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2016-09-30
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Rotella Capital Management, Inc.

CTA Performance During the Brexit Vote

On June 23, 2016, the UK electorate voted 51.9% in support of an exit from the European Union. This resulted in significant market turmoil over the following trade day. The voting outcome came as a surprise to many, who saw the exit as unlikely. Perhaps more surprisingly, medium- to long-term trend followers benefited from the announcement: the SG CTA Index increased 2.27%. Why? Were CTAs forecasting the event?

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Qualitative examination of price movements suggests that markets were trending in the direction of the Brexit exit in the prior months. This is supported by systematic analysis over the same period. There are many ways to define the concept of “trend,” and while it is useful to visually examine the evolution of prices themselves over time, creating a trend metric has its own utility in terms of creating a less subjective view of market behavior. Signal-to-noise ratio (SNR), which attempts to quantify the strength of a price trend by looking at how uniformly it increases or decreases, is one such measure.

In terms of its computation, the SNR is simply the absolute price change over the lookback period divided by the sum of the absolute daily price changes. The lookback period of choice depends on the timeframe of interest. For medium- to long-term trend followers that can mean anywhere from 40 to 120 days. The closer the price path is to a straight line over that period, the higher the SNR. A perfectly straight line will have an SNR of 1, while a completely flat path will have an SNR of 0. Below are some examples with generated data.

 

For the purpose of the analysis in this article, we also are interested in the direction of trends and not merely the strength, so in this context a sign is applied to SNR: positive for when the price increases over the lookback period and negative otherwise.

In addition to the SNR, the net positions of a simple trend following system are included in our analysis. While the details of the system are beyond the scope of this article, for the most part these positions are in the direction of longer term price movements, and are not immediately responsive to shorter term rebounds and whipsaws. The entry points of this system’s positions line up closely with the SNR observed on those dates. In the following charts the roll-adjusted price of a representative set of futures contracts is plotted, along with SNR over several timeframes and the net position of the sample system. From this we can hopefully determine why CTAs benefited from Brexit.

 

 

Gold exhibited some choppy behavior characterized by changing dynamics. 2014-2015 resulted in a weak negative trend, followed by a strong reversal in 2016. This led to higher magnitude SNR values than seen in other commodities, sufficient enough to bring the net position of our sample system into positive territory. This rebound likely benefitted CTAs when gold appreciated 4.69%.

 

 

European equities, and to a lesser extent global equities, exhibited weak downward trends in the later part of 2015. The recent recovery boosted SNR in multiple timeframes, but long-term trend followers likely retained short equity exposure because of their longer lookback period. The Euro STOXX 50 did not rebound to the same extent as some other indices. Because of this signal it is probable that CTAs had mixed exposure going into Friday the 24th, but biased on the short side. FTSE 100 and Euro STOXX 50 depreciated -8.56% and -2.90% respectively that day, so a correctly timed position would have paid off significantly.

With currencies the story was more clear cut. The Yen appreciated this year relative to the US Dollar, after a flat period characterized by a low SNR in most of 2015. This resulted in moderately high positive SNR values and long positioning of the sample system. The British Pound has been weakening fairly consistently, and this also is true year-to-date. Both of these currency futures moved in the direction of their year-to-date trend.

 

Bond futures have been in an extended bull market. This is especially apparent from mid-2015 onwards. This is reflected by above average, positive SNR values over the same period. Bond prices rose sharply, with the EUREX Euro-Bund increasing 1.24% and the CBOT 10-year note rising by 1.19%.

In the table below, we compare the sign of the 120-day SNR, at the time our sample trend following system entered its current position, to the direction of the move on Brexit. As expected, the direction and strength of the trend lines up with the trades the trend following system made. This supports the notion that, while CTAs were correctly positioned for Brexit, their exposure was dictated by trends that originated well prior to the actual event.

While it is tempting to claim that CTAs correctly predicted Brexit coming to fruition, it is more accurate to state that their positions simply reflect longer term trends in the futures contracts they trade. It is possible that as Brexit became more probable, the effect of its outcome became slowly reflected in market prices, resulting in the appearance of the aforementioned trends. This reasoning likely overstates the effect of a singular event. Regardless, SNR and simple qualitative analysis can shed light into the decisions made by CTAs and help to explain the effect of their stances during key events.

Rotella Capital Management anticipates the remainder of 2016 will occur as we describe, but note that unexpected events could change our outlook. We are still bullish on interest rates but this could be the last hurrah for a long time as we should be getting close to a secular bottom in interest rates. The dollar may rise and appear to be a temporary “safe haven.” Most commodities should continue on the deflationary path except for the metals which should continue to rise. Though we are still long-term bullish on stocks the equity markets may encounter strong headwinds in the next 6 months and we are neutral to bearish.

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2016-06-15
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Rotella Capital Management Appoints Ian Ram

CHICAGO, June 15, 2016 – Rotella Capital Management, Inc. (“Rotella”), a Chicago- and Bellevue- based adviser of systematic trading programs in managed futures and equities, announced today that industry veteran Ian Ram has joined the firm as Chief Operating Officer.

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Mr. Ram is responsible for oversight of all operational aspects of the firm in support of Rotella’s quantitative and systematic program offerings, while implementing the firm’s strategic business initiatives. Mr. Ram’s industry experience is extensive, with over 23 years interacting in all facets of futures-related activities for global institutions and advisors.

“I have enjoyed working with Ian for over 20 years. He brings a wealth of industry knowledge and a keen understanding of the broad spectrum of responsibilities essential for this role. He fills an important position in advancing the firm’s vision and is a much welcomed addition to the Rotella team,” said CEO and Co-CIO Robert Rotella. “Rotella will also benefit from Ian’s longstanding industry relationships developed over the years both in the U.S. and around the world.”

Rotella is a pioneer in systematic investing and over the years, it has remained committed to rigorous and innovative research,” said Mr. Ram. “From the beginning of my career, I’ve assisted the trading and operational interests of Rotella and firm principals, having witnessed first-hand the evolution of the firm into a world class systematic manager focused not only on preservation of capital, but consistent alpha generation for investors. This is an exciting time to join Rotella given the breadth of experience among the team coupled with the expanded program offerings.”

Prior to joining Rotella, Mr. Ram served in various senior level capacities, most recently as Director, Co-Head of Cross Asset Sales – Americas | Global Execution Services for Societe Generale Corporate and Investment Bank, and as Senior Director, Financial Futures & Options for its predecessor firms: Newedge, Calyon Financial, and Carr Futures. While at Societe Generale, Mr. Ram managed a team dedicated to CTAs, hedge funds, asset managers and proprietary trading firms. His experience includes managing client needs in execution and clearing, as well as coordinating resources such as Onboarding, IT, Compliance, Risk and Operations. Mr. Ram holds a BA in Economics from Loyola University Chicago.

Founded in 1995, Rotella Capital Management is a Chicago- and Bellevue- based managed futures adviser focused on quantitative systematic trading. Rotella is led by Robert Rotella (CEO, President and Co-CIO), Jagdeesh Prakasam (Co-CIO) and John Harper (Executive Vice President & Director of Research). Together they oversee an internal research team of 8 quantitative analysts and 10 information technologists dedicated to building sophisticated investment programs in both the futures and equities space. Rotella employs a number of proprietary programs using a quantitative, systematic trading approach to managed futures across global sectors in equities, currencies, commodities and interest rates, while maintaining a unique position in the marketplace as one of the most experienced and recognized managed futures firms of its kind.

For additional information, contact Dean Crowder III, Managing Director | Global Head of Strategic Business Development for Rotella Capital Management at 425.213.5700 or Dean.Crowder@rotellacapital.com

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2016-03-16
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2016 AI Hedge Fund Award

AI-Award-2016-Polaris

We are pleased to announce that Rotella Capital Management has been awarded Best Diversified Investment Manager – USA & Best Diversified Trend Fund: Rotella Polaris Program in the 2016 AI Hedge Fund Awards.  Acquisition International is a monthly publication dedicated to delivering high quality informative and up-to-the-minute global business content.  It is published by AI Global Media Ltd, a publishing house that has reinvigorated corporate finance news and reporting.

Best Diversified Investment Manager-USA & Best Trend Fund was awarded by Acquisition International – Wealth & Finance INTL – DealFeed INTL to the Polaris Program.  All potential nominees were required to enter the competition to be considered and were judged on a combination of quantitative and qualitative factors.

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2015-12-31
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

Q4 Market Outlook

December witnessed one of the most telegraphed quarter point increases in the history of Fed funds’ rate hikes. With the Federal Reserve indicating more rate hikes in 2016, this promises to accelerate the divergence in policies versus its counterparts in Europe and Japan. This divergence could continue to provide a favorable environment for the US dollar. This could further put pressure on the US economy on one hand while lifting the European and Japanese economies on the other. If this happens, the Fed could slow down the rate hikes like ECB did in 2011. Irrespective of how it plays out, 2016 could be a favorable environment for strategies that are diversifiers to stocks and bonds.

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2015-11-03
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

The Grand Illusion – EMP

What does the 3 letter acronym EMP stand for? My guess is most people don’t know but then why is it important for markets? I will let you decide.

EMP stands for electromagnetic pulse. It can be both natural and man-made. For example a lightning bolt or solar flare can create an EMP. Machines can be built or bought which can generate EMP’s. Why this is important is simple. EMP’s can be destructive and powerful enough to bring down the entire electrical grid and many electrical devices in a nation. No electricity for anything. Not even if you have a backup generator because it could potentially destroy anything that generates, carries, or uses electricity.

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Natural EMP’s occur all the time but large powerful ones are fortunately rare. The Carrington event of 1859 was the most recent significant occurrence when a solar storm erupted and ejected a coronal mass which hit earth’s magnetosphere creating one of the largest geomagnetic storms ever observed. Damage was actually minimal for a simple reason. There were few electrical devices. It is hard to know how often an event like the size in 1859 might occur. EMP’s happen often but generally with far less magnitude. However a large solar coronal mass similar in size to the 1859 event occurred in 2012 but fortunately just missed the earth.

The Commission to Assess the Threat to the United States from Electromagnetic Pulse (EMP) Attack told Congress in 2014 that an EMP attack could result in the deaths of 9 out of 10 Americans mainly due to starvation and illness with the inevitable breakdown of society. A member of the Commission Dr. Peter Vincent Pry told Congress: “A natural EMP catastrophe or nuclear EMP attack could blackout the national electric grid for months or years and collapse all the other critical infrastructures – communications, transportation, banking and finance, food and water – necessary to sustain modern society and the lives of 310 million Americans.”

Every country faces this problem. The approximate cost to mitigate this threat is estimated to be $2 billion for the U.S. This could probably fix most of the problem and it amounts to far less than 1/10 of 1 percent of the current U.S. budget. It is certainly far less than the amount of graft, corruption, and pork barrel projects currently being lost and certainly much less than the “aid” we give to many of our “allies” and terrorists alike around the world for at best dubious reasons.

What has Congress, the President, or the Department of Homeland Security (DHS) done about this? Other than hold meetings about this the government agencies have essentially done nothing. Christopher Currie who is the director of Homeland Security at the US Government Accountability Office presented his findings in a report noting the DHS has not acted on any of the proposals suggested in the Commission’s original report.

But perhaps we should not be so harsh in our assessment of the government and consider both the words and actions of the DHS to determine if it has tried to be proactive on this matter. For example the DHS acknowledged this threat in 2012 and concluded that they needed to study it more before taking action. However their subsequent actions are quite interesting after the 2012 study. In 2013 they made an announcement to purchase in the next 4 or 5 years approximately 1.6 billion rounds of ammunition which might cost about $2 billion. Even if it doesn’t the cost of the guns and ammunition will certainly go well beyond $2 billion. That is over 5 bullets for each citizen. Some of the ammunition includes hollow point bullets which are generally prohibited in war because they are so lethal but apparently fine for use on American citizens. And this comes when our President wants its law abiding citizens to give up all weapons. The Grand Illusion continues.

Why does this matter beyond our safety? There are many that feel that central banks can engineer us out of market crashes. What will the Fed do when electronic banking immediately ceases and every market in the U.S. comes to a catastrophic halt without warning? I suppose since the markets won’t trade this will be the permanent solution for any future market drop. But then perhaps it won’t matter as we will have more pressing needs anyways.

Some scoff that this is an overblown threat. However given the fact that this has naturally happened before, almost happened again in 2012, as well as the real possibility of an internal terrorist act (real or false flag), or an external attack in war shows this is a serious danger. The question is not if it will happen but when.

With concerns like this why worry when most stock markets are still near all-time highs? I am writing this letter in South Carolina where fighting in the Civil War began at Fort Sumter. I recently visited a southern plantation and wondered if the people living there could imagine how in little more than 4 years a world full of happiness and life could collapse so swiftly to abject misery and death. An intense EMP is not the only thing that could have catastrophic consequences on the US economy. Technology is a double edged sword. As we become increasingly dependent on technology and enjoy its benefits we also increase our risks to the downside since we don’t always understand its inherent risks. However if we refuse to acknowledge and deal with the known risks multiple Black Swans will become far more probable and collapse inevitable. In the meantime enjoy the party while it lasts as the hangover could be apocalyptic.

When I was a kid I used to hear the song “God Bless America” sung with pride and reverence. I don’t hear it much anymore but when I do the sense is more one of sincere plea and outright desperation.

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2015-11-03
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

Q3 Market Outlook

We remain bullish to neutral on stocks, bonds, and the dollar and bearish on commodities but have turned neutral on gold. One government agency that is rapidly running out of ammunition is the Fed and eventually the markets will have to face reality.

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2015-10-19
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

Historical Analysis of CTA Performance in Q4: Relating Returns to Trends

One issue faced by fund managers is developing expectations for the future returns of their products. This task for CTAs is made more complicated by the fact that many strategies are designed to be uncorrelated to conventional market indices, benchmarks and indicators.

An approach to generating such a forecast is to relate strategy returns to bespoke factors that pertain to the known characteristics of the strategy (e.g., trend following or mean reversion). If some of these factors can themselves be predicted with accuracy, then in principal that prediction can be extrapolated to the returns of the strategy.

While CTA returns tend to be uncorrelated to commonly used factors (such as Fama-French factors), it is possible to follow this approach and define custom indicators that have explanatory value. An example of this is a market trend index: if markets exhibit strong, persisting trends, one would expect trend following CTAs to perform well. If trends are weak or nonexistent, trend following CTAs ought to have flat or negative performance. This effect can be measured quantitatively.

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There are many ways to define the concept of “trend.” A market trend index is one possible approach, which happens to be a useful explanatory factor for CTA (as defined by the Newedge CTA index) performance. The first step in computing the market trend index is to calculate a signal to noise ratio (SNR) for asset prices over a given lookback period. The SNR is simply the absolute price change over the lookback period divided by the sum of the absolute daily price changes. The lookback period may vary depending on the length of trends of interest, but two months or longer tends to relate sufficiently closely to CTA returns in terms of linear correlation to a benchmark index. The closer the price path is to a straight line, the higher the SNR. A perfectly straight line will have an SNR of 1, while a completely flat path will have an SNR of 0. Below are some examples with generated data:

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In the second step to computing the market trend index, the SNR for individual futures is aggregated into an index by taking the relevant average. For example, the equity sector trend index is the average of the SNR for equity futures such as the Dow Jones Industrial Average, S&P 500 E-Mini, Eurex DAX 30 and the FTSE 100. An overall trend index would be the average among all tradable markets.

Because this market trend index is a measure of how “trendy” futures prices are, we expect it to correlate with CTA trend follower performance over comparable time frames. Below is a plot of the Newedge CTA index quarterly returns (blue) alongside the SNR trend index (red) computed for the same period:

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The correlation between these two series is 62%.  Below the same data are depicted in scatterplot form.

clip_image006Notice the clustering of points around the regression line.
Given this quantitative definition of the level of trend, statistical tests can be performed to examine whether there are consistent patterns in the level of trend.
One question we hope to address using the SNR is how fourth quarter trends compare to the remainder of the year, on both a sector and overall level for futures. We can start by examining the SNR of a representative set of futures contracts from four different sectors (equity indices, commodities, currencies, and interest rates) from 1990 onwards. The average SNR from Q4 can be compared to the average SNR from quarters 1-3 by using a paired Student’s T-test. The null hypothesis of Q4 SNR equaling Q1-3 SNR is rejected in favor of the alternative that Q4 SNR is greater at the 10% level (p-value = 0.090, t=1.37). While this level of significance may only be modest, it does suggest that, at the very least, the trendiness of all quarters is not necessarily uniform.

To take this analysis a step further, we form sector-level SNR indices, which are the individual futures’ SNR indices averaged at the sector level. Since there are only 4 sectors we compare the values of Q4 SNR to the values of Q1-Q3 SNR. This results in an unequal sample size (25 observations for Q4 PL, 75 for Q1-Q3 PL), necessitating a Welch Two Sample T-test. However, this test has the unfortunate consequence of assuming that each sample follows a Gaussian distribution, but quarterly SNR fails a Jarque-Bera test for normality. Regardless, the following t-test might give some insight into the source of the differing Q4 SNR.

Sector

Less than Q1-Q3

Greater than Q1-Q3

Not Equal to Q1-Q3

Commodity

95.72%

4.28%

8.57%

Currency

50.14%

49.86%

99.72%

Equity

63.12%

36.88%

73.76%

Interest Rate

36.98%

63.02%

73.97%

Above: p-values for Q4 sector SNR when compared to Q1-Q3 (smaller is more significant)

Referring to the above table of p-values, we find that only one sector deviates at the 10% level in Q4 from the remainder of the year. Commodities tended to have stronger trends in Q4.

If this Q4 effect on trends exists, and if CTA returns relate positively to the trend index, we should also expect to see higher than average CTA returns in Q4. We can perform the same t-test on Newedge CTA index quarterly returns. The null hypothesis that Newedge CTA Q4 returns have the same mean as Q1-Q3 is rejected in favor of the alternative that Q4 is greater at the 1% level (p-value = 0.00135, t=3.17). The average annualized return in Q4 was 14.4% vs. 2.67% in the remaining quarters. This effect is also apparent in other CTA indices, namely the Newedge CTA Trend Index, which has an even starker difference at 22.7% annualized in Q4 vs. 2.6% in the remaining quarters.

The available evidence suggests that commodity trends tend to be much stronger in Q4, possibly leading CTAs to perform much better than average during this period. In future research it may be worthwhile investigating what contributes to these Q4 trends (perhaps relatively low volatility or seasonal effects reflected in prices), as well as how to incorporate this information in the systems underlying a CTA strategy.

Relating SNR to CTA Crisis Alpha

One appealing characteristic of CTAs is their performance under periods of market distress, or crisis. If we flag periods as crises using the following criterion: S&P 500 Index monthly returns below their 10% quantile (-4.7%), we observe that the Newedge CTA index realized an annual return of 19.5% in these months, compared to 3.3% in non-crisis periods. Based on the previous analysis, it is possible that this crisis alpha is in part driven by an increase in the level of trend in markets (e.g. downward trend in the case of the equity markets). If CTAs can exploit the persistence of such trends in a crisis, they stand to benefit from prolonged downturns.

image

Distribution of monthly S&P 500 Index returns with a dotted line depicting the 10% quantile. Crisis periods depicted in red.

A similar crisis alpha effect exists with respect to other stock market indices. For example, let us consider the Korea Composite Stock Price Index. Flagging crisis periods using the 10% quantile of monthly returns yields a value of -7.3%. Crisis periods for the KOSPI in red.

image

The Newedge CTA Index realized an annualized return of 9.5% in these crisis periods, vs. 4.9% in non-crisis periods. Crisis alpha appears robust to the equity index used.

Returning to the S&P 500, we may be able to gain insight into the source of crisis alpha by examining how the aggregate level of trend, measured by average SNR, changes during crises. Applying a Welch Two Sample T-test comparing crisis aggregate SNR values to observations from the rest of the sample (1990 onwards), we find that we may reject the null hypothesis that the two samples have equal mean in favor of the alternative that crisis SNR is greater at the 5% significance level (p-value = 0.042, t=1.79).

We may apply the same test at the sector level to see if a subset of futures markets are trendier during these periods. Below is a table of the p-values from this test:

Sector

Less Trend in Crisis

Greater Trend in Crisis

Commodity

54.41%

45.59%

Currency

91.89%

8.11%

Equity

69.32%

30.68%

Interest Rate

98.29%

1.71%

Above: p-values for comparing sector SNR in crisis periods to non-crisis periods in the S&P 500 Index

 

Contrary to the assumption that successfully exploited equity market trends are the source of crisis alpha from CTAs, equity trends as measured by SNR do not appear to differ at the 10% significance level. However, interest rate trends, and to a lesser extent currency trends, deviate from their non-crisis levels. This may be because equity downturns are preceded by persisting trends in these other sectors that are followed accurately. While the understanding of the source of CTAs’ crisis alpha remains incomplete, SNR provides some insight into market behavior during these events.

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2015-08-10
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We Have Moved

ChicagoBuilding2015Rotella Capital Management is pleased to announce our Chicago office move. On August 10th we relocated to the UBS Tower in Chicago’s Central Business District. Our new space at One North Wacker is on the 40th floor of the tower with a stunning view of the city. The building is located directly across from the Chicago Opera House and is within a short walking distance to the Chicago Board of Trade building.

Please note that all phone numbers and other contact information remain the same. Also, the Bellevue, Washington office continues to reside in its current location.

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2015-08-01
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

The Grand Illusion

Norman Angell may not be a household name but perhaps he should be. He was born in England and then immigrated to the United States working at myriad odd jobs such as cowboy, ditch digger, and newspaper reporter. He then returned to England where he won a seat in Parliament and a Nobel Peace Prize. He also wrote an important but relatively obscure book in 1909 entitled The Great Illusion.

When the book appeared World War I was looming on the horizon in Europe. Angell argued that no nation would benefit economically from the disastrous consequences of war in Europe. The prevailing thought at the time was that the conquering nation “won” a war and in the process acquired more wealth and power. This was sometimes the case in the past because nations were more independent and did not rely on each other as trading partners.

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However Angell realized that times had changed and saw things differently. He theorized that nations were more interconnected, relying on each other for trade and credit, and therefore war amongst nations would be disastrous for both the vanquished and the victor. To annex one territory would not make the conqueror any richer (indeed both nations would likely be poorer) because committing resources for war as well as the destruction involved and the necessary rebuilding would be far more costly than whatever was gained.

Critics derided Angell’s idea with the onslaught of World War I. However he never suggested war could not happen but that it was futile. Sadly World Wars I and II proved him correct. Indeed his idea lived on and was one of the core reasons in forming the European Union. The European Union website (http://europa.eu/about-eu/index_en.htm) states: “The EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries who trade with one another become economically interdependent and so more likely to avoid conflict.” That sounds a lot like Angell’s idea to me.

But if war is futile then the question remained: Why does it happen? Smedley Butler, like Angell, is hardly a household name but he tried to answer this question. He was a military hero serving in the United States Marine Corp from 1899 to 1931 attaining the highest rank at the time of Major General. He saw firsthand the ravages and consequences of war. He wrote an obscure book in 1935 entitled War Is a Racket and its first two paragraphs are some of the most powerful of any book written:

War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small ‘inside’ group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes. (Butler, 1935, 2003, p. 23)

Perhaps there are some “good” wars where the majority of people benefit from the aftermath of the carnage. The American Revolutionary War comes to mind where some of the most brilliant and courageous minds fought to promote ideals of liberty and in the process created one of the greatest nations the world has seen. Unfortunately these examples are more the exception than the rule.

The 1937 French film The Grand Illusion directed by Jean Renoir took its title from Angell’s book and is considered by some to be one of the greatest films ever made. The film presents the futility of war and shows how varying interests have different reasons to promote or prevent war. Ironically Angell’s book appeared a few years before World War I whereas Butler’s book and Renoir’s film appeared on the eve of World War II.

Is the Grand Illusion proposed by Angell, Butler, and Renoir relevant today and furthermore what does this have to do with markets? I believe a lot. The markets have periods of optimism and pessimism which can be illusory and ultimately require a reset by reality. There are many illusions which I intend to mention in future articles but for now let’s consider two, the first dealing with the EU.

As mentioned earlier one of the initial enlightened goals of the EU was to reduce the threat of war through more interdependence among member nations. However in the ensuing years this has changed from fostering peace and economic growth to significant supranational control of each country’s policies. Each member nation is now losing its sovereignty in exchange for some possible economic benefits. Does Brussels really know better than Athens what is best for Greece?

The second case is the United States. The Cold War pitted the U.S. and capitalism against the evil empire of the Soviet Union and communism. Many sacrificed their lives in both the Korean and Vietnam Wars as a consequence. However we all know the West won the Cold War as capitalism triumphed over communism with the fall of the Berlin Wall and subsequent dissolution of the Soviet Union. The world became a freer place. Well not quite. Cultural and economic Marxism are still alive and well having moved from Moscow to Washington, DC, Brussels, and the halls of most universities in the West. Russia is still the evil empire even though it has abandoned communism and tried to adopt capitalism. Was the Cold War ever really about ideology?

The EU was created to prevent war but has morphed into a supranational entity with quite different agendas than its original stated purpose. The Pax Americana of the U.S. is yet another supranational agenda that has gone far beyond the ideas of the Declaration of Independence.

But wait. I thought one of the main reasons for World War II was to avoid each country losing its sovereign rights to a higher authority. Will the supranational policies of the EU and U.S., supposedly designed to promote peace and better the world, create the opposite effect? As we continue to waste resources and foster Marxism the world economies will flounder and eventually collapse. And fed by the mainstream press the Grand Illusion Bubble will eventually face reality and burst as well.

We shall end opposite to where we began. But sometimes that’s the way things work. The poet T.S. Eliot was born in the U.S. and immigrated and became a citizen of England. I have always been puzzled by one of his verses but perhaps have finally begun to understand it: “Humankind cannot bear very much reality.”

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2015-08-01
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

Q2 Market Outlook

We may be near a secular low in interest rates which may already have been established in the first half of this year. It is possible for interest rates to stabilize or continue lower from here but the next major move should be higher. Government funding and empty promises will collide with higher interest rates and unless attitudes change the result will not be pretty. We are still positive on equity markets and the U.S. dollar and generally bearish on commodities with deflation continuing to unfold.

We have been fortunate to experience two of the greatest bull markets in both equities and interest rates. However all good things must come to an end and this one is no exception. Although we have had 6 years in a row of positive returns in the S&P500 the rally can continue as the last phase can sometimes be the most powerful one. The key will be discerning the phase we are in and trading it successfully. A secular rise in interest rates combined with a falling stock market will dramatically alter the world of traditional investing.

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