond, Philippines to Explore Dim Sum in Funding Push

European equities are looking for a strong finish this week with EU bourses modestly higher following the outperformance in material names. In terms of stock specific movers, Volkswagen shares fell amid reports that the company will suffer negative special items of around EUR 2.5bln. Alongside equities, EGBs have been bid this morning which is most likely down to technical factors such as month and quarter end adjustments, as well as some short covering ahead of the weekend. Germany curve showing a flattening bias this morning with outperformance in the long-end.

Top European News

• Euro-Area Inflation Fails to Improve as ECB Prepares for QE Talk
• Deutsche Bank Rating Cut by Fitch as Cryan Turnaround Stalls
• London House Prices Decline for First Time in Eight Years
• U.K. Consumers Display Resilience as Saving Ratio Climbs
• May Pledges Britain Will Defend EU From Russian Aggression
• Germany Sept. SA Unemployment Change -23K M/m; Est. -5K M/m

In currencies, the EUR is slightly firmer this morning, above 1.18 (1.2bln worth of expires at 1.18-1.1815) with cross related buying in EUR/GBP supporting the currency. This comes amid usual month-end demand, consequently taking EUR/GBP back to 0.8800. However, the undertone for EUR remains weak, following Merkel’s wobble in the German Elections, while yesterday’s inflation readings from Germany had also been relatively subdued. The USDJPY nursed some of the prior day’s declines, which was slightly aided by the release of the BoJ’s Summary of Opinions from the September meeting which suggested to patiently maintain current easy policy and that further policy easing may be needed to support demand on the impact from the scheduled sales tax hike. However, price action was contained as participants also digested a slew of mixed Japanese data in which Core CPI printed its firmest YTD of 0.7% but was in-line with estimates and still a distance from the 2% target, while Industrial Production surged and Retail Sales disappointed. Cable saw some volatility amid the aforementioned month-end flow, alongside comments from BoE’s Carney with the Governor noting that the committee has seen a downtick in productivity due to Brexit uncertainty. Carney also reiterated that the majority of members may see a need to raise rates if the economy stays on track. A slew of data this morning further pressured GBP with the current account deficit ballooning to GBP 23bln, while service sector output fell -0.2%

In commodities, a quiet morning in commodities with WTI and Brent crude showing a slight pullback from some of the losses seen late yesterday. WTI looking to make a retest back to USD 52, after rejecting the break above the 1 week high. Precious metals have been led by risk flow, as month end unwinds are evident, with a bid seen through the European morning following the bearish September. Gold consolidates back in summer levels, back within pre- August 25th highs.

Looking at the day ahead, there is PCE core for August, personal income and spending, the Chicago PMI as well as the University of Michigan consumer sentiment index. Onto other events, there is the BOJ’s summary of opinions for its September meeting. In the UK, IMF’s Lagarde and BOE’s Broadbent will speak at the BOE conference (Mr Draghi has cancelled his talk due to a relative’s sickness). Over in the US, the Fed’s Harker will speak at a Fintech event.

US Event Calendar

• 8:30am: Personal Income, est. 0.2%, prior 0.4%; Personal Spending, est. 0.1%, prior 0.3%
  • 8:30am: Real Personal Spending, est. -0.1%, prior 0.2%
  • 8:30am: PCE Deflator MoM, est. 0.3%, prior 0.1%; PCE Deflator YoY, est. 1.5%, prior 1.4%
  • 8:30am: PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.4%, prior 1.4%
• 9:45am: Chicago Purchasing Manager, est. 58.7, prior 58.9
• 10am: U. of Mich. Sentiment, est. 95.3, prior 95.3; Current Conditions, prior 113.9; Expectations, prior 83.4; 1 Yr Inflation, prior 2.7%; 5-10 Yr Inflation, prior 2.6%
• 11am: Fed’s Harker Speaks at Fintech Event on Consumers and Banking

DB's Jim Reid concludes the overnight wrap

Welcome to the last day of September and the quarter. There’s always a slight randomness to month and quarter end trading as investors adjust portfolios! The penultimate day of the month initially saw the sudden global bond rout continue after the more optimistic take on tax reform continued before a slight miss on German inflation seems to reverse the decline. 10 year Bund and Treasuries yields saw an intra-day peak of 0.516% and 2.357% respectively, before closing +1.1bp and -0.2bp at 0.475% and 2.309% (+0.7bp this morning in Asia). The yield lows this month were 0.302% and 2.04%.

Yesterday, both the German and Spanish CPI readings missed slightly. In Germany, the September CPI was a touch below market expectations at 0% mom (vs. 0.1%), leaving annual growth at 1.8% yoy (vs. 1.9%). Similarly, Spain’s CPI also missed at 0.6% mom (vs. 0.8% expected) and 1.9% yoy (vs. 2.0%). Looking ahead, we have CPI for the Eurozone, France, Italy and Poland today, along with the US August PCE Core, all of which could help dictate how bonds will end for the month. This morning, the August core Japanese national CPI (ex-fresh food) was in line at 0.7% yoy while IP beat expectations at 2.1% mom (vs. 1.8%). The DB house view on 10 years bonds is for YE yields of 2.75% (USTs) and 0.65% (Bunds) but as DB's Francis Yared suggested yesterday the scale of the move over the last 36 hours has been a surprise as he believes the tax plan is just an opening bid and likely to be pared down. So a long way to go although at least we've moved away from pricing no probability of a tax plan passing.

One event that has slipped a bit under the radar is the independence referendum in Catalonia on Sunday. It's been deemed illegal and therefore it’s all a bit confusing as to what will happen on Sunday, whether it will indeed go ahead and what happens next. Remember 3 years ago a non-binding ballot saw 80% support independence albeit on a 30% turnout.

Continuing on the theme of breaking away, the EU’s Brexit negotiator Barnier noted yesterday that “we are not yet there in terms of achieving sufficient progress” and signalled that it could take weeks or months before the talks can move onto a trade deal, as one of the sticking points remains that UK has not outlined what it thinks the country owes to the EU. Conversely, he did show some optimism, noting the UK PM’s Florence speech “has created a new dynamic in our negotiations, and we have felt this”. The next round of talks will begin from October 9th, two weeks before the EU Summit.

This morning in Asia, markets are trading broadly higher.The Kospi (+0.56%), Hang Seng (+0.21%) and Chinese bourses are up c0.5% as we type, while the Nikkei is down -0.29%. Note the Chinese markets  will be closed for a week from next Monday given their Golden week holidays.

Back onto Mr Trump’s tax plans which still lacks many details especially on where it’s funding will come from. Treasury Secretary Mnuchin said the plans will actually “cut” the US deficit by US$1trn, as the plans “will not only pay for itself, but it will pay down debt” by generating additional revenue. Conversely, the Committee for a Responsible Federal Budget said the plans could add US $2trn to the deficit over the next 10 years. Notably, a Bloomberg survey suggests 21 out of 26 economists expect the tax plans to increase the budget deficit. Elsewhere, White House’s economic advisor Gary Cohn said the tax plans was aimed at helping the middle class, but he could not guarantee that everyone in that tax bracket would get a cut.

Staying in the US, the Fed’s Esther George reiterated the US economy is in a “reasonably good shape” and that recent storms will hit 3Q growth, but is likely to be offset as rebuilding efforts gets underway. On rates, she said a gradual monetary tightening “will benefit the long run sustainable growth and financial stability in the US”.

Quickly recapping yesterday’s market performance now. US equities strengthened further, with the S&P up 0.12% to a fresh all-time high, while the Dow rose 0.18% and Nasdaq was flat following larger gains the day before. Within the S&P, most sectors advanced slightly, with only the industrials (-0.09%) and consumer discretionary sector marginally down. Elsewhere, the small caps index (Russell 2000) rose a further 0.27%, likely building on the optimism from Trump’s tax plans. Over in Europe, the Stoxx 600 gained (+0.19%) for the six consecutive day, while the DAX (+0.37%) and FTSE (+0.13%) also increased slightly. Turning to currencies, the US dollar index dipped 0.30%, but Sterling gained 0.41%, partly helped by BoE Chief Economist Andy Haldane’s comment that policy tightening should be considered good news for UK. In commodities, WTI oil fell 1.11% as investors consider whether rising output from US shale assets will offset OPEC’s efforts for production cuts. Elsewhere, precious metals were slightly higher yesterday (Gold +0.35%; Silver +0.67%), while other base metals are also trading (Copper +1.90%; Zinc +1.07%) higher this morning.

Away from the markets and onto Japan. A former ally of PM Abe has just formed a new party on Wednesday with reasonable traction as per the polls. Tokyo’s first female governor Yuriko Koike has formally launched her Party of Hope, seeking a “tolerant, conservative reform party”. According to a survey by Mainichi newspaper, it found 18% of respondents would vote for Hope vs. 29% for Abe’s party. We will watch and see whether PM Abe’s opportunistic choice for a snap election on the 22 October will eventually pay off.

Finally, our European equity strategist Sebastian Raedler has published “European equity strategy – Market overview” and in it expects European equities to end the year close to current levels, with his models pointing to temporary upside to around 400 for the Stoxx 600 (around 4% above current levels). Yet, with Euro area PMIs at 56.3, consistent with 3%+ Euro area GDP growth, significantly above our economists’ growth forecast of 2.0% for 2018, he sees scope for PMI momentum (the six-month change in PMIs and a key driver of equity market momentum) to turn meaningfully negative in Q1 next year, leading to renewed downside for the market.

Before we take a look at today’s calendar, we wrap up the other data releases from yesterday. In the US, the final reading of 2Q GDP was slightly higher at 3.1% qoq (vs. 3.0% expected), mainly due to a positive revision in inventories. The 2Q core PCE (0.9% qoq) and personal consumption (3.3%) were both unchanged. More up to date economic readings showed the August wholesale inventories was ahead of expectations at 1% (vs. 0.4% expected) and the advance goods trade balance deficit was not as wide as anticipated (-$62.9bn vs. -$65.1bn). Elsewhere, the Kansas City Fed manufacturing activity index was above expectations at 17 (vs. 15 expected) – the second highest reading over the past six years. Finally, the continuing claims (1,934k vs. 1,993k expected) and initial jobless claims (272k vs. 270k expected) were broadly in line.

For the Eurozone, numerous September confidence indicators beat expectations. The economic sentiment index rose 1pt to a fresh 10-year high (113 vs. 112 expected), while both the business climate (1.34 vs. 1.12 expected) and industrial confidence (6.6 vs. 5.2 expected) also beat. The consumer confidence was in line at -1.2. Elsewhere, Germany’s GfK consumer confidence was slightly lower than expected at 10.8 (vs. 11) while Spain’s retail sales rose 1.6% yoy in August (vs. 1.2% yoy previous).

Looking at the day ahead, we have the Eurozone CPI (1.2% yoy expected for core) along with CPI & PPI for France and Italy. In Germany, there is unemployment change for September. In the UK, there is the final reading of 2Q GDP along with mortgage approvals and money supply M4 stats. Over in the US, there is PCE core for August, personal income and spending, the Chicago PMI as well as the University of Michigan consumer sentiment index. Onto other events, there is the BOJ’s summary of opinions for its September meeting. In the UK, IMF’s Lagarde and BOE’s Broadbent will speak at the BOE conference (Mr Draghi has cancelled his talk due to a relative’s sickness). Over in the US, the Fed’s Harker will speak at a Fintech event.

By Chris at www.CapitalistExploits.at

In the late 90's and early 2000's, I spent a lot of time travelling through a host of the world's airports.

This naturally meant spending an inordinate amount of time staring at random people, wandering about aimlessly (no business class lounges when you're an impoverished backpacker living on noodles), and traipsing through duty free stores, puzzling on how it is woman can spend so much on perfume and men so much on big ugly watches.

Today, smart phones have come to rescue us but these things were far from ubiquitous back then. Instead, we had trusty newsstands. Remember them? Magazines and newspapers duelled it out for shelf space. Vanity fair, PC Magazine, New Yorker, the FT, you name it.

What kept the newsprint industry alive was advertising revenues.

When it came to newspapers, people bought them to read about the local politician caught fornicating with a ladyboy while on holiday in Bangkok... or to read about some girl named Mildred who had become a movie star after 70,000 auditions and how proud her parents were.

Nobody read them for the silly pictures of Marlboro man on a horse or for the pictures of some freshly-shaven suit flashing a Rolex while sipping champagne on a private jet. But we still had tons of ads because without them there'd have been no stories of Mildred or ladyboy antics. It's what kept the industry alive.

At its peak, ad rates were astronomical, but the only way to tell people about a new computer was to buy a page in Computer Shopper. And the only way the suits at Goldman Sachs could let you know they were there to screw guide you through the complexities of the market was to buy a full page in the FT.

Then it all imploded.

The internet has been at once the greatest and the most destructive commercial invention in media history. They said it couldn't happen. Then it did. Playboy? Dead. Rolling Stone? Buried. Citadel? Whoosh!

Two decades ago, if you were an editor at a large rag, you were king of the world. Expense accounts, lavish office space, wielding Schwarzenegger-like power with every institution grappling for your attention. Today, if you're still alive, you're bandaging your business together... and you've already taken everything online. But guess which god you're now praying to?

The same guys who now control ad spend.

You see, advertising revenue never went away. It just changed hands.

This chart is a couple years old but shows the overall makeup of the ad market.

And here's the stellar growth of ad revenue for Google.

Google revenue growth

It's been a helluva run for both:

For their part, investors clearly aren't paying for revenues. A forward price to cash flow of 19.71x? Ouch!

And the big boy, Alphabet:

Based on the numbers...investors are buying "Growth".

Benjamin Graham wouldn't be turning over in his grave. He'd be backflipping.

Where to Now?

So are we to sail into the sunset with Google and Facebook leading the charge in the advertising space? For how long?

Or is there a coming pressure on ad revenue, meaning millennials will find themselves carrying catheters around and playing bingo to a different world... one not ruled by these two? Or could it all happen even sooner than that?

Ad growth can take place by acquiring new markets as well as maintaining existing revenues. If you're adding new customers while existing ones are dropping off faster or even at the same pace as additions, you're a hamster on a wheel, and that "growth" that investors are currently paying such a premium for risks being repriced.

Here at Capitalist Exploits HQ there isn't a week that goes by without Natasha, or Henry, or Alec (this week's one) hitting me up with the promise that I can grow my business much faster with SEO/UX/CRM and ad spending with Google, Facebook, and a bunch of other "social media" juggernauts".

I don't begrudge these folks. They're just trying to make a crumb. But unfortunately that usually means promising me they know just the tricks of the trade, and I can pay them to place ads for me and "manage" my online presence. The ROI will come, I just need to be patient. Maybe they're right, but I doubt it. Know why?

I've spoken with many others running online businesses, and you'd have more luck finding the yeti than anyone who's had the ability to say with certainty that any of their ad spend is driving meaningful numbers over and above dollar spend. Site hits? Sure. But no conversions.

It's a world of obfuscation with the promise of gold always lurking over the horizon... but never in reach.

A while ago a company run by some friends spent a godawful amount with what is the equivalent of Google's SAS.

The promise from the Google boys was it'd pay off in a big way — just be patient — and it required a substantial downpayment.

That was nearly a year ago, and the patience has long since worn off. For an excellent breakdown on the murky world of ad trading, I'd strongly suggest Raoul Pal's GMI report on the topic, which you can find by signing up to Real Vision TV.

I agree with Raoul when he says:

I think that as this story develops, Google and Facebook will begin to come under pressure. They are making super - normal profits based on total sham. They aren’t the villains but they own the eco-system and they clearly can’t be left in charge of it.

I've had similar experiences.

In the past, I hired an advertising agency who were considered "best in biz" to build a landing page for me and run a campaign complete with targeting traffic (which I paid for separately) for an event I was hosting.

The results where absolutely hopeless, and after three months and about US$15,000 down it was clear to me there was only one group making money on this gig... and it wasn't the guy I saw in the mirror.

I fired them, took down the landing page, sat down, and wrote a short message to my existing list. No special copywriting skills, or emotional wording. Nothing. Just what I was up to. Bam! Success. Weird, heh?

Now, I realise that my data sample is admittedly tiny in the grand scheme of things, but the thing is I've enjoyed substantial organic growth (thanks to you readers for sharing my content with friends). But the targeting ad side, while only done a couple of times, has been spectacularly useless 100% of the time.

I remembered all of this when last week I came across this article about Procter & Gamble's dialling back on ad spend.

The world's largest advertiser slashed spending on 'crappy' digital ads by over $100 million — and still saw sales increase

We will vote with our dollars and will not waste our money on a crappy media supply chain—so we can invest in what really matters—better advertising and innovation to drive growth.

You may be thinking that US$100m is a drop in the bucket for the duopoly of Google and Facebook, and you'd be right. What isn't a drop in the bucket, however, is Procter & Gamble entire annual marketing budget. A whopping US$2.4 billion!

P&G's Marc Pritchard was pretty frank in a speech given at the Interactive Advertising Bureau’s annual leadership meeting in Hollywood earlier this year.

Frankly, there’s, we believe, at least 20 to 30 percent of waste in the media supply chain because of lack of viewability, nontransparent contracts, nontransparent measurement of inputs, fraud and now even your ads showing up in unsafe places,

He has given the duopoly a one year ultimatum to clean up their act or risk losing P&G's 2018 budget.

P&G are not the only ones as they're joined by Unilever and Bank of America to name a few.

Digging deeper I found this from a few months back:

French advertising giant pulls out of Google and YouTube

Havas becomes first major global marketing company to pull entire ad spend after talks with tech company break down.

The problem that humans have is that we need data to understand and make rational decisions.

The entire digital advertising industry has been so new and so fast-moving that businesses haven't had the time to accumulate meaningful data on which to make calculated rational decisions.

Additionally, the dynamic has been changing so quickly that what may have worked for a few months suddenly no longer works. It's been like trying to fit a hubcap on a moving car. You just get chewed up.

The rush to get, gain, and retain "online presence" has led to a FOMO and subsequent massive boom in ad agencies and, of course, social media companies themselves.

Attempting to value the ad spend companies have opted to just spraying money at ad agencies in the hope that they know what the hell they're doing. Investors, finding it impossible to value companies such as Google and Facebook, have chosen instead to just spray money at them buying the "growth".

Speed Bumps

There are a couple that spring to mind:

1. More government regulation

It's coming and here's why.

Whether or not you believe that the Russians are hacking US elections or not is missing the point. Believing that foreign governments don't or aren't trying to influence elections is naive at best and deluded at worst. And this goes for all governments.

That manipulation no longer takes place via newsprint journalism. Today it's Twitter, Facebook, and Google where the battleground lies. Right now, it's the Wild West.

That's unlikely to remain unregulated.

China has already banned and regulated both. Facebook isn't allowed and Google is hamstrung. In Europe, Zuckerberg is increasingly regulated. The US remains relatively untouched, but I think the trend will assert itself. Importantly, as an investor, it's clear to me that right now none of this is priced into these stocks all the while they're sporting valuations that cause blood to shoot from the eyes of value investors.

2. Hard data spoiling the party

As mentioned above, the industry chorus is growing louder and louder.

Every business model matures, and Google and Facebook's is no different. Businesses have had over a decade now to analyse ad spend and ROI. When entire industries find they can no longer square spending with ROI, we're likely to see them seeking alternatives. It's tough to envision this being good for either of these two.

Question

Cast your vote here and also see what others think will happen

- Chris

Having taken a four month hiatus from blogging, Citadel advisor and former Fed chair Ben Bernanke penned another article on his Brookings blog in which he discusses a familiar subject: that the Fed has run out of tools, a problematic reality which would be exposed by the next financial crisis, so in advance, Bernanke proposes an even more unorthodox monetary policy: price-level targeting.

Pointing out the obvious, namely that as a result of the bursting of the last Fed-created bubble, the US economy remains mired in "low nominal interest rates, low inflation, and slow economic growth" which "pose challenges to central bankers", central banks may want to consider temporary price-level targeting, or PLT, as Bernanke is "no longer confident" that the Fed’s “current monetary toolbox would prove sufficient to address a sharp downturn."

The problem, as the ex-Chairman explains, is that with estimates of long-run equilibrium level of real interest rate “quite low,” Bernanke writes that the next recession may occur when the Fed has “little room to cut short-term rates”; as "problems associated with the zero-lower bound (ZLB) on interest rates could be severe and enduring."

What Bernanke concedes here, is that the current pace of rate hikes and balance sheet unwind are not nearly rapid enough to provide the monetary policy buffer that will be needed to address the next economic crisis, and as a result the Fed needs to resort to more aggressive "temporary" measures to boost inflation, bypassing the Fed's implicit 2% inflation target, and heating up the economy substantially.

To short-circuit the effects of the zero-lower bound, and to "temporarily" (that word is critical to Benanke, who uses it no less than 24 times in his article) overheat the economy so the Fed can boost its recession-fighting ammunition, Bernanke "proposes an option for an alternative monetary framework" that he calls "a temporary price-level target—temporary, because it would apply only at times when short-term interest rates are at or very near zero."

As noted, Bernanke says "temporary" over 20 times, which is ironic because after the Fed injected over $4 trillion in liquidity in the financial system, and 8 years later the Fed is not only still unable to hit its stated 2% inflation target on a consistent basis, but openly admits inflation is a "mystery", a better word would be "permanent."

How does price-level targeting differ from conventional inflation-targeting? 

As Bernanke explains, the "the principal difference is the treatment of “bygones.”  An inflation-targeter can “look through” a temporary change in the inflation rate so long as inflation returns to target after a time.  By ignoring past misses of the target, an inflation targeter lets “bygones be bygones.”  A price-level targeter, by contrast, commits to reversing temporary deviations of inflation from target, by following a temporary surge in inflation with a period of inflation below target; and an episode of low inflation with a period of inflation above target.  Both inflation targeters and price-level targeters can be “flexible,” in that they can take output and employment considerations into account in determining the speed at which they return to the inflation or price-level target."

That is a long-winded way of saying that price-level targeting is an even more brute force approach to pushing inflation higher, one which ignores transitory bursts in inflation, which in a world of record debt has the potential to unleash a financial disaster as its sends the price of global (record) debt tumbling, creating a risk waterfall across financial markets, and reverberate in the economy. In other words, the Fed would flood the system with so much liquidity that economic inflation spikes and only afterwards is reduced back to some baseline level. What happens in between, to Bernanke, is of secondary importance, although with many Wall Street strategists conceding that a burst of inflation is the critical catalyst to unleash a sharp market drop, one could also say that Bernanke is advocating a market crash, wiping away trillions in "welath effect" for the top 1%.

Bernanke ignores such potential downsides, and instead focuses on the positive, saying that price-level targeting has two advantages over raising the inflation target: "The first is that price-level targeting is consistent with low average inflation (say, 2 percent) over time and thus with the price stability mandate. The second advantage is that price-level targeting has the desirable “lower for longer” or “make-up” feature of the theoretically optimal monetary policy."

That said, the author concedes that PLT has drawbacks:

For one, it would amount to a significant change in the Fed’s policy framework and reaction function, and it is hard to judge how difficult it would be to get the public and markets to understand the new approach. In particular, switching from the inflation concept to the price-level concept might require considerable education and explanation by policymakers. Another drawback is that the “bygones are not bygones” aspect of this approach is a two-edged sword.  Under price-level targeting, the central bank cannot “look through” supply shocks that temporarily drive up inflation, but must commit to tightening to reverse the effects of the shock on the price level.

Bernanke's punchline at least contains some truth, namely that PLT would be a "painful" process to all those who rely on nominal incomes to purchase goods and services, especially if said process ends up running away from the Fed's control and results in hyperinflation, to wit:

"Given that such a process could be painful and have adverse effects on employment and output, the Fed’s commitment to this policy might not be fully credible."

And in case his PLT idea is frowned upon - perhaps politicians don't want a revolution - Bernanke proposes another, just as "painful" idea, namely using inflation targeting "but to raise the target to, say, 3 or 4 percent.  If credible, this change should lead to a corresponding increase in the average level of nominal interest rates, which in turn would give the Fed more space to cut rates in a downturn. This approach has the advantage of being straightforward, relatively easy to communicate and explain; and it would allow the Fed to stay within its established, inflation-targeting framework."

Quite easy to explain indeed, and here's one attempt "we will inject so much liquidity, not only will we blow the biggest asset bubble ever, but it will make your head spin how fast prices soar." But it's ok, it will be "temporary."

Finally, while there is much more in Bernanke's proposal which was inspired by the "insightful theoretical work of Paul Krugman, Michael Woodford and Gauti Eggertsson", even Bernanke admits there will be problems, or rather one major one: the peasantry - for some "unknown" reason - is not a fan of runaway inflation:

One obvious problem is that a permanent increase in inflation would be highly unpopular with the public.  The unpopularity of inflation may be due to reasons that economists find unpersuasive, such as the tendency of people to focus on inflation’s effects on the prices of things they buy but not on the things they sell, including their own labor.  But there are also real (if hard to quantify) problems associated with higher inflation, such as the greater difficulty of long-term economic planning or of interpreting price signals in markets.  In any case, it’s not a coincidence that the promotion of price stability is a key part of the mandate of the Fed and most other central banks. A higher inflation target would therefore invite a political backlash, perhaps even a legal challenge.

Ah yes, nothing quite like a former Fed reserve chairman confused by why surging inflation is "highly unpopular with the public", which is unable to grasp that only through soaring prices of goods and services will wages rise... well, maybe: because as the whole broken Phillips Curve fiaso has shown 8 years into this recovery with 4.2% unemployment and virtually no real wage growth, perhaps the reason why the "public" is not too crazy about 4% inflation is that while prices surge, wages seems to have flatlined.

In short, Bernanke is alleging that inflation is unpopular because we, simple peasants, only focus on rising prices while ignoring wage growth. To which the only possible retort is that the "public" would be more than happy to focus on higher wages... if these were permitted for anyone but the top 1%.

Full Bernanke article here

Having been responsible for the biggest flash crashes in recent years, it is no surprise that when it comes to the market's growing structural vulnerabilities, high frequency traders have emerged as the primary authority on how to crash the market in the blink of an eye. Which is perhaps why none other than the Pentagon is seeking advice from HFTs on how hackers could "unleash chaos" in the US financial system.

According to the Wall Street Journal, the Department of Defense’s research arm, the Defense Advanced Research Projects Agency, better known as DARPA, has been consulting with executives at HFT firms and quant hedge funds as well as people from exchanges and other financial companies, over the past year and a half. Officials described the effort as an early-stage pilot project aimed at "identifying market vulnerabilities." The WSJ notes that meeting participants described meetings as informal sessions in which attendees brainstorm about "how hackers might try to bring down U.S. markets, then rank the ideas by feasibility."

Why approach HFTs? Because of all market participants, it is the "high freaks" who, better than anyone, know how to force a market crash at will. The WSJ was a bit more diplomatic:

High-speed traders and quant-fund managers, who use sophisticated computer programs to buy and sell stocks, sometimes in fractions of a second, form the core of the group. Such traders tend to have deep expertise in the inner workings of financial markets and the automated systems that account for huge swaths of trading activity today.

Among the potential scenarios probed by the Pentagon: Hackers could cripple a widely used payroll system; they could inject false information into stock-data feeds, sending trading algorithms out of whack; or they could flood the stock market with fake sell orders and trigger a market crash.

The name of the DOD initiative is the Financial Markets Vulnerabilities Project. Speaking to the WSJ, Darpa officials confirmed the effort, which while unclassified had not been previously reported.

“We started thinking a couple years ago what it would be like if a malicious actor wanted to cause havoc on our financial markets,” said Wade Shen, who researched artificial intelligence at the Massachusetts Institute of Technology before joining Darpa as a program manager in 2014.

The report is the first tangible evidence of what we proposed back in January 2015, when we asked rhetorically if the US is preparing to blame the next market crash on "Russian Spies" and HFTs. We can now add the generalized "hacker" category to this. For those who may not recall, this is one of the exchanges that was contained in the DOJ complaint:

IGOR SPORYSHEV, the defendant, called EVGENY BURYAKOV, a/k/a "Zhenya,"the defendant, and the following conversation, which was intercepted by the FBI, occurred:

 

EB: Well, I thought about it. I don' t know whether it will work for you but you can ask about ETF. . . . E-T-F. E, exchange.
IS: Yes, got it.
EB: How they are used, the mechanisms of use for destabilization of the markets.
IS: Mechanism - of - use - for - market - stabilization in modern conditions.
EB: For destabilization.
IS: Aha.
EB: Then you can ask them what they think about limiting the use of trading robots. . . . You can also ask about the potential interest of the participants of the exchange to the products tied to the Russian Federation.

There was more but the general gist was clear: the US was setting the stage for putting the blame for an upcoming market crash on not only Russians but Russian spies who were looking to ETFs and HFTs as a mechanism of market "destabilization."

Fast forward to today when the WSJ reports that as part of its "Financial Markets Vulnerabilities Project", DARPA has met with some of the most prominent names in the high-speed trading business, especially those who have been implicated in the shadier aspects of HFT. They include Jamil Nazarali, senior adviser to Citadel which is responsible for around 20% of daily volume in U.S. stock markets. Additionally, another former Citadelite, Misha Malyshev, and CEO of trading firm Teza Technologies, has “advised Darpa on vulnerabilities within the U.S. financial markets,” Teza’s website said. Manoj Narang, CEO of quant hedge fund Mana Partners - and one of the most vocal defenders of HFT practices - said he had advised Darpa, too.

So what will Russian hackers focus on?

Among potential targets that participants have worried could appeal to hackers given their broad reach are credit-card companies, payment processors and payroll companies such as Automatic Data Processing , Inc., or ADP, which handles the paychecks for one in six U.S. workers, participants said.

Adding a sense of theatrical urgency to the DARPA project, the WSJ artistically notes that Manoj Narang, whom we have written about previously on numerous occasions, said he began taking part in the Darpa meetings as a skeptic, thinking the U.S. stock market was resilient and it was unlikely for attackers to cause anything more than temporary damage. But since then, he has gotten more worried. What has the biggest advocate of HFTs most concerned?

One scenario he fears: a hack of a U.S. exchange in which the attacker sends a wave of fake sell orders to every firm offering to buy shares. That could potentially erase hundreds of billions of dollars of market value as prices drop and firms try to cover losses by selling on other exchanges, Mr. Narang said.

What he really means is a "wave of fake sell orders" that isn't launched by HFTs, but by some "unknown" entity sabotaging an equity market whose structure is broken beyond repair thanks to, drumdoll, HFTs.

It gets better: "Project participants have also debated the impact of attackers transmitting false data via the electronic feeds that traders use to monitor stock prices, or publishing “fake news” to shake investor confidence."

Ah yes, because the "non-fake" market, which rewards news of a possible ICBM launch by North Korea by sending stocks surging, will crash following "fake news" which "shake investor confidence." Perhaps the only confusion here is who came up with this idiotic script: the US government or the HFTs, who are and will be desperate to shift blame to "someone else" after the next crash.

Finally, what is the logic behind DARPA's project? According to the WSJ, "the goal is to develop a simulation of U.S. markets, which could be used to test scenarios, Mr. Shen said. Such software would need to model complex, interrelated markets—not just stocks but also markets such as futures—as well as the behavior of automated trading systems operating within them."

Many quantitative trading firms already do something similar, Mr. Narang said. His company won a small contract from Darpa this year to test whether its simulation tool could be used by the agency, according to Mr. Narang and a Darpa spokeswoman.

 

The project isn’t the first time the Pentagon has studied such risks. In 2009, military experts took part in a two-day war game exploring a “global financial war” involving China and Russia, according to “Currency Wars: The Making of the Next Global Crisis,” a 2011 book by James Rickards. The Applied Physics Laboratory at Johns Hopkins University hosted the event, a spokesman there confirmed. Such scenarios might seem far-fetched, but Mr. Shen said it is Darpa’s job to think about futuristic attacks that haven’t happened yet.

For those who are still confused, here is what is going on: HFTs are preparing to scapegoat some other, potentially "Russia government controlled" actor for the upcoming market crash, and Darpa has been brought in to provide credibility and validation to the upcoming charge. 

“Our charge at Darpa is to think far out,” Wade Shen, the Darpa program manager said. “It’s not ‘What is the attack today?’ but ‘What are the vectors of attack 20 years from now?’”

In retrospect, the only thing we find surprising about today's WSJ report is that the Fed is not involved (at least not yet) in these Darpa-HFT level talks: after all, in addition to HFTs, whose domination of markets has resulted in market structure that is brittle and fragile and susceptible to fracture and flash crash without warning, and thus responsible for crashes at the micro level, it is none other than the Federal Reserve whose actions over the past decade (and really 104 years) that has led to the biggest macro level asset mispricing, i.e., bubble, in history. As for today's trial balloon that preparations for the scapegoating process are already taking palce, and that it likely will be some "Russian hacker" blamed for the upcoming crash, the fact that the top echelons of the US government are already contemplating "next steps" is the clearest indication yet that the current market bubble is approaching its terminal phase.

Until then, we leave readers with this prophetic observation made by Bank of America this past May:

Yes, it's another glaring case of "revolving door" cronyism between Wall Street and the SEC: on Wednesday, the Securities and Exchange Commission announced it had hired Brett Redfearn, a JPMorgan banker, to head the agency's Division of Trading and Markets, arguably the most important group within the SEC, one which oversees U.S. stock markets and brokerages. Redfearn, who is currently head of market structure at JPM, would fill a slot that has been vacant since January when the previous head of Trading & Markets, Stephen Luparello left the SEC... and three months later joined Citadel as General Counsel, which as a reminder is one of the biggest HFT operators and retail orderflow frontrunners in the world, is responsible for one-fifth of all trading on the $26 trillion US stock market and lists Ben Bernanke as its advisor.

The regulator's Division of Trading and Markets group plays a key role in dealing with some of the most pressing matters facing the agency, including overseeing the construction of a massive trade database being built to help U.S. regulators police the stock market and keep tabs on high frequency traders, as well as writing rules for exchanges and dark pools.

To simplify: a JPMorgan guy is coming in to fill the most important regulatory position at the SEC, one that looks at market structure - and fairness - and which until recently was filled by a guy who now works at Citadel as its new general counsel. A revolving door, if there ever was one...

To be sure, that this is another glaring example of regulatory capture, is painfully obvious. Only this time there may be a twist.

While SEC Chairman Jay Clayton has signaled a willingness to change market-structure rules that some critics argue are antiquated, he’s provided few details on his approach. Clayton, a former deals lawyer whose career wasn’t focused on market-structure issues, has prioritized bolstering initial public offerings according to Bloomberg. As a result, Redfearn - the former head of market structure at America's biggest bank - will likely have significant sway at the agency because of his expertise.

As Bloomberg reports, Redfearn has been at JPMorgan for more than nine years. Earlier this year he expanded his role, moving from running equity market structure strategy to overseeing global market structure for all asset classes. Where it gets interesting, is that in the past, Redfearn has advocated for a regulatory overhaul of markets, and in April, he said Regulation NMS - a landmark SEC rule approved in 2005 that accelerated a shift to electronic trading in the U.S. stock market, and which allowed the uncontrolled, explosive proliferation of HFT algos - is “overdue for reform.”

This, as Bloomberg writes, may set up a clash with not only stock exchanges, who are among the most influential - and "generous" - voices in Washington around financial regulation, but also the just as powerful HFT lobby. Also notable - Redfearn has emerged as a critic of the increasingly costly fees that U.S. stock exchanges charge traders who want access to vital data on prices. Of course, those fees only make sense in a world in which some traders, those with millions to burn, with to receive trade data ahead of everyone else, whether by laser, microwave or fiber optic. Which would suggest that Redfearn's criticism is ultimately aimed at not only the current multi-tiered nature of the market, but at high frequency traders as well.

“We have a fundamental tension in our system of self-regulation that needs to be addressed,” Redfearn said in April. The tension, he argued, comes from the fact that stock exchanges, once public utilities, have over time become publicly traded companies themselves. Which, ironically, is absolutely correct, and if the now former-JPM executive wishes to indeed engage with the practices he finds as unfair, that could well mean the end of the HFT dominance in capital markets.

As for what JPM gets out of it, well that remains to be seen...

• Mueller’s Moves Signal Broad Scope (WSJ)
• Spain awaits next move by ousted Catalan leader from Belgium (Reuters)
• China, South Korea agree to mend ties after THAAD standoff (Reuters)
• For Manafort, Questionable Airbnb Sublets Became a Family Affair (BBG)
• U.S. business group worries Trump unprepared for commercial talks with China (Reuters)
• Google’s Dominance in Washington Faces a Reckoning (WSJ)
• Tech Giants Disclose Russian Activity on Eve of Congressional Appearance (WSJ)
• Collapse at North Korea nuclear test site 'leaves 200 dead' (Telegraph)
• Tech executives head to U.S. Congress under harsh spotlight (Reuters)
• Another China Company Defaults on Bond Payment as Borrowing Costs Jump (BBG)
• Google ditched autopilot driving feature after test user napped behind wheel (Reuters)
• Why Google and Amazon Aren’t in the Dow (BBG)
• Swiss prosecutors seek widening of secrecy law to bankers abroad (Reuters)
• Betting on the Next Fed Chair Often Goes Wrong (WSJ)
• Under Armour slashes 2017 forecast, revenue falls (Reuters)
• Is the ‘Death Tax’ Debate Finally Over? (BBG)
• Ex-Third Point Partner’s Bond Trades Focus of SEC Probe (BBG)
• Two Months After Harvey, Houston Continues to Count the Cost (WSJ)
• Goldman Agrees With Dalio’s Tale of Two Economies (BBG)

Overnight Media Digest

WSJ

- For the second time in three years, Sprint Corp is preparing to leave T-Mobile US Inc at the altar after months of negotiations to bring together the two U.S. wireless providers. Directors at Sprint's parent company, SoftBank Group Corp, met in Tokyo last week and decided to suspend the merger efforts, according to people familiar with the matter. on.wsj.com/2yZRQip

- Facebook Inc, Alphabet Inc's Google and Twitter Inc are set to divulge new details showing that the scope of Russian-backed manipulation on their platforms before and after the U.S. presidential election was far greater than previously disclosed, reaching an estimated 126 million people on Facebook alone, according to people familiar with the matter, prepared copies of their testimonies and a company statement. on.wsj.com/2yYwFNr

- Netflix Inc plans to end the political drama "House of Cards" after the end of season 6, which is currently in production, a person familiar with the situation said. The decision was made before reports about alleged sexual misconduct by star Kevin Spacey, the person said. on.wsj.com/2yZ2rKr

- ?Apple Inc, locked in an intensifying legal fight with Qualcomm Inc, is designing iPhones and iPads for next year that would jettison the chipmaker's components, according to people familiar with the matter. on.wsj.com/2z1UtQM

- A federal judge on Monday blocked President Donald Trump from implementing a ban on transgender individuals from serving in the military, the latest high-profile White House initiative to run into problems in court. on.wsj.com/2yZBYMI

- The Federal Bureau of Investigation is investigating a decision by Puerto Rico's power authority to award a $300 million contract to a tiny Montana energy firm to rebuild electrical infrastructure damaged in Hurricane Maria, according to people familiar with the matter. on.wsj.com/2yZROXC

FT

UK finance minister Philip Hammond will not break his fiscal rules to increase public spending in the autumn budget and fears investors, already worried by Brexit, will be spooked if he abandons the fiscal framework adopted only a year ago, the chancellor’s allies said.

British petrochemicals company Ineos on Monday agreed to buy fashion brand Belstaff, best known for its waxed cotton motorcycle jackets, in the latest off-beat project by Ineos’s billionaire founder Jim Ratcliffe.

Key details about reports outlining the economic impact of Britain leaving the EU on 58 industries will not be released by the Brexit ministry which said it needs to carry out policymaking in a “safe space”.

NYT

- Russian agents intending to sow discord among American citizens disseminated inflammatory posts that reached 126 million users on Facebook, published more than 131,000 messages on Twitter and uploaded over 1,000 videos to Google's YouTube service, according to copies of prepared remarks from the companies that were obtained by The New York Times. nyti.ms/2z56yXn

- The day after Kevin Spacey apologized following an accusation that he made a sexual advance on a 14-year-old boy in the 1980s, Netflix Inc announced that the next season of his show "House of Cards" would be its last. nyti.ms/2z6qA3x

- President Trump is expected to nominate Jerome Powell as the next chairman of the Federal Reserve, replacing Janet Yellen, whose term expires early next year, according to two people familiar with the plans. nyti.ms/2z5Ap1Q

- The special counsel, Robert Mueller III, announced charges on Monday against three advisers to President Trump's campaign and laid out the most explicit evidence to date that his campaign was eager to coordinate with the Russian government to damage his rival, Hillary Clinton. nyti.ms/2z5UVzl

- A federal judge on Monday temporarily blocked a White House policy barring military service by transgender troops, ruling that it was based on "disapproval of transgender people generally." nyti.ms/2z4Q29E

Canada

THE GLOBE AND MAIL

Melbourne-based John Holland Group Pty Ltd has won tenders over the past year to participate in A$23 billion ($17.6 billion) worth of work on large public infrastructure projects, and expects to hire 100 people monthly over the next 15 months. tgam.ca/2xFxIRf

Canada's brand-name pharmaceutical companies are pushing back against a plan to overhaul the country's drug-pricing regulator, saying they are keen to forge a compromise that would reduce prices, but not to a degree that could be "crippling" for the industry. tgam.ca/2xDl19b

NATIONAL POST

Cenovus Energy Inc picked former TransCanada Corp chief operating officer Alex Pourbaix to be its new president and chief executive officer, prioritizing expertise in dealing with external challenges over knowing the nuts and bolts of the business. bit.ly/2xDJOdA

Beverage company Constellation Brands Inc is buying up to 20 percent of Canopy Growth Corp in a deal that lends legitimacy to Canada's fast-growing marijuana industry while potentially throwing open the door to additional investments in the sector by big international companies. bit.ly/2z0dEN9

Britain

The Times

- Stuart Gulliver, outgoing chief executive of HSBC Holdings Plc, and Lloyd Blankfein, chief executive of Goldman Sachs Group Inc, on Monday called for clarity over Britain's future relationship with the European Union, warning that jobs and investment depend on a prompt decision. bit.ly/2z0IbIe

- Chancellor Philip Hammond said Monday that Steffan Ball, chief economist at Citadel, a $26 billion hedge fund based in Chicago, was his new economic adviser. bit.ly/2z0dliZ

- Pearson Plc is understood to be nearing a sale of its English-language teaching business to Asian private equity funds Baring Private Equity Asia and Citic Capital Holdings for up to $400 million. bit.ly/2z1hFPa

The Guardian

- Nationwide Building Society has paved the way for an across-the-board increase in mortgage costs by announcing that a 0.25 pct interest rate rise would be passed on in full to its 600,000-plus variable-rate home loan customers. bit.ly/2yZtuVO

- Hundreds of free-to-use cash machines are at risk of being closed down on high streets across the UK as a result of proposals being published this week to overhaul the 70,000-strong Link network. bit.ly/2z0nXOV

The Telegraph

- Chemicals giant Ineos has bought Belstaff, the British heritage fashion brand, in the latest off-centre move by its founder and chairman, billionaire Jim Ratcliffe, a month after he unveiled plans to start making cars. bit.ly/2z0ltA5

- Ten Lifestyle, the London-based concierge service is eyeing a listing on the junior Aim market in a bid to raise 40 million pounds and help it continue its domestic growth as well as increase its overseas footprint. bit.ly/2yZdmDO

Sky News

- Willie Walsh, the chief executive of British Airways' parent company IAG, has dismissed claims - including from Chancellor Philip Hammond - that flights could be grounded if Britain leaves the EU without a divorce deal. bit.ly/2z1MyD7

- A pack of hedge funds is closing in on a takeover of BrightHouse, Britain's biggest rent-to-own retailer, just days after it was slapped with a 15 million pound ($19.81 million)compensation bill by the City watchdog. bit.ly/2z1MyD7

The Independent

- Walmart's British supermarket arm Asda announced that Chief Executive Sean Clarke will be stepping down at the end of the year, to be replaced by the company's current deputy Chief Executive and Chief Operating Officer Roger Burnley. ind.pn/2yZblY

Looking to put bitcoin’s rise in context? How about this: Over the last five years, the world’s most valuable digital currency has risen an astonishing 11,000,000%. Furthermore, since Jan. 1, it has climbed 950%, compared with a total return of 18% for the S&P 500.

Given the torrid pace of bitcoin’s climb, one would imagine that there are few traders left who possess the wherewithal to short the digital currency. And until recently, the options to short bitcoin were mostly offered through unregulated exchanges, and very risky given bitcoin’s volatility.

But increasingly, mainstream exchanges have begun offering bitcoin-based derivatives that could make it easier for retail traders to short the digital currency. CME Group has said it will introduce a suite of bitcoin-linked products by the end of the year, and LedgerX, the first CFTC-approved Swap Execution Facility (or SEF), traded more than $1 million in bitcoin swaps and options during its first week.

In Switzerland, one exchange has introduced options that make it easier for investors to profit if the bitcoin price drops. But other more creative ways to short the digital currency have existed for a while now – in some cases, for years.

“All the options to short in common markets are becoming available in the bitcoin market,” said Charles Hayter, co-founder of market tracker CryptoCompare. “There’s pretty good liquidity for shorting bitcoin. The main difference with shorting the Nasdaq for example, is it will be a lot more volatile, so there’s a lot more risk. The rate to borrow will also be a bit higher."

With bitcoin on the cusp of breaking above $10,000 for the first time, here’s a list of popular options for shorting bitcoin, per Bloomberg.

Contracts for Difference

"One of the most popular ways to short bitcoin is through CFDs, a derivative that mirrors the movements of the asset. It’s a contract between the client and the broker, where the buyer and seller of the CFD agree to settle any rise or drop in prices in cash on the contract date.

'CFD is currently a great market if you want to short bitcoin, especially ahead of that milestone 10K mark, which we think will bring some retracement,' said Naeem Aslam, a chief market analyst at TF Global Markets in London, which offers the contracts. 'The break could push the price well above $10,100 and it would be in that area when we could see some retracement.'"

Margin Trading

"Another common way to short bitcoin is through margin trading, which allows investors to borrow the cryptocurrency from a broker to make the trade. The trade goes both ways; a trader can also increase their long or short position through leverage. Depending on the funds kept as collateral to pay back the debt, this option increases the already risky bitcoin trade. Bitfinex, one of the biggest cryptocurrency exchanges, requires initial equity of 30 percent of the position.

Short-margin trading positions on Bitfinex were at around 19,188 bitcoins on Monday, versus 23,931 long positions, according to bfxdata.com, which tracks data on the bourse."

Borrow to Short Bitcoin

"Most of the brokerages that allow margin trading will also let clients borrow bitcoin to short with no leverage. This will be a less risky way to bet bitcoin price will fall."

Futures Contracts

"The futures market isn’t as widely developed as CFDs and margin trading, but it’s still possible to make bearish bets on bitcoin with options. For now, LedgerX is the only regulated exchange and clearing agent for cryptocurrency options in the U.S. The CME Group Inc. and the Chicago Board Options Exchange have both asked for approval to list bitcoin futures, so that may open up the market to more investors."

Shorting Bitcoin ETNs

"Investors can also indirectly bet against bitcoin by shorting exchange traded notes with exposure to the cryptocurrency, like Stockholm-based Bitcoin Tracker One, and Grayscale Investments LLC’s Bitcoin Investment Trust. The risk is that these notes don’t always trade in line with bitcoin, so the exposure won’t be perfect."

* * *

Yesterday, Citadel’s Ken Griffin opined that he believes bitcoin is a bubble that will end in tears, joining a list of finance luminaries who have all expressed reservations about the digital currency’s epic rally.

As a reminder:

$0000 - $1000: 1789 days
$1000- $2000: 1271 days
$2000- $3000: 23 days
$3000- $4000: 62 days
$4000- $5000: 61 days
$5000- $6000: 8 days
$6000- $7000: 13 days
$7000- $8000: 14 days
$8000- $9000: 9 days
$9000-$10000: ?

The rise is even making some central bankers nervous. “The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything,” European Central Bank policymaker Ewald Nowotny told Reuters.

But in his confirmation hearing earlier today, incoming Fed Chairman Jerome Powell said bitcoin is still too small to pose a real threat.

"They don’t really matter today," Mr. Powell said. "They’re just not big enough."

Authored by Mike Krieger via Liberty Blitzkrieg blog,

The financial crisis of 2008/09 was the most significant event to happen in my lifetime. That event, coupled with the deeply unethical and corrupt response to it, led to a direct delegitimization of governments and institutions worldwide. It’s precisely this self-inflicted destruction of credibility which opened up the window for the birthing of a new monetary and financial system in the wake of Bitcoin’s emergence in early 2009.

Bitcoin is a system designed to be everything the status quo isn’t. Decentralized, transparent, permissionless, with a well-defined and restricted monetary supply curve.

Given the backdrop upon which it emerged, it’s unsurprising that as more time passes, the more popular it becomes.

Humanity is desperate for a major reboot and an entirely different way of doing things. Bitcoin and other crypto assets offer exactly that opportunity in the realm of finance and money, thus capturing the imagination of millions of the most brilliant and passionate people across the world. Since the status quo stubbornly refused to reform and change the system after the financial crisis, humanity had no choice but to take charge and do it independently at the grassroots level.

One thing that’s become increasingly clear to me as I’ve added years and experiences to my life, is that governments, generally speaking, hate freedom. It’s why something as beneficial and benign as cannabis remains illegal throughout the world, and why people like Jeff Sessions still want to criminalize it even in states where the actual people living there voted to make it legal (see Part 1of this series). While the fairytale we’re conditioned to believe tells us government exists to protect us and create an environment in which humans can thrive, the reality is quite clearly the opposite. The crooked response to the financial crisis demonstrated this in spades to anyone paying even the slightest amount of attention.

As we transition into 2018, increasing numbers of people will see government and large corporations as the unified threat they represent to the global economy and human freedom. Younger generations are particularly aware, as they’ve been thrust into a parasitic system designed to prey upon them via a lifetime of debt serfdom. The more people learn about the way the world really works, the more they’ll want to reject it and create something entirely different. This is where Bitcoin and crypto assets come into play.

As Bitcoin rose through the $10,000 mark, I noticed an explosion in panic and fear on behalf of those who want to keep the current system in place.  This is to be expected, as Bitcoin’s popularity is and should be seen as a report card on the global status quo. The financial system as it’s currently constructed is being publicly rejected with every uptick in the Bitcoin price, and with every billion dollars added to total crypto asset market capitalization. Naturally, this will make those in charge of the current predatory system, and those who have benefited most from it (oligarchs), increasingly hostile to its popularity.

There are so many recent examples of such hostility it’d be impossible to highlight them all, but I’ll provide you with a few examples so you know what I mean.

First, there was the clip of two billionaires discussing Bitcoin on Bloomberg.

These weren’t the only two billionaires who chirped in about Bitcoin last week. Financial oligarch Ken Griffin came out with the truly original line of comparing Bitcoin to tulips, something I’ve heard non-stop in the more than five years I’ve been involved in the community. Via CNBC:

Citadel’s Ken Griffin said Monday that bitcoin may be in a bubble.

 

“Bitcoin right now has many of the elements of the tulip bulb mania we saw back hundreds of years ago in Holland,” said the billionaire hedge fund manager in an exclusive interview with CNBC’s Leslie Picker.

 

Griffin, however, said he does believe the blockchain technology backing the cryptocurrency is valid.

Griffin’s estimated net worth is $8.6 billion. Makes you wonder what sort of society and economy enriched someone like this to such an extent.

Carl Ichan also chimed in. Via Coindesk:

Billionaire investor Carl Icahn has jumped on the bandwagon of financial bigwigs saying bitcoin is in a bubble

 

The business magnate and founder of Icahn Enterprises told CNBC that the cryptocurrency “seems like a bubble” and that he didn’t understand the hype around bitcoin.

 

Icahn stated:

 

“I got to tell you honestly, I don’t understand it … I just don’t get it. I just stay out of something if I don’t understand it.”

He admits he doesn’t understand it, but calls it a bubble anyway. This is surprisingly common.

Of course, there was the infamous nonsense spouted by Nobel Prize winning economist Joseph Stiglitz who appears viscerally triggered by Bitcoin, saying it has no social function and should be outlawed.

Add to the above a plethora of central banker commentary about how dangerous Bitcoin is, and you know status quo types are beginning to sweat. Which brings me to the point of this piece. With Bitcoin having succeeded beyond the wildest imagination of status quo sycophants, many will begin to clamor and beg for an official response in order to defend their sleazy government sanctioned rackets.

At this point, I could attempt to outline all the various ways the U.S. government and others could target free market crypto assets, but I’m not going to do that. The reason I’m not going to do this is because I think the cat’s already too far out of the bag for the power structure to stop this trend. The benefits to humanity generally, and younger generations specifically, will make any attempts to stop this freight train futile. Any government that tries to do so will simply shoot themselves in the foot.

We stand on the precipice of historical shifts in relative economic power.
Those regions that embrace crypto assets will thrive, those that reject them will die.

— Michael Krieger (@LibertyBlitz) December 4, 2017

Unfortunately, most governments exist to protect and defend the status quo, versus doing what’s best for the public. If government actually cared about the future, every single country would be competing aggressively right now to be the most crypto asset friendly region on earth. The human brainpower and talent voluntarily dedicating their lives to this space is extraordinary. It’s a global movement and community the likes of which has rarely, if ever, emerged on this planet.

The smartest people on earth are dedicating their lives to Bitcoin and other crypto assets.

You want to bet against that?

— Michael Krieger (@LibertyBlitz) December 1, 2017

That tweet above more or less summarizes how I see the situation. Anyone who bets against this overall space will ultimately end up historical roadkill. The emergence of Bitcoin and the crypto-asset ecosystem generally is one of the most liberating, paradigm disrupting events that’s ever manifested on this planet. Of course, entrenched interests won’t like it and will try to fight back, but they’ll be no more successful than those who wanted to ban the printing press.

Bitcoin is achieving what global central banks completely failed at. Animal spirits, a dynamic economy and revolutionary innovation.

— Michael Krieger (@LibertyBlitz) November 26, 2017

The above occurred despite governments having placed many roadblocks in the way. Imagine the innovation explosion that would be unleashed if governments decided to support this extraordinary community rather than fight it? At over $11,000 per bitcoin, a lot of money’s been made. While hodlers certainly prefer to spend fiat as opposed to bitcoin, the higher the price rises, the higher the percentage of their net worth is denominated in crypto.

If the U.S. government actually cared about dynamic economic growth as opposed to merely protecting status quo interests, it would unleash the power of this crypto asset wealth creation machine by eliminating taxes on gains. If no capital gains were owed, it’d encourage people to spend some of this newly created wealth in the economy. It’s an obvious move, but because governments are mainly about control and power, their initial reaction likely will be to go in the opposite direction.

The opportunities available right now for regions and nations willing to be openminded about Bitcoin and crypto assets generally are extraordinary. Government roadblocks and bans cannot and will not kill the spirit of this community and the ideals that motivate it. The only question is which regions/governments will put arrogance and control aside to do the right thing by their people. We’ll find out the answer to that question soon enough.

As a declining global empire, the U.S. is unfortunately prone to doing particularly stupid things in order to protect the predatory system beloved by the oligarchs in charge. On the flip-side, there are plenty of wealthy Americans and others with influence who see Bitcoin for the incredible opportunity it is, and cooler heads may prevail. The truth is nobody knows exactly how all of this will turn out.

In the short-term, we’re likely to face increased push back and we should be mentally prepared to face it. In the longer-term, the future appears exceptionally bright.

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Submitted by Rudy Havenstein