Panama

What to make of quite literally the biggest data leak in history?  The 11.5 million documents of the Panama Papers evidently tell the sordid but sadly unsurprising tale of a web of corruption that one might expect to encounter in a B-list action thriller film.   ("Mossack Fonseca" sounds like an obviously made-up company of villains, doesn't it?)


As developments unfold, it will no doubt make for fascinating viewing.  Already the Icelandic PM has stormed out of an interview, David Cameron's late father has been named, and both Lionel Messi (already in trouble for tax evasion in Spain) and a member of FIFA's ethics committee (whoops!) are also implicated.

While the rubber-necking from financial market professionals may be keen, the real scrutiny (and outrage) is certain to come from outside.  As disgusted as we may feel at the naked corruption and greed of kleptocrats, among others, and the financial and legal infrastructure that allows them to perpetrate their crimes, the fact remains that the financial system abetted these endeavours...and naked corruption and greed are not exactly unheard of in our industry, either.

What will be interesting observe is the degree to which the Panama Papers increase the pushback against globalization.  After all, without the ability to easily transfer money across domiciles, perhaps the web of deceit may not have been quite so successful.  It may be easy for those of a certain political persuasion to tar things like free trade with the same brush as the activities uncovered in the leaks.

If this were a film, one could see Bernie Sanders capitalizing on a tidal wave of anger against the "elites" to sweep into office.  One suspects that the only reason that one did not find candidates Clinton and Trump amongst those fingered in the Papers is that US regulations prevented Americans from participating in these schemes.  Well, perhaps that's not totally true.   There's at least one American named, a  "businessman convicted of traveling to Russia to have sex with underage orphans signed papers for an offshore company while he was serving his prison sentence in New Jersey."   Perhaps B-list movie was being generous.

Regardless of whether Sanders makes a fairy tale grab for the White House as a "candidate for the 99%", it seems likely that these developments will do little to stem the tide of protest candidates generally and rebellion against the entrenched status quo.  There have already been calls for the Icelandic PM's resignation, and it's hard to see David Cameron not being hurt politically as well.  A candidate who sets his stall out to reduce tax avoidance sees his old man named in massive deluge of apparent tax evasion, much of it in British-owned territories?  It doesn't look good.

That many of the ventures named in the MF documents may be legal and legitimate is kind of beside the point; as the current US presidential campaign illustrates, facts are much less useful political allies than opinions and inflammatory rhetoric.  It remains to be seen whether this maelstrom will have any impact upon our markets; in the near term it's easy to suggest there should and will be none.  In the longer run, it's hard to see anything that increases the dissatisfaction of the majority and a distrust of globalization as anything but a negative, though that may be a story for months and years hence, rather than the days and weeks that interest many practitioners.

In the meantime, Macro Man leaves you with a re-working of a Van Halen classic from the mid-80's...

Jump back, what's that scene
Here he comes, hands full of bloody green
Relax, ain't never gonna pay tax
"Model citizen", "fiscal discipline" 

Don't you know you can always trust me? 
I'll launder it for sure
I'll do it!

Panama, Panama
Panama, Panama

Ain't nothin' like it, this shiny machine
Put your blood money in, we;ll make it nice and clean
Relax, ain't never gonna pay tax
Got the Virgin workin' hard for you

Don't you know you can always trust me? 
I'll launder it for sure
I'll do it!

Panama, Panama
Panama, Panama

Yeah, it's gettin' a little bit hot tonight
Better backdate some docs, just to take the heat off us
We won't go down, between just us
Ease your seat back 

I'm blindin', they're tryin'
To see where the money goes
Got a nice scheme, works like a dream
Rich get richer and nobody knows

Panama, Panama
Panama, Panama

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26 comments

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Nico G
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April 4, 2016 at 7:13 AM ×

this gets better every day...

i think that together with gig to gig economy and low cost airlines, leaks on the assholes of the world is the greatest perk of our time

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Nico G
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April 4, 2016 at 7:28 AM ×

on a similar note, when will we ever expose the fraud in our industry? i have seen 'P&L washing' going fast and furious during my years in London - brokers offering to do as many trades as possible and set up your 50% kick-back in Switzerland (in the early 2000s i imagine CH is no longer the hot spot)

for years, top polytechnicien brains used to work at prop desks of French banks in Paris - and their bonus was capped by French morale and coutume. So you can imagine how tempting it was, if your P&L was north of 10 millions, to think that it was only fair that your 200,000 bonus be enhanced offshore... who could resist that?

i had the biggest Italian equity arb book for a while ($10bn size) and every broker of the city either offered the bonus enhancement scheme, or two escorts sent to your home every week. Cocaine being free on their 'client entertainment'nights out. Talk about low morale.

you can add to that half of acquaintances in the business calling you offering the biggest inside information on the planet. Some actually do just that, trading on insider informations. (i know one who did just this from Geneva after he lost his license in England)

i am quite proud to have always said no to everything. Actually i am quite proud to have left that industry as soon as i could. PA trading's gotta be the most honest activity in the world if you keep on ignoring insider calls, and leave off your homework.

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Polemic
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April 4, 2016 at 8:55 AM ×

Nico. Well said. The stories all of us long timers in the industry could tell would .. or rather will.. stun folks. But it's not just limited to finance as you know. Any industry where the stakes are high sees lines crossed.

But revelations such as the Panama Papers (hope they don't mix up the PP with me PP)hit 2 ways.. 1.shock and outrage 2. Normalisation of the shocking. I bet a few folks are now working out how they too can now do it, having removed the weaknesses that lead to this reveal. I'm afraid the infection will just evolve into something stronger.

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Anonymous
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April 4, 2016 at 9:12 AM ×

If anyone thought the EU Directive must have cratered offshores years ago they no doubt understand how wrong they were today. The Carribean and Central America have been favourite hidey holes for decades and for them to turn away this business is akin to Turkeys voting for Xmas.
Whatever your view on this issue let me say it all starts with high levels of taxation and tax systems that politicians have made overly complex because it suits them to use taxation has a vote buying tool. The complexity allows them to play their rather stupid electoral games. Indeed 'tool' is an apt description for our political web of would be crusaders who preach ,but almost never practice what they preach.
This all starts with the political system and how it works to buy power. Tax avoidance is as far as I am concerned a certainty to arise from such a system. The irony of course is that some of the main practitioners come from within the political system. Can we spell hypocrisy ? The next big mistake of course is to actually believe that those currying favour with your protest vote are any different from those that you are dissatisfied with. They are not ,they are merely the latest iteration in opportunists.

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Hotairmail
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April 4, 2016 at 1:00 PM ×

People are people, wherever they are. I am old enough to remember when UK NHS dentists filled kids' heads with mercury amalgam because they were paid by the filling. As soon as they changed the incentive, it miraculously stopped as it cost them money to carry out and they were paid for 'good teeth' requiring no fillings instead.

So bankers, politicians whatever it is, is really just a name for 'people' with a particular type of opportunity. Although, it is also true that a certain type of opportunity often attracts the worst types.

Anyway, all I would say is don't confuse 'legal' with either 'honest' or 'right'. The rules of play, even down to money supply and its interaction with assets, the sacrosanct law of contracts (post 1066 of course), free capital flows, even 'privacy' etc. are very much designed to particularly benefit a certain section of society who are also able to warp the rules that govern us.

Many talk of Adam Smith and the miracle of the "invisible hand", the original "greed is good" that makes the capitalist system work from the individual up, without reading his book where he spends just as much of his time, if not more, warning of human capacity to warp markets thru' monopolistic practices, tax avoidance and political capture.

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Bruce in Tennessee
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April 4, 2016 at 1:04 PM ×

http://www.realclearmarkets.com/articles/2016/04/04/solving_the_economic_productivity_mystery_102096.html

Solving the Economic Productivity Mystery
By Robert Samuelson

Other thoughts come to mind. Increasing debt levels must decrease productivity. And if the top layer of the company thinks it is wiser(?) to buy stock, they won't invest that in productivity.

Worth a read, MM.

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Adrem
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April 4, 2016 at 1:16 PM ×

While we may all privately be watching our backs on the web how much more vulnerable must be those in power. It only takes one whistleblower to hit the right key and woosh its all out there. Very democratic actually. And as angst against income inequalities and government incompetence grows the power holders will be laundering their pants ever day.

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abee crombie
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April 4, 2016 at 1:16 PM ×

Interesting Hotairmail

NYC and Miami now have a (temporary) rule that all buyers over a certain amount must disclose the original owners of the trust (how most offshore money moves) or else no title. Will be interesting to see if this increases the likelihood of more cities and permanent law

Corporate tax "evasion" is just as bad IMO. Transfer pricing, corporate inversions etc. I'm very much inclined to throw away the whole bloated system and just do a 10% flat tax like in HK (though I dont know how ppl there really view it, comments appreciated) and get lawyers and accountants spending time on important matters. But that is probably wishful thinking.

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Anonymous
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April 4, 2016 at 1:35 PM ×

Notice Nevada and Wyoming as havens for shell company filings. It is completely legal here as neither of those states ask questions when filing to create entities. You just need the right lawyer and the right banker.

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Polemic
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April 4, 2016 at 1:58 PM ×

The similarities between the offshore accounting industry and narcotics industry are pretty similar - I've done a table here. http://polemics-pains.blogspot.co.uk/2016/04/offshore-accounting-industry-vs.html

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Anonymous
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April 4, 2016 at 1:59 PM ×

abee

HK 10% tax doesnt tell the whole story - Real Estate there is the other part.

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Anonymous
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April 4, 2016 at 3:06 PM ×

The Panama papers are from 1 company, only 4th largest to boot

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Anonymous
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April 4, 2016 at 3:08 PM ×

Hmmm.. So a bunch of really rich and powerful people (with a track record of morally questionable deeds) cheated, stole and tried to hide their wealth?! I am shocked... SHOCKED! :)

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Anonymous
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April 4, 2016 at 3:51 PM ×

How long until leaks from other companies?

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abee crombie
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April 4, 2016 at 6:52 PM ×

The success of Spoos & Blues during Q1 2016 has been nothing short of astounding - especially in light of so many PNL horror stories and drawdowns to start the year. Under our weightings of $100m in Spoos hedged with $100k/01 in Blues, the trade is up about 9.5% YTD (1.5% in Spoos and 80bps in Blues). And at its worst point in Q1, the trade drew down only by 4%. Looking ahead, I would argue that any trade annualizing at close to 40% returns should certainly be a candidate for some profit taking. Now, this decision should not be seen as an indication that I believe risk parity trades are about to fall apart. On the contrary, as you can see from my seven year history of trading recommendations at Jefferies, I am quite a fan of risk parity. It's just that markets have moved a long way - and there comes a time when a trade progresses so quickly in your favor that the responsible course of action is to take chips off the table. So my recommendation as we head into Q2 is to unwind Spoos & Blues and replace it with the following:

1. Take 10.5% of the profit and roll it into upside calls on SPX. Specifically on a $100m original allocation to Spoos & Blues we would spend $1m on the SPX 6/30/16 c2135 for 19 (or 525 contracts).

2. Take 10.5% of the profit and roll it into upside calls on EEM. Specifically on a $100m original allocation to Spoos and Blues we would spend $1m on the EEM 6/17/16 c36.5 for 32 (or 31,250 contracts).

This would leave us nicely exposed to a risk-on rally, and ensure that we are at least up 7.5% YTD by the end of June (since we are only spending 2 percentage points of the profits on option premium). It also takes advantage of the fact that implied volatility on both SPX and EEM are both ridiculously low! Now there is something that should stand out as quite unusual in this recommendation – an allocation to EM. In all my time at Jefferies I have not once made a positive EM recommendation. In fact, I have often been quite bearish EM since 2010 on the grounds that the competitive devaluation strategies from the US, Europe and Japan would create a very difficult environment for EM growth. So why am I finally warming a bit to EM? Well, if the concept of a truce in the developed market currency war is for real (as I have been arguing since 19-Feb-2016), then the biggest beneficiary will be EM

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Anonymous
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April 4, 2016 at 7:08 PM ×

93% of net notional buying in 1Q2016 came from buybacks

http://imgur.com/gGJEQS1

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Anonymous
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April 4, 2016 at 7:09 PM ×

From 2012 to 2015, the share of global trade to world GDP has been basically flat, reversing a decades-long trend

http://ow.ly/10gF3G

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Macro Man
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April 4, 2016 at 7:17 PM ×

@abee

So is he actually selling out part of his position, or is he using some of the paper profits from his paper trade to buy more upside (risk additive, not profit taking at all).

Also, I think he has his risk weightings wrong.

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Leftback
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April 4, 2016 at 7:22 PM ×

Hate to spoil the Spoos and blues party here (not disagreeing, but agnostic), but $wti crude just broke below the 50 day, and then below support at $36. There has recently been a breakdown of the oil/Spoos correlation, but correlations tend to reveal who is (or is not) trading as much as anything else. One wonders if the oil/HYG/Spoos correlation will return once critical levels are breached, especially if market trading volume rises to indicate the return of certain groups of punters to the field of play.

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washedup
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April 4, 2016 at 7:37 PM ×

No horse in the race on the spoos and blues stuff, but that one is one true inflation scare away from an epic disaster - I am kind of tired of the ray dalios and kyle basses of the world insisting to us that we are heading into a deflationary apocalypse, because I quite simply do not see that in the data. The long bond may turn out to be as much of a roach motel on the way down as its seemed on the way up, people have just forgotten it can go two ways. Be wary if someone shows up telling you stories about such and such is a 'free option', coz there is no such thing.
As for crude, I am much more constructive on time spreads than price, but don't see much on argument for price either way - if I was asked to come up with a fair value, my response would be a) what a stupid question for something like crude, and b) it is probably close to fair value here.
Spoos are the toughest - I wouldn't be short energy here, but its a sale higher - other stuff looks toppy but not exactly screaming 'come sell me' either - don't think you are playing for much in the short term either way.

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Anonymous
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April 4, 2016 at 8:14 PM ×

http://www.bloomberg.com/news/articles/2016-04-04/strategist-david-zervos-is-recommending-emerging-markets-for-the-first-time-thanks-to-currency-war-truce

I can only imagine in my wildest dreams MM, LB, and abee wearing a cap like Zervos' in the photo at the above link. LOL

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Polemic
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April 4, 2016 at 8:29 PM ×

LB. Copper too. Has come all the way back down to touch the neck line it broke up thru in Feb at the start of the rebound. A pure techy would say nuy the support. Mr realist here says it doesn t bode well for all the old fave correlators. So yes the astrology of the asset planets isn't augering the dawn of the age of aquarius. But.. the wall of worry is alive and well and a lot of people wanted stockx to roll at Q1 end and gpt squeezed and have now been looking to sell the start of Q2 so if it doesn t happen then grindy grindy catchy carry monkey.

But though I am out of stuff and trying to sit on my hands I'd think a down shake is in order. Perhaps its option time. Sell top side above grind up targets vs buy net zero prem downside and look for asymetry in price momentum to outweigh the r/r spread

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abee crombie
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April 4, 2016 at 9:56 PM ×

i feel like every time I think I know what is going on, it is exactly the wrong thing to do, so take this with that in mind, but perhaps we are getting a really good opportunity to buy oil / risk here. 2 years ago I am pretty sure 90% of ppl who have ever done anything related with oil would have said they would be big buyers of oil below $40. Yes costs have come down (in US mainly, other via FX depreciation) but oil fields still decline and need to be replaced.

ISM New orders were a blow out and have been increasing over past 3 months. EM FX has stabilized and now turning positive on a whole host of moving averages and yields are dropping across the board there, without the FX depreciation of the fall. US Equity markets giving quote checking C suite breathing room. S Korean export orders getting less worse. Other asian countries report soon. CRB commodities bottomed in november pretty convincingly, IMO. Industrials doing well in most markets, perhaps telling us something. Q1 earnings number should be marked down pretty low, though I guess with recent rally there will be some expectations, but traders probably looking for more guidance for rest of the year than actual Q1 results, IMO

Whats holding the market back now? Financials namely. Perhaps the record flows into HY will help alleviate concerns for EU banks. Perhaps not. US Auto sales also pretty crappy, not helping the auto heavy euro and JP indexes.

If trade weighted yen made a new high that would be a bad sign

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Anonymous
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April 5, 2016 at 3:06 AM ×

About buy-backs: http://blog.gavekalcapital.com/?p=10739

About spoos & blues, never understood your weightings (mm) or his. SPX, EDnn vol ratio (price vol) is nowhere near 2 or 3 yet that's what weightings imply... Any clarification welcome

About hk, as anon implied, the corp income rate is 16.5 iirc so incentive for tax optimization is not as high as us/eu or elsewhere but for example, most local hf still attempt to go through offshore entity and local adviser. And yeah, real estate is where stuff (incl. not so clean) happens. Corporate governance is quite fancy too (many cos. with a group of shareholders owning 75%, usually controlling or preventing control of more shares and doing w/e they want)...

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Leftback
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April 5, 2016 at 4:15 AM ×

Yen firmer, Nikkei weaker overnight. Crude has gone from being extremely overbought to being oversold, but that market is so over-supplied the selling may continue for longer than anyone thinks is reasonable. [Yes. We are short oil and XLE]. If another panic sets in over falling oil prices, all the reflation vehicles will be sold and the dollar and yen will rally together. We can't see any reason at all to be long EURUSD here. Likewise if Dr Copper loses the plot, AUDJPY will be out the window again as well.

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Macro Man
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April 5, 2016 at 11:42 AM ×

@Anon 3.06

My weightings involve a static amount of futures for each leg, sized to generate equal amounts of of $ P/L volatility. Zervos's make no sense, as "$100 mio of Spoos" would imply a constant rebalance.

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