2014: That's a Wrap

DJIA 17,823.07 off 160.00 on the day. S&P 500 2,058.90 down 21.45.

To the minions: Thank You

To those who linked to us: Thank You, Thank You

To our readers:

As sergeant Esterhaus used to say on Hill Street Blues (1981-87 for the young folks):

"Hey, let's be careful out there." 

See you in 2015

Pari Passu My Ass: Russia to Lease Long Range Strike Aircraft to Argentina

Before continuing with the armaments story take a quick scroll through FT Alphaville's coverage of what they call the "pari passu saga".

Go ahead, I can wait, and seeing the headlines flash by is almost hypnotic, which may be important to getting buy-in for my conclusions.

From Jane's Defence 360:

UK reviews Falklands defence as Russia offers Su-24s to Argentina

The Ministry of Defence (MoD) is to conduct a review of its plans for the defence of the Falkland Islands following reports that Russia is to supply Argentina with Sukhoi Su-24 'Fencer' strike aircraft, UK media reported on 28 December.

The review follows a report in the Daily Express newspaper that Russia is to lease 12 Su-24s to the Argentine Air Force (Fuerza Aérea Argentina - FAA) in return for foodstuffs.

According to the media report, the Su-24s would be delivered to the FAA ahead of the introduction into service of the first of the UK's two Queen Elizabeth-class aircraft carriers in 2020 (full-operating capability for the Queen Elizabeth is currently slated for 2023).

The potential arrival of Su-24s into Argentine service ahead of the introduction into service of the UK's new aircraft carriers could pose a "real window of vulnerability", MoD officials reportedly told the Daily Express .

With Argentina arguing sovereignty over the islands that it refers to as Islas Malvinas, the UK maintains a force of four Eurofighter Typhoon combat aircraft, Rapier surface-to-air missiles, and about 1,200 troops permanently stationed on the Falklands. These are supported by visiting Royal Navy warships, and while the MoD won't comment publically on such deployments it is understood that nuclear-powered attack submarines are often sent to the South Atlantic as a further layer of defence for the islands.

While the MoD declined to address the specific threat of the Su-24s with IHS Jane's , it did provide a statement which read, "The MoD undertakes regular assessments of potential military threats to the Falkland Islands to ensure that we retain an appropriate level of defensive capability to address any threats. We continue to remain vigilant and committed to the protection of the Falkland Islanders."

ANALYSIS
For some years now, Argentina has been trying to replace its antiquated and increasingly unserviceable Dassault Mirage IIIEA, IAI Dagger, and McDonnell Douglas A-4 Skyhawk fighter fleets with a newer and more capable type....MUCH MORE

The deal is for Argentina to pay in wheat and beef so Putin gets around the sanctions and President de Kirchner can talk with Elliott Management's Paul Singer.

Here's the Express exclusive.

According to The Aviationist, the four Eurofighter Typhoon jets based on the Falklands should be able to handle a dozen SU-24's so it has to be Elliott that the Argentines are thinking about.

Head of al-Shabaab's Intelligence/Security Directorate Not So Intelligent/Secure

I just wish Abdul Haji had been there to see it.
From Reuters:

U.S. confirms drone strike killed al Shabaab leader in Somalia

An unmanned U.S. aircraft that unleashed Hellfire missiles at a vehicle in Somalia earlier this week killed a leader of the al Shabaab militant group, dealing a setback to its ability to carry out anti-government attacks, the Pentagon said on Wednesday.

Rear Admiral John Kirby, the Pentagon press secretary, said in a note on Twitter the department could now "confirm that Tahliil Abdishakur, chief of al Shabaab's intelligence and security wing, was killed in a U.S. air strike in Somalia on 29 December."

The Pentagon said in a statement that Abdishakur was responsible for the group's external operations and "his death will significantly impact al Shabaab's ability to conduct attacks against the government of the Federal Republic of Somalia, the Somali people and U.S. allies and interests."...MORE

Abdishakur was one of the guys behind the recent murders in Kenya and was the plotter of the massacre at Nairobi's Westgate Shopping Mall in 2013.

Haji was one of the heroes of Westgate, a civilian charging into the mall with a ridiculously small handgun against the terrorist's automatic rifles and explosives.

He is credited with helping to save a few dozen people.

 

As we've noted a couple times, bummer for Abdishakur about the misreading of the 72 virgins thing:

A Good Day

14 terror suspects mistakenly kill themselves

"China Plays Long Game With Ruble Deal"

From Barron's Up and Down Asia:

Beijing bolsters global currency ambitions as Russia swap agreement challenges central role of U.S. dollar. 

What new devilry is this? While all of Christendom was recovering from a day over-indulging on eggnog, figgy pudding and antics worthy of that new quadcopter drone, China was busy extending its financial tentacles. On Dec. 26, the currency boffins at the People’s Bank of China announced that, starting this week, they would begin allowing the trade of derivatives for companies and investors to bet on the exchange rate between Russia’s ruble and China’s currency, the yuan, with no U.S. dollars between them as chaperone.

Conspiracy theorists weren’t so besotted with Yuletide cheer that they didn’t sit up and cry foul. This, they bellowed, was a clear instance of China stepping in to lend a helping hand to its old Cold War comrade and prevent Western sanctions (and cheap Saudi crude) from breaking Russia’s back. And just when they seemed so close to convincing Moscow into pushing its proxies in eastern Ukraine into a peace deal and its Middle-Eastern puppet Syria to the negotiating table, too. 

The derivatives deal comes on the heels of an October agreement allowing Russia’s central bank to borrow up to 150 billion yuan ($24.4 billion) using swap agreements. Some commentators called that deal a lifeline to Russia as the ruble slid. The Russian currency has lost half of its value this year, forcing Moscow to take extreme measures to avoid a balance of payments crisis, including raising the benchmark interest rate to 17% and ordering Russia’s biggest exporters to cash in their dollars for rubles.

It may therefore seem like Beijing is trying to turn Russia’s crisis into its own opportunity -- to sew a silk purse from Moscow’s ear. But the Chinese panda may not exactly be scratching the Russian bear’s back here. Opening up a credit line in yuan to Moscow doesn’t begin to solve Russia’s immediate problem: oil prices are too low relative to its imports and overseas debt. Unless Russia can substitute trade with the West for trade with China, the balance of payments risk remains as long as the ruble is in free-fall. All the yuan in the world can’t help Russia if it runs out of dollars....MORE

Weak Agricultural Commodities End 2014 On a Downbeat

From Agrimoney:

Evening markets: negative year for ags ends on weak note

A largely negative year for agricultural commodities headed for a largely negative finish, with profit-taking after what has been a better couple of months for grains seen playing a big role the retreat.

While regulatory data overnight showed hedge funds taking a more bullish view on ags, in fact, the most upbeat positioning in six months, that was not as upbeat news as it seemed.

Helen Plant, at the UK's HGCA bureau, highlighted that this in fact "poses a risk to the current price levels.

"As year-end results are an important measure for investment firms, speculative traders may sell-off some of these long positions in order to book profits or re-balance their positions for a new year's trading."

'Powder is not so dry'

While some have been hoping for a repeat in 2015 of the early 2014 rally, which was spurred by the likes of Ukraine's crisis and Brazilian drought, hedge fund positioning is not so conducive to gains as a year ago, when they were running with short positions in many contracts.

"This year their powder is not so dry," one US broker said.

"To see them add to a long position already [in corn] exceeding the equivalent of 1.2bn bushels will have to come with some serious fundamental reasons."...MUCH MORE

Symbol	Last	Chg
Corn	400-2	-6-2
Soybeans	1025-0	-19-0
Wheat	589-2	-12-6
Cocoa	2910s	-62
Coffee	168.30	+3.50
Cotton #2	60.95	-1.03
Sugar #11	14.52s	-0.09
Live Cattle	163.625	-1.075
Lean Hogs	81.700	+0.525

And from FinViz:

"Winklevoss Bitcoin Trust files to sell 20.1 million shares

Because of the asymmetries inherent in this creature there will be some wonderful opportunities.

From MarketWatch:

The Winklevoss Bitcoin Trust on Wednesday filed to sell 20.1 million shares on the Nasdaq exchange. The shares represent units of interest in the bitcoin exchange-traded fund launched by Tyler and Cameron Winklevoss, the twins who are best known for their legal dispute with Mark Zuckerberg over Facebook's FB, -0.32% origins. The ETF will be listed under the symbol COIN, according to the filing. The Winklevoss brothers also launched a bitcoin index - the Winkdex - in February. Bitcoin is a decentralized virtual currency that has attracted attention for its big price swings. 

HT: MarketWatch's Murdochian brethren at Barron's.

"Math-Based Asset Services, LLC is the sponsor of the Trust"

Putting a Price on Innovation: Measuring a Firm’s Ability to Adapt

From the CFA Institute blog:

A company’s success depends on its ability to develop innovative solutions to problems, and a company’s culture will determine how well those solutions are implemented. However, innovation and culture are difficult qualities to define and hard to measure. Some analysts compensate for this difficulty by using more easily measured substitutes, such as research and development (R&D) spending, when valuing a company’s future prospects.

Barry Jaruzelski, creator of the Global Innovation 1000 Study, has been analyzing R&D investment at the biggest-spending public companies in the world. He published the first version of his annual study in 2005, and he warns against confusing dollar amounts spent on research with the future profits that could result from that research. According to Jaruzelski, his study’s long-standing finding is that that a company’s financial performance and innovativeness do not correlate with how much it spends on R&D.

Anne Marie Knott, professor of strategy at Olin Business School, agrees that R&D spending alone is not a good indicator of a company’s performance. “The trouble is,” she wrote in Harvard Business Review, “it’s also hard to measure strategic alignment and culture, let alone link them to profitability or market value.” Knott has developed a measure for R&D productivity that she calls RQ, short for research quotient.


Knott’s RQ equation uses a standard regression analysis to define the relationship between a firm’s spending on inputs and its revenues from output. Knott notes that “economists have been calculating capital and labor productivity for years — that is, determining the marginal value of increasing either one.” She argues that R&D productivity can be determined using the same method. Both the RQ equation and the Global Innovation 1000 Study show that the link between research and innovation is not as simple as more research dollars leading to more innovative breakthroughs.

A 2014 report from Bernstein Research found that tech companies with the lowest R&D spending were some of the best performers on Wall Street, further complicating the relationship between research spending and financial performance. And companies that change their R&D strategies make things even murkier....MORE

See also:
Inventing the Future
Inventing the Future II
Really Smart Investing: Ocean Tomo's 3D Printing Patent Study (AMAVF; DDD; SSYS; MTLS)

Sony Hackers Threaten News Organization

It was disgusting to watch various news outlets carry the hacker's water by publishing the disclosed emails. It was hilarious to see their defenses:

“The new reality is that journalists simply do not own the news cycle: Even if Gawker, BuzzFeed News, and Fusion decided to stop covering it, others would take up the mantle,” Anne Helen Petersen writes at BuzzFeed. “The new role of journalists, for better or for worse, isn’t as gatekeepers, but interpreters: If they don’t parse it, others without the experience, credentials, or mindfulness toward protecting personal information certainly will.”

-Columbia Journalism Review, Dec. 18, 2014 

There is a similar "We're different"  attitude when a journalist is captured by jihadi's versus some regular bloke.
If the news orgs think it might extend the lifespan of the kidnapped journo to impose a news blackout, then blackout it is. The same consideration is almost never extended to others.*

From Pando: 

The group behind the Sony hack has reportedly threatened CNN

 

The group taking credit for the November hacking of Sony Pictures Entertainment has also threatened a news organization, according to a report from the Intercept, which obtained a Federal Bureau of Investigation bulletin warning about the group’s activity.

The bulletin didn’t name the news organization threatened by the hackers. But Matthew Keys, the former social media editor for Reuters, has posted what he says are images of the threat that seem to identify CNN as the target of the hacking group’s warning.

Reporting on the Sony hack has been troubled from the start. Sony itself has warned journalists against reporting on information found in its stolen documents, and has also threatened Twitter with legal action if it doesn’t delete tweets about the files.

Those efforts haven’t achieved much so far, as I wrote when the Twitter spat occurred:

It’s unclear if Sony Pictures expects its efforts at controlling this information to be successful or if it’s simply looking to cover its ass should it be sued for failing to protect this sensitive information. It’s putting on a good show either way, but that’s not enough.
Sony Pictures is fighting the many-headed beast known as the Internet, and it has yet to separate a single skull from all the tubes and tissues connecting it to the world at large.

Now it seems the threats are coming from the other end of the hack, leaving the news organizations uncovering details about efforts to curb Internet freedoms or just how concerned Sony employees should be about the hack between the opposing sides.

The good news, if you can call it that, is that there’s yet to be any indication of an attack against CNN or any other news organization by the hacking group. The bad news is that if someone does decide to attack a publisher the results could be disastrous, as executive director of the Freedom of the Press Foundation Trevor Timm told the Intercept before its report:

“While it’s hard to tell how legitimate the threat is, if a news organization is attacked in the same manner Sony was, it could put countless sensitive sources in danger of being exposed—or worse. […] This FBI bulletin is just the latest example that digital security is now a critical press freedom issue, and why news organizations need to make ubiquitous encryption a high priority.”...

*See for example the abduction of  NYT scribe David Rohde or the breastbeating of the CJR:
When reporters are kidnapped

"1914: The Year in Review"

From The Awl:

Over the holidays, while watching two children create Lego worlds at the foot of a glowing Christmas tree, it suddenly hit us that in only five years, it will be the twenties again. Feeling old, my cousin and I took swigs of white wine and shoved our faces with ham. So, instead of reflecting on 2014, let’s take a look at 1914:

— On June 28th, Archduke Franz Ferdinand and his wife, Sophie, were shot and killed, triggering a cascade of violence. The “Great War” was disease-ridden, fought in ungodly trenches, saw the deaths and injuries of millions and set the stage for World War II.

— In August, president Woodrow Wilson’s wife, Ellen Axson Wilson, died of Bright’s disease. In reviewing 1914, I found that many stories conclude with Chekhovian despair over losses like Wilson’s. Death and disease permeated culture then in a way far beyond what most of us can comprehend today. The average death rate was 13.6 per 1,000, a record low at the time, but much worse than today’s 8.07, while life expectancy was 52 years for men and 56.8 years for women; Tom Cruise and Geena Davis would likely be dead, not still acting.

— On Lexington Avenue near 103rd St., a bomb intended for John D. Rockefeller exploded in an anarchist’s apartment. The incident became Known as the “Lexington Avenue bombing;” four people died and dozens were injured. It was one of many politically charged acts of violence of the time, among them bombings and assassination attempts by anarchist Luigi Galleani and his followers. Meanwhile, at Frank Lloyd Wright’s home in Wisconsin, an angered servant killed seven people, including Wright’s mistress and her two children, and torched the place. The “Wright-mare” was a national news sensation at the time, and became the stuff of architecture student lore....MORE

Never Better, a collection of essays from writers we love, is The Awl’s goodbye to 2014.

Oil and Saudi King Abdullah's Illness: Why the Succession Matters

Front month oil is down again although off the day's low of $52.51.
$52.81 last, down $1.31.
From ZeroHedge:

Saudi King Abdullah Hospitalization Sends Stocks Tumbling But It's Oil That Is Suddenly Paying Attention

Earlier today, Saudi Arabia's stock market fell sharply with the Tadawul All Share Index plunging following a Saudi state TV report that King Abdullah had been admitted to hospital for tests. As shown in the chart report, the index tumbled as much as 6% in the minutes after the Saudi Press Agency report which quoted a brief royal court statement.

But while the ill king of the King, aged 90, is hardly news to the discounting stock market, a few more nuanced interpertation of not just what happens if and when the King passes away but what Saudi succession looks like, is much more relevant for oil - especially now that Saudi Arabia has unilaterally decided to tear apart OPEC in its push to put US shale producers out of business.

As Emad Mostaque of EC Strat, accurately observes:

Oil prices are now at levels that cause real concern on the streets of Saudi Arabia, with the prospect of succession the icing on top that has caused retail investors to take the market down another leg.

This policy may not make it through a succession period, where public support and good will is essential, particularly as it has nearly been 20 years since the last change.

The new regent could decide to keep existing policy, change it completely or anything he decides. Similarly he has free reign to realign Saudi Arabia’s foreign policy as he wishes, which is a discussion for another time and place, but could have significant regional impacts.

The full note from the source can be found below.

Summary: King could change, new King can do (almost) anything he wants, including changing oil policy

The Saudi market collapsed 6.5% today on Saudi Press Agency reports that King Abdullah was admitted to hospital for medical tests.

Ordinarily this shouldn’t be a big deal and is nothing new, with King Abdullah having had back surgery in 2012 and spent an extended period in convalescence in Morocco in the last year. However, having led the Kingdom for almost 19 years (as of Friday) and at the official age of 90 years old, this report raises the question of eventual succession once more.

Unlike Oman, where Sultan Qaboos has been unwell in Germany and his heir unknown, we know that King Abdullah’s heir will be Prince Salman bin Abdulaziz al Saud (79), who succeeded Prince Nayef as Crown Prince in 2012 having been Minister of Defence and Governor of Riyadh previously. Next in line is Prince Muqrin (69), the youngest of that generation of Princes, meaning a likely generational jump thereafter.

While any process of succession should be smooth with the next two leaders defined (and some strong probabilities as to who follows after), there is significant uncertainty as to what path Saudi Arabia may take going forward....MORE

The author of the Ecstrat note, Emad Mostaque, basically called the rise of ISIS, which we noted in a couple posts last summer:
Oil and a Really, Really, Really Good Analyst Call On Iraq
The Analyst Who Called the Instability In Iraq's Oil Market Says Nigeria Is Next

Possibly also of interest:
Dec. 30
Oil: "Why Saudi Arabia is still in charge"
Dec 21
"Saudi Arabia says won't cut oil output"
Dec 4
"Oil falls on news that Saudis are preparing for $60 US crude"
Nov 13
ISIS leader Urges Attacks in Saudi Arabia - speech
Nov 3
How will Saudi Arabia respond to lower oil prices?
More important than Saudi production are Saudi exports. The Kingdom's domestic consumption is rising fast with the House of Saud subsidizing gasoline prices in an attempt to stave off an Arab Spring in downtown Riyadh.... 
Oct 20
Oil: What Is Saudi Arabia Up To?
I'm leaning toward some sort of geopolitical quid pro quo with the U.S. but because they don't invite me to the meetings I can't tell you the quid or the quo of it. Back on Oct. 2 we had the simple observation "The folks most hurt by this drop in price are Putin, ISIS and the companies producing from shale." 

"2014 in Computing: Breakthroughs in Artificial Intelligence"

Linkmania.
From MIT's Technology Review:

The past year saw progress in developing hardware and software capable of human feats of intelligence. 

The holy grail of artificial intelligence—creating software that comes close to mimicking human intelligence—remains far off. But 2014 saw major strides in machine learning software that can gain abilities from experience. Companies in sectors from biotech to computing turned to these new techniques to solve tough problems or develop new products.

The most striking research results in AI came from the field of deep learning, which involves using crude simulated neurons to process data.

Work in deep learning often focuses on images, which are easy for humans to understand but very difficult for software to decipher. Researchers at Facebook used that approach to make a system that can tell almost as well as a human whether two different photos depict the same person. Google showed off a system that can describe scenes using short sentences.

Results like these have led leading computing companies to compete fiercely for AI researchers. Google paid more than $600 million for a machine learning startup called DeepMind at the start of the year. When MIT Technology Review caught up with the company’s founder, Demis Hassabis, later in the year, he explained how DeepMind’s work was shaped by groundbreaking research into the human brain.

The search company Baidu, nicknamed “China’s Google,” also spent big on artificial intelligence. It set up a lab in Silicon Valley to expand its existing research into deep learning, and to compete with Google and others for talent. Stanford AI researcher and onetime Google collaborator Andrew Ng was hired to lead that effort. In our feature-length profile, he explained how artificial intelligence could turn people who have never been on the Web into users of Baidu’s Web search and other services.

Machine learning was also a source of new products this year from computing giants, small startups, and companies outside the computer industry.

Microsoft drew on its research into speech recognition and language comprehension to create its virtual assistant Cortana, which is built into the mobile version of Windows. The app tries to enter a back-and-forth dialogue with people. That’s intended both to make it more endearing and to help it learn what went wrong when it makes a mistake.

Startups launched products that used machine learning for tasks as varied as helping you get pregnant, letting you control home appliances with your voice, and making plans via text message .

Some of the most interesting applications of artificial intelligence came in health care. IBM is now close to seeing a version of its Jeopardy!-winning Watson software help cancer doctors use genomic data to choose personalized treatment plans for patients . Applying machine learning to a genetic database enabled one biotech company to invent a noninvasive test that prevents unnecessary surgery....MORE

Also at Technology Review:
The Top Technology Failures of 2014

Most-Profitable-to-Lend Securities 2014 (top earning equities in securities lending)

From Security Finance Monitor:

Below is a list of the top-earning equities for securities lenders in 2014. DataLend scanned its universe of more than 42,000 securities on loan to find those securities with the most expensive financing positions in the U.S., Canada, Europe and Asia. Financing costs are determined by taking the total on-loan value of a security and multiplying it by the volume-weighted average fees to borrow that security, then converting the product of those numbers to a dollar value.

We determine the financing costs of all securities per day over the entire year, then add those up and finally select the top 25 that had the highest average financing cost for all of 2014 by region. We then sort the most expensive securities to finance in the securities lending market in descending order.

* Average utilization by quantity across 2014. A high average utilization suggests the security had a high proportion of lendable stock out on loan for an extensive period of time in 2014.

US	Utilization*
1      3D SYSTEMS ORD	93.35%
2      GOPRO CL A ORD	96.77%
3      MYRIAD GENETICS ORD	93.66%
4      MANNKIND ORD	96.35%
5      SEARS HOLDINGS ORD	90.16%
6      DIAMOND OFFSHORE DRILLING ORD	87.89%
7      CLIFFS NATURAL RESOURCES ORD	94.67%
8      VIRNETX HOLDING ORD	90.81%
9      PLUG POWER ORD	90.39%
10    THERAVANCE ORD	91.97%
11     INVENSENSE ORD	94.77%
12     AMTRUST FINANCIAL SERVICES ORD	90.82%
13     ISHARES IBOXX HIGH YIELD BOND ETF	89.94%
14     ISHARES RUSSELL 2000 ETF	86.57%

...MUCH MORE, including European and Asian top earners.

"Goodbye to one of the best years in history"

From The Telegraph:

It might not feel like it, but we are safer, richer and healthier than at any time on record

Newspapers can seem like a rude intrusion into the Christmas holidays. We celebrate peace, goodwill and family – and then along come the headlines, telling us what’s going wrong in the world. Simon and Garfunkel made this point in 7 O’Clock News/Silent Night, a song juxtaposing a carol with a newsreader bringing bad tidings. But this is the nature of news. Whether it’s pub gossip or television bulletins, we’re more interested in what’s going wrong than with what’s going right.

Judging the world through headlines is like judging a city by spending a night in A&E – you only see the worst problems. This may have felt like the year of Ebola and Isil but in fact, objectively, 2014 has probably been the best year in history. Take war, for example – our lives now are more peaceful than at any time known to the human species. Archaeologists believe that 15 per cent of early mankind met a violent death, a ratio not even matched by the last two world wars. Since they ended, wars have become rarer and less deadly. More British soldiers died on the first day of the Battle of the Somme than in every post-1945 conflict put together.

The Isil barbarity in the Middle East is so shocking, perhaps, because it comes against a backdrop of unprecedented world peace.

We have recently been celebrating a quarter-century since the collapse of the Berlin Wall, which kicked off a period of global calm. The Canadian academic Steven Pinker has called this era the “New Peace”, noting that conflicts of all kinds – genocide, autocracy and even terrorism – went on to decline sharply the world over. Pinker came up with the phrase four years ago, but only now can we see the full extent of its dividends.

With peace comes trade and, ergo, prosperity. Global capitalism has transferred wealth faster than foreign aid ever could....MORE

"Researchers have developed the first three dimensional metamaterials..."

Following up on last week's "Metamaterials May be the Next Big Thing: Gates, Allen Bet On Echodyne".
From Next Big Future:

This is a new generation of soft metamaterials that are easier to shape. In their experiment, the researchers got ultrasonic oscillations to move backwards while the energy carried by the wave moved forwards. Their work opens up new prospects, especially for high-resolution imaging (ultrasonography).

The new type of metamaterial, in the fluid phase, is formed of porous silicone microbeads embedded in a water-based gel. This metafluid is the first three-dimensional metamaterial to work at ultrasonic frequencies. In addition, due to its fluid nature, it can be made using physico-chemical processes and microfluidics technologies, which are much easier to implement than micromechanical methods.

One of the properties of porous media is that sound travels through them at very low speed (a few tens of meters per second) compared to water (1500 meters per second). Due to this sharp contrast, the whole suspension has the properties of a metamaterial provided the bead concentration is sufficient: when the researchers studied the propagation of ultrasonic waves through this medium, they directly measured a negative refractive index. Within such a metafluid, the energy carried by the wave travels from the emitter to the receiver, as expected, whereas the oscillations appear to move backwards in the opposite direction, rather like a dancer doing the 'moonwalk'....MORE

Possibly also of interest:
"The Physics Hidden by the Invisibility Cloak": Metamaterials and the Father of the Superlens

Grocery Delivery Service Instacart Raises $220 Million

From the San Jose Mercury-News' SiliconBeat:

Instacart, the scrappy grocery delivery service challenging AmazonFresh, revealed on Tuesday that it has raised up to $220 million, a boost for the quick-growing startup that has so far proven the throngs of grocery delivery naysayers very wrong.

The big investment, led by Kleiner Perkins, values San Francisco-based Instacart at an estimated $2 billion — the same market cap as San Jose data storage firm Nutanix, which is expected to go public next year, and just trailing San Francisco-based Box’s $2.4 billion valuation.

About six months ago, Instacart raised $44 million from Andreessen Horowitz and Sam Altman, among others, at a reported $400 million valuation. The latest funding round reveals just how quickly the startup has grown: It has added new grocery retailers to its app, and has a new partnership with Whole Foods in which Instacart workers are stationed inside the grocery store to shop for and bag food, preparing deliveries for the Instacart driver and expediting the entire process.

Instacart told the New York Times recently that it is poised to generate more than $100 million in revenue in 2014, 10 times what it did in 2013. Founder and CEO Apoorva Mehta told this newspaper in a 2013 interview that the company was making “tens of millions of dollars in revenue” a year after its 2012 launch.

It is also looking to expand into other categories beyond groceries....MORE

Taxi service?

"How did buckwheat become gold dust? Russians in collapsing economy panic-buy Soviet-era staple..."

From the Daily Mail, Dec.16:

The Russian economy is set to plunge deeper into the abyss, after a desperate interest rate hike failed to halt a slide in the value of the battered Russian rouble.

As a result of plummeting oil prices and Western sanctions over Ukraine, the entire Russian stock market is now worth less than the market value of Microsoft.

However, the Russians are concerned with a more pressing crisis: they are running out of buckwheat. 

Buckwheat and bling: A young Russian lady displays her wealth: furs, cash, jewels and buckwheat

Not my buckwheat! Two men in military uniforms pretend to cry over spilled buckwheat in the snow

...MUCH MORE

Oil: "Why Saudi Arabia is still in charge"

From the Financial Times' The Commodities Note:

Opec’s most influential member cannot be taken for granted 

The oil price collapse that started in October 2014 has yet to run its course but this much is already clear: it will be seen as a historic event.

The market has never seen anything like this before. The rout in 2008-09 was arguably more dramatic, but led by factors outside of the oil market. It was a result of a financial crisis and a sharp contraction in economic growth, which sapped demand for oil.

But this time it is different and not just because of the relative scale of price moves. The 2014 sell-off originated in the oil market: first from rising inventories as demand weakened and unplanned outages eased; and then when Opec — effectively Saudi Arabia — decided not to intervene and let market forces rule.

One of the reasons Saudi Arabia relinquished its role as a swing producer is precisely because of these differences — in 2008, external factors caused the drop in demand, which Opec then took action to correct. This time around, the problems came from within.

Production cuts by Saudi Arabia to shore up prices would therefore only result in the kingdom losing market share given the inability and unwillingness (for various reasons such as lack of revenues or high social spending) of other Opec and non-Opec countries to reduce output.

Inevitably, the decision by Opec to “roll over” the existing 30m barrel a day production quota at its November meeting revived old debates about its relevance and importance in the market, especially in light of the growth in US tight oil, or shale output.

But these exchanges usually ignore one simple point. The decision to not intervene is a brave one given that it signals a departure from what economic theory would suggest an oil producer should focus on — revenues.

Saudi Arabia is giving up billions of dollars of revenues in the short term and running a $39bn budget deficit in 2015, in an effort to retain market share. It is betting a period of lower prices (which it can withstand given plentiful foreign exchange reserves) will shake out some high cost producers....MORE

"Runs still threaten the repurchase market: 2014 in review"

From RepoWatch:

As 2014 comes to a close,  it’s tempting to try to assess how much systemic risk has been wrung out of the repurchase market by six years of reforms.

A fair summary would be: Much proposed but little imposed.
In fact, there’s still disagreement on what to do.

One way to analyze the progress might be to see how well the reforms mimic three key programs that have stabilized commercial banking since the 1930s:  (1) Federal Reserve loans to help troubled but still-solvent banks, (2) FDIC insurance to protect depositors, and (3) regulation to make banks financially stronger.

This method for analyzing progress – comparing repo reform to bank reform – has merit because the underlying problem was the same, both for banks in the decades leading up to the 1930s and for the repurchase market in 2007 to 2009: financial panic and runs on banks.

– In the early 20th century, lenders (depositors) lost faith in the solvency of their borrowers (commercial banks) and suddenly demanded their money back. But the banks didn’t have the money any more. They had re-used it to make loans and investments. This created a panic that threatened to bankrupt the commercial banks and the economy.

– In the early 21st century, lenders (on the repurchase market) lost faith in the solvency of their borrowers  (investment banks) and suddenly demanded their money back. But the banks didn’t have the money any more. They had re-used it to make loans and investments. This created a panic that threatened to bankrupt the investment banks and the economy.
As Federal Reserve Governor Daniel Tarullo, the governor with the most responsibility for post-crisis reforms, explained in a November 20 speech  about progress that’s being made toward preventing runs:

The financial turbulence of 2008 was largely defined by the dangers of runs–realized, incipient, and feared. Facing deep uncertainty about the condition of counterparties and the value of assets serving as collateral, many funding markets ground to a halt, as investors refused to offer new short-term lending or even to roll over existing repos and similar extensions of credit. In the first instance, at least, this was a liquidity crisis. Its fast-moving dynamic was very different from that of the savings and loan crisis or the Latin American debt crisis of the 1980s. The phenomenon of runs instead recalled a more distant banking crisis–that of the 1930s.

The structure of the repurchase market makes it particularly vulnerable to runs. Here’s how that works.

On the repurchase market, lenders make short-term loans to borrowers. Because these repo loans are only for overnight or for just a few days, the lenders can quickly withdraw in times of trouble, by refusing to renew the old loan or to make a new one. The lender just suddenly demands its money back.

We’re talking big money here.  More than $3 trillion is outstanding on the U.S. repurchase market every day, compared to less than $300 billion that typically trades daily on the U.S. stock markets. The $3 trillion flows throughout the financial markets, making its way to investors, corporations, businesses, governments, pension plans, insurance companies, and speculators.

If that flow stops, commerce stops.

Repo lenders are almost any large pool of money, like money market funds, hedge funds, government and corporate treasuries, pension plans, and endowments. Repo borrowers are almost any large participants in the financial markets, but especially investment banks and their broker-dealer operations....MUCH MORE

HT: commentator JF at the Economist's View post "Financial Innovation and Risk Management".

"US Equities: 6 Things To Watch In The Days Ahead"

Our first magic number is 2101 on the S&P 500 vs the writer's 2108.
From See It Markets:

It’s been a relatively quiet holiday season for US Equities. But some interesting technical events are taking place that I’d like to highlight and discuss. Some bullish, some bearish.
Here are 6 things to watch over the coming days.

Bullish
1.  First and foremost, the Russell 2000 (RUT), S&P 500 (SPX – Quote), and NASDAQ Composite (COMPQ) have broken out to new highs. The Russell 2000 is probably the most interesting, as it has struggled in a sideways range all year… so a breakout to new highs is noteworthy. All of the breakouts on the US Equities indexes (including the Dow Jones Industrial Average) are marginal, on low volume, and have yet to receive confirmation.
2.  We are also still in the “Santa Clause” rally phase (until Jan 5).
3.  All 4 Indexes mentioned above have rising 50 day moving averages (and these should serve as a barometer of market support into January).
That’s all fine and dandy, but now there are a few near-term concerns that investors/traders should be aware of…

Bearish...

...MORE

Natural Gas: Despite 90% of Nation Being Below Freezing By Thursday (20% below 0°F) Natty Tumbles

Following up on yesterday's 5% upmove the most active February's are trading down 10.1 cents at $3.098.
There's a lot of gas around.
Via Ryan Maue at WeatherBell:

Wed morning will be coldest on avg for CONUS (11°F) but Thurs morn will beat it for area below freezing = 90% pic.twitter.com/G2BqXChtOC
— Ryan Maue (@RyanMaue) December 30, 2014

20% of CONUS now below 0°F Nation avg of 21° coldest since mid-November. Should beat that by morning. pic.twitter.com/ECP7FRPNnH
— Ryan Maue (@RyanMaue) December 30, 2014

Questions America Wants Answered: "Who Would Win in an All-Out Battle: Star Wars or Star Trek?"

From Gizmodo:

Intimidator Class Star Destroyer

A classic debate! Good or Evil? Chocolate or Strawberry? Star Trek or Star Wars (excluding the Death Star)? But unlike those timeless questions this one really does seem to have a compelling answer. And its not what the majority seem to think.

A few necessary caveats (take heed ye trolls): 

1) Although it (should) hardly need saying—these are both completely fictional universes whose technology and scientific foundations are, at best, bolted on after the fact as part of the setting and/or necessary plot devices. This entire debate is like meaningfully debating the combat prowess of Unicorns vs. Dragons. But of course, we're going to do it anyway. 

2) The goal is to assume the most favorable interpretations for each technology as demonstrated most coherently by each canon. Obvious mistakes (i.e using parsecs as a measure of time... Hello Han) or figures completely inconsistent with the results offered (Star Destroyers with power generation of 7.75 x 1024 W... only 100 times less than the sun!) will be ignored. 

For those crying foul a Star Destroyer that needs that much power (to create the abilities displayed) would represent the most fantastic inefficiency ever conceived. Likewise, some of the energy readings suggested for Star Wars laser weapons would instantaneously vaporize any unshielded craft—not to mention the atmosphere in between them—in rather spectacular fashion. Nothing in the physical behavior of these weapons supports these values (for instance that Slave 1 has 64,000 GW lasers or 190 Megaton missiles. Never, in any battle, was a blast of that nature or kind observed). 

Bottom line: All weapons and systems should be evaluated on how they actually perform as depicted in the canon as opposed to often innumerate and psuedo-scientific gibberish offered in support of them. That being said, where a vaguely credible explanation has been offered, it will generally be taken (i.e. lasers are lasers).

3) The treatment of technology dramatically complicates the task of comparison. Star Trek consciously attempted to provide at least some basis (however weak or novel) for the science behind their technology. Star Trek represents a technological utopia and was promoting the idea of a better future via modern technology. This is also evident in that the technology of Star Trek advances dramatically over the course of the various seasons (including referencing far future Star Trek timelines with mastery over time itself). Star Wars, on the other hand, makes no such claims and depicts an utterly static technological milieu in which no appreciable advances have been made (save perhaps the Death Star itself) in tens of thousands of years. In addition, Star Wars often offers little—if any—scientific explanation for its tech (Hyperspace—it's fast!). I am assuming the general tech capabilities of Trek as found as late as Voyager. 

Now, those out of the way lets get to the point. This is not a close fight. Despite the desires of the many fans, the Star Trek universe is rife with economic, tactical, social, and technological superiority. Claims of Star Wars victories all seem to echo the Stalin-esque view that "Quantity has a Quality all its own." But this is profoundly misguided. Let's break down why.

Economic Factors

Star Wars population is very difficult to assess. Some estimates suggest a 1,000,000 world Empire. But the Galactic Senate depicts a vastly smaller political entity. According to Star Wars Wiki, the Empire was divided into units of 50 systems each with a senator. However, the Senate only has 2,000 members. Which means a galactic polity of 100,000 active members. This is still vastly greater than the Federation with something like 150 members and 1-5 thousand worlds. 

However, the nature of this population is most important. The Empire, while having far larger population, appears weakly integrated. Entire populations (quite commonly) are depicted as isolated and poor. Basic farming or harvesting seems commonplace. Much of the population appears uneducated and even tribal. While the core worlds are densely populated, they are apparently completely dependent on agricultural and other products from the empire. This means Star Wars retains a traditional resource economy model....MORE

HT: the accounting nerds at GoingConcern

"...U.S. Drillers Idling Most Rigs in 2 Years"

Not nearly enough.
From Bloomberg:

U.S. oil drillers idled the most rigs since 2012 as prices slid below $55 a barrel to the lowest level in five years and a fight for market share with OPEC intensified.

Rigs targeting oil declined by 37 to 1,499 in the week ended Dec. 26, the lowest since April, Baker Hughes Inc. (BHI) said on its website yesterday, extending the three-week decline to 76. Those drilling for natural gas increased by two to 340, the Houston-based field services company said.

U.S. oil output has surged to the highest in three decades even as the Organization of Petroleum Exporting Countries resists cutting production to defend market share, exacerbating an oversupply that Qatar estimates at 2 million barrels a day. Crude has slumped by almost 50 percent this year, prompting U.S. producers including Continental Resources Inc. and ConocoPhillips to plan spending cuts.

“We should see the rig count going down at least through the end of the first quarter as a reaction to the low oil prices,” said James Williams, an economist at WTRG Economics, an energy-research firm in London, Arkansas, before the report. “By midyear, we should see measurable impacts on production.”

The total rig count, which includes one miscellaneous rig, dropped 35 to 1,840, an eight-month low.

Brent crude and U.S. West Texas Intermediate crude futures are both trading near five-year lows. WTI was at $53.88 a barrel at 9:43 a.m. on the New York Mercantile Exchange today, while Brent was at $57.87.

Falling Margins
“The rig count is falling because oil prices are falling,” Carl Larry, a Houston-based director of oil and gas at Frost & Sullivan, said by phone. “The margins just aren’t there.”

While the U.S. rig count has dropped, domestic production continues to surge, with the yield from new wells in shale formations including North Dakota’s Bakken and Texas’s Eagle Ford projected to reach records next month, Energy Information Administration data show....MORE

Venture Capital in 2015: Mark Suster of Upfront Ventures on Valuations Creeping Up

From Venture Capital Dispatch:

Venture capital exploded in 2014, with bigger deals and more eye-popping valuations than anytime since the dot-com boom. So what happens next, and which opportunities will define 2015?

We asked several venture capital investors to reflect on the past year and give us their outlook for the next 12 months. Next in our series is Mark Suster, a partner at Upfront Ventures. Mr. Suster talks about the new capital in venture, the creep of valuations and the venture cycle versus the economic cycle.

What surprised you the most about 2014?
A couple of things surprised me in 2014. The first was the extent to which new entrants–corporate investors, hedge funds & mutual funds–piled into the late-stage VC market and drove up valuations and created new competition for deals. The second was the increasing sure-footedness and confidence of the great Asian Internet companies as they globalize, including Baidu, TenCent, Alibaba, Rakuten, Naver and others.

What do you think will be the biggest challenge for your part of the industry in 2015?
The biggest challenges for the venture capital industry will be the continued creep in valuations across all stages of the industry. In early-stage capital the influx of angels, seed funds and crowdsourcing has led to an 8% to 12% CAGR over the past four years for early-stage deals, while late-stage deals have seen a 24% CAGR due to increased competition as outlined above. Great companies will be built in this period, but times of over-capitalization in our industry don’t bode as well for long-term capital returns. The other big challenge is that as more tech companies become embedded in daily life they will abut industries that are regulated and will fight back. We’ve seen this already with Uber, Lyft and Airbnb. Expect more of this ahead....MORE

Privately held create-a-corps and some interesting finance in North Dakota oil fields are a couple examples of where Fed policy has taken us. See also:
"The Economics of Artisanal Chocolate" (Here at Zero-bound Chocolates, We Believe...)
Barron's Cover: Tech Stocks--The Bubble Is In the Private Market

Just In Time For the Rise of Passive Investing: "Correlations to Break Down in 2015"

From MoneyBeat:

If there’s one overarching idea for global investing in 2015, it’s that overarching strategies aren’t a good idea.

In 2014, global markets started breaking a multiyear pattern in which different asset classes and geographic markets mostly moved in unison. Correlations are set to break down further in 2015.

Accelerating this breakdown is fact that central banks are going their separate ways – the Federal Reserve is preparing for a rate increase, the European Central Bank for more monetary easing – while energy producers and consumers are experiencing starkly different effects from falling oil prices.

The upshot: Global investors must do their homework. across-the-board bets on risk-sensitive assets such as equities or junk bonds won’t do; they will need to be more selective. The fundamental circumstances for each country, company or commodity must be assessed and differentiated. Investment positions will need frequent adjusting. Simplicity is ceding ground to the realities of a complex world.

“In a year when economic fortunes and central bank policies will diverge, it will be important to be positioned in a way that recognizes the challenges and identifies where the potential opportunities lie,” says Rick Lacaille, chief investment officer for State Street Global Advisors, which has $2.4 trillion under management. State Street is hoping that 2015 will better suit its bottom-up value-investing model rather than the top-down macro approaches that were favored during the highly correlated market movements of recent years.

Correlations became especially strong after the 2008-2009 financial crisis. During “risk on” periods, when central-bank monetary stimulus measures boosted confidence in the global financial system’s recovery, investors poured into all manner of “risk sensitive” assets, raising prices for emerging-market currencies, high-yield bonds, industrial commodities and equities indiscriminately. Then, during “risk off” panics such as those of the eurozone crisis, those flows would abruptly reverse and head to safe-havens denominated in dollars or yen.

However, herd investing has roots that precede the crisis. Its habits could be hard to break.

As Financial Times columnist John Authers noted in his 2010 book, “The Fearful Rise of Markets,” blame for the “global bubbles” and “synchronized meltdowns” of recent years lies with both official policymakers and with the professional investment industry. Former Fed Chairman Alan Greenspan gave rise to the “Greenspan Put,” which after it morphed into the “Bernanke Put” during Ben Bernanke’s chairmanship continued to signify the expectation that the Fed would always minimize investors’ losses in falling markets by flooding them with monetary liquidity. Meanwhile, government bailouts led Wall Street investment banks to believe they were too big to fail. At the same time, monthly assessments of portfolio performances led competing professional money managers to stick closely to their benchmarks, which meant they invested as a group. The same industry devised classifications that put disparate assets and markets under broad umbrellas, each tailored-made for the herd: “junk bonds,” for one, and, most significantly, “emerging markets.” All of this meant that nuanced insights were less valuable.

Meanwhile, economists were describing a world that seemed to be converging into homogeneity. The idea that globalization, information technology and improved policies were driving developing nations to catch up to the advanced economies became an article of faith that in turn encouraged parallel investment strategies. Its baseline assumption – that America was slowing and emerging markets were the future — couldn’t anticipate the late-2014 scenario where the U.S. is again the world’s engine of growth while developing nations such as Russia confront crises....MORE

JibJab 2014 Year in Review: "2014 You Are History"

From JibJab:




Previously:
"JibJab 2013 Year in Review: 'What A Year!"'
That's a Wrap, On to 2011
That's a Wrap: Good-bye to 2009
Jib Jab's Year in Review, 2008
JibJab Year in Review 2007
Happy Independence Day 2013! 

JibJab Year in Review 2012: "The End is Here!" 
Jibjab Year in review 2011: "2011 Buh-Bye" 

And the one that rocketed JibJab to national attention in 2004 (reprised here in 2012):

Lest We Forget: "Rarely is the question asked: Is our children learning?"

-George W. Bush

43rd President of the United States
Florence, S.C., Jan. 11, 2000

Theory of Eternal Inflation: "In a Multiverse, What Are the Odds?"

Alternate title: Peter Schiff Call Home.
Just kidding Mr. Schiff, carry on.

From Quanta:

 

 The theory of eternal inflation casts our universe as one of countless bubbles in an eternally frothing sea.

Testing the multiverse hypothesis requires measuring whether our universe is statistically typical among the infinite variety of universes. But infinity does a number on statistics.

If modern physics is to be believed, we shouldn’t be here. The meager dose of energy infusing empty space, which at higher levels would rip the cosmos apart, is a trillion trillion trillion trillion trillion trillion trillion trillion trillion trillion times tinier than theory predicts. And the minuscule mass of the Higgs boson, whose relative smallness allows big structures such as galaxies and humans to form, falls roughly 100 quadrillion times short of expectations. Dialing up either of these constants even a little would render the universe unlivable.

To account for our incredible luck, leading cosmologists like Alan Guth and Stephen Hawking envision our universe as one of countless bubbles in an eternally frothing sea. This infinite “multiverse” would contain universes with constants tuned to any and all possible values, including some outliers, like ours, that have just the right properties to support life. In this scenario, our good luck is inevitable: A peculiar, life-friendly bubble is all we could expect to observe.

Many physicists loathe the multiverse hypothesis, deeming it a cop-out of infinite proportions. But as attempts to paint our universe as an inevitable, self-contained structure falter, the multiverse camp is growing.
The problem remains how to test the hypothesis. Proponents of the multiverse idea must show that, among the rare universes that support life, ours is statistically typical. The exact dose of vacuum energy, the precise mass of our underweight Higgs boson, and other anomalies must have high odds within the subset of habitable universes. If the properties of this universe still seem atypical even in the habitable subset, then the multiverse explanation fails.

But infinity sabotages statistical analysis. In an eternally inflating multiverse, where any bubble that can form does so infinitely many times, how do you measure “typical”?

Guth, a professor of physics at the Massachusetts Institute of Technology, resorts to freaks of nature to pose this “measure problem.” “In a single universe, cows born with two heads are rarer than cows born with one head,” he said. But in an infinitely branching multiverse, “there are an infinite number of one-headed cows and an infinite number of two-headed cows. What happens to the ratio?”

For years, the inability to calculate ratios of infinite quantities has prevented the multiverse hypothesis from making testable predictions about the properties of this universe. For the hypothesis to mature into a full-fledged theory of physics, the two-headed-cow question demands an answer.

Eternal Inflation
As a junior researcher trying to explain the smoothness and flatness of the universe, Guth proposed in 1980 that a split second of exponential growth may have occurred at the start of the Big Bang. This would have ironed out any spatial variations as if they were wrinkles on the surface of an inflating balloon. The inflation hypothesis, though it is still being tested, gels with all available astrophysical data and is widely accepted by physicists.

In the years that followed, Guth and several other cosmologists reasoned that inflation would almost inevitably beget an infinite number of universes. “Once inflation starts, it never stops completely,” Guth explained. In a region where it does stop — through a kind of decay that settles it into a stable state — space and time gently swell into a universe like ours. Everywhere else, space-time continues to expand exponentially, bubbling forever....MORE

"How much economic potential does Cuba have?"

From Marginal Revolution:

I’m not one of those who thinks Cuba is the next Singapore or even the next Puerto Rico. Why not?

I’m willing to assume that the end of the American embargo will mean some kind of economic liberalization over the next ten years. But how much good will that bring?

We could start by looking for relevant comparisons. We could ask how well have non-British-ruled, non-Dutch-ruled, non-American-ruled Spanish-speaking Caribbean islands done? There is a fairly clear example of such a country with some ethnic, cultural, historic, and linguistic similarities to Cuba, namely the Dominican Republic. For non-PPP-adjusted gdp per capita, the D.R. clocks in at about $5800 per year. And that is about where I think Cuba will end up, after a good bit of turmoil.

Now various official sources put Cuban per capita gdp (again, non-PPP-adjusted) at about that same level. That is highly misleading, and yes I have been to both countries. (Other countries at that level don’t have so many hungry people or so many women selling their bodies to tourists.) In any case I expect Cuban reforms, along with a good bit of additional deindustrialization from U.S. competition, to bring a short-run gdp dip, with an eventual climb into a D.R.-like economy, albeit with big bumps along the way.

Here are a few additional points:

1. The Caribbean in general has done very poorly since the economic crisis of 2008. Most of it does not show signs of bouncing back. ...MUCH MORE

Well duh.
I didn't understand all the econ/financial/investment rhapsodizing upon the December 17th announcements.
If there was any econ/business value there don't you think Canada or Germany or China might have pursued it?

New York Fed: "Global Asset Prices and the Taper Tantrum Revisited"

From the Federal Reserve Bank of New York's Liberty Street Economics blog:

Global asset market developments during the summer of 2013 have been attributed to changes in the outlook for U.S. monetary policy, starting with former Chairman Bernanke’s May 22 comments concerning future curtailing of the Federal Reserve’s asset purchase programs. A previous post found that the signal of a possible change in U.S. monetary policy coincided with an increase in global risk aversion which put downward pressure on global asset prices. This post revisits this episode by measuring the impact of changes in Fed’s expected policy rate path and in the economic outlook on the U.S. dollar and emerging market equity prices. The analysis suggests that changes in the U.S. and foreign outlooks had a meaningful role in explaining global asset price movements during the so-called taper tantrum.

    The earlier post Risk Aversion, Global Asset Prices, and Fed Tightening Signals used a statistical model estimated with data for U.S., euro area, Japanese and emerging market equity markets, the U.S. and euro area bond markets, commodities, and the dollar, where the current changes in the values of these assets are regressed on past changes in the values of all the assets, with the changes not explained being “residuals.” Then, shocks to risk aversion were estimated by looking at shifts in the correlations across the model’s residuals when there are large changes in overall implied volatility. That analysis suggested that substantial increases in risk aversion coincided with Bernanke’s testimony, resulting in a significant downward pressure on global asset prices in the two months after it.

    However, measuring changes to global risk aversion is a difficult exercise and the previous effort did not link it explicitly to either changes in policy expectations or to changes in the economic outlook. Here, the same statistical model and methodology are used to look at shifts in the corresponding residuals’ correlations on three sets of days:

1. Days when there are major U.S. data releases, where the news is measured by comparing for each release the Bloomberg consensus expectation with the realization. A weighted average is constructed, using the covariance with the average model residual on a day as weights, of these data-release surprises across nineteen U.S. releases, ranging from GDP to price, labor market, and housing indicators.
   
2.  Days when there are major foreign data releases with a similar weighted average constructed for the advanced foreign economies as well as some emerging market economies.
   
3. Finally, for days when there are Federal Open Market Committee (FOMC) statements, the changes in Fed funds futures and Eurodollar futures (up to a maturity of three years), adjusted for credit risk and data release surprises on these days, are used to measure changes in the expected future path of the Fed’s policy taking the approach of Gürkaynak, Swanson, and Sack (2005).

    Using an approach similar to that used in Mertens and Ravn (2013), it is possible to quantify the shocks due to revisions in market participants’ U.S. and foreign economic outlooks as well as due to revisions in expected future Fed policy and use the model to estimate the impact of these shocks on asset prices....MORE