Let Us Say It All Together: Nobody Knows Anything
Here is the opening of Barry Ritholtz's column on one of his favourite themes:

In "Adventures in the Screen Trade" screenwriter William Goldman wrote that "nobody knows anything." It is a quote that is enjoying a second life these days.

The book's first mention of that line which is repeated throughout referred to the many studios that passed on films that would go on to be blockbusters. Every studio in Hollywood but one (Paramount) turned down "Raiders of the Lost Ark." It became one of the highest-grossing films of all time and was nominated for nine Academy Awards. "Star Wars" was passed on by the largest Hollywood studio at the time Universal. It grossed $1 billion and spawned a franchise with five films that are in the all-time top 100 in gross box office sales. Eventually Walt Disney Co. purchased the Star Wars production company Lucasfilm for more than $4 billion.
Goldman was referring to the fact that despite all of their research experience focus groups and smarts no one in Hollywood has any idea how well a film will do before its release.
Whenever we try to figure out complex future outcomes -- like what movie might do well -- we enter a minefield. Start with a screenplay which may or may not translate well from the page into a visual medium. How compelling is the director's vision? How likeable are the character portrayals? And perhaps least known what are the public's tastes going to be in three to five years when the film ultimately is released to theaters?
There is an enormous degree of serendipity and good fortune that goes into a blockbuster movie. The same seems to be true of just about everything in life from marriage to careers to stock portfolios.
How easy is it to mistake good luck and randomness for skill? How readily do we convince ourselves we understand what is going on that we are in control of our destinies when nothing could be further form the truth?
Consider this election cycle's primary contests. Bernie Sanders a 74-year old Jewish Socialist was widely expected to drop out of the Democratic race almost immediately. Despite the delegate math he's still in the race. And almost all of the pundits had proclaimed -- quite loudly too -- that Trump had absolutely no shot at winning the Republican nomination. You were admonished to beware their calls of 'Peak Trump' last year because (say it with me people) nobody knows nuthin'.
I know nothing but at least I am aware of my own ignorance and am willing to admit this publicly. Most of the rest of the commentary class has yet to learn this all-important lesson.

David Fuller's view
I think Barry Ritholtz intentionally overstates his case for emphasis but there are some very important points that every investor and trader can take from this theme.
Those of us who are experienced investors know that we need the luck of the big trend to make significant profits at an acceptable risk. Price charts will help because we can monitor the momentum and consistency of a trend even though we have no idea how far it will run.
Looking for temporarily out of favour and relatively undervalued sectors and shares is a good starting point even though there is a subjective aspect to this analysis. However we do not want to be solely focussed on value because the best moves become manias. Identifying relative strength will tell you that the crowd is participating. Charts will help you to see when that enthusiasm is overextended and beginning to wane.
Common sense should tell you that when everyone is bullish they are telling you more about what they have already bought rather than what the market will do. Conversely exceptionally bearish sentiment tells us that the market is oversold and close to a reversal.
Do not mistake a bull market for brains if you wish to remain objective and keep your feet on the ground.
Warren Buffett has reminded us once again that high management charges are too often better for the manager than the customer shades of 'Where are the Customers' Yachts?'.

Paranoia or Justified Concerns Over Potential Social Unrest In Russia?
Here is a brief interesting comment from George Friedman of Geopolitical Futures:

Putin remains popular and there has been no significant social unrest. However in April Putin announced the creation of a new National Guard which will be accountable directly to him. The National Guard will take control of OMON Russia's riot police and SOBR the country's SWAT forces. The creation of this new force under Putin's direct control signals that the president is highly concerned about internal stability and perhaps even about the reliability of Russia's elites and security services.

David Fuller's view
Leaders become less popular with time and especially hard times. Putin has been respected by Russians for creating order following the breakup of the Soviet Union and also the Yeltsin years. However as a tough leader with a KGB background he is more feared than respected particularly by people with influential positions. They dare not criticise Putin publicly but widespread dissatisfaction is the likely cause for increased security forces under his direct control.

Turkey: Last Shreds of Balance Are Disappearing
Here is the opening of this worrying article from Bloomberg:

In the beginning nearly 14 years ago Recep Tayyip Erdogan chose a team of smart and qualified people to run Turkey with him. He now appears set to force out one of the last of that group -- Prime Minister Ahmet Davutoglu -- and replace him with someone more pliant. This is disastrous for Turkey as financial markets have recognized.
To know why look at the issues over which Erdogan and Davutoglu -- who is no rebel or hero of a Turkish secular democracy -- have sparred fraying what was once the tightest and subservient of political relationships to breaking point.
The earliest split came soon after Davutoglu's appointment as Prime Minister when he proposed an anti-corruption package in response to allegations of corruption made against Erdogan's family and closest political allies. Erdogan said the idea was premature and it was dropped.
Davutoglu was keen to preserve a measure of market confidence in the independence of Turkey's Central Bank protecting it from Erdogan's curious beliefs about monetary policy (he has said that higher interest rates promote inflation a theory refuted by several centuries of economic theory and empirical data). When a new central bank governor was to be appointed last month Erdogan wanted someone more responsive to his demands for lower rates.
Davutoglu has also been marginally less hawkish on the destructive war with militants from Turkey's large Kurdish minority which was rekindled last year. He spoke out in support of hundreds of academics who were arrested under anti-terrorism laws for writing a public letter critical of Erdogan's Kurdish policies.

David Fuller's view

Recep Tayyip Erdogan has steadily reversed much that Mustafa Kemal Ataturk achieved when creating a secularized and westernized Republic of Turkey following the collapse of the Ottoman Empire. Will we next be referring to Erdogan as the Sultan of an undemocratic and increasingly authoritarian Turkey?

Negative Interest Rates: A Tax in Sheep's Clothing
Thanks to a subscriber for this article by Christopher J. Weller for the Federal Reserve Bank of St. Louis. Here is a section:
But a negative interest rate is just a tax on the banks' reserves. The tax has to be borne by someone:

The banks can choose not to pass it on and just have lower after-tax profits. This will depress the share price of banks and weaken their balance sheets by having lower equity values.

The banks can pass the tax onto depositors by paying a lower interest rate on deposits or charging them fees for holding the deposits. In either case depositors have less income to spend on goods and services.

The bank can pass the tax onto borrowers by charging them a higher interest rate on a loan or higher fees for processing the loan. In either case it is more costly to finance purchases of goods and services by borrowing.

None of this sounds very 'stimulative' for consumer spending. But then no tax ever is.
Negative Interest Rates in Other Countries

What has happened so far in countries that have tried negative interest rates? The figures below provide answers. As seen in the first chart bank stock prices have definitely taken a hit. After initially continuing their downward trends interest rates on mortgages have now risen in Germany and Switzerland (the second chart). Banks have been very reluctant to charge negative deposit rates for fear of a backlash from customers (the third chart).

At the end of the day negative interest rates are taxes in sheep's clothing. Few economists would ever claim that raising taxes on households will stimulate spending. So why would they think negative interest rates will?

Eoin Treacy's view
The ECB announced a two-step shuffle when it implemented its negative interest rate policy in order to mitigate the effect it would have on the banking sector. However there is no getting around the fact that negative interest rates are going to be borne by someone and that consumers are unlikely to benefit in that scenario.

Negative interest rates are the dumbest idea ever
This interview of Jeff Gundlach by Christoph Gisiger for Finanz und Wirtschaft may be of interest to subscribers. Here is a section:
Energy companies are playing an important role in the junk bond sector. What would oil at $ 38 mean for the credit markets?

Just like oil the high yield market has enjoyed the easy rally. I think it's basically over. I don't see how you are supposed to be all fond off high yield bonds since they are facing enormous fundamental problems. I thought people would learn their lesson but the issuance in the years 2013/14 was vastly worse than the issuance in 2006/07. Also in the bank loan market covenant lite issuance rose to 40% in 2006/07. In this cycle it climbed to 75%. The leverage in the high yield bond market is enormous and you're about to have a substantial increase in defaults. I wouldn't be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high yield bond market.

What would be the consequences of that?
We are now in a culture of default. There is no stigma about defaulting anymore. During the housing crash homeowners walked away from their mortgages. That was the beginning of a massive tolerance of default. Today people talk about Puerto Rico defaulting like it's nothing. But if Puerto Rico defaults why won't some clever person in Illinois say: 'Let's default too! ' Constitutionally Illinois is not allowed to default but Puerto Rico wasn't either. For Illinois it just seems impossible to pay their pension obligations. And then what about Houston what about Chicago what about Connecticut? I am surprised that people have lost their focus on the enormity of the debt problem. Remember in 2010 and 2011 there was such a laser focus on the debt ceiling in the US and we were worried about Greece. Nobody is worried anymore. People are distracted by this negative interest rate experiment.

Eoin Treacy's view
The first time I visited Boston was about four years ago and there was a sign from Prudential above the Charles which proclaimed 'We have $1 trillion under management'. That's an impressive number but what popped into my head was 'What do they own?' The answer of course is that a great deal of that money is invested in bonds. In fact regulators insist conservative portfolios aimed at the pensions market have to own bonds in order to ensure some degree of security that future liabilities can be met. The fact bonds have been in a 35-year bull market has only bolstered the sector's 'risk free' credentials.

The Value of Gold
Thanks to a subscriber for this bearish or at least cautious report on gold by John LaForge for Wells Fargo. Here is a section:
In February we published a cautionary gold not titled 'Not the Time to Buy More Gold' The title pretty much said it all. To be clear we do not detest gold. Rather our long-standing guidance has been that gold should be a regular position in a diversified portfolio. Our beef is not with owning gold but how much gold to own.

Many signs point to underweighting gold in portfolios today. In February's gold publication we highlighted two vital negative trends 1) persistently poor price action and 2) repeated performance losses to other major assets (stocks bonds housing). Both trends by the way are characteristics of commodity bear super-cycles.

Poor price and performance trends while important only tell part of the underweight story. The value of gold is a major concern of ours too. Said simply gold does not look particularly cheap. This may sound odd with prices down $640 per ounce since 2011 but history argues for even cheaper relative prices in order for gold to begin a new bull market. As we will explain next gold does not appear to a great bargain vs. stocks bonds or housing. And gold is downright expensive compared to the average commodity and especially other precious metals.

Eoin Treacy's view
A link to the full report is posted in the Subscriber's Area.

To balance this view of gold being expensive. Here is an interview with Jim Rickards who expects gold to move to new all-time highs. Gold is a market that tends to elicit extreme predictions so let's stick to what I believe are the two most important factors concerning the market. It is a monetary metal and often seen as a safe haven during times of stress

Health Insurers Struggle to Offset New Costs
This article by Louise Radnofsky and Ann Wilde Mathews for the Wall Street Journal may be of interest to subscribers. Here is a section:
Humana's announcement follows a disclosure from UnitedHealth Group Inc. last month that amid deepening losses it will next year withdraw from all but a handful of the 34 states where it was offering exchange plans.

Anthem and Aetna Inc. were far more upbeat about their prospects on the health-law marketplaces in recent earnings calls but both have also said they aren't yet achieving their targeted margins and aim to improve results next year.

Insurers seeking rate increaseswhich include several other big plans in Oregon and Virginiaall cite the higher-than-expected medical costs incurred by their enrollees as factors in their decision.

In Oregon regulators' filings show Moda Health Plan Inc. once the largest insurer on the exchange saying it needs to hike premiums there by an average of 32.3%. That is coming on the heels of an increase of around 25% last year; the insurer also said it would stop selling individual plans in Alaska.

Eoin Treacy's view
For anyone outside the USA who wonders why people might be unhappy with Obamacare the simple answer is many middle class consumers are paying a lot more but for reduced service. This has translated into a great deal of dissatisfaction with the ruling elite which boosted the campaigns of both Donald Trump and Bernie Sanders in their respective primaries.

The Chart Seminar 2016

Eoin Treacy's view
Thank you to everyone who has expressed interest in The Chart Seminar this year. Our plans are to hold a webinar sometime in June and I will share details of this as we firm up how best to conduct it. The timing of the seminar will be catered to where the majority of delegates sign up from but we'll try to pick a time when the most possible people can tune in live.

We also plan to hold two seminars in physical locations this year. From some subscriber feedback I was thinking of holding one in Los Angeles during the summer and another in London during the fourth quarter. If you would like to express interest in any of our events please message Sarah Barnes at [email protected]/* */

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