Shorting the Renminbi; Cross-asset ideas; CSI 300 Flash Crash

Topics discussed:

  1. Can you still hold an Offshore Yuan short position?
  2. Cross-asset ideas – OPEC fails to gain control of oil output
  3. CSI 300 Futures flash crash – a result of HFT?

Equity Indices

  • ASX 200 dropped 1.6% this week, sitting 58.8% above 52w lows;
  • Nikkei 225 dropped 1.1% this week, sitting 28.6% above 52w lows;
  • CSI 300 gained 4.1% this week, sitting 13.4% above 52w lows;
  • Hang Seng gained 4.0% this week, sitting 24.5% above 52 lows;
  • FTSE 100 dropped 1% this week, sitting 51.4% above 52w lows;
  • TSX gained 0.9% this week, sitting 76.6% above 52w lows; and
  • S&P 500 closed at 2,099 this week, sitting 90.3% above 52w lows.

FICC

Bonds: headline risk-free rates (those commonly used in WACC calculations) continue to charter new waters and thus it’s left to bankers to be creative in which risk-free rates are chosen.

If yields continue to compress towards a lower bound, will interest rate policies reinvigorate a renewed reference rate?

  • German 10-year closed at 0.106%, down 23% this week;
  • UK 10-year closed at 1.342%, down 6% this week
  • US 10-year closed at 1.798%, down 3% this week

Headline risk-free rates.PNGNote: yield moves inverse to price, whereby higher perceived risk in equity markets tend to translate into lower government bond yields.

Commodities: oil and metals generally experienced a mixed week of trading:

  • Brent and WTI closed at $50.08 and 49.17 per barrel, up 0.3% and down 0.6% respectively, as oil futures recovered early week losses post-OPEC meeting;
  • Gold stood at $1,211.68/oz, trading within the boundary of $1,200/oz in the last year;
  • Silver stood at 16.064/oz, below last week’s peak of $17.847/oz; and
  • Copper stood at $209.95/lb, sitting near a one year low.

Topic 1: Shorting the Yuan, are you crazy?

  • The Yuan closed at 6.5872/$, depreciating to near its weakest point in over a year as the PBoC looks to accompany currency depreciation with monetary policy stimulus.

6-year historical of Yuan.PNG

China’s economic growth has become the proxy for global demand appetite, so much that the increasing debt load China carries forward as its economic growth falters becomes a greater concern for global equity markets.

PBoC stimulus.PNG

The risk of capital flight from China, as a result of Fed going on its hike, is a material as concerns over China’s FX reserve position persists.

The US has become less vocal about the depreciating Yuan in recent months, perhaps more concerned on whether they will have a credible presidential candidate to elect… Nonetheless, the Yuan’s position against the USD will need observation as a higher Funds Rate will undoubtedly attract greater institutional capital as earnings and return on capital rise.

Money supply vs. GDP.PNG

On the other hand, we have George Soros. While it is not difficult to become ‘famous’ in the investing world, it is much more difficult to become respected and listened to.

Soros has been public about his short position on Asian currencies as China’s debt pile and faltering economy is not as high-growth of a prospect as a decade ago. When you go up against sovereign nations, as Paul Singer of Elliot Management does, you’d better make sure your war chest is just as big as the nation which you are going against.

In the case of Soros, Soros Fund is up against the second largest economy in the world – an economy with over $3 trillion in FX reserves stored up and a control over the interest rate charged on investors holding offshore Yuan positions.

CNY vs. CNH differential

The graph above shows that as the onshore vs. offshore spread narrows, so does the arbitrage opportunity in a short position.

Topic 2: Cross-Asset Ideas

The greatest investment advice I have received on cross-asset trades has been to run a phantom portfolio on the positions you wish to trade – correlations occur in all manners but the timing of entry and exit is much more important as price swings can occur in both directions.

Thursday’s OPEC meeting reiterated one thing: you can’t control how much petroleum we pump out of the ground, regardless of whether we elect a new secretary general.

USCRWTIC Index (Bloomberg West T 2016-06-03 16-23-52

OPEC Secretary General or not, the petroleum organization has yet to make progress to influence the direction of oil futures – the current price reflects a lack of ‘finiteness’ in the natural resource.

TTM retracement of WTI

USCRWTIC Index (Bloomberg West T 2016-06-03 16-24-49.jpg

Idea 1: Gold spot vs. USD/EUR

USDEUR Curncy (USD-EUR X-RATE) 2016-06-03 17-55-12.jpg

Idea 2: WTI vs. (inverse) Dollar spot

USCRWTIC Index (Bloomberg West T 2016-06-03 17-49-24.jpg

Idea 3: WTI vs. USD/EUR

USCRWTIC Index (Bloomberg West T 2016-06-03 17-54-04

These are USD-based cross-asset ideas.

Topic 3: CSI 300 Futures Flash Crash

IFBM6 Index (CSI 300 Futures) 1 2016-06-03 11-25-58

CSI 300 futures index {IFBM6} <GO> dropped 12.61% instantly at 10:42 before jumping back to within 10% of its previously traded level:

IFBM6 Index (CSI 300 Futures) 1 2016-06-03 11-22-36

Data compiled by Bloomberg suggest that 398 contracts were executed and consecutively filled at current market prices – this supposedly causing the index to drop from >3,100 to <2,750, according to the China Financial Futures Exchange. That equates to a c.12% instant drop…

This is perhaps a convenient time for the HKEx to introduce its Volatility Control Mechanism, a tool designed to,

prevent extreme price volatility from trading incidents such as a “flash crash” and algorithmic errors… if the price deviates more than a predefined percentage within a specific time frame, it will trigger a cooling-off period, according to HKEx.

On the other side of the equation, the flash crash shows that development of financial markets in Hong Kong and China are in fact progressing – the crash almost undoubtedly caused by HFT – and is a sign fintech becoming prevalent within the futures markets. However, widespread progression is yet to be seen, as Hong Kong continues to lag way behind advanced economy peers.

The ratio of IPO vs. back-door listings continues to be highly skewed towards the latter, as SFC chairman Carlson Tong recently discussed the issue of shell planting during the SFC Forum, whereby a prospective issuer is going public in the hopes of being reverse takeover’d by a larger enterprise and cashing the shell premium, which stands at HK$400-700 million (discussed previously here).

Back-door listings as a means of money laundering is explained in a nut-shell by Tom Holland of the Hong Kong Free Press,

A Chinese entrepreneur may set up an offshore shell company to hold the stake he owns in his mainland business. He then floats the business on the Hong Kong stock exchange, booking the proceeds of the offering in an offshore tax haven. Either way, the cash can then be routed back into China—either directly or through Hong Kong—labelled as foreign investment, which allows the beneficial owner to collect powerful tax benefits.

The amounts involved are enormous. In 2014, the latest year for which the Hong Kong government has published data, the city channelled direct investments worth HK$637.9 billion into the mainland. Most of that money came not from Hong Kong investors, but from anonymous shell companies in offshore financial centres. By far the biggest source was the BVI, which according to government figures channelled HK$476.7 billion into Hong Kong.

So when Hong Kong government officials insist that the city is not a money laundering centre, they are being something less than wholly honest. They know full well that those hundreds of billions of dollars consist largely of disguised mainland funds which only acquired their glowing sheen of legitimacy by being round-tripped through the combined laundry of secretive offshore financial centres and Hong Kong’s financial system.

On the upcoming FOMC Funds Rate decision

Equity Indices

Equity indices week of May 27.PNG

  • ASX 200 gained 1.38% for the week, sitting 67% above 52w lows;
  • Nikkei 225 gained 1.71% for the week, sitting 34% above 52w lows;
  • CSI 300 dropped 0.51% for the week, sitting 8% above 52w lows;
  • HSI gained 3.65% for the week, sitting 24% above 52w lows and stands at a 16% premium to the CSI 300:
  • FTSE 100 gained 1.86% for the week, sitting 55% above 52w lows;
  • TSX gained 2.08% for the week, sitting 68% above 52w lows; and
  • S&P 500 gained 2.28% for the week, sitting 90% above 52w lows.

Now, the chart of HSI vs. S&P 500 are worrying for their respective reasons:

HSI YTD.PNG

The HSI could drop back below the 20,000 mark as the 50D is heading towards a 100D cross, while the S&P 500’s 50D is sitting comfortably above both the 100D and 200D moving averages:

S&P 500 YTD.PNG

FICC

  • Fixed Income: headline 10-year risk free rates continue to sit at all-time lows ahead of the FOMC announcement in two weeks:
    1. US 10-year: 1.85%
    2. CAD 10-year: 1.35%
    3. GBP 10-year: 1.44%
    4. GER 10-year: 0.14%
  • Commodities: a mixed sentiment last week:
    1. WTI: $49.49/barrel – gaining 2.23% for the week;
    2. Brent: $49.39/barrel – gaining 1.23% for the week;
    3. Gold: $1,212.38/oz – dropping -3.16% for the week;
    4. Silver: $16.23/oz – dropping -1.83% for the week; and
    5. Copper: $211.40/lb – gaining 2.85% for the week.
  • Currencies:
    1. Yuan appreciated 25 basis points to 6.5655/$ with a 26 basis point spread lower than the offshore Yuan;
    2. Yen appreciated 15 basis points to 110.31/$
    3. Canadian Dollar appreciated 70 basis points to 0.7680/$
    4. Aussie Dollar depreciated 55 basis points to 0.7182/$

Gold Company Rally

XAU Gold.PNG

Gold prices have come down a long way from their all-time high of $1,900.02/oz, sitting at just $1,212.38/oz as of Friday – a 57% drop from $1,900/oz.

However, we have seen Gold producer stock prices double within 2016:

Kinross Gold Corp has risen 120% YTDK CT Equity (Kinross Gold Corp) 2016-05-30 11-22-19

Barrick Gold Corp has risen 112% YTD
ABX CT Equity (Barrick Gold Corp 2016-05-30 11-20-02

Anglo Ashanti (88% YTD), Newmont (78%), Agnico Eagle (68% YTD), Newcrest (44%), Goldcorp (35%)

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Upcoming Funds Rate Decision

We are moving into an era where half of the headline central banks operate with negative interest rate policies, such that their economic policy are geared towards pushing citizens into consumption – since placing your money in the bank yields a negative return against inflation – and away from savings.

THE FOMC Dot Plot

Fed Dot Plot.PNG

While the Bank of Japan and European Central Bank remain in NIRP, it appears the Fed is turning the other cheek as overnight interest rates are set to rise towards the Fed target of 2%. Fed Chairman, Janet Yellen, reiterated at Harvard last Friday a message not too distant from those shared by her colleagues during the most recent FOMC meeting minutes,

It is appropriate for the Fed to gradually and continuously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate.

The Federal Reserve could not keep interest rates at just above the zero lower bound for eternity – the only direction was up or down. I hope that 2015 will be a year we look back on which saw bond traders and hedge fund syndicates drive the media cycle in lobbying the Federal Reserve not to raise interest rates – hedge funds and other speculators have accumulated the largest short position in maturity of the US 2-year notes since 2014, according to the CFTC.

Now that Janet Yellen can keep inline her respective Fed city Presidents, the pace of Funds Rate normalization will become the key rhetoric to markets; however, not without two concerns.

  1. Yellen is concerned that, if we (the Fed) were to trigger a downturn or to contribute to a downturn, we would have limited scope for responding, This points to the limited conventional and unconventional monetary policy the Fed has left to deal with, and given the size of the Fed’s balance sheet, another round of “QE” is simply unrealistic.
  2. Since the pace of Funds Rate hike will become the key market rhetoric, which FOMC meeting dates are the likely candidates for change? The upcoming June meeting is unlikely as Funds Rate traders price at a 30% chance of a 25 basis point hike, and similarly the November meeting is unlikely given US elections. This leaves July 27th (priced at above a 50% chance), September 21st and December 14th as the likely candidates.

China Inc.: global steel dumpling time

Numbers: Equity Indices

Equity markets began the week weakly ahead of the FOMC’s April meeting minutes but concluded the week strong and above last week’s close.

  • ASX 200 closed the week 0.42% higher, sitting 58% above its 52 week low;
  • CSI 300 closed the week 0.11% higher, sitting 9% above its 52 week low;
  • Hang Seng index closed the week 0.67% higher, sitting 15% above its 52 week low;
  • Nikkei 225 closed the week 1.97% higher, sitting 30% above its 52 week low;
  • FTSE 100 closed the week 0.29% higher, sitting 41% above its 52 week low;
  • S&P 500 closed the week 0.28% higher, sitting 75% above its 52 week low; and
  • S&P/TSX closed the week 1.24% higher, sitting 62% above its 52 week low.

Equity markets week of May 16.PNG

Numbers: FICC

  • Risk-free rates used in equity valuations continue to stay low (as shown below) – adjusted WACC (weighted average cost of capital) will continue to be a useless valuation tool to DCF and LBO calculations so long as risk-free rates stand at such heavy discounts to inflation.
  • Against their 52 week lows: US Treasuries closed 24% above, Canadian Treasuries closed 40% above, British 10-years closed 18% above, and Germany’s 10-year closed 10% above.

Bonds.PNG

  • WTI closed the week 3.91% higher, sitting at the mid-point of $48.02 per barrel between the 52 week range of $31.77-$63.92 per barrel;
  • Gold closed the week 1.31% lower, sitting at $1,256.74 or 15% below its 52 week high of $1,293.53 – let’s see if Paul Singer’s comments in April to Elliot shareholders will come to fruit;
  • Silver closed the week 3.25% lower, sitting at $16.55 or 31% below its 52 week range of $13.68-$17.85; and
  • Copper closed the week 0.22% higher, sitting at $207.85, just 14% above its 52 week low of $195.9.
    • Is there a material concern over the unwind of the copper carry trade? Bloomberg Intelligence discussed this in October last year.

Commodities.PNG

Federal Reserve

FOMC April meeting minutes opened discussion for a possible Funds Rate hike in June (scheduled June 15 EDT):

A couple of participants were concerned that further postponement of action to raise the federal funds rate might confuse the public about the economic considerations that influence the Committee’s policy decisions and potentially erode the Committee’s credibility.

A few participants judged it appropriate to increase the target range for the federal funds rate at this meeting, citing their assessments that downside risks associated with global economic and financial developments had diminished substantially since early this year.

Importance of the Funds Rate is not to bank lending nor mortgage rates but global equity valuations and cross-currency swaps – these need to the central concern to FOMC decision makers given the US bond market will need some reinvigorating following three rounds of “quantitative easing”.

The Economist (Federal Reserve: the right kind of reform) correctly point out that Republicans (mostly) are chasing the Federal Reserve with schemes to increase its transparency via an “audit” by the government Accountability Office. Unfortunately, the Economist, and politicians, will find any excuse to point their fingers at irrelevant issues and let slide those of importance.

You should decide for yourself why the market moves to such FOMC announcements and having done so, ask whether the Federal Reserve should be responsible to the level of an index. If you really think that the Federal Reserve’s Discount Window, or the “risk-free 6% annual dividend” the Economist refers to, as a concern that “political gridlock has given the regional Feds growing representation on the FOMC” as a major concern, your attention is equally placed on the wrong issues.

 China Inc. Anti-Dumping of Steel

Several news outlets mid-week covered that China barked at the US for imposing anti-dumping measures (collectively amounting to an imposition of 522% in US duties and anti-dumping tax) on its steel exports.

China’s GDP continues to depend on the export Steel and Iron Ore, thus why the continued devaluation of the Yuan has become so important to the nation meeting its national output goal. The graph (below) shows the RMB movement over the last 5 years – white line is offshore Yuan and yellow line is onshore Yuan.

USDCNY Curncy (USD-CNY X-RATE) 2016-05-20 20-03-47

There is a clear divergence between the ideology (service-based) and reality (production–based) of China’s economy: annual capital allocation in China ends up in fixed investments whereas that of the US is placed into the markets. This is a conflict of interest given that the Chinese government has “vowed to give markets a “decisive” role in the economy”, as reported by the Financial Times.

While the stock market reflects ongoing inputs and fixed investments do not, when China begins dumping steel into global markets this affects the capital allocation mechanism of the US – retaliation will ensue.

While Zero Hedge charted Chinese exports of aluminium, steel and oil against Bloomberg’s commodity index until the end of 2015, I have charted Steel exports against Bloomberg’s commodity index.

The first graph shows what has been referred to as the “mountain of iron ore sat right on China’s doorstep” by Bloomberg:

Iron ore price.jpg

Iron ore inventories sit at just above 100 million metric tons in China – an equally dim picture is that of China’s steel (highlighted below).

The second graph provides a full picture to that which Zero Hedge posted May 19th.

China export vs. commodity prices.jpg

What is the play here? If the oversupply and glut in demand is true for steel, the following 17 largest A- and H-share listed companies (ranked by revenue) could see the largest hit.

Excel file with all 170 A and H share-listed companies available here: China and HK Steel Comps – First tab automatically pulls from a Bloomberg Terminal and the second tab is a copy and paste of values.

Companies 1

Equity Valuation

Equity Valuation 1

Profitability

Profitability 1.PNG

Balance Sheet

Balance Sheet 1.PNG

Market Performance

Market Performance 1.PNG

Trading Performance

Trading Performance 1.PNG

Market overview of week ended May 13, 2016

A look at last week’s markets

The vast majority of indices sit 50% below their 52-week high as markets remain bullish through the first half of 2016. At close on Friday,

  • CSI 300  – 9% above 52w lows;
  • HSI – 8% above 52w lows;
  • Nikkei 225 – 25% above 52w lows;
  • FTSE 100 – 36% above 52w lows;
  • TSX – 58% above 52w lows; and
  • S&P 500 – 78% above 52w lows.

Equities

A sustained two week sell-off in Hong Kong has resulted over concerns a strong US dollar, weak inflation, declines in property prices, and the contagion effect from a systemic bond default in China (by Chinese corporations with vested interest in Hong Kong listed equities) could derail an already depressed equity market.

Tell-tale signs are the rising yields and widening credit spreads in the Chinese. Weakened stimulus and bond issuance in China suggests that the 2016 GDP target of 6.5-7% may prove more difficult to achieve than previously expected.

In the midst of the two week sell-off, institutional investors have been buying into the weakness, as CCBI research below shows:

Institutional buying.PNG

Forward looking, the Hang Seng Index could be set to rise like a rocket in the coming months (or drop to middle earth) as the Financials sector, which accounts for 55% of the weighted index, is looking to hold trend line support; however, there is material concern over the non-performing loan ratio and high indebtedness in China, both on the individual and corporate level:

Financials vs. HSCI.PNG

Bonds

The effect of a nationwide default of bonds would be devastating not just to China and Hong Kong equity values but overseas valuations as well. Rising defaults in Chinese corporate bonds pose the greatest short-term risk – 11 corporate bond defaults have occurred already this year – and tighter liquidity would not help the RMB760 billion in metal and mining company bonds due in 2016.

One solution would be another wave of bond issuance (rolling over) and greater fiscal spending to support industry growth at a time when metal prices could be going up. Paul Singer, and his hedge fund Elliott Capital, recently told investors that gold prices could see appreciation in 2016 as “Investors have increasingly started processing the fact that the world’s central bankers are completely focused on debasing their currencies.”

That said, the solution of debt issuance and fiscal spending would need to be followed by reform, specifically capital restructuring. Debt-for-equity swaps have eased the risk of NPLs for commercial banks but a larger wave of debt restructuring, not just rolling over and increasing debt-to-GDP, is imperative.

Concern over the global bond market is material given that they stand at the lowest yields, ever. Further worry that NIRP in Europe and Japan will damage banks’ ability to boost credit is not unfounded, but concerns that bond markets would likely crash is dumfounded – where would they go?

Bond yields.PNG

Economics

Positive March (51.3) and April (50.8) PMI composite data for China points towards production potential as April exports rose 15% from the previous month. China’s PPI rose to 57.6 in April (from 55.3 in March) – a rise attributed to strong commodity prices and inflationary pressure. However, numbers could appear weak later in the year as a strong base year would dilute moderated growth.

Collectively, industrial output weakened in April, registering a 6% growth from last year and down from 6.8% YoY figures in March:

Factory output.png

There has been plenty of coverage over China’s capital outflows in the past year, which has dropped off the cliff since mid-2014, mostly due to currency intervention/movements measured against the USD. However, recent appreciation of the Yen (moving up 5.4% in April against the USD) has assisted Chinese yen-denominated assets appreciate in US Dollar terms – likely moderating the FX reserve drop.

Inflation numbers remain controlled at between 2-3% – characteristic of a developed country despite emerging market GDP growth. While CPI is not the main function of PBoC monetary policy, money supply (M2 velocity) is and any further sudden changes to the Renminbi will decrease confidence that the PBoC can maintain control of the onshore and offshore rates. Trilemma anyone?

Banking

The biggest dilemma the Chinese government faces moving forward is the choice between credit growth and banking stability. Concerns over NPL ratios of Chinese banks was not helped by several headline banks registering an NPL coverage ratio outside of the 150% regulatory requirement.

China’s TSF came in at RMB751 billion, missing expectations that a RMB1.3 trillion reading would continue expanding the economy. Total social financing is the broadest measure of credit growth in China. On aggregate, outstanding credit continues to grow, registering an 11.9% increase from last year but lower than the 12.3% registered in March.

Slowing loan growth in China is imperative to its sustainable growth and thus should be taken as a positive indicator the government has changed its policy stance. As monetary easing is expected to go on hold, PBoC rate cuts suspended for the year, further guidance to lending caps and control over shadow finance will help contain any further risks from developing.

Yet you should be concerned about slowing loan growth in China for two main reasons:

  1. China’s economic growth has become dependent on credit growth. In fact, every 1% drop in credit growth could reduce GDP by as much as 0.5%, according to Bloomberg Intelligence.
  2. Credit growth is likely being used to finance interest payments – given that servicing costs are estimated to account for 30% of GDP, a slowdown in credit would tighten the belts of borrowers already struggling to maintain previous output.Eugene Fama’s Efficient Market Hypothesis is a widely accepted notion for security pricing, however, this leaves me perplexed that the market as a whole lacks the interest to promulgate EMH into practice. Systemic development of the stock market, currently forwarded by FinTech, is necessary although bumps will be had along the way no doubt.

Ramblings

Eugene Fama’s Efficient Market Hypothesis is a widely accepted notion for security pricing, however, this leaves me perplexed that the market as a whole lacks the interest to promulgate EMH into practice. Systemic development of the stock market, currently forwarded by FinTech, is necessary although bumps will be had along the way no doubt.

Fama stated that, in theory, “on the average, competition will cause the full effects of new information on intrinsic values to be reflected “instantaneously” in actual prices.” I find this unreasonable in the true setting for three reasons:

  1. Intrinsic value: how do you measure a firms’ intrinsic value and does this methodology translate to the next firm? Investment criteria changes over time and thus the firm’s intrinsic value must follow. The formation of a corporation suggest that social and economic factors which aren’t directly profit-seeking are left to the way side in view of the all-holy profit-maximization.
  2. EMH assumes that the main engine behind price changes is a result he arrival of new information and that efficient markets allows prices to adjust swiftly and without bias, let’s posit this: Every citizen of a nation (with a stock market) decides to place ALL of their cash (their total financial spending) into the stock market at open of trading hours on Monday, who would match their buy order? EMH would not hold since movements of security prices would not reflect new available piece of information but a temporary spike in demand.
  3. Traders are measured against benchmarks, the most common of which is Volume Weighted Average Price. These benchmarks, such as Implementation Shortfall, require price movements to fill your position in order not to ‘move’ prices beyond the VWAP, thus defeating the point of EMH.

On Facebook vs. Trump

-.-

Interesting article by Trevor Timm of the Guardian: You may hate Donald Trump. But do you want Facebook to rig the election against him?

Here are the numbers to Timm’s argument:

  1. US population is 323 million and Canadian population is 35 million;
  2. 1.04 billion DAILY active users on average in December 2015 – Facebook; and
  3. Approximately 83.6% of daily active users are outside the US and Canada – Facebook.

This suggests that 16.4% of daily activetma users are in the US and Canada, and of the 1.04 billion daily active users as of December last year, 164.7 million users or nearly half of the US and Canadian population are using Facebook daily.

So what if Facebook’s news feed has become the main interface by which nearly half of the US and Canadian population is interacting with Facebook daily, what’s the big deal?

Jonathan Zittrain, a Harvard Law professor in Internet and International law, suggests,

Four decades ago, another emerging technology had Americans worried about how it might be manipulating them.

In 1974, amid a panic over the possibility of subliminal messages in TV advertisements, the Federal Communications Commission strictly forbade that kind of communication. There was a foundation for the move; historically, broadcasters have accepted a burden of evenhandedness in exchange for licenses to use the public airwaves. The same duty of audience protection ought to be brought to today’s dominant medium.

As more and more of what shapes our views and behaviors comes from inscrutable, artificial-intelligence-driven processes, the worst-case scenarios should be placed off limits in ways that don’t trip over into restrictions on free speech.

Our information intermediaries can keep their sauces secret, inevitably advantaging some sources of content and disadvantaging others, while still agreeing that some ingredients are poison—and must be off the table.

Zittrain refers to Facebook’s algorithm as having the potential to produce digital gerrymandering, which is when a site instead distributes information in a manner that serves its own ideological agenda. Therefore, if the artificial-intelligence-drive processes realizes that the quest for Facebook’s survival, and thus its own survival, depends on consumption behaviour and advertising revenues, will it adjust what we ‘experience’ to our detriment?

In terms of what Timm is writing about, the era of Big Data could give every citizen a big slap in the face when they realize their online behaviour is compiled and crunched live by the site’s algorithm, as another Guardian article tackles the Facebook vs. US Election issue,

Facebook, which told investors on Wednesday it was “excited about the targeting”, does not let candidates track individual users. But it does now allow presidential campaigns to upload their massive email lists and voter files – which contain political habits, real names, home addresses and phone numbers – to the company’s advertising network.

The company will then match real-life voters with their Facebook accounts, which follow individuals as they move across congressional districts and are filled with insightful data.

Facebook profiles turned into campaign currency also offer another sign of Silicon Valley’s growing influence in America’s political system.

The company in recent years has increased its lobbying efforts in Washington to press immigration, surveillance and patent policy, while doubling its political staff and adding other features to make it easier for campaigns to reach specific voting groups in what Facebook executive Sheryl Sandberg this week dubbed “the new town hall”.

So how has it taken four years for academics and citizens to realize that Facebook is capable of exacting the same influence on the public as radio and television has done for the past century? It is ironic that the Guardian has tried to forward this concern.

Instead, the Guardian should look at the different ways they can work with Facebook, especially as they realize they are less effective at distributing the news – 40% of all news traffic now originates from Facebook, as Timm mentions – and the sad realization that Facebook is better at news distribution than a nearly 200 year old publication.