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;
3. (THIS IS KEY FOR THE REALM OF GLOBAL MACRO FINANCIAL WORLD) “IN MANY INSTANCES,WE WILL NEED TO GIVE UP OUR QUEST TO DISCOVER THE CAUSE OF THINGS,IN RETURN FOR ACCEPTING CORRELATIONS.”
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 ??