Sympathy For the Devil? Trouble is Brewing in Banker Paradise
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Sympathy For the Devil? Trouble is Brewing in Banker Paradise
Posted by Neil Garfield | May 7, 2017
Authored by Adam Taggart via PeakProsperity.com
Bad Times For Bankers!
A guy I’ve known since childhood works on the ‘sell side’ (investment/commercial banking, stock brokers, market makers) and has been telling me how cutthroat things have become over the past few years. The pay structure and job security have deteriorated notably. And he says the same is true for many of his colleagues on the ‘buy side’ (hedge funds, asset managers, institutional investors), too.
Even with enjoying the “unabated bonanza” described above, even with the markets back partying at all time highs, things are getting worse for many bankers?
And while I personally can’t conjure any sense of empathy for these poor devils, it looks like things are going to get even harder for them.
So what’s going on here?
Well, it’s mostly a story of the banking system’s plundering ways coming back to bite it.
Capital Is Fleeing From Active To Passive Funds
First off, by flooding world markets with over $12 Trillion since the Great Recession, the central banks have pretty much destroyed “alpha.”
Alpha is the “excess return” that fund managers’ fees are based on — i.e., “you’re paying more for a smart guy like me to ‘beat the market’.” But when a tsunami of liquidity rises all boats at once, it’s that money flood (i.e. the central bank money printing) that drives valuations. And its influence is so much larger than any other factor that it’s really the only factor that matters. Great and crappy companies alike rise in price — the “fundamentals” that fund managers use in their analysis become useless.
Which is why 66% of large‐cap active managers failed to top the S&P 500 in 2016, and why 90% missed their benchmarks over the past 15‐year period.
So it’s no wonder that investment capital is fleeing from actively‐managed funds to passively&hyphe;managed ones. If the passive funds have much lower fees AND they perform better than the actively managed ones, why they heck shouldn’t money flow into them!
A buoyant start to the stock market in 2017 couldn’t stop investors from ditching actively managed funds.
The trickle away from stock pickers and toward indexes has turned into a flood, with more than half a trillion dollars heading into passive funds over the past 12 months, according to Morningstar.
Active management in total saw $13.6 billion in outflows for January, mitigated only by net inflows to bond funds, Morningstar said. U.S. equity saw $20.8 billion in outflows, bringing passive management closer to parity when it comes to domestic stock funds.
By contrast, passive management saw just shy of $77 billion in inflows. U.S. equity funds, which track broad indexes like the S&P 500 and its sectors and subsectors, pulled in $30.6 billion for the month.
Overall, actively managed U.S. equity funds now hold $3.6 trillion in assets while their passive counterparts hold nearly $3.1 trillion. All classes of passive funds have seen inflows of $563 billion over the past year, while active funds have suffered $325.6 billion in outflows.
“The massive exodus from actively managed U.S.‐equity funds continued in January,” Alina Lamy, Morningstar’s senior analyst for quantitative research, said in a statement. “The tidal wave is showing no signs of stopping, threatening all but a select few and making active investing a dangerous ocean to swim in.”
The result of this is tremendous mounting pressure for active managers to reduce their fees. Lower fees being charged on shrunken fund pools obviously affords fewer asset managers, who in many cases are now working for less compensation.
Keep in mind, between just the ECB and the DOJ, nearly $200 Billion of additional liquidity has been — and continues to be — injected into world markets each month(!). So, as the above article says, don’t expect the tidal wave of capital fleeing actively‐managed funds to stop while the central banks’ liquidity spigots are still flowing.
The White‐Collar Cost Of Automation
Finance was one of the first industries to embrace the automation boom, given the obscene profits that could be made. In his book Flash Boys, Michael Lewis described how the arms race of high frequency algorithms literally changed the game in terms of how financial instruments are traded — and made $billions upon $billions of unfair profits for the big banks that invested in the technology.
Well, many of the bankers who cheered the boost the machines gave to their annual bonuses aren’t cheering so much now. You know what algo‐driven markets don’t need? Human traders.
Below is photo of the UBS trading floor from 8 years ago, contrasted with one from this year’s source: (Zero Hedge)
8 Years Ago
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