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Category: We live in Financial TImes

The world’s smallest oil storage trade

The world’s smallest oil storage trade

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All the background is in the story. Ms Kaminska will be writing a follow-up on the blockchain aspect of this trade.

Go here to read the full thing:

“Don’t buy a barrel of oil,” the broker said. “It’ll kill you.”

A fortuitous meeting between a gas trader and his broker at a bar in downtown New York was not going the way I had hoped. After revealing a long-held plan to try to buy a barrel of crude, I was now receiving a disappointingly stern lecture on the dangers of hydrogen sulfides. The wine tasted vaguely sulfuric, too.

Oil may be king of the commodities, but its physical form is tough to come by for a retail investor. Mom and pop can buy gold and silver. They can gather aluminum cans, grow soybeans, and strip copper wiring, if they choose, but oil remains elusive—and for very good reason. Oil, as I would soon discover, is practically useless in its unrefined form. It is also highly toxic, very difficult to store, and smells bad.

If gold is the equivalent of a pet rock, then I can confidently say that oil is the equivalent of playing host to a herd of feral cats; it demands constant vigilance and maintenance. If gathered in sufficient quantities, it will probably try to kill you, or at least severely harm your health …
One last (FT) look at the corporate bond market

One last (FT) look at the corporate bond market

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This is my last big story for the Financial Times, as I’m heading off to a brand new gig at Bloomberg. The piece seeks to bring together a lot of what I’ve written about bond market liquidity, the rampant search for yield and the growing power of big buyside investors into a single narrative. Do read the full thing if you can.

Dan McCrum at FT Alphaville also has an excellent summary.

I’ve left some key excerpts below:

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New column – The unbearable tightness of benchmarks

New column – The unbearable tightness of benchmarks

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Benchmarks.

Their importance in financial markets cannot be overstated. So here’s a look at how the makeup of one particular benchmark bond index is making life difficult for big investors and in some cases encouraging them to use derivatives to introduce artificial duration to their portfolios.

(Writing about duration is always a huge hassle, but it too is very important in financial markets, so I try)

Here’s an excerpt:

If there were a recipe for creating the Barclays US Aggregate Index — one of the most important benchmark bond indices in the world — it might go something like this: take some US Treasuries, add a smattering of corporate bonds and securitised debt, then fold in a large chunk of mortgage-backed securities. Mix it all together et voilà — you are ready to serve a heaping portion of fixed income exposure to hungry investors around the world.

Fund managers are like chefs, trying to follow this basic recipe and improve on the outcome where possible — baking the basic bond fund cake, but adding their own twist to beat the benchmark. (After all, if you are simply replicating the benchmark’s returns, you had better be chargingvery low fees.)

However, fund managers seeking to outperform the Barclays “Agg” face a unique problem in the market in the shape of a severe lack of ingredients, and there are lurking concerns as to just what exactly fund manager cooks are reaching for in the kitchen.

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Bond index mix creates ingredient shortage

Creating liquidity from illiquid stuff

Creating liquidity from illiquid stuff

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A quick take on a long-running theme in markets, especially fixed-income.

Investors are reaching for a toolkit of exchange traded funds, mutual funds and credit derivatives to make up for a dearth of liquidity in parts of the financial system, according to market participants and research from Barclays.

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Many have turned to ETFs, mutual funds and certain derivatives to make up for a lack of liquidity. ETFs use a network of banks and trading firms to give investors cheap and instant exposure to a wide variety of assets.

The trend is particularly pronounced in the fixed income market, where new rules aimed at increasing bank capital and reducing the risk of a run in the “repo market” — Ground Zero for the financial crisis — are said to have most hurt ease of trading.

Risks squeezed out of banks pop up elsewhere

 

Big data, finance and inequality

Big data, finance and inequality

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… Financial companies have the option of using data-guzzling technologies that make the observation of shopping habits look downright primitive. A plethora of information gathered from social media, digital data brokers and online trails can be used to mathematically determine the creditworthiness of individuals, or to market products specifically targeted to them.

The degree to which such algorithms are utilised by mainstream banks and credit card companies is unclear, as are their inputs, calculations and the resulting scores. While many types of data-driven algorithms have been criticised for opacity and intrusiveness, the use of digital scorecards in finance raises additional issues of fairness. Using such information to make predictions about borrowers can, critics say, become self-fulfilling, hardening the lines between the wealthy and poor by denying credit to those who are already associated with not having access to it.

“You can get in a death spiral simply by making one wrong move, when algorithms amplify a bad data point and cause cascading effects,” says Frank Pasquale, a professor of law at University of Maryland and author of a book on algorithms called The Black Box Society.

I’ve said before that I am incredibly proud of this Financial Times piece exploring the impact of big data on finance and equality. Researching this kind of topic is challenging because details on the use of big data remain murky – even more so when it comes to banks and financial companies. For that reason, much of the discussion remains theoretical, although it’s hard not to believe that this is the direction we are heading when you read that Google – a company notorious for using big data to personalise ads and search engine results in the name of advertising dollars- is now trialling money transfers. The British bank Barclays has reportedly also begun selling aggregated customer data to third-party companies.

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New column – All the young traders who’ve never experienced an interest rate hike

New column – All the young traders who’ve never experienced an interest rate hike

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It’s been ages since the Federal Reserve last raised interest rates. Who remembers how that works? (Certainly not me, I was a baby reporter covering airlines back then) Here are some excerpts:

At least at the junior end, Wall Street is now peppered with traders and investors who possess no first-hand professional experience of an interest rate rise. Even for finance veterans, the habit of measuring one’s profit and loss on a day-to-day basis leads to notoriously goldfish-like memory spans and it has been six years since rates were last above the zero bound.

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Years of ultra-low interest rates have become integrated into the very fabric of markets. Asset managers live and die by their interest rate bets. Hundreds of billions of dollars have poured into riskier asset classes as investors seek out higher returns with borrowed money, or leverage, used to amplify profits.

Markets display total recoil on Fed interest rate rises

New column – Asset managers, repo and derivatives. Oh my!

New column – Asset managers, repo and derivatives. Oh my!

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Chances are, when you think of the repo market you think of banks and broker-dealers and the craziness that went down in 2008. This column, based on an amazing research paper by Zoltan Pozsar, suggests that’s a mistake.

(Bonus: It calls out Pimco on window-dressing its balance sheet)

Here’s an excerpt:

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What’s in a name? How peer-to-peer became marketplace lending

What’s in a name? How peer-to-peer became marketplace lending

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I’ve written repeatedly about how peer-to-peer lending – the cuddly industry that began with the aim of disintermediating big banks by directly connecting individual borrowers with lenders – has been co-opted by the very industry it once set out to disrupt. As the industry grew and became more entwined with existing financial infrastructure, P2P lenders made a conscious decision to move away from the outdated “peer-to-peer” name.

Ever wonder how that happened? Here’s the story.

The future of the US peer-to-peer lending industry was decided in a luxurious San Francisco hotel on a spring evening last year.

On the sidelines of an alternative-lending conference, the heads of some of the biggest companies in the “P2P” space met privately to discuss rebranding the sector.

Eyeing the success of Uber and Airbnb — tech groups that have created digital marketplaces for car rides and rooms — they agreed to drop the peer-to-peer name in favour of “marketplace lending”.

In investor materials released over the following months by Lending Club, the biggest US P2P lender, as it prepared for its $5bn initial public offering, the phrase “peer-to-peer” did not appear once.

Democratising finance: P2P lenders rebrand and evolve

New column – Markets’ misplaced faith in central banks

New column – Markets’ misplaced faith in central banks

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For years the omnipotent, all-powerful central bank has been a dominant influence on markets.

Can investors blind believe in central banking last forever? Does the power of monetary policy know no bounds?

I have my doubts.

Our Draghi, who art in Frankfurt, hallowed be thy name.

Mario Draghi’s €1.1tn of shock and awe — €60bn a month of bond buying until September 2016 — might yet turn out to be insufficient to kickstart a moribund eurozone, but it is possible that it has achieved something more important for the animal spirits of markets: a revival in the cult of central banks.

For the last six years many on Wall Street have knelt at the altar of central banks, singing the praises of bulk asset purchases and taking for granted the omnipotence of the men and women who run them.

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As Ben Hunt, chief risk officer at asset manager Salient Partners, puts it: “We pray for extraordinary monetary policy accommodation as a sign of our central bankers’ love, not because we think the policy will do much of anything to solve our real-world economic problems, but because their favour gives us confidence to stay in the market.” Sometimes ‘cult’ is too soft a word.

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Crises of faith are rarely pleasant experiences and the unwinding of the central bank cult — when it comes — looks set to be no different.

Markets’ misplaced faith in central banks