Pension Fund Posts...So What's the Trade?

I've devoted significant time and space to the investment strategies of US public pension funds over the past couple of days.

This blog is called "Macro Man". Not "Shawn's diatribes".

So what's the trade?

The reason I didn't include any trade ideas in either of the original posts is because it isn't entirely clear to me what they are. Are we at a tipping point, the middle of the trend, or way too far ahead of the curve here? I'm not sure.

Here's what I thought as I put this together:

1) The one thing I think was clear in the two pieces was that the investment consulting industry is pushing pension funds to take more risk in alternatives. This is absolutely a function of easy monetary policy. Another taper tantrum could turn into a bad accident. The market is very complacent to this risk, even after the last couple weeks of hawkish rhetoric, higher rates, media attention, etc. Buy gamma.

2) Inflation. Accelerating inflation would likely help on the asset side (equities, "real return") and limit the damage on the liability side, depending on how each system indexes benefits. Also supportive of buying the dips in linkers. However, as mentioned in #1, higher real rates are negative--fixed income, credit and equities get hurt, with potential disastrous consequences in frothy/bubbly markets.

3) Equity names like JP Morgan, Goldman Sachs, Bank of America, Blackrock, and Blackstone are well positioned to take advantage of these trends.

3a) The combination of the move towards more alternatives among institutional investors and the broader rotation towards indexing among retail investors is indeed a big threat for asset management firms that are levered to traditional mutual funds. How are these companies adapting to these trends? Are they digging in, circling the wagons and relying on hope? Are they diversifying into alternatives? Will "smart beta" save the day? (I doubt it--ed.) Are all of us PMs and analysts going to be replaced by robots? (will their pieces be shorter than yours? ed.) Long banks, short traditional asset managers? Seems too clever by half.

4) Muni curves should probably be steeper. Pension reform will fix these problems, but global experience suggest that means states explicitly taking these liabilities onto their balance sheet. That said, I have very little (well, actually zero) experience trading munis. 10/30s muni steepener, hedged with 10/30 ust? Again, too clever by half.

5) All DM governments are insolvent. Buy gold. Hat tip to Albert Edwards.

That's all I got. Anyone have anything more persuasive?


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July 10, 2017 at 8:33 AM ×

You ask whats the trade?

Twitter/Fox AI coming soon to a screen near you. Murdoch and Trumpy are branching out into artificial intelligence. The latest G20 meeting was a cold run to establish the effect of having a President of USA blog 140 words per post and delegate a country from a laptop verses ..( i admit this is my view) saying less than 5 words at a G20 meeting. The mail I got was that when Ivanka sat at the table for him she said more than him and she didn't say a word. Before Trumpy leaves office I'm betting him and his pal Murdoch come up with some sort AI that can produce a level a delegation equivalent to a President of a billion dollar company and people will be able to purchase this program and delegate to friends and family and work colleagues through the network and give the impression that they are sitting in the oval office.

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July 10, 2017 at 9:44 AM ×

Research note just in:

Analysts on Wall Street are leaning towards Trumps next G20 meeting to further prove that AI can sway the Presidential approval ratings in the Gallup polls.

The technical analysis desk has stated for our traders that are partial to technical analysis that the support line on the chart rests when Murdoch is seen wheeled out of the New York Cigar Club.

If you have any queries please contact our Goldman Sucks desk.

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Nico G
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July 10, 2017 at 2:08 PM ×

a quick hello and happy summer to all

https://www.theinstitutionalriskanalyst.com/single-post/2017/07/09/US-Equities-Unwinding-the-Yellen-Leveraged-Buyout

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Jim
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July 10, 2017 at 3:20 PM ×

Shawn, have you been following Puerto Rico? Total anarchy, fraud, looting, lying to the courts.
Good daily reporting here: https://twitter.com/cate_long

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July 10, 2017 at 3:54 PM ×

Research note just in:

Analysts on Wall Street have reported that Murdoch was seen being wheeled into Trumpy Plaza earlier today to discuss with former Goldman Sucks vice president Cohn on the forthcoming of their IPO of "AI Trumpy" which is to be listed on the NYSE after the next G20 summit after phase two trail completion. Sources close to the cabal have said that for every twitter post between the G20 summit of 2017 and 2018 that exceeds 100 words and is totally irrelevant to 99% of the USA population a news limited shareholders will be offered 1 share and a B&B overnight stay at Mar a Lago and will have their very on signatured Time magazine cover of Trumpy.

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checkmate
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July 10, 2017 at 5:14 PM ×

At the end of the day what might become apparent at the end of this cycle is just how limited central banks really are when it comes to making a difference to growth. The appreciation in asset risk asset values balanced against the ever increasing liabilities attached to future income streams. So when these are weighed together exactly what differnce did they make?
I don't have the answers to really creating productivity driven growth ,but I am very sure we won't find the answer in monetary policy.

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July 10, 2017 at 6:21 PM ×

Checkmate,

Wall Street , New York is just baggage.....going there would be beating a dead horse from two miles out, and the sooner the people who read my research notes realize this the sooner I can move ahead and kick goals.

"To the people of New York..you chose to live on that overcrowded island and pay through the nose for everything and live in 5 ft snow for 3 months of the year....sorry the risk vs reward on that island is not worth it."

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July 10, 2017 at 6:45 PM ×

Checkmate,

As a punter that gets out of bed each day and does ones best all I'm trying to do is prevent a disaster on Wall Street New York. Do you think I got out of bed for ten years at 4am each day and shovel horse shit for six pence a day. I know myself well enough to know what motivates me. You put me on any trading desk of any hedge in America and I will self destruct for reasons only a close few know....and believe me he knows. You've been warned and this is as polite as it will get.

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July 10, 2017 at 7:29 PM ×

I want to add one thing..Sir, you don't get to buy a share and than keep it as a hedge and watch from the sidelines as the market ebbs and flows and than expect to collect at full inflation adjusted face value at maturity. No, Sir....those ebbs and flows between market cycles has an effect on the markets future direction. Your investment has changed and no longer sees America as a trading proposition.

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johno
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July 10, 2017 at 8:28 PM ×

Re Shawn's post:

Interesting thoughts. I've wondered whether there was a trade in munis, although thinking from the perspective of higher future tax rates needed to fund state pension deficits. In that respect, I'd expect municipals to richen against taxable bonds. But as you point out, cutting against that perspective is the hit to municipal credit from those deficits.

Gold. I'll posit that one problem with gold in a regime of QE without aggressive fiscal stimulus as we have now is that it doesn't generate income. Sure, there's more liquidity and some of that goes into gold, but assets that really get aggressively bid are those with income streams that can be levered, like companies with managements willing to lever them (as in the US). Admittedly, there are the counter-examples of art, TSLA, cryptocurrencies. I think Jared Dillian recently argued that gold is driven by two things: real rates AND fiscal deficits (which are either monetized or raise expectations of eventual monetization). The first is going the wrong direction and the second likely only explodes in the next recession. It just seems WAY early for gold and it probably gets washed out with the destruction of liquidity going into the next recession. I mean, it went down THIRTY percent from its high in 2008 as it was becoming apparent that there were going to be years of fiscal deficits and that the ATMs might stop working the next morning! That destruction of liquidity at the onset of recession trumps even the most bullish narrative and 2008 proves it.

The big things I see in markets currently are: 1) central bank balance sheet divergence and 2) Chinese tightening. Re the 1st, EURUSD seems stretched, especially since the Fed will also be taking action on its balance sheet. EURJPY is interesting. I mentioned previously that I've changed my mind about "BoJ stealth tapering," so the divergence is clearer here, but the cross has moved very far, very fast. I've got some calls with RKOs. In cash, I think EURCHF is perhaps the better bet and am positioned there. In think FX is the better place to play the theme than rates right now. Re the 2nd, I haven't done anything yet. There are probably better expressions, but will take a look at copper options. Supply picture eases up in H2 and Chinese demand has been lackluster. Still, I don't see massive downside, so maybe a spread.

Worthwhile read on oil: http://www.zerohedge.com/news/2017-07-08/when-facts-change-oils-biggest-cheerleader-capitulates-andy-halls-full-bearish-lette

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Whammer
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July 10, 2017 at 11:57 PM ×

Hey Nico, nice to see you!

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Leftback
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July 11, 2017 at 2:43 AM ×

There is no trade in munis, just hold some and buy tons of 'em when they go on sale, then hold 'em. Enjoy the income.

Very hard to short a muni vehicle, you'd have to know a lot of specifics. The managers of the diversified muni funds are some of the sharpest minds in the business, and usually exit the smoldering premises long before the building burns down, leaving the hapless pension fund guys holding the bag, who by the way are definitely NOT the sharpest minds in the investment business.

Last time someone called a muni rout (M Whitney) some of us made a pile by buying what she was selling.

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checkmate
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July 11, 2017 at 8:43 AM ×

On reflection I'm not sure the best trade for pension liabilities is in the arena of state/national entities at all. History I think will show the people making money from low rate/high pension liabilities have done it by seeking out individual companies and shorting them. Case in point just yesterday in Carillion. Whilst there was an additional factor involved regarding it's middle east business this is a share that's been under the cosh mainly on it's pension funding for ages. Unlike state/national entities it can't just reach out and raise your taxes to ameliorate it's problems which is the crux afterall of picking a target that can't really fight back.

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Unknown
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July 11, 2017 at 9:22 AM ×

Welcome back Amps.

Keep up the good work TMM v2.0, really great to see Macro themed posts and comments.

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July 11, 2017 at 10:51 AM ×

Thanks Uknown, but I won't be trading under the majestic Team macro banner anymore. I'm retired from trading for that realm. I'm an independent trader these days , best Sir, that you leave me alone b/c I don't won't the responsibility under your banner.

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July 11, 2017 at 11:05 AM ×

Thanks Unknown, but you understand , when someone quits your best to leave'em be and find someone else to fly your flag.

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July 11, 2017 at 11:11 AM ×

Thanks Unknown, but I don't want more money, and I don't want assurances. I get out bed and have go for myself and my clientele.....not yours anymore.

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checkmate
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July 11, 2017 at 12:44 PM ×

S&P today took a serious shot at calling the UK growth slowdown that I mentioned some time back and of course that's a 'nigger in the woodpile' for trying to buy and hold risk investments in anything cyclical. Before I get a yellow card and suspended for using the 'n' word I did snap a quick 10% off Galliford Try. I think that's a good analogy for my view on the UK market right now. Good news that I would have held and carried forward to the Autumn divi was an excuse to exit at a good price in a sector that doesn't promise much good future data.
The second issue now getting media attention revolves around the political risk issue I was also talking about sometime ago. The need for the Tory government to get Labour support because it can't get a mandate from it's own members DUP or no DUP. The Torys are now infighting like Labour was a year ago. Two probable outcomes are either another election where Labour probably start favorites OR a Tory government hamstrung fiscally because of the need to get Labour support. The EU must be loving this , a country and party system split right down the middle and unable to summon any semblance of cohesive strategy. Ripe to be taken to the cleaners on any and all issues. For example, how likely is it a Tory govt could now get a Brexit neutral trade off via enacting business friendly policies aimed at attracting inward investment? Heading to zero probability unless the Tory party could come up with a significant social welfare payoff for Labour. Really, it's a mess and the political uncertainty alone as now got me more or less sidelined.

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July 11, 2017 at 3:28 PM ×

I just want to know , Checkmate.....how dirty are you for hedging out that Ruble trade against the Shekel. I mean...we're going to have so much fun. I'm going drink 2 bottles of sambuca to their one bottle of vodka. Their going win 5 times ...nah ..make that 100 times more than me. The rollercoaster could go anyway..we don't know yet. Come on..tell me..little bit..a lot...a really lot..or gigantic lot...lol!

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July 11, 2017 at 4:43 PM ×

Read my lips, Sir..I don't gotta do anything.

You have no right whatsoever.

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checkmate
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July 11, 2017 at 5:30 PM ×

Note to self don't come back for awhile.

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Jim
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July 12, 2017 at 9:42 PM ×

Pro tip: Do not google “how sec detect unusual trade” before making trades on insider information

Press Release
SEC Files Insider Trading Charges Against Research Scientist Aiming to Avoid SEC Detection
FOR IMMEDIATE RELEASE
2017-125
Washington D.C., July 12, 2017—
The Securities and Exchange Commission today announced insider trading charges against a research scientist who allegedly searched the internet for “how sec detect unusual trade” before making a trade that the agency flagged as suspicious through data analysis.

The SEC’s complaint alleges that Fei Yan loaded up on stocks and options in advance of two corporate acquisitions late last year based on confidential information obtained from his wife, an associate at a law firm that worked on the deals.

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abee crombie
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July 12, 2017 at 9:46 PM ×

Shawn, i like aternative asset managers like bx, oak etc ..pension funds, family office, swf, etc. Plus they are trading cheap...but they are llcs. Messy taxes. And if u read naked capitalism, there are lots of agency problems too.

Hey nico. How you doing broski.

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Skr
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July 13, 2017 at 12:23 AM ×

https://www.bloomberg.com/view/articles/2017-07-12/why-commodity-traders-are-fleeing-the-business

Nice article on commodities.

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