Steven J Cohen CFA Newsletter Q2 2023

Economy & Capital Markets:

The Federal Reserve June 14th projections show improved GDP (higher), unemployment (lower) and inflation (lower) expectations, as well as; “higher for longer” Funds Rate of 5.6% (2023), 4.6% (2024) and 3.4% (2025). Whilst the longer run Funds Rate is maintained at 2.5%

On 24th February 2022, Russia launched a large-scale invasion of Ukraine which now appears to be faltering but the endgame remains uncertain.

On June 13th the Peoples Bank of China conducted reverse repo operations at a lower bidding rate of 1.9%.

On June 21st the ECB raised its interest rates to 3.50% for deposits, 4.00% for refinancing and 4.25% for margin lending. From July 2023 there will be no reinvestments under the Asset Purchase Program. Reinvestment of principal for the Pandemic Emergency Purchase Programme will continue till the end of 2024. For 2023 the ECB expects 0.9% real GDP growth, 6.5% unemployment rate, 5.4% inflation, 89.1% government debt to GDP and 3.4% 3m EURIBOR.

Kings’ Portfolio (Global Mega Cap Long/Short Equity Investing):

In the second quarter of 2023, the portfolio returned 1.89%. Largest contribution to performance were from a long positions GBP (1.68%) Axsome Therapeutics (US Biopharmaceutical 1.37%) , Unicredit (Italian Financial 1.10%) and Skywest (US Airlines1.07)% and detractors were Siemens Energy (German Energy -2.81%). Since inception: the portfolio trails the ACWI by 4% cumulative performance but, with far less volatility. A position in Everaz & its spin off Raspadskaya (Russian steel & coal) is suspended in London, although most of the value has already be depreciated.

Belsize Strategy (Macro & Global Futures Trading):

In May 2021, with the advancement of the firms AI abilities, this long-standing strategy that provided excellent returns during the 2007/8 financial crisis restarted. For the year 2022 performance was -2.5%. In the first half 2023 the portfolio returned -4.5%, most of which occurred in the last two weeks (around the ECB Forum on Central Banking) and is expected to reverse.

Private Equity Strategy (Illiquid Investments):

In 2021 Q2 the firm added five position (including reservations) to its first venture capital investment in 2019. Sector breakdown now stands at: 29% media & entertainment, 22% communications, 18% real estate, 18% finance and, 8% food and beverage. The technology breakdown in the portfolio consists of 60% apps, 20% hardware, 10% sharing economy and 10% e-commerce. The firm makes no positive discrimination except for the combination of good ideas and teams, however the initial investment was to a female managed business and, we have further invested in one black and two Latin managed businesses. The female managed business was found to be providing false sales reports and, was acquired for stock in a company with a larger consumer base at an unknown valuation.

Crypto Currency Strategy (Inter-day Trading):

Due to the rapid development of the firm’s proprietary AI, in June 2021 a crypto trading strategy was initiated, across 11 currencies each with a market capitalisation over $1Bn. For the year 2022 the trading performance was negative 10% although positive since inception. Unfortunately the portfolio was transferred to FTX from Binance in June due its improved facilities and tools. Whilst we await the final distribution from bankruptcy proceedings that may take several years we will maintain the investment at book value. The firm is now committed to a full decentralised financial system and will repeat our initial investment to a decentralised exchange with preferred trading in proof of stake instruments.

Artificial Intelligence & Technology Development:

The firm has nearly completed the development of ADDITIONAL AI that underpins Chat GPT4 but using our in-house databases and labelling. Human language analysis to identify non quantifiable impacts on capital markets, is in further development. The firm is developing consultancy and possibly software offerings to non-financial firms. Internally we will also apply artificial intelligence to venture capital and private equity investment opportunities.

Firm Operational Update:

The firm successfully relocated to St. Petersburg in Florida under its Californian Registered Investment Advisor (RIA) within FINRA and SEC USA government oversight. Transfer of client assets from our previous UK entity and its closure is expected in the near future.

Why the essential business cycle is driven by innovation, not speculation.

Innovation from a more efficient process or discovery of raw resource (material/people).

Wealth sees that capex/training will increase to diminish short term profits so valuations decline.

Producers see long term profits will rise so borrow (now relatively cheaper than equity) to fund capex.

Interest rates rise.

Consumers see better return on saving so divert from (less essential) consumption to savings, that are lent to producers.

Reduced consumption leads to reduced production, leads to reduced employment.

Recession.

Completion of capex.

Wealth sees only rising profits so valuations rise.

Improved process leads to greater profit so repayment of borrowings so interest rates fall.

Consumers reduce savings and increase consumption.

Increased production leads to increased employment in efficient processes.

Even in declining business cycle employing a more efficient process/resource will lead to increased profit/market share so will be undertaken.

If over the business cycle wealth valuations grow at a greater pace than production, this is an indication of excess money via an asset bubble, unless reversed consumers will spend this excess wealth creating consumer price inflation (higher prices for the same production). If valuations grow at a lesser pace this will lead to deflation.

Price stability leads to easier decision making. However removal of indication of benefit for substitution through price movement (including cost of money) leads to incorrect allocation of resources and sub optimal capacity (including labour) .i.e. a lower real GDP/head and greater wealth inequality.

Steven J Cohen CFA Newsletter Q1 2023

Economy & Capital Markets:

The Fed’s March 22nd “dot-plot” is an amalgamation of selected Regional Reserve Presidents’ economic forecasts. There was a creep up in individual Presidents’ Longer-run projects of Federal funds rate at the higher limit. Whilst the median remains at 2.5%, with a Longer run inflation median projection of 2%, this still implies QE infinity and beyond, valuation inflation and, wealth redistribution by selected bail-out of the financial sector. Whilst depositors are not compensated for inflation and risk of default by a realistic interest rate, productivity and distribution to lower income households remain inhibited.

In the short term the effect of an increase from 0.11% to 4.83% in the funds rate over the last year are yet to be reflected in the data the Fed uses to assess its forecasts. The treasury bill market is therefore projecting cuts to the funds rate by the year end.

On 24th February 2022, Russia launched a large-scale invasion of Ukraine which now appears to be faltering but the endgame remains uncertain.

On March 17th the People’s Bank of China cut the required reserve ratio to a weighted average of 7.6%, whilst refraining from strong stimulus policies. On January 29th it announced: the carbon emissions reduction facility will be extended in 2024, lending for clean and efficient coal use will last through 2023 and the transportation and logistics facility will continue through till June.

On March 22nd the ECB raised its interest rates to 3.00% for deposits, 3.50% for refinancing and 3.75% for margin lending. From March 2023 the asset purchase program portfolio will be reduced by EUR 15bn per month. For 2023 the ECB expects 1.0% real GDP growth, 6.6% unemployment rate, 5.3% inflation, 89.4% government debt to GDP and 3.3% 3m EURIBOR.

Kings’ Portfolio (Global Mega Cap Long/Short Equity Investing):

In the first quarter of 2023, the portfolio returned 4.61%. Largest contribution to performance were from a long positions in Eurocash SA (4.26%, Polish food retail/wholesale) and GBP (1.68%). Since inception: the portfolio only trails the S&P 500 by 7% cumulative performance but, with a 0.08 improved Sharp Ratio and 0.17 improved Sortino Ratio. A position in Everaz & its spin off Raspadskaya (Russian steel & coal) is suspended in London, although most of the value has already be depreciated.

Belsize Strategy (Macro & Global Futures Trading):

In May 2021, with the advancement of the firms AI abilities, this long-standing strategy that provided excellent returns during the 2007/8 financial crisis restarted. For the year 2022 performance was -2.5%. In the first quarter 2023 the portfolio returned -0.10%.

Private Equity Strategy (Illiquid Investments):

In 2021 Q2 the firm added five position (including reservations) to its first venture capital investment in 2019. Sector breakdown now stands at: 29% media & entertainment, 22% communications, 18% real estate, 18% finance and, 8% food and beverage. The technology breakdown in the portfolio consists of 60% apps, 20% hardware, 10% sharing economy and 10% e-commerce. The firm makes no positive discrimination except for the combination of good ideas and teams, however the initial investment was to a female managed business and, we have further invested in one black and two Latin managed businesses. The female managed business was found to be providing false sales reports and, was acquired for stock in a company with a larger consumer base at an unknown valuation.

Crypto Currency Strategy (Inter-day Trading):

Due to the rapid development of the firm’s proprietary AI, in June 2021 a crypto trading strategy was initiated, across 11 currencies each with a market capitalisation over $1Bn. For the year 2022 the trading performance was negative 10% although positive since inception. Unfortunately the portfolio was transferred to FTX from Binance in June due its improved facilities and tools. Whilst we await the final distribution from bankruptcy proceedings that may take several years we will maintain the investment at book value. The firm is now committed to a full decentralised financial system and will repeat our initial investment to a decentralised exchange with preferred trading in proof of stake instruments.

Artificial Intelligence & Technology Development:

The firm continues refinement of existing techniques and adoption of best practice. Human language analysis to identify non quantifiable impacts on capital markets, is in further development. The firm is developing consultancy and possibly software offerings to non-financial firms. Internally we will also apply artificial intelligence to venture capital and private equity investment opportunities.

Firm Operational Update:

Since 2015 the firm has been maintained as a Californian Registered Investment Advisor (RIA) within FINRA and SEC USA government oversight. The firm will seek to establish a US firm to provide a regulatory umbrella for existing clients. Until that time client assets will be managed on a non-professional basis, with reduced contractual liability.

Is it time for the Federal Reserve to get REAL

I don’t claim to be a genius an intellectual or know what’s better for anyone else.

What I do know is that when I deposit my cash I demand the return to exceed inflation and cost of insurance for default (if I wish to purchase).

As can be seen from the above chart since 2000, and especially since 2009, real interest rates have averaged negative.

This is a result of the Federal Reserve implementing a real interest rate dictated by models that are above my pay-grade.

In its latest projections the Fed has Longer run inflation at 2% and the Federal funds rate at 2.5%, giving a long run real rate of interest at 0.5% (=2.5%-2%). i.e. QE infinity and beyond

This is a long way from its original projection in March 2013 of a long run Federal funds rate of 4% or a long run real rate of interest of 2%.

Contrast this with the 2023 August Chinese monetary policy review of keeping a reasonable growth of M2.

Which has updated its 2021 August guidance of keeping growth in line with nominal GDP.

If today’s inflation was caused by anything other than an excess of money supply, we would have seen the substitution out of products and a fall in their prices to compensate for the increase in demand of other products. But now the economy has adapted to QE / modern monetary theory (zero time value of money) and is just as sensitive to changes in interest rates as ever.

Now is only 13 months since the Fed rates interest rates from near zero, but the central bank has forgotten the 1955’s Fed Chairman’s message “take away the punch bowl just as the party gets going”, which implies a lag in effect of monetary policy. Instead, today’s monetary authorities plead their policy to be dictated by data (headline inflation). This ignores the transmission mechanism for monetary policy though the finance industry, by a change in lending ability (data to which monetary authorities also have full access).

It may take decades to repair the economy from the QE experiment, however an immediate solution could be for the Fed to set a nominal effective fed rate of 4% (as suggested in the first dotplot) until inflation comes down to 2%, and then maintain a real interest rate of 2%.

On the flip side a 0.5% real interest rate identifies the hurdle rate for real project returns. As the Fed funds rate is the yield the government borrows at, it must expect real long run revenues (taxes) to increase at greater than 0.5%. If we assume tax revenues remain the same percent of GDP the government must expect real GDP to increase at above 0.5%.

The US government census estimate for population growth in 2022 was 0.4% this implies a minimum required productivity growth at 0.1%. (0.4%+0.1%=0.5%) or expected productivity growth of 1.4% (1.8%-0.4%) at long run real GDP growth projection. But the super productivity gains (way above 1.4% pa) in technology and pharmacy cannot not be fully implemented due to “zombie”: companies and venture capital projects, and inert assets (real estate) utilizing cheap funds. Once higher interest rates have removed funds from these assets, the capital could be applied to the most productive production techniques across the board boosting real GDP/capita growth.

Further, perhaps an easier method on financial regulation is to utilize the behavioural economics of self interest and competition rather than the dictate of intellectuals, bureaucrats and oligopolies.

We have seen that the banking industry is still characterized by too many “too big to fail” (outsized economies of scale) institutions e.g. SVB and Signature. Industry universal anti-monopoly/trust rules could encourage foreign ownership from countries with fair democracy and judicial system and, security vetting, to assist in the reduction in size of banks. Further a rule to require directors/employees/managers of banks to own 50% of its share capital (not options or salaries) may align their interests with clients deposits and further assist in the reduction in size of banks.

In short, simple solutions may be the easiest explained and implemented for a sustainable and distributed real economy, being: 1) sound and fair money 2) ceasing of inefficient government expenditure 3) strict implementation of anti monopoly/trust rules 4) all citizens to be self-sufficient or productive.

What the f**k is ChatGPT?

As a caveat I’m not an expert on Generative AI and have never used ChatGPT. However I do know more than 99.99% of the population and 100% than anyone in the media on this matter, as a self taught A.I. coder of 7 years.

The most important part of the name is the “G” == Generative, this means it creates something as opposed identifying a result, giving a prediction or ultimately making a decision.

Your probably very familiar with CGI Computer-Generated Imagery, that creates the backgrounds or realistic visuals in movies or games. It is very cost effected, by not requiring humans to undertake intensive stop go animation and, allows visuals that would be near impossible to create eg a tiger talking.

Below is a composite of what venture capital is funding in the space including: visuals, interfaces, text, speech, audio and even coding.

It claimed that Generative AI can create 50% of code for new projects, providing massive amounts of productivity. However as someone without any formal training my personal experience is, the first 80% of coding only takes a few hours but its the last 20% that takes the weeks. Perhaps the most scary part of this is, Generative AI coding ultimately birthing its own offspring.

Today the biggest problem the industry is facing is copyright infringement. The internet permits instant access to content that could be utilised by the Generative AI e.g. a Picasso painting, an article by a leading lawyer, an engineering paper by a student. This content could be appropriated for use against the wishes of the originator.

However with proliferation of information on the internet for me the biggest problem is to avoid, in your area of concern, the equivalent of what someone had for lunch or their miming and dancing in a TikTok video, which appears the majority of new human content. In-fact I personal check a sample of most input data that I use.

My second area of concern is that the AI needs classification or labelling of initial training data to give it a reward mechanism for its actions on subsequent data.

Most people are aware that Silicon Valley is where the largest proliferation of new technology industry is based. You may also be aware that Silicon Valley is in California, which is famous for its “progressive” views. It could be a lazy assumption that, the labellers of the training data could have a high propensity to this political bias, including using a rare event as the representation result.

If you have no knowledge of a subject using ChatGPT is probably an easy way to give you content. If you are a successful specialist you are probably better labelling your own data. If you have no coding skills its probably better to engage your own boutique to assist you in this labelling. Or, you could go to one of the specialist companies below, to give you the accuracy, speed, productivity and access to legal specialist information already available from your industry.

Source: Sequoia Capital

Steven J Cohen CFA Newsletter Q4 2022

Economy & Capital Markets:

The US Federal Reserve Bank identifies 0.5% as the long run REAL interest rate. This implies that production (or tax revenue) expansion needed to payback a loan and interest is also expected to be 0.5%. Given the exponential technological advances and still positive demographic growth, there must be many areas where productivity is being crushed.

This 0.5% real interest rate has to be supported by money supply expansion far in excess of that necessary and so gets parked in many unproductive assets (how much does someone’s productivity increase by having one more house), leading to huge inequality of wealth for those who cannot or should not risk investment in these assets. Eventually the money supply leaks into consumer prices which just so happens to negatively effect the wealthy and so elicits a political response.

Through being the best to adapt, humans evolved. This is what has led to the our greatest advancements, the wheel, the plough, the steam engine, nuclear power, the cpu, the discovery of gravity, electricity and penicillin etc. Plato even suggested “adversity is the mother of invention”. However monetary authorities change monetary stance with the insight and frequency of circuit race driver’s gear change, in an attempt to prevent adversity. Instead of, being a truck driver moving to a lower gear when going uphill before sticking it back in cruise for the rest of the journey, allowing the economy to adapt.

With the US Fed trying to forecast too many variables and ignoring adaptability, it now realises it has no insight and has to rely on current data to enable its policies. Ignoring for 15 years the 1955’s Fed Chairman’s message “take away the punch bowl just as the party gets going”, that implies a lag in effect of monetary policy.

Ignoring adaptability is perhaps just a reflection of those in political positions own shortcomings by, relying on group or media think and, being unable to comprehend the advantages of a digital economy’s ability to target the (helpless) individual. Instead of setting a healthy environment where adaptability thrives, they seek to impose macro policies that crush productivity. Further the conflict of interest in extending their power base results in gratuitously spending future taxpayers income and erroneous immigration, further crowding out productive investment.

For 2023 the Fed now expects: 0.5% GDP growth, 4.6% unemployment, 3.1% inflation and 5.1% funds rate.

On 24th February, Russia launched a large-scale invasion of Ukraine which now appears to be faltering but the endgame remains uncertain. Crude oil prices have fallen 1/3rd from the initial spike.

In China on December 5th the required reserve ratio for financial institutions was reduced to a 7.8% weighted average. November 24th established financial principals to maintain a healthy housing market. 18th November established principals for overseas investment in the domestic bond market.

On December 21st the ECB raised its interest rates to 2.00% for deposits, 2.50% for refinancing and 2.75% for margin lending. From March 2023 the asset purchase programme portfolio will be reduced by EUR 15bn per month. For 2023 the ECB expects 0.5% GDP growth, 6.9% unemployment rate, 6.3% inflation, 90.6% government debt to GDP and 2.9% 3m EURIBOR.

Kings’ Portfolio (Global Mega Cap Long/Short Equity Investing):

In an incredible last quarter of 2022, the portfolio returned 24%. With only 6% attributable to the legacy cash sterling’s recovery against the dollar measured benchmark. We have now activated a currency overlay in the style of the portfolio. Other large contributors to performance were 3.57% from Myovant Sciences (US healthcare), 2.54% from Vivint Smart Home (US technology), 2.15% from Harmony Biosciences (US healthcare) and 1.67% from Scorpio Tankers (US energy). Since inception: the portfolio only trails the S&P 500 by 2% cumulative performance but, with a 0.07 improved Sharp Ratio, other incredible features were that shorts and longs have contributed equally to performance, only 3 out of 15 sectors have performed negatively the worst being -2%, out of six years performance only one has been (a single digit) negative. A position in Everaz & its spin off Raspadskaya (Russian steel & coal) is suspended in London, although most of the value has already be depreciated.

Belsize Strategy (Macro & Global Futures Trading):

In May 2021, with the advancement of the firms AI abilities, this long-standing strategy that provided excellent returns during the 2007/8 financial crisis restarted. For the year 2022 performance was -2.5%.

Private Equity Strategy (Illiquid Investments):

In 2021 Q2 the firm added five position (including reservations) to its first venture capital investment in 2019. Sector breakdown now stands at: 29% media & entertainment, 22% communications, 18% real estate, 18% finance and, 8% food and beverage. The technology breakdown in the portfolio consists of 60% apps, 20% hardware, 10% sharing economy and 10% e-commerce. The firm makes no positive discrimination except for the combination of good ideas and teams, however the initial investment was to a female managed business and, we have further invested in one black and two Latin managed businesses. The female managed business was found to be providing false sales reports and, was acquired for stock in a company with a larger consumer base at an unknown valuation.

Crypto Currency Strategy (Inter-day Trading):

Due to the rapid development of the firm’s proprietary AI, in June 2021 a crypto trading strategy was initiated, across 11 currencies each with a market capitalisation over $1Bn. For the year 2022 the trading performance was negative 10% although positive since inception. Unfortunately the portfolio was transferred to FTX from Binance in June due its improved facilities and tools. Whilst we await the final distribution from bankruptcy proceedings that may take several years we will maintain the investment at book value. The firm is now committed to a full decentralised financial system and will repeat our initial investment to a decentralised exchange with preferred trading in proof of stake instruments.

Artificial Intelligence & Technology Development:

The firm continues refinement of existing techniques and adoption of best practice. Human language analysis to identify non quantifiable impacts on capital markets, is in further development. The firm is developing consultancy and possibly software offerings to non-financial firms. Internally we will also apply artificial intelligence to venture capital and private equity investment opportunities.

Firm Operational Update:

Since 2015 the firm has been maintained as a Californian Registered Investment Advisor (RIA) within FINRA and SEC USA government oversight. The firm will seek to establish a US firm to provide a regulatory umbrella for existing clients. Until that time client assets will be managed on a non-professional basis, with reduced contractual liability.

FTX

We have been a customer of FTX since june 2022, we chose FTX because it had the greatest liquidity in FUTURES crypto currency. We transferred from Binance due to increased UK regulatory burden on customers to trade crypto derivatives. Although it was still possible to trade on margin on the Binance exchange the increased workflow to: organise the borrowing and repayment of currencies for shorts, the calculations to ensure to be within non-liquidation of account holdings and the processing of stop loss and profit taking made it nearly impossible even for a seasoned professional to trade. Whilst trading futures only requires the calculation of stop loss and profit taking, additionally the one click from calculation to trade on the FTX made it far superior than the previous Binance futures trading platform.

We were horrified to hear that Binance was even considering purchasing the FTX platform due to the negative effect on the competition of the industry. We consider one of the existing commodity/currency/stock/money market derivative exchanges to be the preferred purchaser, obviously they have to calculate if the purchase price would be lower than the revenue stream from their ability to develop a crypto futures exchange and on-board the clients independently.

In the meantime we continue to happy trade futures on the FTX platform as we are on a hiding to nothing. Further our total exposure to the FTX platform is less than loss on many individual stocks we invest in.