The world's biggest hedge fund is worried the Federal Reserve could mess up everything

• Rachael Levy
 

• Sep. 17, 2016, 9:27 AM
• 13,589
 
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Ray Dalio talks at the Alpha Exchange panel at the CNBC Institutional Investor Delivering Alpha conference September 13 in New York City.Heidi Gutman / CNBC

Billionaire investor Ray Dalio told a hedge fund conference on Tuesday that the Federal Reserve doesn't need to raise interest rates now.

A note sent to Bridgewater Associates' investors on the same day further explains why the firm thinks the Fed should hold off.

The note warns that raising rates during a deleveraging, or selling off of debt, could crush the economic recovery.

"If it were us, we would not take the risk the Fed appears to be moving toward," the note said. "Cyclical conditions point modestly but not strongly toward tightening, and the secular backdrop screams that the risks of tightening prematurely outweigh the risks of falling behind."

Bridgewater's Greg Jensen, Phil Salinger, and Alan Keegan wrote the note, a copy of which was obtained by Business Insider. Bridgewater is the world's biggest hedge fund firm, managing about $150 billion in assets.

Historical precedent

In the note, Bridgewater flagged several cases of tightenings during deleveragings: the UK in 1931, the US in 1937, the UK in the 1950s, Japan in 2000 and 2006, and Europe in 2011.

"In nearly every case, the tightening crushed the recovery, forcing the central bank to quickly reverse course and keep rates close to zero for many more years," the note said. 

In those cases, markets have tended to tank, recoveries fade, and inflation drop.

More specifically, the average rate hike during a deleveraging "caused, over the next two years, a 16% drawdown in equities, a 2% increase in economic slack and a 1% fall in inflation."

The note continued:

"Looking at each case of tightening in a deleveraging reinforces the picture: in general, the tightenings are short-lived and unsuccessful, with the central bank quickly reversing course and keeping rates at zero for many years. Even in the most successful example of tightening in a deleveraging, the UK in the 1950s, the BoE hiked rates only modestly, despite roughly 7% of nominal growth with 4% inflation, such that there was no tightening in real terms."

On the other hand, in cycles where the economy was not deleveraging, "economic activity continued to strengthen, inflation kept edging up and asset returns stayed strong, allowing the Fed to keep tightening."

Bridgewater said that, if it were the Fed, it would not raise rates faster than what is priced in. That's because what is priced in is at a much slower pace than what the Fed has recently projected.

The market has priced in a slower tightening phase than what the Federal Reserve projects, according to Bridgewater.Bridgewater document

"Normally, a mistake in monetary policy is not that big a deal because it can be reversed," the note said.

"The risk now is higher than normal because a tightening mistake is harder to reverse today when the ability to ease is more limited."

Russell Sherman, a spokesman for Bridgewater at external public-relations firm Prosek Partners, declined to comment. 

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My Ballot (Video)

My Ballot

2016 , HOME   » POLITICS  -  53 MINLEAVE A COMMENT

Money and politics seem to be unavoidable bedfellows in the modern age. Sadly, the obscene sums spent by political campaigns every election cycle do little to directly benefit the American public. The wealth divide in the country has only widened, and those with limited means are left with an even more limited voice. This stark reality is apparent in the millionaires who overwhelmingly occupy seats in the Congress and the House of Representatives. Who do they ultimately work for in the end? The penetrating new documentary My Ballot scrutinizes the American political system and those who profit most from it.

The film is a protest against those politicians who spend and earn absurd amounts of money while the poor and middle class citizens they were elected to represent suffer through abject living conditions, pay cuts, shuttered schools, limited access to healthcare, slashed social security benefits, and unaffordable housing costs. Wouldn't the money spent on election campaigns be better placed in funding a cure for these societal ills?

To be fair, the film makes it clear that the issue runs deeper than any one individual. Many industries enjoy a financial windfall come election season. Political and media insiders break down the numbers. Television advertising accounts for the majority of dollars spent, and its effectiveness is ultimately questionable at best. The system itself is broken, and stacked against the possibility of real change. If someone sets out to run for political office, they must be independently wealthy, or have unfettered access to others who are. Potential change makers who are true advocates for the other 99% simply cannot afford to provide these everyday citizens with a voice in today's political arena.

Is there a better way? Campaign finance reform has been on the table for many years, yet little has been done to act on it. As long as the dollars keep coming in, and the rich continue to get richer, there's little incentive to do so.

Admirably, My Ballot does not approach its subject from a stance of hysteria and outrage; its approach is more measured and precise. It delivers a clear message that should not be ignored.

Directed by: Mohammad Tayyeb

The Bank of Japan is worried about a stock market crash

• Wolf Richter, Wolf Street

• Aug. 27, 2016, 7:04 PM
• 9,024
 
• 4

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A man looks at an electronic board displaying a news photo of Bank of Japan (BOJ) Governor Haruhiko Kuroda in Tokyo May 29, 2013.REUTERS/Toru Hanai

No central bank of a developed country equals the Bank of Japan in trying to manipulate the stock market up by buying equities. The BOJ has done this for years. With breath-taking ineffectiveness.

So on July 28, the BOJ announced another stock market pump-up scheme: it would nearly double its annual purchases of equity ETFs from about ¥3.3 trillion to ¥6 trillion ($60 billion).

Hedge funds and other speculators expected for the BOJ to instantly throw its weight around in the stock market, and hopes were riding high that the Nikkei would surge, or at least rise in a visible manner. Alas, on Friday in Tokyo, the Nikkei dropped to 16,361, down a smidgen from where it had been on July 28.

The debacle was right in line with the BOJ’s prior stock-market pump-up schemes. While it managed with its negative interest rate policy to totally kill off all money market funds in Japan, with the last 11 shuttering earlier this year, and while it managed with its gigantic purchases of Japanese Government Bonds to completely freeze up the JGB market, the BOJ has failed to accomplish much of anything in the stock market. The Nikkei stock index is down 21% from its recent peak in June last year, and is down 57% from its all-time peak in 1989.

But nearly doubling the ETF purchases should have done something. So why did the highly anticipated pump-up-scheme rally flop?

Now an answer is seeping to the surface. It seems the BOJ is worried about a stock market crash, triggered by Fed tightening, and has decided to keep its power dry to be able to put a floor under plunging stocks later this year.

According to the Nikkei Asian Review, the BOJ purchased ETFs on only three days in August through Wednesday: August 3, August 4, and August 10, totaling ¥176 billion.

But its new rate of purchases of ¥6 trillion annually would mean ¥24 billion in ETF purchases per trading day. So 18 weekdays in August through Wednesday, minus one holiday (Mountain Day) should equate to ¥408 billion – which left the BOJ’s purchases short by ¥232 billion.

This pile of moolah has been added to its “dry powder.” Every day the BOJ is not buying ETFs, its pile of dry powder increases. The Nikkei Asian Review:

The BOJ does not make public the process by which it buys ETFs, for fear of unduly influencing the market. But an official offered a passing reference to “last October” by way of explanation for the conservative approach.

“Last October” means this: Last year, the BOJ had front-loaded much of its ETF spending during the stock-market swoon in the summer, when China was crashing, and Japan followed. Then there were just ¥500 billion, or two months’ worth of ETF purchases, left over for the final three months of the year. So in October, it bought ETFs on just one day, saving up what was left to combat any sell-offs at the end of the year.

Hedge funds watch this sort of thing closely to wring some advantage out of it. Central bank action is all that matters anymore in the markets – at least, that’s the meme:

But as 2015 drew to a close, market players nevertheless began to suspect that the bank was out of options. An extra ¥300-billion ETF purchase quota added at the BOJ’s December policy meeting was viewed merely as a tack-on measure and failed to keep share prices from entering a slide.

This year, too, speculation around US interest rate hikes makes a stock market slide near the end of the year a real possibility.

But with stocks going nowhere now, the BOJ has decided to not waste its powder at the moment, because it wouldn’t accomplish much anyway. Instead, it would keep its powder dry for when it was needed. The Nikkei:

The BOJ does not explicitly define its buying as a stock price control measure. But eschewing a regular buying schedule to tailor purchases to market movements speaks to a significant level of concern about staving off another slide.

These ETFs are a special central-bank concoction. In a new twist last December, the BOJ promised to buy ETFs based on companies that boost wages, employment, and capital spending. But those ETFs didn’t exist. They’d have to be created first so that the BOJ could buy them.

Major asset managers in Japan have been busy creating these ETFs. Daiwa Asset Management partnered with index provider MSCI to develop a special stock index for these anointed companies. Nomura Asset Management and other firms in the Nomura group also came up with an index. The first ETFs that track those indices started trading in May.

Everything was ready when the BOJ announced at the end of July that it would nearly double its purchases of these ETFs. With every day that the BOJ is not buying, its pile of dry powder is growing. It is likely that the BOJ, when it decided to ramp up its ETF purchases in July, already knew why, and it had nothing to do with inflation or any of the other pretexts of QE: it was to prepare for the moment when the Fed made its move despite expectations that it would not, and when, in response, the markets would unravel.

But it’s doubtful that this will work out. Practically nothing the BOJ has tried to accomplish in the Japanese stock market has worked out. While stocks might have reacted positively at first, they invariably ended up tanking.

Read the original article on Wolf Street. Copyright 2016. Follow Wolf Street on Twitter.

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RAY DALIO: The 75-year debt supercycle is coming to an end

• Ben Moshinsky
 

• Jan. 27, 2016, 2:35 AM
• 71,730
 
• 42

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Ray Dalio.Larry Busacca/Getty

When Ray Dalio talks, people tend to listen.

Dalio is one of the most successful hedge fund managers of all time, founder of the $82 billion (£57.1 billion) Bridgewater Pure Alpha fund.

He's worried that one of the fixed constants of economics — the ability of central banks to stimulate economic growth through lowering the cost of debt — is coming to an end.

In an op-ed article for the Financial Times published this week, Dalio said (emphasis ours):

We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about eight to 10 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years.

What I am contending is that there are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed "pushing on a string."

Dalio says risk premia — the return of risky assets such as bonds compared with cash — are at historically low levels.

This makes it harder for central banks to keep pushing up the prices of these assets with loose monetary policy, such as low interest rates and quantitative easing, because there is less incentive, or yield, to compensate investors for taking the risk on debt.

Here's Dalio again:

As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.

When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.

This debt fatigue could go some way to explaining why central banks are still locked into near-zero interest rates, seven years after the financial crisis that prompted their fall. 

But, worryingly, central banks would be powerless to stop the next financial crisis or recession with inflationary tactics in Dalio's scenario.

Dalio made the comments in the Financial Times in the week LCH Investments crowned him as the most successful hedge fund manager ever, dethroning George Soros.

Dalio's $82 billion (£57.1 billion) Bridgewater Pure Alpha fund generated $3.3 billion (£2.3 billion) in net gains for investors in 2015, according to the report. The fund, founded in 1975, has made $45 billion (£31.3 billion) in profit over its lifetime. Soros' Quantum Endowment Fund, which began in 1972, has made $42.8 billion (£29.8 billion).

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Expedia picks banks for Trivago float: sources

• Reuters

• 22h
• 164
 

The logo of global online travel brand Expedia is pictured at the International Tourism Trade Fair in Berlin Thomson Reuters

FRANKFURT (Reuters) - Online travel firm Expedia has picked advisors for the planned stock market listing of its Trivago travel search site, sources familiar with the matter said.

Expedia has tasked JP Morgan, Goldman Sachs and Morgan Stanley as global coordinators for the initial public offering (IPO) on the U.S.-based Nasdaq, which will likely take place this year or early 2017, the sources said.

Citi, Bank of America and Deutsche Bank are acting as bookrunners, the sources said.

The banks declined to comment or were not immediately available for comment. Expedia was not immediately available to comment.

Expedia Chief Executive Dara Khosrowshahi told investors in July that management and Trivago's founding team had agreed to an IPO to value Trivago as a stand-alone company.

It interviewed banks for potential roles in the IPO earlier this month.

The hotel search platform was founded in 2005 in Duesseldorf, where it remains headquartered, and is one of Germany's most successful start-ups of the past decade.

Expedia said in July that on a trailing 12-month basis Trivago had generated revenue of more than $660 million and that revenue had grown sixfold since it acquired Trivago in 2012.

(Reporting by Arno Schuetze; editing by David Clarke)

Read the original article on Reuters. Copyright 2016. Follow Reuters on Twitter.

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The iPhone 7 goes on sale today

• James Cook and Rob Price

• 8h
• 1,483

The iPhone 7 goes on sale around the world today, with Apple Stores opening early at 8am so that dedicated customers can get their hands on the device early. 

There was a small queue outside the Apple Store in Covent Garden in London:

Twitter/Rob Price

Apple  $114.91

AAPL

+/--0.47

%-0.40

Disclaimer

Here's what it looked like when the doors opened at 8am:

Twitter/Rob Price

Staff clapped as customers entered the store:

Twitter/Rob Price

It was reported on Thursday that Apple wouldn't have any iPhone 7 Plus (the larger phone) units on sale in stores in launch day because of high demand for the product. Sure enough, staff in London were only accepting pre-order collections for any iPhone 7 models at launch.

Thanks to its time zone, Australia is the first place in the world where the iPhone 7 goes on sale. Here's what the reaction was like when people found out that they wouldn't be able to simply walk into the store and buy an iPhone 7 Plus:

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Oracle whiffs on Q1 earnings

• Julie Bort
 
•   

• 19h
• 5,545
 

Oracle executive chairman and CTO Larry EllisonOracle

Oracle  $39.18

ORCL

+/--0.94

%-2.30

Disclaimer

Oracle just reported its Q1, 2017 earnings and the news isn't great.

It reported:

• Q1 EPS $0.55 vs estimates of $0.58, a miss.
• It also reported revenues of $8.6 billion vs expectations of $8.7 billion, also a miss.

Stock is just a tad down in after-hours trading.

The bigger news is how well Oracle is doing with its cloud sales. That's been the company's major focus. It has said it wants to hit $10 billion in sales before Salesforce does. That's a tall order. Salesforce is on track to do $8.3 billion in revenue at the end of this fiscal year. 

Meanwhile, Oracle reported cloud revenues up 79%. That's healthy growth, but doesn't put Oracle on track to hit $10 billion before Salesforce. The company says it expects to do $2 billion this year in software as a service and platform as a service cloud revenues. It also has a new cloud that competes with Amazon's Web Services, but its the smallest of Oracle's cloud businesses.

Here's the press release.

REDWOOD SHORES, Calif., Sept. 15, 2016 /PRNewswire/ -- Oracle Corporation (ORCL) (NYSE: ORCL) today announced fiscal 2017 Q1 results. Total Revenues were $8.6 billion, up 2% in U.S. dollars and up 3% in constant currency. Cloud plus On-Premise Software Revenues were $6.8 billion, up 5% in U.S. dollars and up 6% in constant currency. Cloud software as a service (SaaS) and platform as a service (PaaS) revenues were $798 million, up 77% in U.S.dollars and up 79% in constant currency. Total Cloud Revenues, including infrastructure as a service (IaaS), were $969 million, up 59% in U.S. dollars and up 61% in constant currency. Operating Income was $2.6 billion and Operating Margin was 31%. Non-GAAP Operating Income was $3.4 billion and non-GAAP Operating Margin was 39%. Net Income was $1.8 billion while non-GAAP Net Income was $2.3 billion. Earnings Per Share was up 10% to $0.43, while non-GAAP Earnings Per Share was up 4% to $0.55. GAAP and non-GAAP Earnings Per Share was negatively impacted by three factors: 1 cent because of a higher tax rate due to more cloud sales being in the U.S, half of one cent because of borrowing, and 1 cent due to strengthening of the U.S. dollar. 

Short-term deferred revenues were $9.5 billion, up 4% in U.S. dollars and up 5% in constant currency compared with a year ago. Operating cash flow on a trailing twelve-month basis was $13.7 billion.

"Our Cloud business plus our On-Premise Software business grew 7% in constant currency in the first quarter, on a non-GAAP basis," said Oracle CEO,Safra Catz.  "The overall top-line growth of our two strategic businesses was driven by non-GAAP SaaS and PaaS revenue growing 82% in constant currency, substantially outperforming our guidance. As our SaaS and PaaS business continues its rapid growth, we expect its gross margins to climb from 62% this quarter toward our 80% target."

"This year we are on track to sell more than $2 billion of SaaS and PaaS annually recurring revenue," said Oracle CEO, Mark Hurd. "We believe this will be the second year in a row that Oracle has sold more SaaS and PaaS than any cloud services provider.  In the first quarter alone, we added more than 750 new SaaS customers including 344 new SaaS Fusion ERP customers – that's more ERP customers than Workday has sold in the history of their company."

"Next week at Oracle OpenWorld, we will introduce the second generation of our Infrastructure as a Service," said Larry Ellison, Oracle Chairman and CTO. "Our Generation2 IaaS delivers twice the compute, twice the memory, four times the storage and ten times more I/O at a 20% lower price than Amazon Web Services. IaaS represents a huge new cloud opportunity for Oracle to layer on top of our rapidly growing SaaS and PaaS businesses."

The Board of Directors also declared a quarterly cash dividend of $0.15 per share of outstanding common stock. This dividend will be paid to stockholders of record as of the close of business on October 12, 2016, with a payment date of October 26, 2016.

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