Notes From Underground: Global Macro In a World of Rising Big Data

The new buzz word from the realm of the “talking heads” is BIG DATA. When we mention FACEBOOK and the other social media companies, the discussion leads to big data. The issue of Snowden and the NSA is the U.S. Government’s collection of vast amounts of personal data on U.S. citizens in the name of national security and preventing possible acts of terror. Ultimately, the discussion is about the ability of computers to search through ginormous amounts of data and find patterns that will reveal threatening behavior. In the May/June issue of Foreign Affairs, Kenneth Cukier and Viktor Mayer-Schoenberger wrote an article, “The Rise of Big Data.” It is an essay adapted from a book they wrote. Three key points are outlined:

1.Collect a lot of data rather than rely on small samples;

2. Not be concerned about how pristine the data may be and through algorithms sort through vast amounts of data regardless how messy it may be because quantity is more important than quality;


This has been the rise of so much pain for many QUALITY analysts over the last half decade. Many trades get decimated as algos wreak havoc in the search of correlations. The ultimate example of this–RISK ON, RISK OFF. Fundamentals don’t matter in a market searching for correlative relationships. In support of the BIG DATA crowd the authors note that while “knowing ” causes for market moves is desirable “… causes are often extremely hard to figure out, and many times, when we think we have identified them, it is nothing more than a self-congratulatory illusion.” The work of Cukiera and Mayer-Schoenberger reflect the battlefield of investing. Fundamental traders must always use technicals to set loss parameters and as algos destroy value through the constant search for correlation. We must be prepared to allow the markets to bring prices to an absurd level.

Think in terms of developed markets and ask the question: ALL ARE EMERGING MARKETS THE SAME INVESTMENT? In a correlative world they of course are and the ability to INDEX them makes it more so. In actuality there may be vast differences from economic policy to interest rates. As the boxer Mike Tyson was wont to say: Everybody has a plan until they get punched in the face. The crunching of BIG DATA has delivered a punch to fundamental-based traders so we will always be searching for adjustments. It seems that the markets will reward reactive trades rather than proactive, but this is a work in progress.

***There’s an article from the August 6 Wall Street Journal, “Private Equity Payout Debt Surges.” It seems that the large private equity firms are taking a page from the pre-debt crisis playbook and loading up acquired assets with “cheap” debt so as to fund payouts to themselves at a record pace. Buyout deals are typically done with cash and debt to entice public firms to go private and hope the transaction results in a better managed firm. In times of low interest rates the newly privatized firm is loaded with DEBT so that the acquirers can get their cash out and leave others holding larger debts that look easily fundable. This was the huge increase in LBO (leveraged buyout obligations) in 2006 and 2007, prior to the debt crisis, and helped create problems for the debt holders.

***Quick Hitter: All last week the wires were full of reports about Brazilian Finance Minister Guido Mantega taking serious issue with the IMF‘s Greek bailout. The Brazilian Government was questioning the double standard that the IMF applies to issues of debt relief when it comes to European nations versus the much harsher terms pressed upon the developing world. In the Financial Times today there was a story, “Brazil Eyes Push For EU Trade Agreement.” The Brazilian foreign minister revealed that Brazil was seeking a separate free trade deal with the EU and not including its fellow members of the Latin American trade bloc, Mercosur. Brazil is in a hurry “… because it has been reclassified as an upper-middle income country, meaning it LOSES EU TRADE PREFERENCES NEXT YEAR” (emphasis mine). I am left to ponder if the recent posturing of Brazil toward the IMF and its role in the Greek bailout is a mere gambit to gain negotiating leverage over Brazil. Europe can buy Brazilian complacency on Europe by using the funds of the IMF. It’s something for both parties at minimal cost. When it comes to global finance and politics nothing is as it seems. Any question as to why 2+2=5 ??


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8 Responses to “Notes From Underground: Global Macro In a World of Rising Big Data”

  1. Dustin L. Says:

    Yra- Portugal seems to be flashing warning signs that all is not well in Europe. Can Frau Merkel succeed in keeping everything quiet and under wraps until after the September election? It appears that is getting harder especially as talks of Greece needing another bailout in 2014 start to gather momentum helped by a Bundebank “confidential” report. Portugual’s curve is starting to flatten and a push below 0.645 on the 2-10 would be very dangerous it appears. Portugal’s 2 yr. spread to Bunds also is resuming it’s widening where 6.74 appears to be a level to watch. You said to keep our eyes on Portugal, and you appear to have been right on the mark. As all is intended to seem calm across Europe Portgual is stirring the pot. The Dow and S&P are looking tired and a trade in which many have become complacent in the TINA trade. While I do not view this as a major top in US equities it is setting up for an interesting September and fourth quarter across all the markets. I hope you have and continue to enjoy your summer as the Fall is shaping up to be extra busy. It is good to have the blog back rolling!

    Alles Gute. Achten Sie darauf. (The use of German is intentional)

  2. Dustin L. Says:

    The German was suppose to say “All the best. Take care.” Freudian slip I guess. Google translate failed me.

  3. yra harris Says:

    Dustin—I am not seeing the flattening in the Portugese curve that you are referring to—it was flattening until about 3 weeks ago but has received an aggressive steepening since

  4. Dustin L. Says:

    Yra- I was talking to the broad trend and the recent sideways move since the end of July which is showing what could be the end of the rally you are referring to. I am not saying it is certain by any means and I should have said quietly stirring the pot and starting to show signs of flattening again but, I am starting to sense cracks appearing in the armour of Europe’s recent strength. And the loss of momentum, which would have been a better way to word it, in Portugal’s steepening, is just more confirmation of this. As we speak it has gotten slightly steeper and the 2 yr. spread has narrowed so who knows and much further confirmation is needed before one takes any kind of action. Portugal just seems to have diverged some from the rest of Europe. Sorry for my lack of clarity.

  5. yra Says:

    Dustin–ok.It is interesting how everybody on the chatter box is pushing the European stock market as cheap relative to the U.S. market and it is time to buy Europe—but when you listen to the rationale it is all about correlating to the U.S. which is on record highs so it must be Europe’s time and that means it is undervalued—again,not causation but mere correlation.

  6. Dustin L. Says:

    Yra-The focus on correlation is interesting. If these systems don’t account for complex adaptive dynamics they could get in real trouble. If they take short term correlations for granted they will get caught in the every changing market cycle as even I know correlations in markets don’t stay the same forever and relationships to macro data are always changing as well. That’s not even considering co-evolution. If they focus on long-term correlations they will have to have extreme patience which is unlikely in money management circles where it is all about annual returns. My two cents.

  7. yra Says:

    Dustin–good points and as we treat global macro as a very dynamic endeavor–this will be a work in progress

  8. Mario Says:

    Great adn true here Yra. Trade on what is…..Everyone lets put together compilation of the best of the UNDERGROUND. Make this a valuable source for your fellows. Contact me or paste within blog. everyone

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