Shibor - Canary in the Coal Mine?

I'm surprised that the recent Shibor spike hasn't (Shibor is the Chinese version of LIBOR) sparked more concern. After staying at less than 4% for the last year, the 3-month rate has surged to above 5%. The overnight rate has spiked even further to 13%. To put things in perspective, 2011's top five banks by profits included four chinese banks. What is happening?

One major explanation being posited is that this is the just the next step in the Chinese government's attempt reduce credit expansion/leverage in the system. However, what if this is a different signal - that of a funding crisis? Such a crisis was prelude to the US-led recession of 2008.

On face, China's metrics are fine (gdp growth of over 7%, large fx reserves, small deficit), the soft landing scenario from rapid growth. However, how much of this growth was economical and indeed sustainable? The overall china argument has been debated ad nauseum centering on non-economical commercial real estate backed by a levered shadow banking system, but could this funding crisis be catalyst for the bears? After all, this is not just restricting lending, it is choking China' banking system.

More specifically the strongest point that is related to this is China's own "Ponzi Scheme" (central bank governor's works) fundamentals in its wealth management products and in others' opinions (see: Chanos) more generally the China's shadow banking system. These products essentially allow yet another layer of borrowing short to lend long. However, what happens when funding disappears (a la Lehman 2008) given the vast proliferation of these products?

As a result, what if the funding pop is not by choice? A large flood of liquidity would push the rmb lower, usually okay, but given Fed tapering could push the rmb lower than even what the government/economy wants? Furthermore, fear of this could unfortunately be self-fulfilling because a push to buy usd could lead to more conversion into usd (or non-rmb currencies) ahead of a banking/currency crisis.

Pricing Power of the TI-83 Plus

For many of us in United States, the TI-83 Plus is the quintessential (pre-college) calculator. It was required for many classes (e.g. AP Calculus) and the $100+ price tag 10+ years ago did not do wonders for the wallet. Still, the multi-line interface, matrix operation capabilities and games such as snake made it a versatile instrument pre-iphone. 

Yet, as an electronic system in a highly competitive field, why is the same TI-83 Plus still almost as pricey as a decade ago?? Keep in mind that with the same money, one can buy a 4th gen ipod touch with a Color screen, gigabytes of ram and streaming video+wifi and that the same smartphones a year from now are probably worth far less (try selling the older motorola razr's now). This extends beyond phones to vcrs (remember those?), stereos etc.

John Herrman from Buzzfeed gives us a reasonable explanation - captive customers:

This is a list of CollegeBoard-approved calculators for the AP exams (college-level high school courses) which includes the TI-83 Plus. The TI-83 Plus has remained on this list for at least a decade, requiring each new batch of customers/students to either buy from the year above (which may or may not happen depending on the older students' needs) or buy a new set of the same product.

This is only the beginning, however - teachers get used to these approved calculators (specifically) TI-83 Plus and learn to teach with them. Study guides, manuals etc. for calculus come directly with TI-83 Plus-specific instructions, further strengthening the stickiness of the the product. Given that the underlying topics (high-school/early college mathematics) do not change much, the product does not need to improve much. 

As a result, for these certain products (especially the TI-83 Plus) there is an institutionally-mandated and sticky demand for these.


Unfortunately, it is harder to translate this into an investment because calculators as a whole is only 3% of revenues for the producer (page 6), Texas Instruments (TXN). Calculators revenues are lumped into an "other" segment that includes other products - but it is interesting to note that this other segment has the highest operating margin of the company:

When an Investment Goes Awry, Politely Ignore?

Paulson and Co. made an interesting decision last week:

"At the request of clients and consultants, we will be reporting the performance of our Gold Funds separately to investors in those funds and interested parties," Paulson wrote to clients. The firm's gold investments "have received a disproportionate amount of attention over recent months"—as gold prices plummeted—"and have detracted attention from the performance and positive developments of our other funds."

They key instigation is that despite being only 2% of the firms assets, the Gold Fund's -47% performance (not a typo) is getting all the attention. This would make sense, except that most of his fund is gold-denominated (e.g. gold-share classes). 


This means that even the funds that are doing well, such as the credit funds (up 16.7% ytd) are often overwhelmed by the gold losses. Roughly 85% of Paulson's aum is in gold share classes so that the best fund's 16.7% is usually realized as -30.3 = 16.7%-47%. In other words, gold does matter greatly to the Paulson & Co. as a whole.

I do believe this is a unique situation and opportunity to learn (and possibly profit) as it is a purely marketing and psychological move meant to soothe investors' and consultants' fears. Like a many trader when a large position moves against him/her, the natural instinct is to ignore and hope it comes back. This phenomenon is well-known and is inherent to us as humans.

(source: http://sophlylaughing.blogspot.com/2012/03/home-cognitive-dissonance-kit.html)

In this case, it is Paulson & Co.'s unwillingness to truly consider a fundamental misunderstanding of gold. Indeed, the below statement shows the fallpack to general statements:

“Federal governments have been printing money at an unprecedented rate creating demand for gold as an alternative currency for individual and institutional savers and central banks alike,” John Reade, a partner and gold strategist at Paulson & Co., said yesterday in an e-mailed statement. “While gold can be volatile in the short term and is going through one of its periodic adjustments, we believe the long-term trend of increasing demand for gold in lieu of paper is intact.”

As the the largest holder of GLD at 6.7%, it is not stretch to say that the first represents a large part of the gold bull arguments and crowd. What happens if the crowd realizes it can't take the pain?

Disclosure: I am short GDX.

Actively-Managed ETFs to Short Managers?

As one of the fastest growing segments of the already fast-growing ETF market, actively-managed ETFs could open up a whole new set of strategies - both betting on and against managers. ETFs- exchange-traded-funds- are already known as a more transparent, tax-efficient and liquid way to buy indices. They have these advantages as opposed to the commissions, spreads of trading which are now required to buy  (full comparison). Increasingly, the costs are being outweighed by the benefits.

In my opinion, however, the key attribute that has led to ETFs' success is its liquidity/transparency. Like a shiny new machine in the casino, ETFs (such as DXJ) promised even faster trades and up to date pricing that make (or break) entire companies. With this in mind, will the next generation of active etfs allow for investors/speculators to hedge their managers?


The prototypical active etf is PIMCO's Total Return etf (BOND), which has done well:

(Source: http://seekingalpha.com/article/578491-pimco-total-return-etf-off-to-a-fast-start)

Notice that the etf (top-most line) is not just being compared to its benchmark (which it handily beat), but also PIMCO's own Total Return Fund. In a very real sense, Bill Gross has beaten himself. Similar to the cash-futures basis, could there be an etf-mutual fund basis?

Now let's take this a few steps further:

1. Execution-hedging: If xyz investor has a large holding in a mutual fund that he wants to liquidate intraday (wanting, perhaps erroneously, to catch the top), he can short the etf until the close.
2. Manager-hedging: xyz investor likes abc strategy and has invested in a top tier manager. There is another manager doing the same abc strategy but the investor believes this other manager will do significantly worse than the top tier. He/she can short the etf while still invested in the top tier manager
3. "Basis" trading: If one believes that a particular manager's etf version is going to do worse or is mispriced relative to the mutual fund version, he/she can short the etf and buy the mutual fund. This is admittedly incomplete, as one cannot "short" a mutual fund easily.

This is all conjecture- but what if it were possible to hedge the LTCM/Harbinger/Paulson-like exposure to your portfolio?