Wednesday, 23 December 2015

That's a wrap.

So here were some calls I put out last year for 2015. And it's time to appraise.

- Trends in equities and bonds will end. This is the year of the whip.

I think we can score that as a categoric HIT

- Though general equity indices will see a path of general sidewayness with high volatility there will be large sectoral oscillations.

Again a HIT. SPX closing much where it started in the general scheme of things (even China's SHComp outperformed it by 12% over the year) with sectoral plays having been massive.

- Because of the above, funds will start to move from index trackers towards discretionary as the point above means that GOOD discretionary starts to perform.

MISS. Looking back on it there was a self-inforcing escape clause in it. GOOD discretionary has been good, or it wasn't good. The problem is that discretionary in general has been pretty bad. But then so have most indices. So I am a bit lost on this one.

- Discretionary macro will find they are short of portfolio managers as they have mostly been replaced by quants who are absolutely brilliant at working out value in their space but unfortunately don’t have a clue as to how someone else’s space effects their space, especially if it hasn’t happened before.

MISS, though I’ll claim an assist as Discretionary Macro have indeed found themselves short of portfolio managers but that should have been caveated by ‘GOOD' portfolio managers as performances have been pretty abysmal. The quants are still dominating the world and the discretionary macro has at best had a ‘year of living dangerously’ or at worst completely screwed it up.

- Macro hedge funds that have sold their souls to pension funds and real money investors will feel like straight jacketed loons peering out at freedom from the confines of their asylum as the risk rules imposed upon them by their new masters of dull money mean that they can’t participate in the way they would really like to. Or stay in when under pressure.

Not sure -  Funds have found the combination of lack lustre performance within the confines of rules implied by their investors egregiously restraining, or, ok , their performance was just rubbish but many have decided to hand back investor money and go it alone with just their own. Bluecrest a case in point, but a number of macro funds have hit the headlines this year, handing money back or closing.

- Fast swings will seek out and eat at the edges of risk boundaries. Much as lions will take down the wildebeest on the edge of the heard, funds that can’t move fast enough or are too restricted by process will under-perform as their positions are taken away from them in a steady stream of stop losses on both sides of the market.

HIT - Hard to tell now how much the whipsaw destroyed returns through stop losses being triggered without the agility to get back in in time for bounces, but 2015 has certainly been the year of the whip and stop loss. Either you took them and missed the re-entry or didn’t and wished you had.


2016 - I've been looking at trade recommendations from some houses and the complexity of some of them e.g. GS’s ‘Stay long a basket of 48 non-commodity exporters and short a basket of 50 EM banks stocks’ has me thinking that no one really has any confidence in anything at the moment. The idea that a year that has left many confounded ends with an outlook that is also bathed in confoundedness is not really to be unexpected. As a general rule, forecasts are normally an extrapolation of current mood.

If I was to be completely true to my faith, now would be the time to go for some big calls that sit outside confused tweaks of yield curves or spreads of things that are pretty much reliant on good fortune than real cleverness. I don't want to be fooled by complexity. It may look clever, it may sound clever, it may even be funny, but it can still lose you money as fast as betting that Trump would be out of the running by now.

But I don’t have any brave calls other than thinking that 2016 may see the following

-People will think that the Fed will hike faster than currently discounted, discount that, and then the Fed end up trailing market expectation again.
-The UK and GBP will take a hit as the rest of the world wake up to the fact that the ‘leave EU’ vote is going to be a very close run thing. I would love the UK to join NAFTA instead. If Turkey can be considered part of Europe then why not UK part of the North American continent.
-Europe will continue to politically melt like a lump of fat on a hot plate - From the bottom. The only hope is that economies grow fast enough to defuse nationalistic unrest. Greece will become an issue again in June.
-China will be just fine but relations with the west will continue to cool politically.
-Something will happen in the oil markets to see prices rise, the breath holding contest between marginal producers is going to see drownings. Or someone forcibly goes in to turn the taps off in Saudi.
-ECB will continue to trade Oil. ( i.e. energy and commodity price inputs will be the main sway to EU inflation and ECB will follow the swinging watch chain, hypnotised)
-Iran becomes more of a friend to the west putting further pressure on Saudi Arabia.
-Saudi Arabia will come under someone’s cosh in general. Too many points of interest coincide at Saudi Arabia.
- The West reduce sanctions against Moscow. I don’t know what will be the catalyst, but something will thaw relations.
- Equities will have a shake down at the beginning of the year and there will be the usual 'EM is going to collapse' call (seems a regular feature of Januaries) but then you scoop them up with both hands. Probably on the 19th Jan.
- Banks will continue to morph into old fashioned post offices as they are squeezed between regulation and Fintech. The intelligent output of Universities is now going to where it always should have gone, science, engineering and creativity.
- Inflation will be back. Great for deflating debt but only as long as real rates stay negative while inflation rises otherwise the cost of servicing debt could wipe out borrowers before their debt levels denude through inflation.

I am not going to put any trades on until something sticks. And I dont mean to fur.

Now finally, here are some things I would LIKE to see happen in 2016, but are, unfortunately not very likely.

- Amazon is found to be run by creatures that otherwise occupy the 'Tripods' in 'War of the Worlds' as I gather the way they treat humans is similar.
- SKY TV go bust.
- The road works on the M3 will be finished, or at least finished before the world is engulfed by the sun as part of its natural evolution towards a red giant.
- People will fix your computer rather than telling you how to do it.
- Trump and Putin meet in a cagefight - on the basis that two men enter and hopefully neither leave.
- Politicians are fined for every proven untruth they tell. Check your stats folks...
- Banks will work with retail so that all transactions automatically attach an invoice to your online bank statement which is automatically downloaded into accounting systems.
- A large blank swathe of Syria is secured by international forces and new cities rebuilt to rehouse all the fleeing refugees. Better to rehouse on their own land than in foreign countries.
- A new ‘thing’ is invited that becomes the must have essential item for the whole world, kick starting economies (large TVs, phones and cars have run their course)
- Battery energy density break through.
- Someone events a new class of antibiotic.
- Scotland gains independence whether they like it or not.
- Peak Political Correctness occurs when my offence at your offence causes stalemate in the Ombudspersons judgepersonst
- People reading from 2000yr old books stop trying to change my life.

Friday, 4 December 2015

Nobody expects - ECB more dorkish than expected.

The ECB has added yet another positive data sample to support the theory that the most profitable trade of 2015 is to fade market expectations into central bank announcements. I have produced this simple representation using the Fed as an example before, but it is just as aptly applied to the ECB and their announcements. For the ECB we should replace 'hawkish' and 'dovish' with 'less dovish and very dovish' and apply a slight downward gradient on the black line, but you get the picture

I have seen comments this morning that the market was shocked by the ECB's hawkish tone. It's a funny old world where a central bank moves rates from negative to more negative and can be accused of being hawkish. Dorkish maybe, but not hawkish.

As I keep stressing, the thing that we should have learned over the past few years is that that expecting central banks to follow market expectations is like expecting the Spanish Inquisition. No one should expect it.

The element of surprise that the ECB has once again induced in the market has lead me to shamelessly rehash the post from October when the market was surprised by the ECBs dovish tone.

The latest ECB press conference Monty Python Style  - No one expects such little ECB action.

Market -  I didn't expect such little ECB action.

Jarring chord. The door flies open and Cardinal Draghi of the ECB enters, flanked by two junior cardinals. Cardinal Vítor Constâncio and Cardinal errr the other one at the press conference who never says anything.

Draghi - Nobody expects such little ECB action! Our chief weapon is surprise...surprise and fear...fear and surprise.... our two weapons are fear and surprise...and obscure communication.. Our three weapons are fear, surprise, and obscure communication...and an almost fanatical devotion to inflation targeting.... Our amongst our weapons.... amongst our weaponry...are such elements as fear, surprise.... I'll come in again. (exit and exeunt)

Market - I didn't expect such little ECB action.

Jarring chord. They burst in.

Draghi Nobody expects such little ECB action! Amongst our weaponry are such diverse elements as fear, surprise, obscure communication and an almost fanatical devotion to inflation targeting, and doing everything it takes, - oh damn! (to Constâncio)  I can't say it, you'll have to say it.

Constâncio - What?

Draghi - You'll have to say the bit about 'Our chief weapons are ...'

Constâncio - I couldn't do that...

Draghi bundles the cardinals outside.

Market - I didn't expect so little ECB action .

They all enter.

Constâncio - Er....

Draghi - Expects.

Constâncio - Expects... Nobody expects…such little ECB

Draghi - ACTION!.

Constâncio - I know...I know! Nobody expects such little ECB action. In fact, those who do expect...

Draghi - Our chief weapons are...

Constâncio - Our chief weapons

Draghi - Surprise.

Constância - Surprise and...

Draghi - Stop. Stop there! Stop there. Whew! Our chief weapon is surprise, blah, blah, blah, blah. Read the charge!

The other one - You are hereby charged that you did on diverse dates commit heresy against the Holy ECB. My old man said you didn't follow the curve.

Constâncio -That's enough. (to Markets) - Now, how do you plead?

Market - We're innocent.

Draghi - Ha! Ha! Ha! Ha! Ha!


Constâncio - We'll soon change your mind about that!


Draghi - Fear, surprise, and a most ruthless... (controls himself with a supreme effort) ooooh! Now, Constâncio, their expectations!

Constâncio cites obscure inflation indicators in support of the ECBs lack of action. Draghi looks at him and clenches his teeth in an effort not to lose control. He hums heavily to cover his anger.

Draghi - You....Right! Tie the market down. (the other ECB officials make a pathetic attempt to adjust the market expectations) Right! How do you trade?

Market - Still long Bunds, short Eur/Usd and running long Dax.

Draghi - Ha! Right! Not for long! Cardinal, give their expectations (oh dear) give their expectations a vicious twist.

Constâncio stands there and awkwardly and shrugs.

Constâncio - I....

Draghi -  (gritting his teeth) I know. I know you can't. I didn't want to say anything. I just wanted to try and ignore your crass mistake in leading the market to believe in October that we were going to follow Switzerland

Constâncio - MY mistake?

Draghi - It makes it all seem so stupid.

Constâncio - Shall I, um... Tell them that we'll continue QE until March 2017?

Draghi - Oh, go on, just pretend for God's sake

Constâncio mumbles about the effectiveness of QE and need for its extension. The market looks decidedly bored with this pathetic attempt. 

The doorbell rings. The market detaches itself from the ECB and answers it. Outside there is a dapper Fed official with a suit, slightly detached from reality.

Fed Official - Ah, hello, you don't know me, but I'm from the Fed. We were wondering if you'd come across the pond and do a sketch over there, in that sort of direction... You wouldn't have to do anything - just look as though you expect the Fed to raise rates

Market - Oh, well all right, yes.

Fed Official - Jolly good. Come this way.

Wednesday, 2 December 2015

The Pitch - ‘FiX Up’

The Pitch for working title ‘FiX Up’

After seeing the age of the criminals who pulled off the record breaking Hatton Garden vault heist and at the same time witnessing the outrage at the FX market's fixing scandal, I thought I could marry up the two genres in a typically British film, the pitch of which I have sketched out below. I was wondering if this could actually be pulled together into a film so if anyone would like to talk to me about making this real then please get in contact.

The tale is a familiar one of old criminals (lags) getting together for one last job, only in this case the lags aren't criminals but old school 1980's FX dealers. Imagine Oceans 11 meets Trading Places meets Sexy Beast meets Wall Street (only the Essex version). The old trading lags come together to have one last crack at the markets, but do so behaving as they did in the 1980s causing all sorts of financial mayhem and amusement as they apply 1980s trading skills in an electronic world. (All characters are of course fictitious and any resemblance to ..etcetcetcetc)


Sitting outside the clubhouse of a golf club in Essex, England, supping lagers, two old FX spot traders are discussing how things have changed since their day and despair over the news of FX fix fixing. They reminisce over the old days and decide that the traders of today must be completely stupid to be caught out doing something that they all did but nowhere near as blatantly. At this point a waiter appears and while clearing the glasses catches their conversation and starts to chip in. He tells them that he was recently let go from an FX shop for not being profitable i.e. he didn't rip the clients off enough and regales them with a list of the absurdities of today's markets including algorithmic trading, arrogant Real Money fund desks, demanding Hedge funds, compliance officers and the regulators themselves.

The old lags start to fume at what has happened to their beloved market and decide that if a collection  of young muppets can so nearly get away with the FX fixing, but for being idiots, they would have a crack at showing them how it should be done, fiercing up the market one last time.

As with any good heist movie the target isn’t the public but the other evils in the market. The plot sees the old lags actions end up, Robin Hood style, benefitting the public good whilst taking down the modern evils on the way.

The two originators, Mickey and Danny, hatch a plan to get the boys back together.

The team cast list  (actor suggestions in brackets)

Mickey. ex-trader and now the groundsman at the Essex golf course (Ray Winstone)
Danny. ex-trader, recently made reduntant from the back-office of an Aussie bank (Phil Collins)
Dave and Steve. ex-traders who are approached in one of those green taxi cafes in London as they are now drivers for  FX taxis (the two bald actors from Eastenders)
Bugle (real name Charlie).  As a young guy he was the 'muppet' on the spot desk but now is a corporate FX sales guy at a bank, about to be busted for peddling 'charlie' to his clients. (Lee Evans)
Wayne. Now a compliance officer at a US bank. He doesn’t want to join, but they blackmail him with photos from a 1989 stag party. (Jim Broadbent)
Gerald.  A smooth investment bank type who used to be their boss in the old days who is now treasurer at a small private client bank but is about to be let go (Ralph Fiennes or Jeremy Irons).
Sparks. Ran the primitive IT at the old shop but is now running a porn website. (Timothy Spalls)
Jimmy (but now prefers James).  The old economist cum strategist - nervous and lacking in confidence these days - he is now writing financial blogs and running a failing online private trading advisory service. His character regains its old force throughout the plot. (Colin Firth)
Beverley. Telex girl and everyone’s old fling. Now a house-mum in Romford (Patsy Kensit).
Archie.  An old school french sales guy, always drunk but knows every important name in the European market as he has probably been whoring with half of them and slept with the other half (Gérard Depardieu)

Each one has a scene of them being approached and finally accepting.

When they gather Sparks tells them of a bank’s disaster recovery dealing room he knows of that has been mothballed and as the owning bank is going under due to regulator fines they seem to have forgotten about it.

The lags break in and start to set up. There are scenes of them all larking around trying to understand the new technology (even though it is old by modern standards) whilst Sparks gets angry and Gerald has to read the riot act.

They set up dealing lines with dodgy prime brokers using the credit card numbers Sparks has hacked from the client list of a high class City strip joint.

They start to trade and gain market credence by behaving as normally as they can though they often nearly let slip (such as asking for USD/DEM) which Sparks and Gerald have to cover via IT hacks and Gerald's connected shmoozing. E.g. when starting up they don’t know what an EBS is and nearly cause a flash crash by hitting it in anger (ends with Mickey throwing it out of the window and declaring that from now on its phone only like the old days. Cue more blackmailing calls to old school voice broker types).

As they get bigger  investment bank sales desks hear of the volumes they are doing (facilitated by tip offs from Archie to his sales mates)and start to court their business wanting direct access to this new client instead of via prime brokers. Wayne knows how to fool the Know Your Client regulations and Sparks links their credit references to those of a large Far East sovereign wealth fund, so large dealing lines are obtained.

Once all the credit lines are in place, it all sets up for the sting which is based around a set of data releases, could be non farm payrolls or an important CB rate announcement (a bit 'trading places').

The announcement is way off expectations but instead of doing what would be expected they do everything that theoretically they shouldn’t.  James “ECB cut 1% much much lower than expected.. so boys what do we do with EUR/USD?… well we should sell the sh*t out of it .. so… MINE MINE MINE”. The resulting price action confuses the hell out of the algorithmic trading models and new world theorists (cut to the odd 21yr old quant at a large investment bank muttering 'this shouldn't be happening'),

Cut to shot of the back of a chair in a chic glass office with a young preppy exclaiming to the occupant "We don't understand it sir!" The chair swings round as it's occupant, fingers steepled, quietly utters "I do". It is one of the old school macro hedge fund giants who was also around in the old days and was the lags' old nemesis (probably played by Ben Kingsley). The Hedge fund is called 'Nemesis'

The game then develops into a battle of old fashioned phone trade spoofing with analogies to real battles. It’s mayhem and the weaponry expands as the old lags realise that the Hedge Fund Nemesis has more than they are used to - ‘Shit he's got f’king options, he’s using options! Where the f’k is Willy?" Willy is a retired prehistoric options trader who they call in last minute only to find he is on oxygen in a nursing home, but he starts to help via mobile phone and manages to talk them through countering the option attack via a massive option barrier battle with him directing the spot desk through his oxygen mask (highlights option market manipulation).

It is now 3.30pm and the old sales lags, Bugle and Archie, are preparing for the 4pm fixes. Sparks has hacked the financial chat services of other major banks and the old lag sales guys are now using them to offer all the real money fund accounts reverse spreads on the fixing prices, but only on sell orders.

Cut to Real Money dealing desk hearing this and giving the lags all of their sell orders despite a junior there asking how it can be possible to offer reverse pricing and says something dodgy is going on, but the Real Money traders saying they don't care, as they only have to outperform the fix and get paid themselves on the difference. Thus they fall into the trap.

Come the 4pm fix they manage to coordinate it so the hedge fund Nemesis is about to unleash hell on the boys filling their bids, but the boys pull the bid just as Nemesis screams SELL. The market melts on the back of it right into the fix. This screws the Real Money fix orders and the regulator, now seeing the fast move and receiving screams from the Real Money sector start to track down who was responsible - leading to the Hedge Fund Nemesis.

The rapid move in the fix also triggers regulatory investigation as to how so many orders were effected leading to the exposure of the real money execution desks accepting reverse pricing.

In the background is the battle of the computer algorithms who can’t understand 6 standard deviation moves and there are scenes of barely out of teens quants and their ‘this shouldn’t happen’ cries. As the old lags notice stop losses coming in from the algo sector, they realise they have found the algo’s Achilles heel and crank up their 'do the wrong thing’ trading.

Meanwhile Sparks has hacked into Bureau de Change style holiday money changers via his old porn site dropping viruses into their front offices (cut to bored young FX teller in a Heathrow Bureau de Change late at night surfing porn).

By now the traders are raking it in over the algos but when the team’s profits hit $1 billion they start to transfer their profits back to flat by providing stunning FX rates via all the usual rip off holiday money FX joints (cut to scenes at airports/train stations/post offices of queues of people taking currency out)

 When their P/L is down to zero they plan to pack up the dealing room and scarper. But it’s a race against time as the authorities are closing in having tracked Sparks' hacks and compliance officers finally seeing cracks. They make it out just in time but not until after the police are seen on the CCTV breaking in down below. Sparks shouts that the Feds are in. Mickey shouts “The Fed’s in?” and instinctively buys 300m USD/JPY before being stopped.

There is a resulting huge media storm. Investigators dragging off compliance officers for not preventing it, the Hedge Fund Nemesis for manipulating the market, the real money guys for accepting impossible fix prices for personal gain and the algo shops go bust amid scenes of riots against computer trading. Finally, Parliament rules that Bureau de Changes must provide interbank rates. There are TV clips of embarrassed statements from all.

The final scene is the police breaking into the dealing room the boys have been using to be greeted with a mess and a huge spray painted slogan on the wall - “F'CKING MUPPETS’ (which will become a catchphrase forever linked with the film)

 Fade to Mickey and Danny outside the golf club chinking together their pints of cold lager.


Memorable scenes -

- Old lag calls new US Investment Bank dealer. New dealer -“He’s just given me a 100 and asked how I am left shag, what’s that mean? - He wants another price - But he’s just had one - Make him another - He sold again .. damn .. and again .. and again. Old lag marches the price down but then lifts the new kid in huge at a large loss. Old lag - ‘F’king Muppet’.

- The boys go to the pub for lunch and get legless coming back at 4.30pm - drunk behaviour party scenes, bins on heads etc. but hugely successful trading.

- A bank dealer to his older boss "That's odd, he just said that I am a monkey and put the phone down" Old boss asks "what EXACTLY did he say?", " He said 'you're a Monkey' and hung up" - Boss "SHIT! he said 'YOURS, a monkey'. A monkey is slang for 500, you are now long $500million USD/JPY and as I see it $500,000 underwater"

- Beverly being sent off to Mayfair to seduce the Hedge Fund’s critical quant over lunch in a smart Bistro/Cafe and dropping MDMA in his double espresso so that he goes back euphoric only doing nice things instead of the Hedge Fund God's instructions.

- One of the old lags deciding to be long or short by the way the crane outside the window is pointing.

- The team plan to hit the market on the US trade data. But nothing happens as no one cares about US trade data any more, only to be caught out when Non Farm Payrolls come out “What the f'k was that all about? NFPs? Not F’ing Playing.. that’s what I am ..”

- Old lags trying to visit old city haunts. Flash backs to seedy pubs and omellete shops - all gone and replaced with Starbucks and glassy wine bars. Plus reminiscing lines of past bad behaviours.

- Gerald being told he is no longer needed at the merchant bank as a new US MBA non market savvy geek is being moved in.

- The young kids around one of the old school brokers serving the old lags experiment with the old techiniques gingerly trying to say “and thank you too .. errr Mr… Shag?”

- Willy, the options dealer, in the nursing home asking why the price is spiking every 2 seconds when he mistakes his heartbeat monitor for a trading chart.

- Compliance officers in the investment bank queried about the new customer a/c saying everything does seem to be in order as they have a copy of a passport and two recent utility Bills - shot of one of the passports being that of a FIFA president.

- Old lag's first trade asking for Usd/Spain only to be told it doesn’t exist anymore. He screams "Ok Usd/Mark then". No not that either. He freezes in stunned disbelief.

plus many many others…………

Tuesday, 1 December 2015

I just don't Noah.

Apparently the next two weeks in markets are going to be the most important since Noah predicted the flood crisis. Thinking about Noah for a moment, I can only imagine how absolutely pissed off all his neighbours must have been with him. He was probably the Zero Hedge of his time, but rather than calling for everyone to build a cabin of wood and fill it with gold, he came up with the cunning plan of telling his neighbours to stick all their livestock in his floating cabin so he could sail off with it all.

But Noah is a literal case of survivor bias. 'Literal squared' actually, as he was the one who survived and he was written about. What we don’t hear about are all the other nutters who were building arks for the previous eon calling for doom only to go bankrupt as their long gophur wood positions suffered decay and they died long before their wild predictions of flooding would ever come true. So it is with markets. We have hundreds of financial Noahs telling us to build arks and not to squander our time and wealth on farming, procreating, lying in the sun and generally having a nice time. But as my wife says 'you only live once' so we might as well enjoy the now.

Living for the 'now' is apparently what ‘Mindfulness’ is all about so, with it being so fashionable, I am surprsed no one has launched a 'Mindfullness Fund' where they just spend all your money on the 'here and now', not worrying about future returns as it’s the now we have to be concerned with. Oh, hang on, they have haven’t they. It’s what macro funds have been doing with your money all year. Macro funds - where mindfulness is not mindfulness.

Everyone desperate for something predicatable to happen in the market is telling us that the two greatest predictable events are going to happen in the next two weeks and it is going to result in amazingness, where amazingness equals whatever they are predicting to happen once the two most predictable events have occured. The two most predictable events are the Fed and ECB rate decisions, but the follow-on predictable events depend upon who you are talking to. Spotted the problem here yet? Polemic’s Certainty Principle. 'If you can see how predictable an event is, the outcome is unpredictable. If the outcome is predictable then the event that causes it isn’t'. Back fitting of news stories to fit market moves is a case in point.

On the other hand there is an unpredictable event coming up that is so unpredictable people would rather not talk about it that much because predicting a tradable outcome from OPEC can be as exciting and probabilistically reliable as calling the lottery numbers, most probably because OPEC's decision are as much political as they are economic. Which makes it tough for the great mass of financial research which relies on the quasi-maths we call economics rather than the base cause of human inter-relationships which is called politics. Economics works really well until I smash you over the head and steal your belongings, at which point the supply and demand price curve bypasses price, instead verging into the i-dimension of imaginary economics.  Perhaps someone has written a paper on that, but though many seem to think citing someone else's 'paper' is gospel proof of their own arguments, most papers are only worth what they are written on (and I am not talking about a Macbook Pro).

I am getting pretty bored with markets at the moment. There seems to be an excess of navel gazing with respect to economics with actually very little happening in response. The next triggers to market moves will be via basic politics rather than newly found economic theory. I don’t know what the next trade is. Doom rests upon everything going caput re debt, but one man’s debt is another's asset so these huge numbers being bandied around probably net off to a huge extent. Imagine if there is a Martian life form up there saying ‘Fleep bodudle gweeb, have you seen how much debt there is on Earth? That planet is bankrupt!”. No it isn't, only in this respect are Flat Earther’s correct. Earth as a whole is flat.

Whilst talking about Martians, here's a philosophical question - is it possible to be criminally racist against a race doesn’t exist, but instead is only a figment of one’s own imagination? I bet it is.

As for EM and USD debt, the most likely outcome will be that EM switch to Euro or Swiss funding as close to negative as they can get and then just roll up the FX risk as usual. Bad for Eur and Chf, but then everyone is positioned for that anyway so probably nothing will happen.

Basically, if you don’t have to be trading and you don’t have to be writing about markets then don’t. If, however, you are employed to look busy in markets I recommend you buy a copy of ‘My Big Bumper Soduko Book’, make an excuse about a prawn curry and lock yourself in Trap 3 until everyone else has left for Christmas.

Wednesday, 18 November 2015

Swarm Economics

Whilst a lot of attention has been paid today to the BoAML fund manager survey my attention was more drawn to their lesser mentioned small business report which can be found here.  I was struck by the hugely upbeat nature of it with investment and hirings planned at a pace. This was particularly of interest because I think the world of small business is too often (always) lost in the reportage of big business.

I now run a small business. I used to work for big business. It has been eye opening.

Working for big banks dealing with big clients, analysing big companies and looking at the data that they provide gave me the impression that big business is the driving force in the world. Having left a large institution and been immersed in the small business world I can see just how misinformed and blind I was. Small business is responsible for 50% of GDP yet coverage is naturally biased towards the big companies.

Most small business is privately owned and because of that rarely gets reported on. If there aren’t myriads of investors then the audience for any analysis or reporting is reduced to miniscule. This leads the wires to be swamped with further perception bending pieces on big business alone. And then there is the matter of size distribution. Though that 50% of GDP is made up by small business it is easier to focus a biopsy on an elephant than each individual ant in a huge ant hill. Hence small business is further ignored.

Yet conditions for doing business as small business are improving and it is expanding in response. Technology is making it so much easier to establish small businesses, from cloud software to run accounts, legal functions, HR and reporting, to the internet making communication from a barn in the countryside as practical as sitting in an expensive city centre office. It is not that hard and the advantageous synergies of large business are being whittled down. In fact there are efficiencies in being a private small business compared to a public behemoth that has management sapped by and legions employed in investor relations keeping shareholders and regulators happy.

Small is good and with the model of egalitarian exposure proven for the individual through social media models it is becoming replicable for small business. Now advertising your wares is dependent as much on the viral nature of the idea or product you have rather than how much money you pay to put it through traditional costly media placements. The playing field is being dramatically levelled. I may not be unique in bypassing any tweet or facebook post sponsored by a large corporate, more likely being enticed by something novel from an unknown.

The mistrust of large corporates is not diminishing with the latest VW scandal further pushing large corporate reputation after than of bankers. The fashion for artisanal goods has naturally spread to that of artisanal companies, and the term ‘small’ normally suffices for artisanal.

The idea of a swarm of companies driving the economy, each being technologically enabled to communicate efficiently with each other is seeing the formation of a virtual super corporate and that swarm operative is exhibited in the way the swarm employ too. One of the past disadvantages of running small companies has been the inflexibility of hiring due to the huge commitment just hiring one extra member of staff can make. As a percentage of total employees that one extra body can be large making it hard to fine tune. Thinking you need half a person more results in one or zero. Yet the technology that is making swarm business possible is making swarm employment possible too. Freelancing works and though zero hours gets terrible press it is in fact the most efficient way of employing and, if onerous competitive clauses aren’t invoked by single employers, allow for huge flexibility for the employee too (though I acknowledge than many need security).

Freelancing can be considered as the water poured into that glass of golfballs, marbles and sand that time management consultants like to use as an analogy for efficient planning. I would not be able to run my current business if I couldn’t outsource effectively to specialist services and freelancers when needed. It is not just the oil in the machine, it is now part of the machine itself. Whilst many complain that employees are being exploited by big business on such employment terms, down in the swarm it can be considered as a socialisation of jobs. The relationship between owner and employee is much more entwined at a smaller level and whilst big corporations pay lip service to employee interests few really care. At the small level you have to care.

With the importance of small business and its relative size I do wonder if data is getting missed that is more easily harvested form large corporates. One, for example, is exports. 70% of my clients are overseas yet I have never been asked to report my exports. Earnings data at the small level can get clouded too where director of small businesses tray to take dividends rather than salaries. The change effected in the UK next year with increased taxation on dividends will push the balance back towards salaries so there may well be a jump in reported wage earnings

Big business will continue to monopolise big investment projects where massive R+D spends or vast equipment investmets are needed but I wonder if even there there there is an advantage to fracturing up into a swarm of smaller units. The greatest being the dissemination of risk. If VW, BP or the big banks, rather than being huge mammoths for the litigators and regulators to target, were swarms of smaller companies then corporate malfeasance would be harder to pursue. Attacking a swarm of ants is harder than killing a mammoth. One small component would be sacrificed and bankrupted for the good of the whole and the swarm would continue to function. In VW’s case it could have been the small unit that supplied the cheat software. Perhaps one day the documentation on car sale invoices will stipulate we aren’t buying one make but have separate contracts with each component supplier. Just as we do when we put together our homes.

The ants are making the elephant's life uncomfortable.

Other interesting links -

Monday, 16 November 2015

When in Doubt do Nowt.

The plethora of news headlines ending ‘as/because of Paris attacks’ is hugely infuriating.
The best one must have been the The UK Sunday Times with 'Paris attack rattles markets as ECB readies cash injection’ written on Sunday. Sunday, before the markets had a chance to show any rattledness through price. Pure speculation.

The subsequent move higher in global stocks has had journos scrambling to fudge away their expectation of financial meltdown, but we have to remember that those selling are not selling on the Paris event but how they think others will react to the Paris events.

'Buy the rumour, sell the fact' is better phrased today in a glorious 'Sell the fact, buy the hope'

Moving swiftly on, the moves lower in ‘stuff’ have fitted with my feelings expressed in my last posts at the end of October (Sorry for not posting since then, I have really had nothing to say) as the bullish momentum finally faded. Back then I was surmising that dovish expectation from the FED and ECB were at an extreme and any change would wobble things lower. So it has been with the Fed, where we are now back to expecting a December hike with confidence levels, as represented though Fed futures, at levels not seen since the Fed last moved. So it is very tempting to now think that market disappointment at a hint of no move would be worth playing.

My basic rule is that if we consider this game theory where H= Hawkish Fed and h = hawkish ECB and 'D' and 'd' the dove versions. Dd and Hh are equity trades whilst Dh and Hd are FX trades.
So since last commenting when we were at Dd we are now at Hd and indeed the equity trade has unwound a fair chunk to more neutrality and the FX trade is in play via EUR/USD. ECB expectations appear to be stuck in ‘d’ for awhile yet but there is another chance of Fed to move from H to D.

China - Xi says China GDP will be 7%. Really? Either he has more control of the economy than I thought or he is playing King Canute

Oil.- If ever there was proof that the world isn't expecting the Middle East to blow up to an extent that oil supply would be effected then the price of oil is it. Supply is assumed to be safe. I am surprised that the Saudis are being allowed to get away with such supply aggression. I am surprised that the Saudis are not being leaned on by many western allies to do something about it. I am surprised by many things that centre upon Saudi Arabia. Quizzical too. 

All in all I am worried about the state of the world but that doesn't easily translate into market prices as bad can mean good and good bad. It get's more complicated when I still feel that inflation is the end game and though central banks are shaking hard at the inflation bottle, it contains a genii that will screw everything. 

There are charts of doom everywhere but there have been charts of doom everywhere for the past six months and markets have only oscillated.  Nothing grabs me. So though I have been running short risk for the pat few weeks I am taking a lot of those shorts back. 

When in doubt do nowt. 

Not a Happy Christmas for Bank Employees.

First please forgive me for not commenting on the terrible events in Paris, nor offering any solution. My horror and sympathies are total and absolute but don't need publicly broadcasting and I have no solutions. Instead I am going to ramble about the employment prospect  for financial analysts and traders.

Parkinson’s rule - "work expands so as to fill the time available for its completion".

Parkinson's rule,  data derivative - "data expands to fill the data storage space available".

Polemic’s rule of Fed watching  - "the number of forward Fed moves analysed will fill the amount of analysis available".

This observation was triggered by my first sightings of speculation as to when the next Fed move will be after the one that is ‘obviously’ going to be in December. This reallocation of analyst CPU time to the next task, having decided that the first task is complete or at least now only needs minimal background processing, might be worthy but is probably not. The huge amount of processing power applied to working out the first Fed move has been so inaccurate over the last few years that moving on to the next derivative seems foolhardy at best. The further up the derivative family tree one goes the greater the compounding error factors mount up.

The traditional analyst model is that analysts are much like the CPU in your computer. You have paid for it to sit there so you might as well have it doing something. Most analysts are employed full time by institutions and so are expected to be analysing things for every hour that they are in paid employment. This results in a fixed analyst supply that does not respond to demand, well not swiftly anyway (I’ll come on to that later). So when demand shoots up, usually when markets are flying around, accompanied by economic, financial or political crises, the limitation of supply means there isn’t enough analysis going on, or at least not at the speed needed, but when things are deadly quiet analysts apply themselves with equal vigour to the equivalent of the SETI project, examining noise and trying to find patterns of life in it. Yet most of it really is noise, such as trying to determine when the fourth Fed hike will be or if the colour socks that a CEO wears has any bearing on profitability.

Yet supply of 'analysis' is not totally fixed. An increase in demand sees part-time analysts come out of the woodwork, forgoing their other day jobs for an hour or two to do part-time analysis. Yet unlike a normal supply and demand curve where an increase in demand will see prices rise and a better quality of analyst feel it worth getting out of bed to fill the gap, these part time analysts are usually of dramatically lower quality. Every Tom, Dick and Harry jumps on the airwaves to give their analysis, which is usually just a view, making it harder to filter out the wheat from the chaff.

This is how it has been, but the shape of the analyst market is changing fast. Banks are under the cosh as their investment bank arms are dramatically trimmed or closed. The strategy desks in banks have always been as much showmen as market calling geniuses but if no one is willing to pay for the show can we expect the show to go on?

Funds are turning more to algo and roboadvisory, macro funds are performing appallingly and restructuring, even the mighty Brevan Howard let 70 people go last week and tough they are said to be back office and support it is part of a bigger underlying trend. Even the target audience for independent analyst companies are having their spends questioned by investors and regulators.

With strategy and analyst desks being shredded there is a growing population of individuals out there looking to either rejoin other units, coagulate into smaller cooperatives or go it on their own. Going it on your own is exceptionally hard and unless you have been a super-name and can afford to hire an infrastructure around yourself to provide the management and sales support you are most likely to end up as a zero hours contractor hoping that the spiel you put out gets read. It is very hard for a one man show to switch hat at the end of a presentation to become salesmen and negotiate fees. Getting read is hard enough with every bank and house feeling obliged to put something out each day but then getting followed is probably only as good as your last five calls. The horrible reality is that even if you get the first four calls right the chances are the client will act on your fifth which turns out wrong, so despite a 80% hit rate you are back to square one.

The banking layoffs are continuing with a vigour in the trading operations too. The Sunday Times story yesterday 'Bonfire of the bankers" (sorry it's paywalled) encapsulates it but there is a lot more going on below the surface of the headline banks. All the second and third tier global operators who have units in London are going through the same pain. The latest raft of layoff are going to find life even tougher than the first as alternative employment posts have already been applied for. Moving to completely different careers is tough for many as the skill sets developed in dealing rooms are not as transferable as many think.

If traders are hoping to move into the corporate sector they will find that their too restructuring has killed any ‘profit centre’ style trading reducing then back to old fashioned hedging units. Risk taking opportunities in Hedge funds has collapsed too. Macro performance this year has been appalling and the layoffs in that sector continue. Brevan’s lay off of 70 staff last week may be tagged as ‘back office and support’ but that doesn’t hide the trend. The alpha singularity is being approached. The mind boggling application of IQ chasing the finest basis point has driven alpha returns to microscopic levels as trends are lacking and most macro trades are based upon the development of a trend. Even when one does arise it is interesting to see that funds rarely outperform the trend once leverage and risk allocation have been discounted.

So where’s the margin gone? Any one popping into a bank or trying to transact FX at an airport Travelex can see that margin is alive and well but at the lower retail sector leading, in the UK, to a proliferation of new companies stepping in to try to take value out it. If you run a small company you will no doubt be currenty recieving cold call on daily basis from small shops offering you bank beating FX rates. I can only assume that they are growingly staffed by ex-wholesale salesfolk who have managed to find a home before becoming the drivers of FX taxis (even that back stop has been screwed by Uber).

The squeeze in pricing will continue to cascade down the retail tree until even that becomes a margin singularity as someone such as Google or Amazon steps in offering FX services or even, someone (and here’s an idea) sets up the Uber of FX where you type in how much cash you want and the app tells you in real time the location of anyone willing to do the other side of the trade allowing you to meet on a street corner and swap your currency notes. Security would be a problem though, with the app becoming a muggers guide so the next iteration would lead on to centralised Amazon style distribution centers and which point, voila, we have recreated the original biblical hall of the money changers.

The upshot of all if this is that the employment prospects of rafts of university leavers hoping to join a well paid and steady carrier in the City are shot. The whole idea of a City career has been anathema to me for years. Most city workers have a series of jobs, not a career.

However if you are a 15 year old wondering what to do, finance may not be such a stupid choice.  By the time you finish university the banks will have fired too many people and suddenly be desperate to find new cannon fodder.

I will end here and comment on markets in a further post, but I have a feeling that any readership I have in financial institutions will be be dramatically culled in the next month or so. Sorry folks, it isn’t going to be a happy christmas for many.

Thursday, 29 October 2015

Market post FOMC

The FOMC once again managed to surprise the markets. This time by being a bit more hawkish than expected. This fit in with the feeling I’ve had for the past few days that the market is pricing max ECB action and max Fed no action leaving risk for disappointment on either. The FOMC statement with its missing reference to exogenous pressures might have surprised some but the Polemic FOMC market expectation model is still performing .
It's a simple model that plots market interpretation of Fed intention against actual fed action. So simple in fact that I can express it like this.

The subsequent price action in assets was predictable, right up to the point it was not. A dump and rally seeing indices close near/at/through recent highs again depending which one you look at. I can only assume it was a battle over impact and reputation of Fed action. Stay low and it's stimulatory but ZIRP nuts, move higher and respect is regained but it’s less stimulatory.

This caused some jitters at Polemic Position Towers, but the view that risk things roll over again is intact. Asia coughed a ‘meh’ with the FOMC caught between a strong Western equity close and a tap back towards ‘Fed rise = bad for EM debt’ but with Western market looking soggy again we may well see some contagion flip back into EM, which starts the feedback loop into DM, rinse repeat etc.

Last nights FOMC just adds to the interest in the stretch between FOMC and ECB policy. The obvious plays are EUR/USD shorts and ESTOXX vs SPX but that is so obvious I am looking at EUR/USD at 'only' 1.0950 and deciding that though everything should be set for it to fall it will stuff everyone again by returning to the 1.1100 magnet again. the catalyst could well be an ECB expectation catch up. We have seen Fed expectation move post FOMC, we may well see ECB expectation shift from uber-dovish on the next squeak out of them. We can't get much more dovish than now can we?

The Euro/US stock spread isn't performing that well either today with the move down in European stocks hinting that the sell off is going more general and with that in mind and the hefty falls in UK stock the mighty peaking US markets could be seeing the still kicked from under them ready for a catch up

In the last post (not the bugle call, though it may be apt in equities if my feelings play out) I said oil was the key to many thing and had pretty much thrown the towel in on seeing it rebound meaningfully. Well, add me to the list of oil counter indicators as the stuff shot up 6% as soon as I said that. But despite that my oilly stock things are still getting 'Shell'acked suggesting that the belief in the rally is not complete.

One last point on Central bank expectations. I wrote this a couple of years ago and it remains as pertinent now as it did then

And the US? We have been throwing around all sorts of arguments and analogies, most of them medical ranging from tearing off the plaster of QE as quickly and painlessly as possible, to continued methadone prescription, to amputation and stem cell therapy. Once again, as with Japan, it all rests on continued confidence and here we have a balance between confidence in the continued supply of liquidity if the economy needs it against confidence in long term Fed policy, the two being slightly different. The other point of confidence is who follows whom. the market the fed, the fed the data, the market the data or the Fed the market. We would prefer to think that the Fed will, as they keep stating "do what is necessary" (as the ECB also keep saying) to which point they will try and play the Goldilocks scenario of just the right amount for any situation. 

We would like to remain confident that despite the wild oscillations in central bank expectations the central bank Governors are indeed Governors - Those big Brass Balled governors on the steam engine of the World's economy and they can’t afford to choke off what confidence may finally have emerged. 

Tuesday, 27 October 2015

The markets are pricing the medicine, not a cure.

Since the Fed no hike decision and the ECB 'likely cut' press conference, it is looking as though markets are pricing interest rates rather than growth. The low rates lever has  been pushed down almost to the floor and expectations are now taking it into nutty negative territory. With EUR and JPY real rates at -40bps, there’s not much more they can do and my concern is that a further depo cut by the ECB will ultimately prove to be contractionary and/or neutral at best because of the bizarre nature of negative rates (I stand by my suggestion of a QE credit card to get the money directly to where it belongs).

The commodity sector is not playing ball as one would expect it to if we were looking through CB policy to the end game of that policy which is growth. Oil and commodities are not the only disconnect with equities. High Yield is too, with credit guys skittish and issuance starting to ramp up again leaving the credit markets nowhere near as bullish growth as the equity markets. Something is fishy.

US equities are effectively back in their pre August dump range and European equities are around their early 2015 ECB QE expectation hype levels. But the background situation is worse than it was either in January or August. Earnings growth is still weak/negative everywhere and I have a hard time seeing equities make new highs in that context alone.

As a background indicator I am wondering if the proliferation of stories about companies cooking their sales books to disguise falling performance is a sign that leverage can-kicking in the balance sheets is hitting a brick wall. Growth realities are poluting the growth dreams that many of these companies need to sell in order to survive. A company that borrows to fund a dream and then uses that borrowing to pay itself and the interest on its borrowing without earning anything will go pop. Unless it can resell the dream to the next punter willing to lend to it and repeat the process.

But it is oil that is my barometer. Oil is looking horrendously sick again and it is beginning to look as though the broader swing in oil is a leading indicator for how other markets will behave. A fall, a rally and then a fall. Oil is down 2.5% as I type and it is now really hard to see what is going to give it a lift if CB uber-dovishness doesn’t instil expectations of growth, Russia in the middle east doesn’t upset expectation of supply and the last bulls (including me) are throwing in the towel as the last rally fades. What is more we haven’t even had the press signalling a bottom by calling for sub £1.00 petrol imminently - it normally works a treat as a base caller.

I just can’t get away from believing that oil prices are the key to everything at the moment. Oil is the centre of one of those overlapping Venn diagrams we all learnt about at school, but have never really used since, other than as allegorical references such as this.

Oil is shaping Russian policy, it's reshaping US policy (or lack of it) towards the Middle East, it's driving CB policy as referenced by Draghi at the last ECB press conference, it's shaping financial stresses through high yield as well as long term mega-investment plans and it is reshaping political alliances in the Far East. It is now even being used to fund the US budget deficit with the sale of their strategic reserves (rearrange the following words - Brown, Gold, Gordon).

One of my embryonic pet themes is the relationship between Russia and Saudi Arabia. All roads, whether financial, economic, political or military seem to end with that interface as key. If the West is drawing battle lines supporting Saudi interests, to support their own, as Russia builds ties with the crescent of Syria and Iran then the easiest place to anticipate the make or break of the region is Saudi Arabia. Russia jabbing the Saudis is as good as jabbing the West, whilst also applying pressure indirectly by coercive pressure on Saudi to reduce supply or by wrecking the region making sure that supply diminishes. Europe’s increasing deals to procure Saudi oil as a means of energy diversification away from Russia is understandable but Saudi offering discounted oil to Poland is as good as Walter White selling meth in Los Pollos Hermanos. Gustavo ain’t going to be happy.

In summary, the oil and the equity rebound together with the positional/leverage reasoning mentioned yesterday has lead me to believe we are better set up now for a sharp fall in markets than we were in August. Oil remains the leader and it is telling me that equities are about to have a another big wobble. The markets are pricing the medicine, not a cure.

In the meantime I will nurture my Russia/Saudi theories.

Sunday, 25 October 2015

First wave New Paradigmers rarely win.

Cor blimey governor. That’s a cool $4 trillion added to the world's stock market values in the last four weeks. I must thank @Groditi for supplying me with these natty representations of global market cap.

% of total

Total in USD billions

Anyone who thought that the Fed were solely guided by asset prices would be thinking that hey can now raise rates. But that would not be the cleverest thing for them to do because in doing so they would be telling the market that all they care about is asset prices. Which they don’t. If they did they would have raised rates in July.

The ECB appear to have lit the blue touch paper on bonds and equities and if it wasn’t October but January  right now I’d say it was groundhog year, so let's settle on groundhog 9 months. The market has reached for its Jan 2015 play card and hoovered up European equities, bonds and everything ZIRP. At this rate even Bitcoin is becoming a carry trade vs Euro. But then so is sand, dust, old plastic bags, dirty needles and anything else with zero yield. The ECB rally has knocked on to all global assets as the ECB is now seen as the cash water-cannon quelling the globes financial riots. If that wasn't enough China has cut rates this weekend.

The price action has led to most shorts having to refer to the Kubler-Ross model to explain where they stand as surely this was not meant to happen. I mean China? Debt? High Yield? Earning season? Wasn’t this the big one? Well no, in financial asset price terms it has run pretty much as I was hoping, because down moves behave in just the same way as sharp up moves during investment mania, whether the 1890s railroad, 1998 internet, fracking or any first wave of the new paradigm. Doom moves are just the same. The first in mortgage the kids to invest in the next big thing that is a sure fire winner based on long term arguments. Yet though the long term argument is right, the investments are done on huge leverage that the embryonic paradigm is unable to support in the short term.  The groundworks of infrastructure were laid in wave one but it is rarely the first investor who makes the big bucks. It's usually the second investor who picks up the assets for a song, once the first bows to debt load, who lands the sustainable profit.

So, I imagine, it will be with falls in asset prices.  The new doom paradigm kicked in in August, the first wave went nuts managing to reprice the world 10% cheaper in a couple of weeks, yet the real economy didn't see a 10% slump in those weeks. Since then the squeeze has been on as the disparity between price and actual performance has closed up. With prices nearly back to where they were pre-dump it's as though the investor community can brush off the post-explosion debris, examine the scenario afresh, take stock and now properly enter the trade they think best.

Indeed, now that the market has weathered China, high yield debt, growth, emerging markets and earnings it might well be the time to start worrying about China, high yield debt, growth, emerging markets and earnings. Add to that the feeling that the world is fully discounting further ECB action and the picture may be near to complete as current expectation are for ECB cuts, Fed inaction, BoJ  cuts and BoE dithering. The last few years has shown fading central bank expectation regularly pays off.

The market's reactions have been indicative of a rates response rather than a growth response and that is of concern. Until we get an uplift in demand expectation any rates linked market responses should be considered temporary. The way that commodities and particularly oil really didn't respond to other post ECB market moves leaves an important piece of the rally jigsaw missing.

For the first time in a long while I am actually short in stock indices, but am also now a tiny amount long a couple of dodgy oil cos to play a bit of performance spread.

Friday, 23 October 2015

Nobody expects any ECB action

One thing that we should have learned over the past few years is that that expecting central bank action is like expecting the Spanish Inquisition. No one should expect it.

With that in mind I give you the latest ECB press conference Monty Python Style  - No one expects any ECB action.

Market - Well I was just saying that there is a chance that Euro rates could drift lower, I wasn't saying I was expecting any ECB action.

Jarring chord. The door flies open and Cardinal Draghi of the ECB enters, flanked by two junior cardinals. Cardinal Vítor Constâncio and Cardinal errr the other one at the press conference who never says anything, Bonnici.

Draghi - Nobody expects any ECB action! Our chief weapon is surprise...surprise and fear...fear and surprise.... our two weapons are fear and surprise...and obscure communication.. Our three weapons are fear, surprise, and obscure communication...and an almost fanatical devotion to inflation targeting.... Our amongst our weapons.... amongst our weaponry...are such elements as fear, surprise.... I'll come in again. (exit and exeunt)

Market - I didn't expect any ECB action.

Jarring chord. They burst in.

Draghi Nobody expects any ECB action! Amongst our weaponry are such diverse elements as fear, surprise, obscure communication and an almost fanatical devotion to inflation targeting, and doing everything it takes, - oh damn! (to Constâncio)  I can't say it, you'll have to say it.

Constâncio - What?

Draghi - You'll have to say the bit about 'Our chief weapons are ...'

Constâncio - I couldn't do that...

Draghi bundles the cardinals outside.

Market - I didn't expect any ECB action .

They all enter.

Constâncio - Er....

Draghi - Expects.

Constâncio - Expects... Nobody expects…any ECB

Draghi - ACTION!.

Constâncio - I know...I know! Nobody expects any ECB action. In fact, those who do expect...

Draghi - Our chief weapons are...

Constâncio - Our chief weapons

Draghi - Surprise.

Constância - Surprise and...

Draghi - Stop. Stop there! Stop there. Whew! Our chief weapon is surprise, blah, blah, blah, blah. Bonnici, read the charges.

Bonnici - You are hereby charged that you did on diverse dates commit heresy against the Holy ECB. My old man said you didn't follow the curve.

Constâncio -That's enough. (to Markets) - Now, how do you plead?

Market - We're innocent.

Draghi - Ha! Ha! Ha! Ha! Ha!


Constâncio - We'll soon change your mind about that!


Draghi - Fear, surprise, and a most ruthless... (controls himself with a supreme effort) ooooh! Now, Constâncio, the expectations!

Constâncio produces a few charts that don't show much. Draghi looks at them and clenches his teeth in an effort not to lose control. He hums heavily to cover his anger.

Draghi - You....Right! Tie the market down. (the other ECB officials make a pathetic attempt to tie the market to ECB expectations) Right! How do you trade?

Market - Selling Bunds, staying long Eur/Usd and running short Dax.

Draghi - Ha! Right! Cardinal, give the expectations (oh dear) give the expectations a twist.

Constâncio stands their awkwardly and shrugs.

Constâncio - I....

Draghi -  (gritting his teeth) I know. I know you can't. I didn't want to say anything. I just wanted to try and ignore your crass mistake.

Constâncio - I...

Draghi - It makes it all seem so stupid.

Constâncio - Shall I, um...?

Draghi - Oh, go on, just pretend for God's sake

Constâncio makes a lot of random verbal gestures hinting at imminent monetary easing

The doorbell rings. Market detaches himself from ECB expectations and answers it. Outside there is a dapper Fed official with a suit, slightly detached from reality.

Fed Official - Ah, hello, you don't know me, but I'm from the Fed. We were wondering if you'd come across the pond and do a sketch over there, in that sort of direction... You wouldn't have to do anything - just look as though you don't expect any Fed action.

Market - Oh, well all right, yes.

Fed Official - Jolly good. Come this way.

No liquidity? More fool you.

There is a lot of concern that liquidity in some markets is so dire it could lead to some serious meltdowns. Eyes have been on High Yield via the energy sector but the perennial debate over corporate or emerging market debt liquidity risk rolls on. So here I post my strong feelings that I have expressed in this space before

But should we be concerned about a meltdown caused by low liquidity? The normal response is "Yes of course! Prices will collapse and there will be high volatility and and and" but am I allowed to ask “So what? Does that matter?"

If there is a meltdown in something it's triggered by an adjustment in perceived value. When there is no liquidity then prices pass through where people think fair price sits (otherwise they wouldn’t be moaning about a lack of liquidity) to prices which they feel are unfair or downright silly and don't reflect actual probabilities of default or yield outcome. So why are they selling at values that they think are absurd and moaning that it's due to lack of liquidity?

Most likely it can all be boiled down to money management rules creating large gaps between actual outcome probabilities and priced probabilities. This is particularly true in systems that use price as an input of probability in the first place, as we saw with CDS prices being quoted, wrongly, as actual probabilities during the EU crisis. So we could argue that any huge swings in pricing because of lack of liquidity will punish those who have to employ short term money management rules over those who can take a sanguine long term view. So rather than all being bad, it creates opportunity and acts as a feedback hopefully moving fund management away from the, sometimes cretinous, short term consultants tight risk rules back towards a more balanced macro big picture world.

But what about the losses? Well if the true price that reflects future outcomes has indeed moved then tough. That is nothing to do with liquidity. For those who are being forced to sell below what they see as the  real price, due to no liquidity,  their loss must be someone else’s gain as those selling must be selling to someone else who is picking up a bargain. So the negatives due to bad liquidity are offset by someone else’s positives.

So if there is to be a High Yield meltdown  due to poor liquidity I look forward to buying some at stupid levels caused by some VAR calculation deep in a fund saying  'spew at any cost'. Thank you.

Of course the wealth destruction argument is different. If leverage is involved, which of course it is, then book values will tank and no doubt the value of that book has been used to borrow to fund some other asset, which then has to be sold. Now THAT is the transmission risk to other asset classes.

It's not liquidity that is the problem, it's once again leverage.

Wednesday, 21 October 2015

QE card - That'll do nicely

QE - Nice idea but the whole process was like trickling water down a pile of sand, most of it got lost on the way down the slope due to seepage. QE was a great way to get the banks back in shape as they collateralised their debt but did the man on the street actually see much of the benefit other than by secondary effects from those who were able to hand over a bond for cash?

One thing I find peculiar is that a bank or central bank, will buy a bond made up of an aggregation of debt no matter how small the face value, but won't buy the same size debt from one of the entities that is a component of that aggregation. All debt is, at some point in the food chain, claimable upon a company or a person. Although a company is the sum of a group of people, I list it separately to a person because a company can declare bankruptcy thus protecting the people who make up the company from personal responsibility. In this respect you are less likely to have ultimate recourse over a company than you would do over an individual. Of course a person can declare bankruptcy too, but that is a lot more personally unpleasant than walking away from a company. Ask Donald Trump, he seems to worth a bob or two after spectacular bankruptcies.

So my point is, if you are going to look at the risk of lending then lending to people should be, in aggregate, less risky than lending to companies as people own all assets anyway but are less likely to walk away as a company would. A bailiff at the door is more worrying than losing your share holdings.  The argument against this is that in lending to an individual you don’t benefit from the portfolio effect of averaging default risk. Which is why anyone lending to individuals tries to garner as big a portfolio as possible to average out that risk. This is exactly how the credit card industry works.

Here I am surmising, so please excuse any unchecked facts, but my first surmise is that there is a feedback loop in setting the interest rate at which you lend on your credit card. Though you want to lend at as high a rate as possible, as you raise the rate so you introduce a bias in your client set. The higher the rate goes the more desperate a borrower must be to borrow through you rather than through a cheaper facility, so the more likely they are to have lower credit ratings.

So I am also surmising that the reverse is true. Lower your borrowing rate and the default risk of your client base will improve. So what if you lower your credit card rate to say 2% p/a? Wow, wouldn’t you love one of those puppies? The credit profile of the portfolio would increase dramatically as funding switched to it from otherwise credit worthy borrowers. We’ll all have one of those and at that rate we can afford to run our debt, not worry about paying it off and go and spend the proceeds.

But which credit card company could possibly want or be able to do that? They’d have to have a potentially massive balance sheet and be able to borrow short term at exceedingly low rates themselves. There is one bank that satisfies these conditions - the central bank.

In issuing a credit card at very low rates the central bank will have effectively QE’d the populations debt directly, putting the spending power where it was meant to be, with the population, rather than being usurped by replenishing corporate and bank balance sheets. This is direct democratic QE with individuals borrowing from the sum of all individuals, individuals deciding how to spend it and individuals responsible for repayment.  If you can’t lend your money to yourself then who can you lend it to?

So the pay day loan co's and loan sharks are bypassed, banks are let of the obligatory hook to lend more whilst trying to reduce balance sheets, squeezed corporate debt gets priced realistically rather than via QE comparables and Joe Public gets lent to. What is more, do enough of it and they can even move base rates off Zirp or negative levels and restore a bit of normality.

An impossibility in many minds, but it's always fun to try to bypass normal procedure as failure is the mother of innovation.

Friday, 16 October 2015

Just the 'J' word

There is a word that has the same effect upon me as a taser. Well, let's be honest here, I haven't actually been tasered, though I did once decide as a child to see how quickly an electric fire element heated up by touching it, forgetting that though my reactions may have been fast enough to remove my finger as the element heated up, they certainly weren't fast enough to avoid the onrush of 240 volts of alternating current that would be coursing through the element long before its natural resistance caused it to heat up. The result was a scarred finger and a lifelong lesson in stupidity management that has born me in good stead through my time in finance.

As I explained to my mother, I was just trying to see how quickly the element would heat up. And there was the word. Did you spot it? It was the word that should halt (Taser, or electric fire like) everyone in their tracks as it is a word that is a preposition for a further string of words that, without this magic word in front of them, would sound so ridiculous as to cause the listener to choke on their own epiglottis.

And the word was ... just.

The mighty 'just' word. My wife and I do battle over the just word. In her case it is a word that achieves the holy grail of physicists and sci-fi nuts. Time travel. Or at least the ability to travel faster than the speed of light. In my wife's opinion prefixing any task with 'just' freezes time allowing her, when we are already late for engagement, to 'just' pop back indoors to make sure that the bed is made, kitchen clean, curtains made, jigsaw finished or War and Peace read' without in anyway further delaying us. 'Just' also allows us to depart from home in a 'just leaving' sort of way at exactly the time we should be arriving not to be more than sociably late, thus imparting us with the ability to travel faster than the speed of light. Which is 'just' incredible.

Of course I also have found the word to be of use in the war against the laws of physics. In my case I can perform Messianic acts such as turning half a pint of beer into eight pints by making it 'just a quick half'. I can also conjure up free cups of coffee (I was just passing), cross oceans in the face of hurricanes (just a light breeze), consume cakes without putting on weight (just one more), cure life threatening disease (just a cold) and even attempt to avoid criminal prosecution (I was just the president of FIFA).

But where the word is most effective is in finance where one can use it to limit all losses, for not only does the word 'just' freeze time, in doing so, it suspends reality. The monitoring of the use of the 'just' word is imperative and if the cleverest algorithms out there can spot word tone in Fed statements I am sure it isn't beyond them to count the occurrence of the word 'just' in financial twitter or IB chats and plot that occurrence against price trends. For I am damn sure that any move in the market that is accompanied by a preponderance of 'just' is going to just right royally screw the 'just'erers.

The dismissal of moves against ones views with the word 'just' is highly dangerous. Let's take today's equity moves. In fact, let's take the last week's equity moves. The S+P500 battled through 1995, failed again at 2022 with many crying 'triple top' and fell in what must have been one of the most predictable turns lower we have had for a long time (as previously posted here). This obvious move lower would naturally have attracted in short term players and confidence in a renewed down move was notable Wednesday morning. Since then we retested the 1990/95 area and have had a climb higher (tripping my previously stated trailing stop entry trades back into longs). Nasdaq was the first to break key areas around 4390, leaving SPX to battle the 2022 area that had previously been reaffirmed as a safe top. Whoops. Not only did SPX break but it has been tracking higher.

Now call me old fashioned but if I was to be short and see this happen I would be rather perturbed considering I have had three cracks at trying to go lower on old bad news and failed. But no. There is a very good reason for this rally - it is, apparently, JUST option expiries. So that's ok then. Does that mean that the loss on your book isn't really a loss? Or do you actually mean 'I have JUST shut my eyes and stuck my fingers in my ears going nahnahnahnah ignoring everything until after option expiry at which point I will open them again and pray to God that prices have fallen because at that point losses become real again? Or are you allowed another throw of the 'just' word to roll out your position on maybe a 'just people being silly', 'just stupid, I'm right' or a 'just you wait, one day Greece will implode, China blow up, gold become the only currency in the known universe and Northampton Town win the FA cup'?

If prices were just wrong for a simple 'just' reason then logic would suggest that someone with ample funds to do so would knock them back to the price they should be at. If that isn't the case then one of two things is happening. 1 - The price is not 'just' at a wrong level. 2- There is no one left able or willing to short the rally. Either of these scenarios should be of concern to a short with a 'just'.

Just now my just indicator is bleeping just madly. That just may not be the end of this rally and may just go on to cause a lot of pain. That may not be just, but it is fair.

Tuesday, 13 October 2015

A SPX oddity - Fortress style

“2001 - a  SPX Oddity" grew to become the David Bowie song a 'SPX oddity' But it is all the more pertinent with a Mr Mike Novogratz having his fund at Fortress closed down. So this is for him.

Risk Control to Major Mike
Risk Control to Major Mike
Take your pro-plus pills
And put your best trade on.

Risk Control to Major Mike
Commencing countdown,
Euroswiss on
Don’t let the markets f*k with you

AUM - Nine, Eight, Seven, Six, Five, Four, Three, Two, One… 

This is Risk Control
To Major Mike
You've really bust the trade
The SEC want to know whose shirt to tear
Now it's time to leave the company
If you care

This is Major Mike to Risk Control
I'm stepping on the floor
But the price is floating
In a most peculiar way
And the stocks look very different today

For here
In my really shit position
Far above the bid
Markets have the flu
But I don’t own the skew

nah nanah nanah nah nah

Though I'm passed
Three hundred million bucks
I'm feeling very ill
And I think my hedge fund knows which way I'll go
Tell my broker, I never liked him much
he knows.

Risk Control to Major Mike
The options dead
The expiry's gone 
Can you hear me, Major Mike?
Can you hear me, Major Mike?
Can you hear me, Major Mike?
Can you....

Here am I floating
Round the wine bars
Far away from funds
I don’t know what to do
Maybe guest on Channel 2?

(with thanks to @Zatapatique for giving me the idea and a couple of lines)

A very public rollover

It started with oil

It bled into commodity types and FTSE.

The US meantime tried to fight it with volatility also having a splurge lower

but finally followed the commodity leaders and tipped overnight.

This all fits beautifully with classic overbought signals  (I thank Cam Hui for this

Capitulation of the shorts? We have even had macro funds throw in the towel and I don't just mean close down  positions. I mean close down completely.

But to be a perfect fall this should be accompanied by a new news devastating concern. So far this morning the news is recycled old, known bad news and data is being twisted to fit.

The Chinese trade data out overnight, though soft was not as soft as many expected. It was a classic figure that can be used by both camps, so in that respect it isn't of much use at all. But it isn't terrible.

the UK BRC survey was released late last night and hasn't picked up much attention but saw September like for like sales exceed expectations +2.2%. Another sign that Joe Public is disconnected from the concerns expressed in financial land and hasn't got the message that this is a crisis? Come on guys, don't you know you are all meant to be suffering?

I can't get as worked up about inflation figures as others as I still see commodity inputs as the main drivers. Wages are not falling, so in many ways this is still good deflation mixed with bad inflation - that of all the monopolistic costs we have to endure.

The next bleedin' obvious that appears to be taken as read is this quarter's terrible corporate earnings. Braced we are, veritably braced! But so far the dribs and drabs aren't all bad. (H/T AL)

DELL/EMC: Agreed deal worth $67bn. $33.15 a share
BELLWAY: Beats expectations & raises dividend.
SAP: Q3 sales/profits beat.
LVMH: Quarterly sales beat, strong Europe/US.

I really wish I wasn't so cynical, because in a classic case I'd be happily shorting the back end of this market but the lack of new bad news (not the shoehorning of existing news), the disconnect between financial commentary and what the public is actually doing  and finally the complete flip in commentary this morning calling this as the start of the next slide, makes me wonder if this turn lower is so so blindingly obvious it must be too good to be true.

And if you want any further evidence that the bear case may be a bit too discounted then this released by BAML over the weekend should be born in mind.

With this in mind and having cut my longs on Friday, I am working trailing stops as entries to long risk positions rather than piling into the shorts.