Barnejek on PremoSocial


I have been tweeting for several years now and have found twitter immensely useful for better understanding of markets. I can’t recall how many times I found useful and actionable views here. Similarly, just bouncing the ideas off people on Twitter has saved me a lot of money by avoiding stupid decisions.

Having spent my career on both sell-side and buy-side I have been observing how the discussions about markets change. Therefore, I was very pleased when I found out about PremoSocial. And when the good guys from Bespoke asked me to join, I was more than happy to try it out and so here it is: @BarnejekPremium.

This account will be discussing mostly Emerging Markets matters across asset classes. Granted, these days many developed countries are behaving like old-school EMs so you can count on an occasional discussion of Brexit, Grexit, Trumpxit etc. but the bread-and-butter of this feed will be emerging views and trends. Importantly, I am hoping to get a lot of interesting discussions going. Also, I will leave all the “clever puns” and sarcastic comments to the open @Barnejek handle.

How to become a part of it? It’s very simple. You just need to subscribe at my @BarnejekPremium page on Premo and you’re good to go (importantly, you can unsubscribe anytime!). I have been posting some stuff there lately, which hopefully will give you a flavour of what to expect. I have set the subscription at 10$ per month, which is where I think the Premo market is starting and we’ll see where it gets us. It goes without saying that both replies to tweets and DMs will be welcome and I will strive to answer promptly and to the best of my ability.

I think this is one of the most exciting ideas in the “FinTweet” sphere in recent times and I am very happy to be a part of it right from the start (also, I am told I am the first user content provider outside of the US). I hope you give it a go, not just for me but for the gurus like Josh Brown and Mark Dow too! And of course, don’t forget about the good folk at Bespoke, who are making it all possible.

See you on the other side!

10 EM questions for 2014

In the last post of my first blogging year I have decided to blatantly steal the idea from the great Bill McBride. He asked 10 most important questions for 2014, focusing mostly on the US. They are all very valid and probably triumph anything else but nonetheless this is my list for emerging markets:

1. Will rates in China continue to grow?
I disagree with those who think that the only reason behind the EM carnage this year has been the tapering fear. Since the middle of the year the situation in the Chinese money market has been very delicate and dangerous. In the last days the squeeze has intensified which begs the question will China be able to orchestrate tighter money market conditions after the massive build-up of credit in recent years.
If you’d like a nice overview of the situation, do read George Magnus’ comment in the FT.

2. Will the renminbi continue to rally?
Very few things have been trending in the EM in the last year. Importantly, however, the CNY (or the CNH) has enjoyed a tremendous rally, basically without looking back. Now, in 2014 there are still trade balance related reasons to expect some more appreciation but a one-way traffic in the Chinese FX only encourages the rest of the world to lend money to China, which is against the theme I mentioned in Question 1.

3. Will The Great Rotation apply also to EM?
Everyone is talking about, broadly speaking, selling US Treasuries and buying S&P500 by big asset allocators. I don’t want to go into whether that makes sense or not but I think it is important to ask whether a similar story could happen in EM? After all, the world is still underweight emerging markets but within that position the skew is towards fixed income. And it is difficult to argue that EM equities are super expensive…

4. Will EMFX continue to disappoint?
The last several years have seen EMFX performing poorly. The reasons were related to shrinking growth differential between DM and EM (and hence equity flows). It does appear, however, that the differential has stopped shrinking so perhaps the EMFX will behave a bit better?

5. Will default risk in EM stay low?
With the exception of the usual suspects (Argentina, Venezuela and Ukraine) there haven’t been any worries about sovereign defaults in EM. The underlying fiscal position in EM is quite good so this should not change, unless of course the private sectors (and banks) need bailouts after the big increase in debt in recent years.

6. Will the Terrible Five make it?
Brazil, Turkey, South Africa, Indonesia and India have been in the eye of the storm this year. The pressure is still on and the responses of authorities have varied from Rajan’s holistic reform approach in India to Basci’s never ending ignorance in Turkey. In order of fighting chance to make it I go for: INR, BRL, ZAR, IDR and TRY.

7. Will Russia join the Bad Boys Club?
There’s been nothing going on for Russia lately. Growth slowing, current account reversing, fiscal situation deteriorating, commodity prices refusing to grow… If it wasn’t for quite low public debt, Russia would be in serious trouble by now. But it is definitely headed in the wrong direction.

8. Will EM be able to “buy more stuff” or will they struggle with disinflation?
Mario Draghi says that the current kind of disinflation actually boosts the disposable income, as it is effectively a supply shock. I agree. That said, the risk is that low inflation has set across the EM spectrum, which could really make it more difficult for some of them to grow.

9. Will Central Europe continue to outperform?
A forced adjustment right after the crisis has left CEE as the most stable sub-region among emerging countries. Bank deleveraging is more advanced than anywhere else and balances of payments have improved drastically. On top of that growth is really picking up (in a non-inflationary manner, too!). This sets the stage for another year of outperformance but will it happen?

10. Will EU periphery intercept the stream of investments into EM?
I know, I know, even Ambrose Evans-Pritchard or Wolfgang Münchau couldn’t say that EU periphery is part of emerging markets already. However, in my opinion they have become a serious competitor for capital against some of the biggest EMs, who have witnessed a dramatic loss in competitiveness in recent years. With global growth increasing, chances are that the FDI pool will rise too. Perhaps instead of targeting Brazil investors will go to Portugal? Or instead heading to Turkey they will choose Greece?

These are the 10 things on my mind as far as emerging markets are concerned.

And in the meantime I wish you a very Merry Christmas and a fantastic New Year! Thanks for reading the blog and leaving a valuable feedback.

See you in 2014!!!

Damn you, Mr. Sharpe

  1. Treat this post the same way as you would treat a fat-guy in a pub screaming at the telly when watching a football game.
  2. If I ever had a shot at working at a macro HF I am probably about to blow it completely with this post.

After those two important disclaimers let me tell you what I think. I have a bit of knowledge of how investment managers operate, be it real money or absolute return people. And by no means what I am about to write applies to everyone but it seems that things have been on a downward trajectory for a while now. Have a look at this fancy table from the Credit Suisse’s Hedge Index:


What interests me the most in such reports is the last column, i.e. the Sharpe ratio, which basically measures the volatility-adjusted returns. As a rule of thumb, anyone consistently below one should not be paid much. As you can see here, most funds are actually below one and the sample is almost 20 years. We will get to the exceptions later.

I do realise that trading since the financial crisis has been difficult and the risk-on/risk-off environment has made it very tough to apply any meaningful portfolio strategies but that doesn’t mean hedge funds should not be accountable anymore. Just remind yourself where the name “hedge fund” comes from. No, it’s not a marketing ploy aimed at fooling the audience – hedge funds are meant to make money regardless of the market direction. Instead, these days we seem to be willing to praise hedge fund managers for leveraging bets consistent with the prevailing market trend. And since with the exception of US equities, there haven’t been many trends, the macro guys are struggling.

Here’s why I believe the whole industry is failing: the fetish of market positioning. In recent years we have seen a massive increase in focus on positioning data. Things are getting so ridiculous that some investors are taking it to the next level by wondering what the market thinks positioning is. It’s a bit like a “what if he knows I know that he knows” mentality. Consequently, many moves in financial markets are being explained mostly by positioning. Take last Friday – the often-cited reason why EMFX rallied after the US labour data was that people were short rather than the fact that historically good growth in the US has traditionally been associated with good EM performance.

Or take the euro over the last year. It doesn’t matter that fundamentals have vastly improved and that the break-up risk is virtually zero. No, the euro has rallied because the market has been short. If you think of it, this is a very convenient excuse for being wrong: “If it wasn’t for people being so short, the euro would’ve surely crashed by now and I would’ve made a fortune“. You can’t argue with that “logic” unfortunately.

So we are in an environment where hedge funds are wondering what the real money are doing and vice versa. At the same time, local investors keep second guessing the foreigners while foreigners mostly care about demand and supply from the locals. No wonder that in the end the market ends up super correlated and everyone makes or loses money at the same time. The funny thing, though, is that hedge funds charge 2+20 for the privilege…

Interestingly, results for 2013 are still not terrible (although infinitely worse than most of the passive 60:40 strategies). Why? Well, one of Abe’s arrows was golden and pretty much every macro fund caught some of the move in USD/JPY at the beginning of the year. Now they are of course celebrating even though draw-downs since then have oftentimes been eye-watering.

But let’s go back to the table. Have a look at who hasn’t fallen below unity. Special situation funds and multi-strategy guys. Special situations, like distressed debt, require a lot of ground work with little regard to global trends. If a company in stress has debt that matures in the next few months, it really doesn’t matter much whether Draghi pushes the deposit rate below zero. Or at least it’s not the most important factor.

And multi-strategy? Well, that’s sort of my point. I have no idea what are the exact constituents of this group in CS’s sample but it sounds and awful lot like the diversified market portfolio. Except it costs 2% to run.

I know plenty of smart hedge fund managers and I know many of them are fuming at all the gamblers waking up every day and thinking whether to buy or sell 500m AUD/USD given the latest positioning data they’ve received from bank X or they received directly from dealers after they asked them to judge positioning on the scale from -5 to +5. This is truly pathetic and for some reason the market is getting such funds get away with this behaviour just because Abe sent USD/JPY higher and they happened to have been in front of their screens


Big problem for EM

A friend from a global macro hedge fund asked me after the surprising ECB rate cut followed by a fairly strong US employment report:
Tell me, why do we even bother about EM anymore?

I honestly didn’t know how to respond…

There are two ways of looking at the issue here. Due to my day-to-day occupation I will start with the glass-half-full one.

The global cycle is turning
I have been noticing a very peculiar divergence in various sets of data globally. On the one hand activity indicators are looking far stronger than anyone would have anticipated six months ago or so. The US is storming forward if one adjusts for the fiscal thrust, the Eurozone is out of the recession and Chinese 7%+ growth hardly looks like a hard landing. And yet the world is paranoid about deflation…
Yes, if you look through my previous posts you might notice that generally I used to be a proponent of loose monetary policies in the face of wide output gaps. But I don’t think this is valid anymore. I treat a lot of the current disinflation as a supply shock (have you seen food prices lately?) and I fully subscribe to Draghi’s “you can buy more stuff” view. Likewise, potential growth rates have shrunk dramatically so it is not entirely obvious it will take years to close the output gaps. All in all, I do see current low inflation as merely a reflection of the past rather than anything to be concerned about.
If that pseudo-analysis is anything to go by then the current disenchantment with emerging markets is only temporary. Why? Well, because the market is confused like during each and every turn of the cycle in the past and therefore even the liquid stuff allows for decent volatility. And if nothing is trending (in fixed income at least) then why bother with extra, EM-specific issues.

The market has changed
This is something that is a bit of my darkest nightmare to be honest. If I am wrong about the turn in the global cycle the period of trendlessness will continue unabated. And if so then the short-term players will naturally focus on punting in G3 markets while long term investors will make sure they don’t trail their benchmarks too much. This is already happening – I track a lot of EM funds benchmarked to the JP Morgan’s Global Bond Index and I can’t remember the last time the tracking error was so small. And to be perfectly honest, I don’t blame them as indices like that are difficult to beat in an environment like currently and the upside is very limited.

I like to think that not all is lost and once a medium term direction is established, investors will return to EMs en masse. After all, there’s some unfinished business to do – rates in Brazil, Turkish lira, Russian ruble, Mexican Bonos, Polish zloty… These are only a few examples of things that you don’t need vivid imagination to dub “severely mispriced”.

But I guess for now we will be in a “taper on / taper off” type of trading…