The large market dislocations of 2015 - who said the year was uneventful

The year was filled with surprises and big divergences, but most of them were policy-made and highly unpredictable. This is a small table highlighting some of the ones that we think caught investors napping.


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BREXIT is the trade of the year

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The BREXIT issue may be the trade of the year. What does that mean and why give it this view?  1. This is a big event - Not only will this have huge impact on Great Britain and its place in the European and world economy, there will have a spill-over effect to the rest of the EU. This is the type of event that will shift rare event expectations and increase tail risks. 2. There is a specific date when uncertainty will be resolved. There is not an issue of when it will occur. We know the vote date. 3. The probability of the vote can be tracked and measured. Handicappers now say there is a 24% chance of an exit. The poll numbers look like it is very close. The risks of a bad outcome after June are still not clear, but the vote can be watched and given precision. 4. The market has already spoken that this is a big deal and talk is generating more interest. The IMF just stated that there will be severe global damage if the Brits leave.  5. Financial institutions will have to squar...
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Managed futures index ends the year flat - between equity and bond returns

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Effort and results were not linked for managed futures managers in 2015.  For all of the trends, opportunities, and trading, the SOCGEN CTA index ended the year up 10 bps. Going to sleep for the year with money in a mattress would have gotten the same return. Nevertheless, equities as measured by the S&P 500 stock index (SPX) fell less than one percent while bonds as measured by the Barclay Aggregate Index (AGG) gained just less than 50 bps. It was a sideways year in spite of the historic change in Fed behavior,  significant oil shocks, and negative interest rates in the EU. A closer look at the monthly returns show an interesting story for how and when managed futures managers made profits and lost money. Of course, we are generalizing, but we believe a simple comparison with traditional assets can tell an effective story.  Looking at equities, there were two big positive return months, February and October. During these months, managed futures posted loses. The powe...
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The broken counter of banking

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The word bank is supposedly derived from banca, the Italian word for counter; bankrupt may be a corruption of “Banca Rotta” or broken counter. - Smart Money by Andrew Palmer  With the significant decline in COCO bonds, the rise of CDS spreads for banks, and the large amount of NPL's at EU banks which may be over $750 billion, investor should ask if banks are broken. With native rates throughout Europe, one has to ask why investors would pay someone to hold their savings. A simple answer is that the next best alternative is worse. Would you want to be a debt holder in bank which has an uncertain future or would you rather have a certain loss with a negative yielding government bond? With more regulation and capital requirements, it is not clear that banks will be profitable without restructuring of their core loan portfolios. 
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