Anchored VWAP by Brian Shannon CMT

Indicators

https://cmtassociation.org/wp-content/uploads/2017/09/0927-shannon.pdf

Notes

Volume Weighted Average Price can be useful for market participants of
all timeframes
VWAP is a quick & easy way to visualize who is in control, buyers or
sellers
Trading in the direction of VWAP will keep you on the right side of the
trend
VWAP “From the Event” helps us understand the emotional disposition of
participants

A rising VWAP indicates positive price action
• A declining VWAP indicates negative price action
• Rallies with a declining VWAP are treated as bounces which
are likely to fail
• Be more aware of the direction of the VWAP than whether it
closes above or below it for a session or two
• Like any support or resistance level, the more times they are
tested, the more likely they are to fail

Notes on The Myth of Capitalism by Jonathan Tepper

Uncategorized

Trade Idea:

Go long concentrated industries and go short unconcentrated industries.

00:07
if you take a variety of inputs into our leading indicator for wages it would
00:11
tell you that wages should be rising considerably the thing that was bugging
00:15
me though is that clearly our leading indicator for wages was wrong and I
00:18
didn’t know why the lack of vitality the lack of innovation and low productivity
00:24
all of these things The Economist’s are documenting coming from essentially
00:28
increasing industrial concentration
00:55
at very perception what we try to do is to help hedge funds family offices asset
01:01
managers essentially look ahead and what we’re trying to do is to develop leading
01:06
economic indicators leading liquidity indicators and tools that sort of tell
01:12
us where the economy is going whether it’s the US economy or the Chinese
01:15
economy but even more importantly where our credit spreads going where it’s the
01:20
yield curve where our stock prices you know these investors ultimately it’s not
01:24
that they don’t care about the economy but rather they actually care about sort
01:27
of you know where their investments are going and so a lot of the way that the
01:32
leading indicators are built is based on some historic relationships you know we
01:36
haven’t reinvented the wheel but there’s also an enormous amount of additional
01:41
research and work that we’ve done and the only reason that we care about this
01:45
is to try to find tradable investment ideas so something that might lead us to
01:51
conclude that we have a disagreement with the market and therefore a variant
01:56
perception and where you can find essentially a high risk reward short or
02:02
long and then sometimes you know if our tools confirm what the market thinks
02:06
then those tend to be more momentum trades but at least it’s good to have an
02:10
objective set of tools that tell us where things are going I was a
02:15
proprietary trader many years ago and what I wanted to do is to have tools
02:21
that would help me create a repeatable robust and scalable process and there’s
02:28
the assumption that you know someone has a crystal ball and that they might be
02:33
able to tell you the future and the approach that we’ve adopted it variant
02:37
perception is certainly there many people who have you know deep insights
02:41
but the the best way to try to create a repeatable process is effectively to
02:46
find tools that work across cycles if we’re trying to create these tools that
02:51
provide a lead on asset prices in the business cycle
02:58
one of the things that had been troubling me the most in the past few
03:03
years had been a particular leading indicator for wages in the United States
03:08
and so if you think about a variety of economic data some are coincident
03:16
meaning they tell you about today and if you used a driving analogy it’s like
03:20
looking out of you’re sort of you know side window and it tells you sort of you
03:24
know where you are and that’s like retail sales or industrial production
03:28
they tell you about today if the economy is doing well people are buying if the
03:32
commies didn’t well industrial production is grind then there are
03:36
things that I know obviously what we focus on are leading indicators that
03:38
tell us a bit about the future one of the things that is a lagging indicator
03:42
is inflation or wages so typically if you’re running a supermarket you have a
03:48
good month or two of sales you don’t start hiking your prices immediately you
03:51
wait to make sure that the demand is there that you know you can raise prices
03:55
so the key thing that I was looking at was wages and wages lag the economic
04:00
cycle considerably and so you know one because wage negotiations tend to happen
04:06
at the end of the year often you know when you go to talk to your employer and
04:09
like well how is my year do I get a bonus you know obviously it’s even more
04:12
exaggerated in the financial industry and the hedge fund industry where you
04:15
know how much your entire pay depends on your year-end bonus but throughout many
04:20
industries as well that are lower paid it’s an annual thing and so therefore
04:24
wages lag the economic cycle and over the past couple years everyone’s been
04:28
saying well wages are very low don’t worry about it
04:32
you know eventually they’re going to pick up because they like the economic
04:35
cycle considerably and it’s been sort of like waiting for godot where the ink you
04:39
know that the labor market has gotten tighter so if you’re looking at initial
04:42
unemployment claims in the United States basically they’re lower than they were
04:46
going back to 1973 and at the same time if you look at it as a percentage of the
04:51
total workforce it’s the lowest percentage ever so your chances being
04:54
fired in the United States right now we’re practically insignificant now that
04:58
would imply that there’s this tremendously tight labor market and
05:01
therefore the balance of power should be shifting towards workers and
05:05
historically if you take a variety of inputs into our leading indicator for
05:09
wages it would tell you that wages should be rising considerably some of
05:12
the things we look at our surveys like the NFIB survey which is the National
05:18
Federation of Independent businesses and you know they ask them they say do you
05:21
expect to raise wages you know anytime soon and most of them said that they did
05:28
also is hard to find workers most them say it’s hard to find workers those
05:32
things tend to lead the wages historically going back decades yet at
05:38
the same time you know I kept on looking at these charts and wages weren’t going
05:42
up you know even when our leading indicator was going up and it’s worked
05:44
almost perfectly for four decades and and if you plot it against most of these
05:48
inputs that I’m telling you it’s also worth perfectly so I don’t mind being
05:53
wrong I think that when you’re wrong off and that’s where you can actually learn
05:56
quite a bit if you can analyze sort of why you’re wrong and you know where you
06:01
can you can fix things or what new insights or understanding you might be
06:04
able to have the thing that was bugging me though is that clearly our leading
06:08
indicator for wages was wrong and I didn’t know why and so one of the things
06:12
that I wanted to do is to go away and do loads of research that variant we focus
06:16
on cyclical stories you know of the economy we don’t spend an enormous
06:21
amount of time on unstructured big structural breaks but we do pay
06:25
attention to them and so one way instead of doing a lot of work on the structure
06:29
of the US economy and corporations and it was became quite evident after
06:33
reading hundreds of academic articles and doing lots of our own independent
06:39
work that one of the biggest changes that’s happened in the US economy
06:43
directly affects wages
06:48
the answer to the puzzle that we had is you know about why our wage is not
06:54
rising is essentially that the US economy is becoming increasingly
06:57
concentrated and by concentrated I’m talking about industrial concentration
07:01
so if you’re looking at an industry you know you have a perfectly competitive
07:04
industry let’s say we have 100 companies each one with one percent market share
07:08
right and that’s like a perfectly competitive industry no one company can
07:11
dominate the industry no one company can raise prices you know essentially that
07:15
in do you go back to economic textbooks that’s what’s referred to as perfect
07:19
competition everyone is essentially a price taker the other extreme is
07:23
obviously one company which has 100 percent market share that’s a sort of
07:26
classic textbook case monopoly now these don’t tend to exist in in real life for
07:31
a variety of reasons and where they do they tend to be regulated so like you
07:34
know a water utility will provide water to a hundred percent of the customers in
07:39
a given City and so there are as it turns out of course there are many
07:44
industries in the United States and around the world that are almost
07:48
monopolies or believe it or not that actually appear to be oligopolistic
07:53
where you take the whole United States and you carve it up geographically and
07:57
you defined for players or five players but you find out actually that each one
08:01
has a local monopoly and so this matter is an enormous amount because if you
08:05
look over time the proportion of workers that are in unions has been declining
08:10
and as at the same time we’ve seen an increase in concentration among
08:14
companies so if you are a worker in a hospital for example a nurse and you
08:19
live in a town that has only one hospital you have a diffuse set of
08:24
nurses for example in doctors negotiating against one hospital
08:27
provider likewise there many other industries where you know if you are a
08:31
telecoms worker and you’re working in a a town that has one cable system you are
08:37
negotiating for wages against one employer and this is also true for
08:41
example if you’re looking at Airlines many airports in the United States or
08:48
what are known as fortress hubs so if you take Charlotte North Carolina it’s
08:52
close to ninety percent I believe it’s um American Airlines right and then you
08:55
look in Atlanta which has Delta right and so you start going around the
08:58
country and while it appears that there is this a very
09:01
market what actually happens is that you have these sort of local monopolies and
09:05
this to a large extent explains why wages have been weak there’s quite a lot
09:12
of research that’s been done and you know that looks at online job posting
09:18
and then pairs that to industrial concentration by city and county and
09:23
what’s very clear is that if you live in a town and this generally rural because
09:28
obviously if you’re in a big city you have more choices in general for who
09:30
you’re going to work for but it’s so the rural economy generally has an in that
09:35
just rural but sort of smaller cities relative to big cities have a lot less
09:39
choices and therefore tend to have much lower wages due to the fact that they’re
09:42
generally facing off against one big employer and this is very true
09:46
certainly in towns that you know have one major poultry employer whatever it
09:52
might be this clearly has enormous implications one for for wages in the
10:01
1970s there were quite a few reasons for the inflation spiral one of them
10:06
happened to be the wage price spirals inflation is going up then workers
10:10
demanded wage increases if we’re just increases were going up then companies
10:14
started passing them on as costs and so you ended up with this wage price spiral
10:18
so there’s sort of a macro element to the story in terms of why we know what
10:24
we’re saying so what we’re saying on the on the price level and the other is the
10:27
micro story for long short investors what what are the implications in terms
10:31
of do you want to be going long or short certain industries or certain companies
10:36
what’s fascinating is that if you’re looking at the sort of top-down question
10:42
right which is where should inflation be and where should bond yields be they’re
10:47
they’re two ways that you can look at it an investor in New York I was a client
10:52
put it this way to me he said they’re straight to two types of sort of
10:57
monopolies or concentrated industries one is the sort of Giants kicking
11:03
midgets in the head and the other is Titans facing off against Titans so one
11:08
has very clear implications for prices I mean either going up so this is
11:12
generally the Giants kicking midget in the head if you are the local cable
11:15
company and you know you’re facing off against all these diffuse consumers you
11:20
can afford to hike prices on the other hand what often happens is you’ll find
11:24
industries where like for example Walmart faces off against for you know
11:30
agricultural you know meat or you know soft commodities producers and you end
11:36
up with sort of Titans facing Titans and this is something that happens often and
11:40
so what what happens there is not the pricing necessary go up but rather that
11:43
the supplier gets squeezed tremendously and it’s unsurprising that bankruptcies
11:48
among farmers over the last twenty thirty years have completely skyrocketed
11:51
and that’s partly because while it appears competitive in the sense that
11:54
you have so you know three hundred million consumers and then you have sort
11:58
of two million farmers and you’d say well that’s extremely diffuse this is
12:02
like the definition of perfect competition it’s a very sort of an
12:05
hourglass structure where there are four firms that meet in the middle whether
12:08
it’s archers Dan’l middle and Bunge Cargill you know and so you have the
12:14
hourglass figure whether it’s on the softs whether it’s on the meat side you
12:18
know whether it’s produced in the field and so increasingly more and more of
12:22
these industries are concentrated and it really does depend on what kind of
12:27
industry you are whether going to see price increases or whether you’re going
12:30
to see squeeze on suppliers and squeeze on workers but invariably the worker
12:34
gets squeezed and that was really sort of the origin of the question what’s
12:38
interesting is that often the companies that are monopolies don’t necessarily
12:42
appear to be monopolies so for example if you take many industries that appear
12:47
to be oligopolies that would be you know four five six players generally it’s for
12:53
when you get to up to six players it tends to be more competitive but for
12:57
players what happens is often as I mentioned before you have these local
13:01
monopolies develop so for example take something like the funeral industry the
13:05
phenol industry in the United States about 30 percent of it is in the hands
13:08
of service corporation most people obviously are in great distress when a
13:13
family member dies you know it’s a horrific event and so they don’t tend to
13:17
be shoppers you know they’re not going to go around and comparison shop for
13:20
funeral services for a loved one and so because of that if you can be the
13:24
funeral home it’s located in a place that it doesn’t have much
13:28
competition you know you’re going to get an enormous amount of pricing power
13:32
unsurprisingly service corporation has prices are about
13:35
thirty percent higher than independent funeral homes and so these are very
13:39
clear examples where markets may appear to be essentially diffuse and perfectly
13:44
competitive but in fact have a lot of local monopolies Warren Buffett is the
13:48
ultimate monopoly man you know he’s certainly a genius he’s very very smart
13:53
when greatest investors of all time but if you start looking sort of over all
13:57
his investments from the outset not till later now clearly Berkshire Hathaway
14:01
where the name comes from was a terrible investment you know it was a New England
14:05
mill but once he started moving outside of that and learned some of his first
14:09
lessons he was essentially buying local newspapers and he would often run like
14:14
there would be like a weekly newspaper and maybe a weekend edition and he would
14:16
drive out the other other newspaper from from business and then he would have a
14:21
local monopoly and four years before the internet that was basically a license to
14:25
print money likewise one of his first investments
14:28
was you know in the ABC television company uses capital cities and you know
14:33
it was very similar you know you paid for the asset you know the cost appeared
14:37
high but it was just depreciation over time and you know these were essentially
14:42
local monopolies and often you know local duopoly and oligopolies he’s
14:47
almost always bought industries when they’ve gotten down to about four
14:50
players so he bought Burlington Northern when the railroads got down to four
14:54
players you know so when the staggers act and deregulated the US railroad
14:59
industry you know there were about 31 I believe railroads and then over time you
15:05
had said of all the railroads started converging and it got down it was like
15:08
you know March Madness it got down to the Final Four and sure enough that’s
15:11
from Buffett bought one interestingly same thing happened with the airlines
15:16
the airlines were allowed to merged they got down to four players and Warren
15:20
Buffett not only bought he didn’t buy one he bought all four of them right so
15:24
he wasn’t making a bet on a company he was making a bet on an industry in a way
15:28
that when he had said that capitalism would have been better off if the Wright
15:32
brothers had been shot down you know and so it gives you a sense of sort of how
15:36
Buffett thanks you know the oligopoly is a monopoly is very powerful
15:40
when industry by industry identifying the stocks that had monopolistic power
15:45
it took quite a long time because there’s it’s not immediately obvious how
15:50
to do it you know you can for example look at higher returns on capital there
15:53
many companies that might exhibit higher returns on capital but might it might be
15:57
brief or temporary and then some companies that do have pricing power and
16:02
I do have monopoly power often essentially don’t appear so from the
16:08
outset but when you qualitatively start looking at it you can then see where the
16:12
the pricing power of is
16:18
there’s a paper that I highly recommend reading it’s easy to find online it’s
16:24
everywhere it’s by Gustavo go to you and GRU LLO and he is a professor at Rice
16:32
University and he wrote a paper called our industries becoming more
16:36
concentrated and what’s very interesting is that he noted that if he went long
16:42
the concentrated industries and short the unconcentrated industries you would
16:46
achieve a 9% out performance per year so that has very clear implications for
16:52
equity long-short managers we’ve identified almost all the companies that
16:56
would fit the concentrated industry we’ve not yet written a short report on
17:00
the unconcentrated industries but that’s probably a second step and what’s
17:05
interesting is then you can put them into a a portfolio now obviously you
17:09
could throw them all in this it’s not an optimal way to wait to do it necessarily
17:13
because that clearly what you would prefer to do is to buy cheaper ones or
17:16
buy better ones and that is where some of these sort of secret sauce comes in
17:21
but the implication is pretty obvious from bullion’s work and from our work
17:26
that this that concentrated industries can produce higher higher performance
17:32
and in there clearly is something about moats you know we’re Buffett talks about
17:39
it some of the moats are our business related so you have for example you know
17:45
Buffett’s talked about low-cost providers and Walmart and he once said
17:49
it was mistake that he did not buy Walmart early on but he has brought
17:52
other low-cost providers you have the network effects those often can
17:56
essentially help create conditions that might encourage monopolies or duopoly so
18:03
network effects for example are very evident if you’re looking at sort of
18:08
PayPal you know a payment systems it seems true with Visa or MasterCard you
18:14
know before they were floated obviously the banks owned them collectively and
18:18
the reason for that was that it made sense to have a common resource you know
18:22
where you wanted to have a network for payment and you know I don’t think that
18:26
their manager is sitting around saying I want to buy monopolies and that’s their
18:29
invest and philosophy but rather obviously it’s
18:32
a very key part of it which is that you’d like to find companies that have
18:35
less competition so I don’t think anyone would necessarily go out and say you
18:39
know give them monopolies are usually viewed as being bad people probably
18:42
wouldn’t admit that but certainly from an investment standpoint they’re quite a
18:45
lot of funds out there that that do that
18:52
inevitably there is a pendulum back and forth and you can see this in history
18:57
that I think this will change the question of course is one how quickly
19:01
does change happen and you know how does the political mood shift if you look at
19:07
American history you have to go back to essentially the the Gilded Age the time
19:13
of the so-called robber barons I mean the term itself robber baron comes from
19:17
medieval Europe where you had barons who had roads going through their you know
19:21
lands and they would charge people for going on the roads without actually
19:24
providing any improved roads and in a way the funny thing is the the entire
19:29
basis of monopoly investing if you will for a long short fund is that what
19:33
you’re trying to essentially own a toll road and so the it’s funny that the term
19:38
robber baron comes from the sort of toll road collecting idea for for long short
19:41
investors but if you go back to the robber barons that in 1890 a Sherman Act
19:45
it took quite some time once the Act even been passed for there
19:49
to be effective prosecutions and it wasn’t really even until 21 years later
19:53
that Standard Oil was broken off in 1911 and so the question is now one you know
20:00
how did we get where we are and how it’s going to change so for four decades
20:04
particularly after the late 1930s antitrust was vigor very vigorously
20:09
enforced and there were you know most industries were not very concentrated
20:13
what you had was Roosevelt had appointed a head of the Antitrust Division very
20:22
aggressive the 40s and 50s presidents continued this and it was only really in
20:26
the late 1960s and 70s Robert Bork in the Chicago School started attacking
20:32
essentially the idea of antitrust arguing that efficiency is better and
20:37
consolidating companies getting bigger companies can create more consumer
20:40
welfare and okay and then the the Sherman Antitrust Act and the
20:44
Clayton Act the only real reason they existed was because they might raise
20:47
prices on people and therefore if you could have a monopolist or you could
20:51
have a do a list that might be more efficient and give you lower prices then
20:55
who cares about any of the other considerations and of course the
20:58
consumer welfare doctrine is nowhere in the original acts it’s basically a sort
21:02
of a revolution and in thought and but everyone bought into that and you know
21:07
Bork were a highly influential book called neon tetras paradox and so when
21:12
Reagan came into power the antitrust in a way had possibly gone too far in the
21:16
70s where you know to Los Angeles supermarkets couldn’t merge with each
21:20
other because they might increase their market share by a percent or two which
21:23
was you know probably taking it too far so as a pendulum
21:26
things had gone from no antitrust you know in the 1880s to essentially quite a
21:33
lot by the 1930s that stated for a while and then it went essentially from the
21:36
early 1980s it’s now moved in the exact opposite direction where once Reagan
21:40
appointed people who bought into vorks idea you know any merger could go
21:43
through and since the 1980s what we’ve had essentially is every single decade
21:48
has had a merger wave and which is extraordinary if you think about the
21:51
first merger wave was a strangely after the Sherman Antitrust Act was passed
21:57
because it wasn’t really enforced so from 1918 92 1904 you had a huge merger
22:03
wave then the next one was the 1920s you know everyone stock market
22:06
rebuilding companies or button people were buying each other and and then you
22:10
had essentially the and these were all horizontal mergers meaning the you know
22:14
competitor a buck competitor be in the same industry the 1960s because they
22:18
weren’t actually enforcing the antitrust laws
22:20
you had a merger wave of creating conglomerates so if you couldn’t buy
22:25
your direct competitor because of antitrust enforcement you’d have crazy
22:29
things like Gulf Western where you’d have an oil company buying a Hollywood
22:32
studio you know and you just had the most ridiculous conglomerates put
22:36
together you know wanting to merge but not being able to by their direct
22:40
competitors so these all got broken up in the 1980s and 1990s in these were
22:45
like ITT for example and others and so when threatened came in in 1980 they
22:51
changed the merger guidelines and then every single decade has had a merger
22:54
wave where competitors have slowly been you’ve been there
22:57
field down till now you’re down to a very very few so as you can see from
23:02
history it takes a very long time to move the pendulum in either direction
23:06
and I think that unfortunately it’s going to take some time it’s going to
23:10
take I think it’s starting to happen a bit on the Democratic side I suspect
23:14
that Republicans as well you can see this with some conservatives and
23:19
capitalists you know bizarrely in the Chicago School which is historically
23:25
been the most Pro merger free market for stroud they’re recognizing that there
23:31
are very bad consequences that come from high industrial concentration and it’s
23:35
not just low worker wages is actually less economic dynamism so there’s quite
23:40
a lot of research that ties fewer startups in all areas you know including
23:45
technology they’re just fewer startups and so the the the right or the sort of
23:49
pro-capitalist side is also recognizing that it’s just not good to have two or
23:53
three companies or even one completely dominate an industry you end up with
23:57
less innovation and you end up with less flexibility less creation of new
24:02
companies so I suspect that the left and the right will end up abandoning
24:06
together eventually for different reasons left motivated by higher wages
24:10
the right motivated by more economic dynamism and you’ll end up with merger
24:15
guidelines being changed perhaps new acts some of this has to do with I think
24:20
the digital monopolies if you’re looking at Facebook and Google and others you
24:25
can see that people are starting to wake up the fact that one player owns all
24:29
your digital information and so all this that I’ve been talking about essentially
24:33
is starting to play out and the national consciousness and I think that that’s
24:37
going to start leading to a change we’ve written these reports for variant
24:41
clients I’ve started writing a book and you can go to the website it’s a myth of
24:47
capitalism calm I’ll be doing further blog posts on all the various issues
24:51
that I’m outlining here not so much from the investment investing angle more from
24:56
the social angle from the historical angle looking at these very very big
24:59
issues and so I do think that things are going to change but I think that this
25:02
process is a long one and I think that you’re going to start seeing it play out
25:05
essentially in you know the department justice FTC but also obviously
25:11
in the election cycle that this is not really purely a u.s. phenomenon I think
25:21
that perhaps it’s most exaggerated in the u.s. you know because it’s a very
25:25
it’s one of the largest markets in the world by GDP but you see this in many
25:29
other countries and the the strange thing is often you see it even more in
25:33
smaller countries so if you think that for example the Australian banking
25:36
situation that’s an oligopoly right they earn extraordinarily high returns
25:40
because there’s almost no competition likewise if you start you know if you’re
25:43
in the UK you can see that there are very few players in many industries in
25:47
some industries these are obvious monopolies that are regulated you know
25:51
whether it’s telecoms in some of the European countries and so to that extent
25:56
they’re they’re reined in and controlled but in many other countries you have
26:01
oligopolies and Wobblies that essentially are not reigned in not
26:04
controlled and you see a very similar dynamic that you see in in the United
26:09
States and so the problems in the United States which is the lack of vitality the
26:14
lack of innovation and low productivity all of these things The Economist’s are
26:18
documenting coming from essentially increasing industrial concentration or
26:23
evident in other countries and you know this this is very true if you’re looking
26:27
at Mexico if you’re looking at Russia and unfortunately it is highly tied to
26:32
income inequality which is obviously getting to be a much bigger issue in our
26:35
time and I think this in part explains why you’re seeing a rise of third-party
26:40
candidates sort of outside of the two major parties in most countries people
26:45
are simply watching you know every day if you pay money to these monopolies and
26:50
oligopolies money’s going out of your pocket into their pocket and this is
26:53
effectively a form of Taxation but it’s happening and people recognize this feel
26:58
that somehow things are wrong and then mysteriously are voting for third
27:02
parties you know and obviously the political system itself is a form of
27:05
duopoly in most countries you know so they’re there in a way we revolt against
27:08
this political and economic sort of oligopoly and duopoly and I think that
27:12
it does answer quite a lot of those questions
27:16
I think the technology clearly can help break up some monopolies but the paradox
27:26
is that if you’re looking at technology often it actually entrenches monopolies
27:32
and oligopolies and you know part of that is that before
27:34
you know if you wanted to take over many many towns you know you had to
27:38
physically locate a store there or a service point in the digital world you
27:43
can achieve scale much much faster and and therefore locking people in to your
27:48
program or to your software and you know your your web platform means that you
27:53
can generally achieve network effects and economies of scale much faster and I
27:58
think that’s one reason why a lot of the monopolies are concentrated in the tech
28:03
sector and you know they’re clearly not just the tech sector but very definitely
28:07
I think scale and technology rather than break down barriers actually helps erect
28:13
them by allowing for faster scaling under Network effects
28:23
what’s very interesting is if you’re looking at the asset management business
28:27
the investing business which everyone who subscribes to real visions in you
28:33
know whether whether you’re providing the the product or whether you are an
28:36
investor and consuming the product you know investing in a variety of funds or
28:42
even stocks and what’s fascinating is you’ve seen this increase in
28:46
concentration in other industries where fewer and fewer players exist and so for
28:50
example like if you’re looking at u.s. listed stocks they declined by 50% since
28:54
1997 so you’re getting all this concentration on the industrial side but
28:58
in the asset management side you’re seeing a similar industrial
29:01
concentration some of it for example in the hedge fund side comes from
29:04
increasing regulation and scale so like you know the top 100 funds control
29:08
almost all the assets in the hedge fund world you know people it’s very hard to
29:13
start smaller funds but interestingly on the passive versus active side you know
29:18
the very big passive players are getting more and more of the market share and in
29:24
theory this is great because everyone’s paying fewer fees I mean it’s just bibs
29:28
the problem with this of course is that you end up looking at an industry and
29:32
before I was saying Buffett’s buying all the airlines well it turns out that all
29:35
the passive guys are buying all the airlines too and they’re buying every
29:38
other industry right and they have no interest in promoting one company to try
29:42
to gain market share to compete they would far prefer to see no competition
29:46
and have no interest in sitting on the boards or voting their shares and
29:49
achieving a better outcome for any particular company that’s just not the
29:52
way they operate right so you have this increasing concentration on the
29:57
investment side then with further effects that encourage further
30:01
concentration on the operating side of companies so in under the laws you know
30:09
JP Morgan used to buy up shares and you know trying to control industries
30:13
whether it’s buying all the railroads that competed with each other and so
30:16
that was outlawed now obviously there are some exemptions for passive
30:20
investing where one fund can own in every railroad and it’s not a problem
30:24
but quite clearly it’s the same effect you know where you have essentially a
30:28
few large players whether it’s Blackrock and Vanguard and others that are
30:31
essentially now the dominant owners in the US economy
30:35
with no interest in encouraging any competition between their holdings you
30:39
know and I think that it is sort of going back to the days of of JP Morgan
30:47
there’s an enormous amount of historical detail which i think is fascinating you
30:52
know it’s so we have like a report on the investing side at fair and
30:57
perception if you have any interest in the history the ideology and all the
31:00
rest that goes with the the pendulum back and forth and where things might be
31:04
going on the myth of capitalism which will be coming out probably later this
31:07
year and so there’s there’s quite a lot there and they’re just true truly
31:12
unexpected paradoxes so when the US came into Europe after World War two you had
31:16
essentially the Potsdam agreement they wanted to dakara lies and decentralize
31:20
the u.s. effectively exported its antitrust ideas to Europe and wanted to
31:25
make sure that was a critical part of European reconstruction and it’s funny
31:28
that the u.s. now forgotten about antitrust completely and the EU is
31:32
actually the one making all the noise right so it’s funny how sort of history
31:35
often goes in swings and roundabouts but it’s absolutely fascinating area you
31:40
know which is one I think fun to read about and two obviously has enormous
31:43
investment implications on the macro side
32:36
you

the truth on foreign exchange average daily turnover

Uncategorized

Common knowledge says that the FX market is the most liquid market in the world. But how much transactions and liquidity is there really?

The Bank of International Settlements (BIS) publishes a Foreign Exchange Triennial Survey every 3 years. The last one was in 2016 and here are the numbers.

The survey divides the numbers between five instruments namely:

  1. Spot transactions $1.6T
  2. Outright forwards $700B
  3. Foreign exchange swaps $2.4T
  4. Currency swaps $82B
  5. Options $254B

“Net-net” basis, April 1995-2016 daily averages, in billions of US dollars

  1. USD $4.4T, 88%
  2. EUR $1.6T, 31%
  3. JPY $1.1T, 22%
  4. GBP $649B, 13%
  5. AUD $348B, 7%
  6. CAD $260B, 5%
  7. CHF $243B, 5%
  8. CNY $202B, 4%
  9. SEK $112B, 2%
  10. MXN $97B, 2%

“Net-gross” basis, April 1995-2016 daily averages, in billions of US dollars

These numbers tell the story of the world’s financial centers.
  1. UK $2.4T
  2. US $1.3T
  3. Singapore $517B
  4. Hong Kong $437B
  5. Japan $399B

Extrapolating from these numbers, we get the following Average Daily Turnover value for the currency majors:

  1. EURUSD $436B
  2. USDJPY $309B
  3. GBPUSD $183B
  4. EURJPY $109B
  5. AUDUSD $98B
  6. EURGBP $64B
  7. GBPJPY $46B
  8. AUDCAD $5.6B

I extrapolated these estimates combining the Total Spot Transactions, Total Currency Turnover, then multiplied by the cross-pair.

Highlighted are what I think are the least correlated pairs. I haven’t done enough research on it so if you find a good resource for comparing correlation, please comment below.