Wrapping up our annual gathering this past week, three common themes across regions and sectors stood out. As 2020 unfolds, we’ll have more to say on these topics, but in the meantime, here are the broad outlines of our dialogue.

Disruption: Few themes are as evergreen as identifying disruptors and the disrupted, so it was no surprise that we spent much of our day on the subject. Our ideas around the poster children for disruption – e-commerce and the retail industry – came full circle as our retail teams argued that traditional retailers need to disrupt themselves, innovating in order to reinvent their cost structures. Innovation isn’t just driving down costs, but also transforming the way businesses grow – e.g., using digital technologies to scale up, it’s taken upstart Luckin Coffee just two years to match the store count that Starbucks needed 20 years to build in China. We also discussed the hype around 5G, the opportunities it may bring in an increasingly urbanized and data-centric world, and its limitations in transforming manufacturing processes (where investors may need to wait for 6G). And since no discussion of disruption would be complete without addressing the proliferation of the public cloud, we debated the ultimate size of the addressable market and growing risks that not only tech hardware companies but also software firms could see increased disintermediation from the cloud platforms themselves.

Spheres of influence: The new theme this year was the movement of the US and China away from integration. The idea of diverging spheres of influence – separate universes of economic activity, technological standards and political influence – came up again and again. Intensifying competition for technological leadership, as well as limited market access for companies seen as too closely aligned with one side or the other, will affect fundamentals and multiples. Long term, identifying exposure to these trends will create alpha. For example, we think that China’s buildout of a semiconductor industry is likely to have meaningful implications for US and European players. Whether it’s in big data and AI, payment & networking standards, innovation in biotech, consumer products or social networks, the theme of US-China divergence is bound to be relevant. This new reality also raises the

Primary:

“First they needed some high-profile endorsements,” said the CIO. “Then they needed to win a couple early primaries,” he continued. “Only then could they raise the big corporate money to fund a campaign.” Few candidates could make it, they’d drop out early, narrowing the field by the end of March. “Now candidates raise money online. And the timeline has accelerated so that 70% of delegates are allocated by March 31, whereas previously it was only 35-40% by then. This will transform the Democratic primary process in ways few people yet understand.”

“If a candidate gets above 15% of the vote in a state primary, they receive their proportional share of that state’s delegates,” explained the same CIO. “In the past, that was fine because the field narrowed early. But we’re likely to see four candidates make it all the way to the convention in July.” Biden, Buttigieg, Warren, Sanders. “It’s highly unlikely anyone will win 50% of the delegates.” So candidates will transfer delegates to the contender of their choice, and that will determine the winner. “This will be America’s first parliamentary-style nomination.”

"We’ll head into the July convention with two voting blocks,” he said. Warren and Bernie (Progressive). Biden and Buttigieg (Moderate). “It will create a lot of uncertainty as to who will prevail, and some people will think this will benefit Trump. But he is an extremely weak candidate.” Trump lost the 2016 popular vote and were it not for 77k voters spread across Philadelphia, Detroit and Milwaukee, he would have lost the Electoral College. “He’s tripling down on a strategy to bring out his base, but there aren’t many ageing, white, rural males left.”

As we pointed out first last month, and as Convoy Investments echoed last week, with the US economy allegedly doing very well, the Fed's balance sheet is now expanding at a rate matched only briefly by QE1, and faster than QE2 or QE3, in the aftermath of September's repo fiasco which provided Powell with an extremely convenient scapegoat on which to hang the return of "NOT QE" (which, we now know, is in fact QE.)

The Fed's unprecedented balance sheet expansion in a time of alleged economic stability and solid growth is a handy explanation why the S&P has been soaring in the past two months, and as we pointed out, a remarkable correlation has emerged whereby the S&P is up every week the Fed's balance sheet is higher, and down whenever the balance sheet has declined.

And so, while helping us understand what has been the fuel for the market's recent blow-off top meltup, the Fed's emergency intervention does beg the question: is there something amiss more than just the repo market, and is Powell telegraphing that a far more serious crisis may be looming.

It's not just Powell, however. It's everyone.

As Bank of America's Michael Hartnett notes in his latest Flows and Liquidity weekly, global monetary policy has flipped from Quantitative Tightening (net 42 hikes & $650bn liquidity removed in 2018) to aggressive Quantitative Easing (net 53 cuts) and represents that fastest pace of central bank cuts since the financial crisis.

Of course, back then, there was a legitimate reason for central banks to be cutting rates as if their lives depended on it: they literally did, because absent stabilization at any cost, fractional reserve

Here Comes Santa Claus (Rally)

On Friday, the market rallied sharply on the back of a much better than expected employment report and comments from Larry Kudlow that a “trade deal” is near. Given we are now at the last stages of the year where mutual, pension, and hedge funds need to “window dress” for year-end reporting, we removed our small equity hedge from the portfolio for the time being.

A quick word about that employment report.

While the headline number was good, it remained primarily a story of auto workers returning to work and continued increases in lower wage-paying jobs and multiple jobholders. Such has been the story of the bulk of this recovery. However, more importantly, the bump did not change the overall dynamics of the job market cycle, which is clearly deteriorating as shown in the chart below.

The key to trend change is CEO confidence which is extremely negative and coincident with employment cycle turns. Note that the end of employment cycles, when compared to CEO confidence, looks very similar at the end of each decade.

Nonetheless, in the short-term, the market dynamics are positive suggesting the market can indeed rally into the end of the year. As noted above, we have removed our equity hedge for now to allow our long-positions to fully benefit from the expected “Santa Claus” rally.  (Or if you prefer the more PC version then it would be the expected “Jovial Full-Figured Holiday Person” rally.)

With the market back to short-term overbought, and the short-term “sell signal” still in place, it is possible we could see a bit of a correction next week. However, as we head into the last week of the year, a retest of highs is quite likely. 

In the longer-term, as we will discuss more in a moment, the risk remains to the downside. It is highly unlikely there will be a “trade deal” anytime soon, and with the upcoming election, there will likely be increased volatility going into 2020.

From a purely technical perspective, on a monthly basis, the

Then on Saturday, at around 1:45pm, the art world was shocked and the art gallery stunned, when a random man, allegedly a performance artist, ate said duct-taped banana that sold earlier this week for $120,000.

New York-based performance artist David Datuna ate the banana early on Saturday afternoon in front of a stunned convention full of "art" lovers most of whom had no idea whether they were witnessing even more "art", of just some clueless rando eating the world's most discussed "art" exhibit, the gallery told the Miami Herald.

"Are you kidding me?"
"It's performance."
"It's absolutely not performance."
…
"See you after jail, guys!" pic.twitter.com/BHsCtNLki2

— JiaJia Fei ??? (@VAJIAJIA) December 7, 2019

Perrotin Gallery spokesman Lucien Terras told the Herald that Datuna did not "destroy" the artwork because "the banana is the idea", or as Magritte would say "Ceci n'est pas une banane." 

The controversial piece, called "The Comedian," was created by Maurizio Cattelan, an Italian artist who had also entertained art lovers from around the globe in 2017 with his "America" 18-carat-gold toilet. The $6-million throne was stolen from England's Blenheim Palace over the summer according to CBS.

Emmanuel Perrotin, the gallery founder, told CBS News that Maurizio's work is not just about objects, but about how objects move through the world.

"Whether affixed to the wall of an art fair booth or displayed on the cover of the New York Post, his work forces us to question how value is placed on material goods," he said, although he could have also added "or eaten."

He added that "the spectacle is as much

Seven years later, the recovery is just as sluggish and yet nothing has changed; in fact, just two months ago, the Fed launched what Fed Chair Powell sternly refuses to admit is QE4 but… is QE4. And while Einhorn has been right that the Fed is ultimately destroying the very fabric of not only the US economy, but taking down society with it as the growing wealth and income disparity chasm will eventually culminate in civil war, by fighting the Fed, Einhorn has seen his AUM plummet in recent years, his hedge fund a shadow of what of what it once was, largely due to the relentless ascent of the so-called "bubble basket" of stocks, those names which benefit entirely due to the Fed's monetary generosity, and which have seen their stocks prices explode in the past decade.

Which brings us to another Jelly Donut – that's the name of a new podcast service, which in recent weeks has interviewed, Julian Brigden, Ben Hunt, Miles Kimball, and others. Most notably, among those interviewed is that man responsible for the concept in the first place: David Einhorn.

While David Einhorn has recently been in the press for yet another feud he is currently waging, this time with Elon Musk, in which he first accused the Tesla CEO of "Significant fraud",  followed up with even more specific accusations of accounting irregularity profiled here, in the podcast with Ryan – which marked the Greenlight CEO's first appearance in two years – Einhorn goes back to his roots and takes on his primary nemesis, the Federal Reserve, which is why among the topics covered are QE, ZIRP, MMT, fiscal and central bank

Where in the world is 32 year old art dealer Inigo Philbrick?

The mysterious young dealer burst onto the art scene years ago, bidding for million-dolllar works before age 30, his name written down in the rolodex of every art-collecting billionaire.

But now, he has vanished. And as Bloomberg reports, his name was one of the biggest topics of discussion in Miami Beach this week, where Art Basel – one of the biggest events in the art industry – is taking place. 

His disappearance comes after a wave of lawsuits filed against him for fraud in London, New York and Miami. The aftershock has left the Art Basel crowd fearing that it could stoke broader fears about the often-opaque industry globally. 

The story, not unlike the industry itself, stretches around the globe. It has links and ties to major auction houses, including an art-finance firm backed by George Soros.  Los Angeles-based art dealer Timothy Blum said: "It checks every box in a bad way. So gross."

The scandal centers around allegations that Philbrick sold the same art works to different investors, often at inflated prices. Just like with rehypothecated collateral, companies in Asia, Europe and the U.S. have all staked claims to the same art pieces. 

The allegations emerged in October which is when Philbrick disappeared. His gallery in Miami has been closed and he hasn't been spotted for weeks at the trendy Japanese restaurant where he was once a regular. There was a "For Rent" sign hanging outside of his London gallery.

Meanwhile, he failed to appear for court last month in both Miami and London and his lawyers in Miami have stopped representing him; his whereabouts have raised questions across the industry. 

Wendy Goldsmith, a London-based art adviser, asked: "What was he thinking?"

Adam Lindemann, a dealer and collector, said: "Philbrick seemed to come out of nowhere, and [I] was never quite sure where he got his funding. He had this charming, rogue manner about him. The art world always has people like

After Amazon spent all that time and money developing its cashierless 'Amazon Go' convenience store model, where a complex array of sensors and cameras are employed to ensure that customers are charged for their groceries via their Amazon accounts, convenience store chains from Russia to the US have found that allowing customers to pay for their own items at self-checkout counters – a system that relies on customer honesty – is equally as effective.

It sounds like an invitation to steal, but in the race to make shopping as seamless as possible, it makes sense. And many convenience store owners have found that rates of theft are surprisingly low.

"Our answer to Amazon Go is a store based on trust," said Andrey Krivenko, founder and chief executive officer of Vkusvill, Russia’s fastest-growing grocery chain, which started opening what it calls "micro markets" in Moscow office buildings last year. “People scan everything themselves and, in our already sizable experience, there’s virtually no theft."

Check out the photo below, taken at a Vkusvill market in Moscow. It's not quite the Amazon Go walk out with your groceries model, but it's close. And at a cost of $0.

Some of these markets have come up with truly ingenious psychological tricks to discourage theft.

Across the globe in downtown New York, beverage-maker Iris Nova sells $10 bottles of brands like Dirty Lemon in a small store in the bottom of a building that doesn’t have employees or a cash register. Customers are trusted to use their phones to pay for drinks via text message. The space has visible security cameras, as well as mirrors that may subconsciously push visitors to pay because they don’t want to see themselves stealing—although the company says the mirrors are purely for aesthetics.

Such a setup works because “you want to show yourself you’re a good person,” according to Kelly Goldsmith, an associate professor of marketing at Vanderbilt University’s Owen Graduate School of Management, describing it as “self-signaling.”

The mirror thing has helped the location clock a

His firm makes its investment decisions based on daily meetings, where managers pitch their ideas and thoughts about macroeconomic events behind a podium. He also has a "situation room", where TVs feature news networks like Al Jazeera and China's CCTV, according to Bloomberg.

But nowadays that is considered archaic and behind the times, especially in the age of algorithms and high frequency trading. 

And so Hintze looks as though he may be ready to embrace a switch, saying in a interview that his firm has now turned to "quantum computing" - a superfast technology that is still in labs, where major corporations like Google and IBM are still trying to figure it out. 

Hintze said: “We’re trying to get a little bit ahead. You need to be mindful of the tools you have, the ground you’re fighting over, and, thirdly, who you’re fighting against.”

But he also dismissed plans to start a fund run by algorithms. Instead, he says that CQS is working with a startup to develop a quantum chip to help the firm optimize portfolios and execute hedging strategies. CQS recently hired Ahmad Deek, formerly of Oppenheimer, to be the firm's head of data science. 

The firm has about $19 billion under management and so far, has done so just using traditional human analysts and managers. The company is one of the largest firms in Europe and its $3.1 billion multi-strategy CQS Directional Opportunities fund is up more than 550% since launching in August 2005. This is double the gain of the S&P 500 over the same time period and about 7x the average hedge fund return.

Hintze knows he faces upcoming challenges, too. Almost half of his firm's assets are in long-only strategies and he has recently entertained approaches by at least one PE firm about buying a stake in CQS.

He also has to deal with an investor appetite that is stoked primarily for quant funds and low-cost passive funds. He has previously called this a "paradigm shift"

But is that really the case in a world where virtually everything is fake, pro-forma, non-GAAP or otherwise "adjusted" to fit a given narrative?

To answer this question, ten days ago we showed the one measure of corporate profitability that avoids various non-GAAP adjustments and one-time addbacks. We referred to the data set tracking corporate profitability without the benefits of non-GAAP adjustments, which is reported by the BEA as Corporate profits with inventory valuation (IVA) and Capital Consumption (CCAdj) adjustments. Such operating profits, or profits from current production, are the purest form of corporate earnings since this series puts all firms on the same accounting framework – it avoids non-GAAP adjustments – and the profit numbers are not adjusted for the number of shares outstanding.

And here, something stunning emerged when looking at corporate profits (after tax with IVA and CCAdj) as a % of US GDP: these have not only tumbled to the lowest level this decade, but are in fact lower than where they were when the US was sliding into the 2007-2009 financial crisis and when the US entered the 2007 recession!

Needless to say, this is a problem because as former chief economist for Alliance Bernstein, Joseph Carson, put