U.S. equities had its worst day in a year on Black Friday, down 2.3%. Bitcoin ("BTC") fell even more, down over 7% during the day. BTC is many things to many people, from an instrument of world peace to a source financial instability. For enthusiastic investors, BTC promises not only to be a wonderful returning asset but also an important portfolio diversifier, a safe-haven asset that is a potential alternative to gold. Hmm, okay...so BTC fans have big expectations! True, in years past, when BTC was an obscure crypto-thingy interesting only to techno-geeks, it was largely uncorrelated to public equities. But as BTC has become mainstream, its volatility (always high) and correlation to broader markets have increased as well. Consider that in 2019, BTC exhibited a beta of -0.28 to the S&P 500; in 2021, its beta has risen to +1.83!
Source: Yahoo Finance, Mantabye
But what really highlights BTC's increasing correlation with public equities is the growing dichotomy of the cryptocurrency's performance on days the market is up versus when it is down, as shown in the up/down capture chart below. Over the past three years, the S&P 500 has been up on 320 days or 58% of the time; the positive days are roughly equally distributed across each year. In 2019, BTC was, on average, positive when the market was negative and captured roughly 50% of the market's upside on positive days. In 2021 so far, BTC has on average underperformed the S&P 500 on market down days and outperformed on market up days, consistent with its growing beta of ~2x.
Source: Yahoo Finance, Mantabye
BTC's seeming change from a diversifying asset to a levered equity bet is best reflected during large market moves, defined as +/-1% days. The S&P 500 had 115/85 of them, respectively, over the last three years. As shown below, BTC has gone from exhibiting characteristics of a safe-haven asset in 2019 to becoming the go-to "risk-on" asset in 2021. And it's not just BTC. Ethereum, the second most popular cryptocurrency, exhibits an 80%+ correlation to BTC and displays similar dynamics. (Together, Bitcoin (50%) and Ethereum (25%) make up 75% of the $2 trillion crypto market, i.e., basically the whole market) By contrast, gold continues to be a source of diversification in periods of stress (if not a great source of returns). As they say, all that glitters is not gold...
Last November we wrote about how bad the Covid pandemic in the U.S. could become once winter arrived...and that was before we had vaccines. Well, we got vaccines in 2021, plenty of them (at least here in the U.S). Yet, the number of Covid deaths in 2021 has already surpassed that of 2020, with 5 more weeks to go. In 2020, there were 327,027 Covid-related deaths, according to Worldometer. As of Nov 24, 2021 there were already 428,215 Covid deaths or 58,188 more.
Looking at the chart below, we can see a surge in deaths in the colder months between Oct and Mar; roughly 45% of all U.S. Covid deaths happened in those six months. With the rapid uptake in vaccinations in the early months of 2021, deaths fells precipitously in Q2. But the onset of the more contagious Delta variant, lower adherence to social distancing and masking, and the plateauing of vaccination rates, all contributed to a significant increase in deaths in the Q3 and Q4. In total 798,242 Americans have died due to the virus since January 2020.
Source: worldometer, Mantabye. *As of Nov 24, 2021.
To put those numbers in context, according to the Peterson KFF Health System Tracker, "COVID-19 was the third leading cause of death across most of 2020, but in December 2020 and early 2021, the illness surged and briefly became the number one leading cause of death in the U.S., far surpassing even cancer and heart disease deaths in those months." Historically, heart disease and cancer have averaged around 600K-650K deaths a year, Covid is averaging over 400K (click chart to enlarge)...and winter is coming, once more!
Back in 2005, then Fed Chair Alan Greenspan expressed frustration that despite hiking the Fed’s target rate six times, by a total of 150 basis points, long-term interest rates barely budged. He called it a "conundrum." (Years later the Fed's own research would provide evidence of the tenuous connection between the federal fund rates and long-term yields).
Well, it's important because not long after in 2006 the yield curve inverted and not long after that the global financial system crashed. As Cullen Roche of the Pragmatic Capitalist notes the conditions today seem eerily familiar:
Prices are rising across the board at an uncomfortable pace
The Fed is getting worried about all of this and has started discussing potential rate hikes
The long end of the curve has barely budged
However, back in 2005, the benchmark 10-year Treasury yield was hovering around 5%, today it's at 1.5%. As Roche notes, if the Fed starts raising rates they don’t have the same 5% of wriggle room before the curve starts to invert. "They have barely any room at all."
As of now the bond market is strongly signaling that it thinks “inflation is transitory.” To use the gambling analogy to financial markets (which seems apropos), the bond market is the casino...and the "house" always wins (well, almost always). So the Fed is in a precarious position of having to choose between saving the financial markets (which is not in its mandate, but you know, the "wealth effect") and controlling inflation (which is a part of its dual mandate). Sure, sure this time it's different; after all, in the mid-2000s there was a massive housing bubble...but only in hindsight. Could the same not be said about a corporate debt bubble today?
Regardless, it's a fascinating exercise for portfolio managers. Inflation and the potential Fed hikes should be bad for bonds. Yet, the dangers of an ensuing bear market will likely cause fixed income assets to surge! Quite the conundrum? So, do you allocate 60/40 to stocks and bonds or 40/60 or even 20/80? Perhaps it's time for gold to finally shine again.
In 2001, Goldman Sachs economist Jim O'Neill coined the acronym BRICs to represent the four major emerging market nations, Brazil, Russia, India and China, that he predicted would drive global growth and transform the international economic order. (The full report is here.) The idea soon took off, leading to an investment and business charge into the BRICs that catapulted O'Neill from head economist to chairman of GSAM. Two decades on, how have O'Neill's predictions fared?
From an economics perspective, it's been a mixed bag. China has soared to become the second biggest economy in the world. India has climbed, while Brazil and Russia have stagnated after a decade of strong growth, as shown below (GDPs in current USD; click to enlarge). In 2001, Brazil, Russia, India and China were 2.2%, 1.2%, 1.9% and 5.3% of global GDP, respectively. By 2020, Brazil and Russia were still around 2.4% and 2.5% of world GDP, respectively; India had risen to 4.3% of global GDP; but China...had shot up to a remarkable 24.3% of global GDP from $1.3 trillion to $14.7 trillion. Over the past two decades, the world's economy grew from $20.5 trillion to $60.5 trillion and China was responsible for nearly 40% of that increase!
Source: Bloomberg, World Bank
Source: World Bank, Mantabye
Source: Mantabye
But what has been the result from investors' perspective? Were all the billions flowing into the BRICs, as a result of O'Neill's report, a good investment? Based on returns of the individual countries' MSCI indices...the answer is (a qualified) yes, as shown below. (MSCI ACWI represents MSCI's benchmark All Country World Index and MSCI EAFE represents Europe, Australia and Far East)
Source: MSCI family of indices, Mantabye. Returns range: Nov 2001-Oct 2021
Since the GS report was published in November 2001, the BRICs have all outperformed the U.S. and global equities. But all of the outperformance came in the first 10 years. Over the past decade, following the Global Finance Crisis, each of the BRICs substantially underperformed the U.S. and global equities. Brazil has especially struggled in the past 10 years, losing investors 4% per year. Even Chinese equities have generated only half the gains as U.S. equities. Perhaps that's an opportunity...now that U.S. equities are at elevated valuations, some of the BRICs may once again be attractive.
Inflation is dominating headlines around the world...except in Japan. While most OECD countries are experiencing the biggest surge in inflation in decades, Japan continues to struggle with deflation. In the U.S. the Consumer Price Index ("CPI") gained 6.2% y-o-y in Oct, the highest increase in over 30 years. The U.S., U.K. and other major OECD economies have now averaged a 2.5% y-o-y increase in CPI over the past twelve months; Japan just -0.5%.
Source: OECD.Stat, Mantabye
Inflation in moderation is good for the economy, but too much or too little it hurts economic growth. Japan has been fighting deflation ever since its economic bubble burst in the 1990s. Over that time Japan has attacked the problem with innovative policies, including "using negative interest rates to encourage spending and injecting money into the economy through large-scale asset purchases, a policy known as quantitative easing." But nothing has really worked. Economists believe a combination of self-fulfilling expectations of lower prices, Japan’s aging population, globalization, and technology have worked to worked to keep demand and costs down. It's part of the secular stagnation thesis, popular among prominent economists. The big worry, even a few quarters ago, was that the U.S. and Europe and would also struggle with the same forces. And they may yet do so, but for right now one of these things is not like the others.
That's still a mystery. But new evidence shows that two of the three persons actually convicted of doing so were innocent. Inspired by the Netflix documentary of the same name, the Manhattan DA--Cyrus R. Vance, Jr.--is set to exonerate Muhammad A. Aziz, 83, and Khalil Islam (who died in 2009), who along with Mujahid Abdul Halim, were convicted of killing the the charismatic civil rights leader in 1965. Vance acknowledged that Aziz and Islam did not get a fair trial and plans to ask a judge to vacate the convictions on Thursday. Both men have consistently denied being involved in the murder. Halim has confessed to being one of the three gunmen who killed Malcolm X, but testified that neither Aziz nor Islam were involved in one of the most important political assassinations in American history. Both Aziz and Islam served more than two decades in prison for the crime.
Chartr has great data and charts. In light of Rivian's massive IPO, this one, based on work by University of Florida professor Jay Ritter (aka "Mr. IPO"), seems very relevant:
It's probably just a coincidence that the last time only 20% of IPOs consisted profitable companies was in the 1999-2000 period. Naturally, it's different this time.
Elon and Jeff are not just vying for supremacy in space (if that weren't enough!), they both want to take over transportation on earth too. Electric vehicles ("EV") are all the rage (at least among investors) and Telsa is the $1 trillion colossal in the space (no pun intended). Musk's company is more than three times bigger than Toyota by market capitalization, even though Telsa sells only about 5% of the cars per year that Toyota does. Yes, yes, it's all about growth...but still...there are limits? There were 56 million cars sold worldwide in 2020, 3 million were EVs, Telsa sold 500K of those, and it is worth more than all those other car manufacturers combined!
Well, Bezos has certainly taken notice. After all of Musk's snarky tweets and jokes, Bezos has hit back with him own EV-maker Rivian, that went public on Wednesday in the largest share sales since Facebook in 2012. Sort of...Amazon owns 20% of Rivan, and Bezos maintains a 10% ownership of Amazon (Musk owns 17% of Telsa). At one point in the trading day Rivian was worth $100 billion, more than Ford or General Motors, even though the company had delivered just 53 vehicles, so far, in 2021. Why not? It's electric, and it's being funded by Amazon, err Bezos. Rivian is 10% the size of Tesla by market cap even though (based on full-year 2021 projections) it sells about 0.2% of the cars as Telsa. Makes sense.
The only question is which one would you buy? And if you're keeping score Elon is ahead...
And why not? In the U.S. everything these days is either Left or Right. Why should a virus infecting the world be different when it come wrecking havoc here? Even the solutions are political. The NY Times' David Leonhardt has great piece highlighting the large gap in vaccination rates between Democrat-leaning areas and Republican-leaning areas of the country. He writes "the political divide over vaccinations is so large that almost every reliably blue state now has a higher vaccination rate than almost every reliably red state." That pattern further extends to the county-level of each state. And that's led to significantly higher deaths among Republicans:
Why is this happening? It's predictably about conspiracy theories and "own the left." But even conspiracy minded right-wing pundits are beginning to question their side's rejection of vaccines..."In a country where elections are decided on razor-thin margins, does it not benefit one side if their opponents simply drop dead?" Maybe the easiest way to own Liberals is to stay healthy and vote?
Gregory Zuckerman's 2019 book of the same name sought to provide a look behind the curtains of Jim's Simon's Renaissance Technologies, the most successful (and secretive) hedge fund of all time. Well, sort of...While how RenTec makes money is as much a mystery at the end of the book as it is at the start, Zuckerman provides a good background into the key personalities, investment philosophy, and the scope of RenTec's massive engineering infrastructure that has been critical to its success.
Renaissance was founded in the early 1980s by Simons, a highly respected mathematician, successful NSA code-breaker and university administrator who left academia in his '40s to try his hand at this finance thing, drawn by...what else?...MONEY! The Firm became a pioneer in using mathematical and scientific techniques to identify hidden patterns in the market. And its flagship fund, Medallion, has been phenomenally, wildly, crazily successful--a veritable money machine!!! How successful? Since its inception in 1988, Medallion has generated annualized net returns of 39%. Effectively doubling investors' money every two years! By comparison, the S&P 500 has returned just 10% per year over the same period. The average hedge fund, represented by benchmark HFRI Fund-weighted Composite, has returned 9%, as shown below:
Source: Gregory Zuckerman, newtraderu.com, HFR
Just as importantly, Medallion generated those returns with a negative beta to the S&P 500, generating 42% of alpha per year. Its returns were not just spectacular but they were uncorrelated to the broader market. In fact, the Fund's best years were in periods of the worst dislocations for stocks: 2000 (+99%), 2008 (+82%), 2020 (+76%).
Source: Mantabye.com
Mind, you Medallion's 39% annualized net returns are after its hefty 5% management and 44% incentive fees. On a gross basis, Medallion has generated 66% annualized returns. To put that in dollar context, Medallion, which has $10 billion of assets, has produced over $126 billion of gross trading profits for investors (mostly Renaissance employees). It has generated $8 billion of management fees and $51 billion of performance fees for Jim Simons and other shareholders.
No one knows exactly how Medallion makes so much money. Probably only a few people at Renaissance fully know either. Conceptually, Medallion utilizes statistical arbitrage, exploiting very short-term deviations of historical relationships between assets (think trading horizons of minutes and hours). Betting that these relationships will mean-revert, Medallion uses significant leverage to amplify gains. According to the book, Renaissance is only looking to be right 51% of the time, but that's more than enough. Trading thousands of times a day, those gains add up, especially when multiplied by leverage.
So, does Medallion single-handedly prove that markets really are not efficient? Did Simons really solve the market? Or is Medallion the exception that proves the rule? Perhaps it's the latter. Medallion's consistency, or persistence, is so remarkable precisely because of its rarity. Moreover, there are trade-offs. Short-term trading is generally capacity constrained. That's why Renaissance has capped the size of Medallion at $10 billion and distributes profits annually. (It's now effectively the world's most attractive bond! Producing 39% of yield per year!) Renaissance has tried to scale its business by attempting to develop long-term trading strategies that have less capacity issues. Alas, the Firm's other funds, like RIEF, RIFF or RIDA have not able been able to produce anything close. In fact, REIF, RenTec's longer-term equity trading strategy (think trading horizons of weeks and months) has actually underperformed the S&P 500, since inception in 2006 (by 2% per year):
So, in the end Simons and Renaissance's many brilliant researchers have figured how to stay just ahead of everyone else, and that's all they need to do. This video basically narrates Zuckerman's whole book in 20 minutes (with some deepfake images from Mr. Robot). Or you can hear RenTech's story from Simons himself:
Saturday Night Live, introduced a new Donald Trump and it is, by far, the best impersonation of the former President yet. New cast member James Austin Johnson debuted his "the Donald" in this week's cold open and what a Trump it was. Johnson was able to mick Trump's mannerisms, discursive rambling and even the tone of his voice almost to perfection. It is scarily accurate! The rookie cast member is becoming an integral part of the show this season, playing Biden and Trump.
