Where is the US Consumer?


Where is the US Consumer?

Tick tock...is it all over?

First off, we have changed the name of our newsletter to better reflect the full scope of our commentary to UNHEDGED.  Our objective is to provide broader coverage reflecting not only market conditions, but some of the underlying trends, especially in FinTech, that we feel will be of interest to you.  .

Before delving into our commentary, one book recommendation for the summer: The Summit by Ed Conway.  Well worth the read and will create strong sense of deja vu...does history repeat itself: yes.

That said, we continue to remain concerned about the overall condition of markets.  

This week's NFP headline numbers will be the talk of the town, yet the underlying wage data will continue to confound the Fed. Quite simply, there is no wage growth and this belies a bigger problem.

The central bank liquidity trade remains in place.  Pundits are underplaying the significance of the central bank balance sheet pare backs over the next 7+ years.  What does this mean?  A higher likelihood of nothing occurring again.  Remember, if we were to be back on track the DJIA would need to be at 32,000+ to have pension systems back at break-even.

A lower VIX breeds complacency, and that sets up markets poorly for a systemic shock.  

"There are no catalysts remaining, as the Trump slump is real," said one portfolio manager to us this week.  That bears consideration: none of Trump's campaign efforts have happened despite a Republican controlled Congress.  

"There are no market participants...just the Fed, the BOJ, and the ECB," said another prop desk head. "Why do you think Bitcoin has such volatility to it...central banks cannot buy it!"

Here in APAC we are witnessing an interesting phenomenon.  Whist the giants like Ant Financial continue to make progress in FinTech, the ability for the startup community to get past a lukewarm A-round remains extraordinarily difficult. "There is a lack of true IP and scale into a fragmented market," said one VC on background. "The Asian dragons need only watch the innovation in the USA and replicate it to an APAC offering at massive scale leveraging off their existing platform user base."

It has been fascinating to me that there is virtually no investment banking activity, either fundraising or M&A, of any size/substance in the region. What we are seeing are small acqui-hires.  It is all strangely reminiscent to me of the 2001 dot-com companies with more cash on their balance sheets than their market capitalization.  Boards will start reviewing the viability of an exit and monetizing their initial investment(s).

I struggle with defining a continued rationale for a market bid. Instead, I hear of unsophisticated market participants stretching for yield/return and too many conversations about Bitcoin...

Here were my recent comments on CNBC.  In short, be very very careful.

Our long term view has changed slightly in regards to equities:

  1. Long equities, with a focus on Europe and Asia
  2. Short duration (the infamous fixed income pivot)
  3. A weak dollar


The FinTech Tortoise


The FinTech Tortoise

Prior to my 2014 arrival in Singapore, one could not go anywhere in the financial trade press without reading about robo-advisor “disintermediation” and/or “disruption.”

In the last three years, despite an avalanche of publicity, and massive VC funding, we have yet to see a robo-advisor put an incumbent out of business. Instead, the incumbents are beginning to adopt the very changes that were supposed to put them out of business.

The DBS rollout of their "DBS iWealth" app is a prime example. To quote Ms.Tan Su Shan, DBS Group head of Consumer Banking and Wealth Management: "Robinhood (a free stock trading app based in USA) had the best, fastest user experience for equity trading... I told my guys about it, and they delivered on the speed and agility of the user experience, of what the best that Silicon Valley can offer."

The same FinTech paradigm applies to what we are witnessing in wealth management vis-a-vis the robo-advisors. Robo-advisors committed the same mistake that most FinTech entrepreneurs made: mistaking the lack of an incumbent response as an inability of the incumbents to compete.

What had occurred was that incumbents were paralyzed by the extraordinary regulatory regime imposed on them following the Global Financial Crisis. Simply put, they could not respond, hence part of the regulatory arbitrage that existed for the entrepreneurs. Therefore, the “FinTech revolution.”

Today, the incumbents have woken up, because now they can compete. In this new, competitive, and realistic environment, a different paradigm is at work.

Robo-advisor entrepreneurs need to be aware of the following:

•   Decide now: client acquisition or client retention? This decision alone will define your business. If you are focused on acquisition you will begin a slow, costly, laborious process and you might create some new IP. That IP might draw the attention of a VC, but that is very doubtful now. Conversely, if you are focused on client retention then you are a consulting firm, not a start-up.

•   Client acquisition costs will kill you. In fact, they can kill you immediately. Any market new comer who has not prepared a complete client acquisition analysis will lose..

•   The robo-advisor IP is not unique, nor is it IP. This is a hard truth many have not accepted. Unlike the math necessary for driverless cars, the math for asset allocation, tax planning, rebalancing, etc. is simply not that complex. 

•   Only product and/or service platforms will survive. The robo-advisor needs to be a “Blackrock” or a “Schwab.” The robo-advisor needs to be either a business dedicated to creating products (i.e. ETFs) or providing wealth management services. Brand recognition and massive platform scale are the factors of survival

Using the DBS/Robinhood example stated earlier, there are strategic variables that robo-advisor need to absolutely consider. In APAC, there are obvious constraints, for example:

•   Can retail accounts buy ETFs in the local market? If not, why introduce a robo-advisor at all? HNW investors in Asia tend to want either separately managed accounts (SMAs) or trading accounts.

•   Are there already dominant market participants with sizable market share? If so, what acquisition tools do you have that provide you with a competitive advantage? If the answer is “none,” then you are a software consulting firm.

•   Is your design/user experience patentable? If not, it will be copied. Look no further than the brilliant design of Robinhood and how quickly it has been copied, and improved upon, by other trading platforms in Asia like DBS.

There will be a significant weeding out process of smaller robo-advisor participants as the B2C models fail due to exceptionally higher customer acquisition costs. Conversely, the surviving B2B robo-advisors must build scalable bespoke solutions for the incumbents; thereby becoming consulting/service providers and not unique IP only.

Who wins? The very firms that were originally meant to be dis-intermediated and disrupted. As with the fable, the tortoise will win this FinTech race.


Frank is a pioneer and recognized industry expert in Asia for the distribution of investment products to Private Bank and Investment Banks. Over the last 25 years, Frank has managed multi-billion dollar portfolios and developed expertise in Smart Beta, separately managed accounts, portfolio replication, and factor based investing.

He is a frequent co-anchor and co-host of The RunDown on CNBC with Akiko Fujita. Currently, Frank is a Senior Advisor with Synpulse Management Consulting, a leading global financial services consulting firm.


The Fed Hike and Asteroid 2005 YU55


The Fed Hike and Asteroid 2005 YU55

As investors, behaviorally we have a tendency to avoid the facts. Like whether or not an asteroid will hit the earth on November 8th. Specifically: Asteroid 2005 YU55.

Instead we focus on Fed policy.

As investors, behaviorally, we have a tendency to avoid the facts. Like whether or not this election cycle will be normal. It will not.

Instead we focus on Fed policy.

Will the Fed raise rates in December? “Yes if…”is the standard pundit’s reply.

Ignoring Asteroid 2005 YU55 and the election, we can say, “yes if”:

  • We agree that the employment data was strong (it was mediocre)

  • We agree that the market’s reaction will be positive/indifferent (we have now had several days of strong selling)

  • We agree that Asian markets will react positively (they most likely will not)

  • We agree that China will not devalue (now might be a good time for them to do so)


Ask yourself, would the Fed knowingly bring an economic “crisis” to a new Administration before it is sworn in?

Now add on to the above set of variables the almost certain chaos that will ensue from this election. Begin imagining:

  • Voter riots/militias

  • A disputed election

  • Immediate indictments (regardless of who wins)

  • We may be really electing the Vice Presidents, not the Presidential candidates


And that’s just to start.

What about the Asteroid 2005 YU55? It just missed us in 2011, but it was a near miss. That is one less thing for you to worry about.

As investors, focus on the next immediate worry: the election.


The Irrational Investor


The Irrational Investor


Giffen Goods, Tulips and Bears Oh My!

By Douglas Borthwick & Frank T. Troise

We were both fortunate to go to some of the more prestigious undergraduate and graduate universities in the world.  We both had a focus in Economics and Finance and somehow managed to graduate.

Underlying that education were some basic assumptions:

·         The risk free rate

·         The role of a fiduciary

·         Free markets

Yet, as we look at today’s market, and the factors underlying it, we have come to realize that viewing the markets through the lens of a rational investor today, is in fact, the least rational thing to do.  This market is being driven by central bank policies that make a mockery of valuation, pricing, and exit strategies.

A few decades ago we held a belief that equity markets in developed market economies rose and fell in accordance with company profits and earnings.  The stock market was looked on as a separate entity from the economy. It could rise when the economy fell and vice versa. Today the stock market is seen as a proxy for economic growth. A higher equity market is highlighted as a sign of economic strength.

This conclusion harkens back to some of the basics of what we were taught regarding valuation and pricing.  An equity’s price is, or should be, a function of its underlying cash flows (earnings/dividends), and some “goodwill” thrown in for added measure.  Valuation was discounted using the risk free rate, which is/was a government interest rate determined by the free market.

This couldn’t be further from the truth today. Today’s higher equity prices come as a direct result of corporate buy backs and extremely low interest rates that are not set by the market, but rather forced lower by Central Banks as they nationalize their relative Sovereign, Mortgage and Corporate Fixed Income markets through quantitative easing.

These lowered interest rates serve two purposes.  They increase the Net Present Value of equities as the discount rate is adjusted lower, and they encourage companies with listed equities to issue bonds at low rates in order to buy their own stock back in the market.

In the old days, bonds rose when stocks fell.  Bonds rose as Central Banks cut rates to stimulate the economy.  The slowing economy would have been evident in a lower stock market.  In times of expansion, portfolios would be overweight equities relative to fixed income. In times of contraction, equities would be underweight relative to fixed income. 

These days it is best to be overweight both equities and bonds… With the crowded popular notion that Central Banks will not step away from quantitative easing because the consequence would be economic contraction. It sounds like the Central Bank mandate has shifted from employment and inflation to keeping equities bid… Otherwise known as the FED Put.

This creates a unique fiduciary dilemma.  Using some very basic math, one could easily rationalize that the DJIA today should be somewhere between 24,000 to 28,000 (depending on what equity return assumption you use in 2007/2008 and then project that forward).  As the world’s pensioners calculated their financial plan in the midst of the Great Recession, their savings were slowly and methodically whittled away.  What is their option today?  They have no choice but to follow the central banks, and double down on risk.

How does Wall Street reconcile to that?  It doesn’t and it fights strongly to have the fiduciary standard removed from its responsibility.  This simple irony is at the core of the pension dilemma facing the world today as individuals and sovereigns realize their financial shortfall(s).

Rather than pontificate on the merits of what we learned at school, we have decided to change our perspective to that of the irrational investor.  What would we do if we had no education, no valuation expertise, no fiduciary responsibility to anyone, and simply succumbed to the tulip mania we are all seeing today?

We are confident in our assumption that current markets show similarities to the Tulip heights of March of 1637, will be met with doubt by many in the investing community.  However we believe we are merely stating what most investment professionals already acknowledge behind closed doors.

We believe that what we are witnessing across global markets is the manifestation of what Scottish economist Sir Robert Giffen aptly described in the late 1800’s as “Giffen Goods”.  The definition of a Giffen good is here:

A Giffen good is a good for which demand increases as the price increases, and falls when the price decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. A Giffen good is typically an inferior product that does not have easily available substitutes, as a result of which the income effect dominates the substitution effect.


Could we categorize Sovereign Debt as Giffen goods?

There are nowadays so few AAA rated Sovereign debt instruments that their lack of substitutes, in combination with quantitative easing has resulted in them being well overpriced relative to where they would be in a regular free market.

What should we do to become irrational?  To be a successful irrational investor is a process that involves several steps:

Step #1: Forget prudent man/fiduciary protocol.  To become a successful irrational investor, one must renege on any common-sense you initially portrayed to clients.  That won’t work today.  Abdicate any responsibility to your clients and, if possible, have them indemnify you for any of your future decisions.  Of note the recent lobbying efforts by Wall Street to Treasury/DOL on any fiduciary definition/responsibility.

Step #2Hit the pain point: Baby Boomers.  Their retirement expectations are bankrupt and are only now beginning to see the dilemma they are in.  Once they have given you a free legal pass to their portfolios, you can double down.  Why?  They are already so far behind the retirement curve they are desperate.  If they ask for traditional MPT/efficient market logic, then pass on them as client accounts.  Mathematically you cannot win that battle.

Step #3: Forgot about valuation/pricing.  This is all about momentum.  There is no true “risk free rate” today underpinning any valuation/pricing analysis.  Throw that out.  It is all central bank driven and governments are buying everything.  What’s another way to look at valuation?  The central banks are nationalizing the debt and equity markets.  What does this mean for passive investing?  It is the cheapest way for you to rationally implement an irrational investment strategy. 

Step #4: Forget about true labor growth.  While it may look like there are jobs, the underlying numbers are BAD.  No real productivity growth since WWII and wage growth that barely keeps up with inflation.  Remember, technology is deflationary.  Uber has driverless cars; do you really think you are safe?

Step #5: Go Russia/China. Why? Everyone else is building walls and going isolationist/nationalist.  Who benefits the most?  Russia and China.  Stable governments execute trade deals, and the rest of the “modern” world has forgotten this.  Look no further than the oil in Africa deals both Russia and China have negotiated.

Step #6: Go infrastructure.  The USA has so far decided to forego negative rates.  Instead, they appear ready to issue more debt to build infrastructure.  Whether to build a wall, new roads or new bridges, significant infrastructure spend is coming to the US.

Finally, while we wrote this post as a tongue-in-cheek exercise, we found ourselves nervously laughing.  Why?  We both have young children and our kids are beginning to understand the world’s problems in their social studies classes.  But who cares?  Our children will commit us to a Florida retirement community and pay for our health care as we watch the rising waters from global warming approach our beachfront condominiums.


About the Authors

Doug Borthwick is a Managing Director and the Head of Foreign Exchange at Chapledaine FX, a Tullet Prebon Company.  Mr. Borthwick has served as the Managing Director of Chapdelaine FX, a division of Tullett Prebon since its inception in October, 2012. His business serves institutional investors and global financial institutions, providing electronic and voice enabled trade execution in foreign exchange; combined with market moving commentary.

Douglas was formerly a Managing Director and the Head of Research and Trading at Faros Trading LLC. He spent 10 years with Morgan Stanley in New York and London managing the Asian NDF and the G20 deliverable forwards desks. Douglas also ran Proprietary Trading with Merrill Lynch and ran the Latin American FX trading desk at Standard Chartered Bank. Douglas was a member of Institutional Investor ranked teams in both US and Latin American Economics at Lehman Brothers.

Douglas is regularly interviewed on Bloomberg, CNBC and the WSJ, with his opinions often sought by institutional investors.  Douglas holds a BS in Economics from Carnegie Mellon University and an MBA from Yale's School of Management.


Frank T. Troise is a Managing Director and the Head of Digital Distribution and Communications (Asia) for Leonteq Securities (Singapore) Pte. Ltd. (member of the Leonteq AG group SIX: LEON).  He is responsible for digital distribution and communications across Asia for Leonteq’s three main businesses in Asia: Structured Solutions, Platform Partners, and Pension Solutions. 



The information presented in this article/post is provided “as-is” with no warranties, and confers no rights.  The information contained, and any opinions or views expressed, in this article/post are not intended to be, and do not constitute, investment research, recommendation or advice on any securities, investment products and/or instrument or to participate in any particular investment strategy.  This article/post has not been reviewed by, and does not reflect or represent the opinions or views of, Chapledaine FX, Tullet Prebon, or Leonteq.  Unless expressly stated, it is or represents solely the opinions or views of the author(s).


A FinTech Parable


A FinTech Parable

My daughter (14) asked me the other day: “Dad, what is Fintech?”

I struggled for a second as I pondered the best way to encapsulate the Fintech phenomenon, and then it hit me:

Forrest Gump.

“Fintech is like a box of chocolates sweetheart.  Each new company is a different flavor.  Payments are milk chocolate, robo-advice is dark chocolate, trading is white chocolate, and so on.  People in Fintech spend a LOT of time debating whose chocolate is better, but they are missing the bigger point.”

“What’s that?” she replied

“The price of sugar.  At the end of the day it all boils down to that”

“Who controls the sugar?”

“The banks.  That’s why they have to be there”

“But, you are missing one thing Dad,” she noted

“What’s that kiddo?”

“Who owns the box?”

“That’s easy.  That’s China”

“Sounds to me that’s who your friends in Fintech need to make friends with,” and with that she was done.