Sebastian Galy on the EURUSD pain trade

If you're not getting updates from Societe Generale's Sebastian Galy, you should be. Contanct him on Twitter or something: @sebastiangaly (follow him anway). 

This is from his latest note: 

By analyzing tick-level data, we find that the pain trade in long EUR/USD starts at around 4am and ends at 10.30am except on Fed decision days. Economic data releases generate virtually all the moderate minute-by-minute shocks, but their impact over the following 10 to 100 minutes is a function of flows amplifying the moves either by adding positions or being sharply squeezed out. EUR/USD saw some quite pronounced downward trends as foreign investors were squeezed out of the eurozone by the ECB’s negative interest rate. There is little indication that the pain is over either, judging by the length of downward moves or previous analysis of reserve manager positioning.

Photo: Deborah Leigh - creative commons

You're the sucker

"If you're playing a poker game and you look around the table and and can't tell who the sucker is, it's you"

- Paul Newman

Selskapet RAK Petroleum skal børsnoteres på Oslo Børs, forteller DNB Markets meg. Om jeg skal tegne aksjer, har jeg frem til 5. november. 

Jeg tror det kan være best å stå over denne. 

RAK Petroleum, for de som ikke kjenner selskapet, er [nå gidder jeg ikke skrive det selv og heller bare limer inn fra wikipedia] et olje- og gasselskap i De forente arabiske emirater. RAK ble etablert i 2005, og petroleumsreservene er vesentlig i Ras Al-Khaimah Free Trade Zone.

RAK besitter konsesjoner for leting og produksjon i Ras Al-Khaimah, Sharjah og Oman. Aksjene er notert med ticker (PCL), og eierne sitter vesentlig i UAE og Saudi Arabia.

Selskapet eier også litt under halve DNO. 

Fra hjemmesiden til RAK: "RAK Petroleum Public Company Limited had 367 shareholders as of 31 December 2013. Shares are not listed on any exchange, but are traded over the counter through a select group of brokers in the United Arab Emirates". Så om dette er slik en bra investering, hvorfor sender disse select group of brokers det ut av regionen? 

RAK har arabiske eier, ledere, styre, virksomhet og eier DNO som driver (tvilsom?) virksomhet i Kurdistan og litt i Oman og Jemen. 

RAK er ikke norsk, har ingen som helst kobling til Norge (med unntak av den løse koblingen via DNO), men skal likevel børsnoteres her. 

Det kan være mange årsaker som Oslo Børs kommer til å trekke frem, som om at Oslo Børs er en så viktig børs (ikke riktig), men jeg tror det kan ha med å gjøre at de tror at Nordmenn kommer til å være dumme nok til å kjøpe aksjer der. 

Hvorfor skal en nordmann kjøpe aksjer der og ikke i et hvilket som helst annet selskap på Dubaibørsen? Har du noengang hørt om en nordmann kjøpe aksjer i Dubai? Nei. Hvorfor tror du det er? Kanskje fordi det er langt borte, en veldig annerledes kultur, et næringsliv med lite gjennomsiktighet og en børs med lite troverdighet. På tross av alt dette, så skal det være fornuftig å investere i RAK Petroleum bare fordi de har en norsk ticker? 

Jeg vet lite om RAK Petroluem, i likhet med resten av Norge, men jeg vet at man skal være forsiktig når noe ikke helt rimer. Og dette rimer ikke. 

How to lose 158 billion dollars on stocks in a week

If you're wondering about the headline. It's simple. I tricked you. I have a thought that I've been developing for a year now, and to get you to read it, I went ultra tabloid. It refers to a 30% selloff in global stocks in a week, something akin to what happened in 2008. This would cause The Norwegian Sovereign Wealth Fund to lose about 158 billion dollars on stocks. 

Now let's get to the actual idea. Bear with me. This is one of those kind of posts with the point in the last few paragraphs. 

At the exact moment of writing this, The Norwegian Sovereign Wealth Fund (NBIM) is valued at 5 722 040 285 379 NOK or $859 810 711 552. That's just shy of 1 trillion dollars. 

The fund has a complex structure of investing directly in companies, leaving the fund as - on average - a 2% owner of any major corporation out there. That's the rule of thumb. 

The investments are, as of today, split into:

• 61.4% equities
• 37.3% bonds
• The rest in real estate

I know several of the people in the fund, and the depth of talent there crushes anything you find anywhere in Norwegian finance, which is notoriously underdeveloped. Considering how the rest of the financial landscape is in this small nation, with a animosity towards modernity, it's kind of remarkable that such a fund is able to effectively be run as a hedge fund. Which makes me both proud and hopeful. 

With $859 billion in AUM, it's effectively the largest de facto hedge fund in the world, easily beating Bridgewater, which manages "only" $87.1 billion. It's not a hedge fund of course, but it's a pension fund in name only, in my view. Which is excellent. 

The size of the fund is a huge problem. The fund received its first money in 1996; $6.9 billion. This was at a time with the price of crude oil hovering right above $10 (I know right, it sounds unbelievable now). In 18 years the fund has grown huge, both due to returns and a lot of money injections from the government. It is now more than 100 times larger than in 1996, yet the strategy is pretty much the same. 

It's still got a 60/40 style of investing, having added a tiny fraction of real estate in the past years. 

But the uncomfortable truth is, today QE is more than likely ending and the thrill ride that has been fueled by global central banks appears to be over. Yet the strategy is still to keep surfing that wave with a big exposure to global equities. 

But with almost 1 trillion dollars, what the hell else can you do?

Well, like the FT has partially put forward, I think they should reevaluate how they approach the situation. 

Here's what I would like to see changed:

• Reduce the equity allocation to 40%
• Increase the real estate portion to 10%
• Keep bonds at 30%
• 10% to infrastructure in Norway. In a high speed rail and road system
• 10% to renewable investments (anything from Tesla to solar)

If you're reading this as a non-Norwegian, you might be surprised to learn that the infrastructure in this country is fairly poor. Norway has historically been a poor country, with people living isolated lives in very remote areas. It's only in the last 100 or so years the country is fairly unified. This has resulted in a road and rail system of substandard quality and a heavy reliance on airplanes to get around. Looking to Sweden, it's easy to see how much better a road system could be, if you have a big plan (sidenote: it doesn't hurt to cooperate with the nazi's and not get burned to the ground - but I digress). 

It would be possible to turn the road and rail system to world class with the kind of assets Norway holds, creating much needed diversification of business away from oil, structured similarly to NBIM with limited political interference. 

At the end of the day, what the hell is the point of creating the world's largest fund, which is 60% exposed to global equities? What is the outcome? With 1/100th of that amount of assets, the strategy makes sense, but now it's just based on inertia and a complete lack of vision.

Lastly, using oil money to invest in the future of energy has a very nice ring to it, doesn't it? If the last ten years has been about oil, QE and China-fueled growth, the next ten could likely be about renewable energy. Just because it hasn't quite worked yet, doesn't mean it's been wrong. Just early. 

If you got this far, maybe you'll like our podcast, A Finance Podcast. It's here.

The selfish reason we've created a finance podcast

On the 14th of August I asked Joe Weisenthal why Business Insider didn't do interviews with prolific people on finance Twitter. 

@TheStalwart Have you guys ever done interviews with Twitter people? If you haven't,but you will, I'd say @IvanTheK is a good place to start

— financial acrobat (@finansakrobat) August 14, 2014

A few seconds later I sent him a DM. "Screw it, I'll do it". 

This is pretty much the amount of thought that went into the podcast known as A Finance Podcast, by myself and Michelle (@SardonicaX on Twitter). 

The idea of the podcast was originally just us talking to smart and cool people on finance Twitter. It's morphed slightly since, and is now trying to also tackle the subjects we care about.

The reason for doing this in the first place, came from that there are practically no finance podcasts out there. While there are plenty of finance TV-channels, whom I don't watch or care about, there is almost nothing (with the exception of the Bloomberg-backed Barry Ritholtz show) for the people that live in this universe. 

That is also the reason we chose such a generic name for the podcast. A Finance Podcast. We're not the only ones, but as far as I can tell, the only independent one. 

Wanna listen to the podcast? Find info here

I come from the world of finance journalism, and I'm in the process of reinventing myself. I'm involved with a few different startups, some media and some other things, but all revolving around business and finance. And I have a huge problem with the current state of affairs in media. No one is going the long form route, delving in to topics for an hour or more, because they're afraid to scare away the listener or viewer. 

My view is that people are hungry for long form content, getting to know and understand interesting people and shedding light on subjects that the media usually gets completely wrong (like hedge funds, which we did a show on here) and the people that they never speak to (like the unique trader Ed Matts who was our last guest) or our amazing next guest we have lined up (teaser:). 

But the world of podcasts is not an easy one. There is almost zero money in it, so we don't even bother. Even though you have engaged listeners who really do act on ads, not a single podcaster out there makes any real money (even Leo Laporte appears to not be doing that great). Those stupid click-metrics are being used, even though I'm willing to bet that the listener of a podcast is even more engaged than the viewer of a TV-show, where no reliable metrics are being used. Until someone fixes this issue, podcasts will never truly take off. There's just not enough money in it. But there should be. 

The traffic on our podcast has been growing faster than we expected. So far we've had a few thousand listens, about half of these being subscribers. Mostly the subscribers use the podcasting app on iPhone. 

But the world of podcasting is missing a huge component. How on earth are the small ones being discovered? We're lucky enough to be able to reach a few people on social media, but other than the small amount of traction that comes with iTunes, there are zero good avenues for being the new guy on the block. If someone would solve this problem, making the whole discovery thing easier, it would be better for us as listeners, and easier for us as producers.  We need the cable-TV of podcasts. 

Little money, small amount of listeners (so far). So why even do this?

It's the most selfish of reasons. We get to talk to really cool and interesting people. We get to pick the brain of some of the smartest people out there, and get to change our view of the world. It's also rather fun to be able to say whatever you want. And if people don't like it, too bad. 

And if someone actually listens... well, that's just a bonus. 

In a few hours the largest economic experiment in history is ending

Tune in to the podcast A Finance Podcast to listen to @finansakrobat, @SardonicaX and many guests talk about topics like this

On Wednesday the 29th of October, pretty much exactly six years since it first started, The US Federal Reserve will most likely end its extensive program to prop up the financial markets - most commonly referred to as QE or Quantitative Easing. 

It's a very, very big program. In the past six year, it has expanded its balance sheet from between $700 and $800 billion before the crisis, to $4500 billion - or $4.5 trillion. Until now. Now it ends. 

In the past, the Fed were mostly able to control the economy by changing the Fed Funds Rate. But when it effectivly hit zero, stronger stuff was needed. 

In the fall of 2008 the Fed became basically a "bad bank" for the entire US economy, becoming the single biggest buyer in the debt market. 

This was called easing, but many have complained that it was not easing at all, but rather a massive transfer of wealth. From the US State, to banks, corporations and investors. 

In the span of the period with QE, which most likely ends this Wednesday, we've seen enormous wealth being created. Stocks have recouped all losses from 2008 and hit new highs, silly money has entered Silicon Valley (allowing stupid stuff like Yo to get million dollar valuations) and only some of the lost jobs in the finance crisis have been recovered. 

But a few things have not occurred. Unlike what was warned by the many doom-and-gloomers, such as Peter Schiff or the prominent blogger Zero Hedge, we have almost no inflation (and we're very far from the hyper-kind).

So you may be asking yourself. What now? What's next? 

The scary answer is, given the scale of the operation conducted by the US Fed, no one can really say for sure. 

Let's first put the fed buying into some context: 

• If the Fed had continued QE in the previous pace, before tapering off, they would own every single US government bond by the year 2022
• With QE, the way to the top was reached much quicker in the past. It took the Dow 2621 days to climb from 7,000 to 14,000 points between '97 and '07. The second time around it took only 1044 days
• A large part of the money in QE went directly into the bank accounts of companies, not willing to reinvest (which The Fed really want them to do). Moody's says that US corporations now hold $1200bn in cash. Half of that overseas, largely untaxed

So what will happen when this experiment ends? 

No one knows, but I'll give it a try. Stocks will likely not rally any more, since a large buyer in bonds, The Fed, is gone. Bonds will most likely also sell off, but that's actually less likely, since US government bonds ironically is considered a safe harbor. 

We'll most likely see much more volatility and I expect the Fed to keep interest rates at extreme lows for a generation. You can't reverse such a thing. 

At least they were not able to do so the one time someone tried this before, in Japan.