Graham Osborn

There's not enough negativity yet. This thread is an example. Exactly. Alright, I'll bite. Agreed on cycles and this one has already been longer than most. Economically speaking, I don't expect the U.S. to fall off a cliff, but I do expect U.S. equities to fall off a cliff. The last cycle for U.S. equity prices wasn't really that deep considering the end-point was the long-term average and NOT below it. Further, it wasn't anywhere close to where it would need to be to put longer term valuation metrics anywhere near where prior secular bull markets have started. Because that excess capacity is indicative of a demand problem and the very real potential for a deflationary cycle - not good for equities either. Agreed on your last point, but I do expect a recession. The majority of the growth in U.S. GDP since the crisis has been in shale states - you remove that growth which has been crippled and the paltry GDP figures look even worse before you even consider a contraction in those states. Further, U.S. consumers aren't spending that windfall as is evident from the increase in the savings rate. Deleveraging continues and the growth rate going forward will be lower than the low figures we were already seeing. You mean like all that excess capacity you mentioned above? No deleveraging took place - it was simply shifted onto public balance sheets instead of private balance sheets. Sure, that lowers the interest burden, but it doesn't actually result in a deleveraging and the policy for most everyone has been to increase this burden over past several years. Corporations have also re-levered in the buyback craze that defined the last 18-24 months. Yes, because of the overcapacity and demand problem mentioned above. Still deflationary. U.S. equity valuations are still basically near the most extreme levels they've seen in the history of the U.S. equity markets. There are sub-sectors that appear to be getting more attractive, but that is because the profits are threatened in this type of environment so they may not be real deals yet. Any long-term valuation metric still showing that we have much, much further to go to the downside before the excess in the financial markets is wiped out. Further, while I understand the logic and reasoning behind comparing equity multiples to interest rates, the truth is that they're really not that correlated. When did equities hit their lowest multiple - in the midst of the great depression and what were interest rates at then? What about in the depths of the 2008/2009 GFC? What about in any recession. While the levels should be comparable, history suggests that it's more the direction in interest rates/inflation that direct the equity market and not the absolute level of interest rates. Use this knowledge to your advantage. None of what impacts the "real economy" matters because equity markets are actually largely uncorrelated from the real economy in the short-to-medium term. Average equity returns in years with negative GDP growth rates are actually higher than average returns in years with positive growth rates. Go figure. The one thing that matters the most and trumps all other considerations has continued to be the value you buy the equities at - if equities are good value, then buy them. If they're not, then sell them. You can basically ignore what the "real economy" is doing in those scenarios. Equities are, and have been, expensive and a small decline that takes us back to mid-2014 levels hasn't really changed that much. +1. Exactly. Nowhere near the bottom of this cycle. What he said :) Some of us have been waiting a long time for the technical vindication in some of the more resilient sectors. Always remember: internationally there is more money tied up in oil-and-energy assets than you can possibly imagine. Saudi Aramco is/ was conceivably worth as much as 10T, and that's just one NOC. The governments/ companies/ banks/ families that own these assets are large and take time to really start gasping, but when they do we all bleed together since you sell last that which is most dear. The severity of the bear market in commodities gives a good indicator of what is to come. The good news is at some point the money flowing out of financial assets around the world will have to go somewhere (apart from the central banks from whence it came), and physical assets will find their feet again (but probably not until valuations are substantially lower - perhaps 60-80%). The Fed is spent, and the world's central banks which might launch QE3 are too fragmented and divisive to take any action that would sustain valuations in the next 12-24 months, if ever. While I'm not sure, this year is shaping up to look a lot like 1974. I'm not sure which part is sadder, seeing a bunch of brokers on the streets because their firms downsized or seeing a bunch of old people working at Walmart because their 401ks and IRAs (pitched as a surrogate for pension plans) are inadequate. What I do know is Ray Dalio is probably feeling right at home right now, and Bridgewater along with a handful of other macro funds may be in for some excellent years. Good luck, Graham

And yes it's essentially a variant of market making.

What I read somewhere is they focus on front running large institutional orders. If that is true it would be a largely market independent strategy assuming they don't maintain a large inventory that would be shock susceptible (they've been around long enough it's unlikely they're doing stupid things like carry trades/ short vega). Since fundamental analysis is really just a more sophisticated version of the same thing I don't think the strategy would be self-defeating assuming the algos were continuously updated. The lunch is not free but that doesn't mean there is no lunch.