Monday, 29 February 2016

Chart bottoms. Commodities to do the unthinkable?

It's leap year and we are enjoying our extra day of February, a miserable month as it is without having to extend it any further. February has been true to form in the financial markets too bringing us new concerns towards debt with obscure products such as the AT1 structures of banks and Deutsche Bank's storm in a coco cup. 

Yet despite all of that, many asset prices have returned to near start of month levels with some exceeding them For example if you were in the position of lending to Germany and paying them for the privilege of doing so at the beginning of month, as people are now willing to pay them even more for the privilege, your debt asset has gone up in value. Which is nuts. I hang by my basic rule of Negative Interest Rate Policy which is it isn't really of any use to me, or any other Joe Public, until we can personally borrow at negative rates. 

But the bounce in 'stuff'  has produced some interesting chart formations. The scales are not equal but the patterns are very similar. 

The SP500 looks double bottomish, 

S+P 500

Oil looks reverse head and shouldersish, though hasn't yet done the equivilent break that SPX has. Wasn't oil meant to be leading stocks rather than the other way around? 

Oil  (WTI)

Doctor copper is showing similar basing patterns but despite Thursday's attempted break has not yet confirmed it is ready to rip higher. Though I would be watching out for it to do so. 


Could we really see a turn higher in commodities? Sentiment has been so dire and tehe forward curve of sentiment is weighted by stories of limitless supply and no demand that it is easy to see the balance tipped and as we have seen throughout 2016, the sentiment, or at least the story,  seems to follow the price rather than the other way around. 

I am aware that month end produces whippy markets the way oil is grinding higher, despite USD strengtening against EUR and GBP,  has me thinking that commodities are about to explode higher. I know that doesn't fit with the the narrrative but so be it. 

Which leads us on to CB expectations. the flip flop of market sentiment in Fed rates continues to the point of tedium.  Expectations are so well swung towards ECB action that disappointment is to be expected anyway, but add in the Oil/Eur price upwswing and Draghi has another excuse to disappoint as he just loves mentioning oil and commodity prices when talking about ECB inflation expectations.  

Thursday, 25 February 2016

Correlation wobbles.

Nothing like a 3% down to 3% up swing in oil to sharpen the mind. But interestingly in this move oil appeared to be lagging and not leading the usual culprits. Oil started the US morning heading down yet stocks were resolutely unbudged to the down side and indeed it was they that started the pressure higher dragging oil reluctantly behind until oil snapped and flew. 7% up from its lows as I type.

After writing yesterday about looking for the crack in the correlations to appear to indicate a move from general stress, seeing China (the king of bear stories) fall hard I really thought things didn't look rosy for Europe and US equities. But yet they held in and rallied on the european open. Correlation break 1.

Meanwhile German Bunds were continuing to look bid, which is normally a sign of stress. Of course bunds up, equities up points to all the eggs resting in ECB action, which is somewhat worrying because it is pretty rare for central banks to exceed market demands, leaving scope for disappointment at the next ECB meeting. The other play could be, and here I am guessing, that long Bunds is the European hedge against Brexit. Little has been spoken of risks to Europe on a possible UK departure, instead finding it easier to point the grief finger at the smaller partner  but if the UK were to go, Germany would be holding an even larger share of the EU grief. So if pressure increases on EU, buy Bunds. But they weren’t moving in the normal counter direction to equities. Correlation break 2.

The JPY has been bid throughout all of the stress and though oil was down, China down and Bunds up, JPY has been weakening with GBP/JPY doing exactly what it shouldnt do according to the narrative of the last 2 days by going up. Correlation break 3.

And look at AUD/USD, as Europe came in and saw what China had done AUD had shrugged it off and was higher than where London had left it, chosing to take its lead from DM rather than China. Correlation break 4.

I haven’t mentioned GBP as that has been playing it’s own Brexit game for the last few days but the screams of imminent GBP doom have vanished from the wires today as, basically, GBP stopped falling - which reassures me over yesterdays ‘GBP short squeeze’ thoughts.

So what do I take away from it all? The correlation wobbles and noticeable switch to oil playing second fiddle to equities has me thinking that though it is not so discernible on many other levels, the background fear expressed through tight correlations is abating and a drive higher in risk is next as this ‘bear market rally’ continues to squeeze out the next raft of shorts until it is no longer a bear market rally but rather flips, very expensively for the bears, into ‘just a range’. We saw the pattern in August and it is still in play today.

As for news? Was there any? I know there wasn’t because the best the Daily Telegraph could come up with was the rescuing of an escaped pigeon from the royal dove house, so we'll add the adage ‘never sell a quiet market’ to all of the above.

Finally, one last correlation that certainly hasn’t broken is clearly seen in the glaring similarity between Dame Janet Smith’ s investigation into sexual abuse in the BBC and Serious Fraud Office investigations into bank FX and Libor fixings. Where are they identical? “THE MANAGEMENT DIDN’T KNOW”.

Wednesday, 24 February 2016

Correlation of fear and the Sterling short squeeze.

Before we start, here is a little primer for my non-Brit friends as to how UK foreign policy works towards Europe and is possibly the best case for staying in, though of course David Cameron can't put it as bluntly as Sir Humphrey did 30yrs ago.

GBP- The shock with which everyone was shocked at the not at all shocking news that BREXIT would be a close run thing appears to have caused a kitchen sinking of all possible reasons to sell GBP being chucked at the current Brexit inspired move lower. Seeing Deutsche Bank and their ilk now citing debt overload and diminishing current account balances due to FDI seizure smacks of 'chase the dragon' muck chucking or (now I'll put on my conspiracy tin foil beeny here) a deliberate besmirching of the mighty Pound for Euro political reasons. Smash it hard and show the British what even the threat of leaving EU will do to their markets.. right I'll take the beeny off now.

But this kitchen sinking and sudden OMG from distant shore traders does have me thinking that maybe phase one of 'Pound crushing' may be over soon. Back in the old days before algos took over the market, your decent honest and 'ahem' truthful cable trader only knew two positions to hold. Short and VERY short. So I can assume there are some old lags out there finally going 'told so'. But when that happens you normally want to buy it. Cable, for the uninitiated, is GBP/USD and derived its name from the first trading of it over the transatlantic cable (‘Wire' became the nickname of the Irish pound because it was a small ‘cable’). Cable then mutated to ‘Betty’ as in cockney rhyming slang Betty Grable - Cable. But I digress.

It strikes me as odd how the press are suddenly referring everything to Cable and not EUR/GBP, when the later is the one that we should really be watching. Of course it isn't really that odd. Cable is performing 'not since [insert last time]’ new levels whereas EURGBP is only really where it was not that long ago, so effectively not a headline story.

It is also strange to think that not long ago everyone was decrying the EU and ECB for being complete idiots when it came to handling crises and how the EU was as doomed as the Titanic, yet now, having one of the more stable entities threaten to leave and Whooo . 'EU is the strong battleship and sanctuary that you would be mad to desert'. Not that I’m declaring a hand either way, but the narrative doesn't half swing with perspective, so it's advisable to stand as far back as you can, taking in the widest view, so as not to be fooled by that tricky perspective thing.

It's not only sterling that has been trounced but UK stocks too, with the FTSE falling about 6% in the last few of days in USD terms. USD based commodity companies such as Rio have been torched in USD terms even though one would expect GBP falls to give their stock price a lift. But then about 5 hours ago it looked as though all global risk asset prices were about to melt again. The ‘it’s just a short squeeze’ camp were out selling again confident that a top was in. Even Mr Demark (the technical chart soothsayer of old) has been on the wires calling for a 7% fall ’should stocks fade'.

A momentum formula employed by the DeMark Analytics LLC founder that compares closing prices with levels four days earlier would issue a bearish signal should the advance fizzle this week, he said. Specifically, it would foreshadow a decline should the S&P 500, which ended at 1,945.5 Monday, slip at Tuesday’s open and close below 1,926.82. Those conditions were met today.

So much for that then. Wednesday has seen the SPX has put in a 40 point reversal from the lows and that is pretty spectacular on a no news day.  But the move in credit is confirming that this is not a stand alone equity silliness. It was across risk as oil went up, credit went up and stocks went up.

Charts courtesy of Eric Burroughs (@ericbeebo) with whom I have been chatting about this.
 Credit and stocks.

I have been looking for one of the gang of 10 bear factors to break ranks and show some lead. Perhaps a forgotten bear function that has quietly started to recover and will lead rather than just correlate. Oil - Credit - Stocks? I will still have my chip on China leading the way out but it doesn't look as though the 'correlation of fear' has broken yet.

Why the 'correlation of fear'? Well a simple analogy is that the different asset classes are like ducklings. When there is no danger they can wander off, never too far though, exploring their environment. But come a sign of trouble and they race back to mother duck and follow her as closely as possible whilst fleeing the danger. At which point the location of all the ducklings correlates perfectly.

Trades from here? The 'Just a short squeeze camp' must have been sucked in over the last two days' falls and I imagine are squirming, but we are not yet clear of this resolution zone so I am still flat and waiting for better confirmation. Perhaps it will be a late night watching China again. But as for GBP, I will join the 'just a short squeeze' camp on that, the only difference being that the short squeeze hasn't started yet, but I expect it to, hence the overconfident title of this post!

Tuesday, 23 February 2016

Brexit facts - Strange but untrue

It's at times like this, where a population has to make a crucial decision on their country’s destiny that the facts relating to the issue should be clearly on display for all to consider when making their decision. Unfortunately it is usually nigh on impossible to gain a clear representation of the pertinent data as it's mostly presented by parties with vested interests. Those campaigning for one side or the other will only present arguments supporting their case.

If we were to follow the principles of the US Republican party presidential candidates, those facts would be so twisted as to become unrecognisable. With that in mind I present a handy repository of EU/Brexit data for your consideration when making your choice.  I have saved you the bother of making up facts to support your own case as I have made them up for you. Quote them with gravitas and fervour you may even find people believing them.

60% of biscuits made in Yorkshire are exported to Brussels to be served on plates at EU council meetings.

The UK benefits from Langoustine Tax rebates that contribute £40bio to the economy.

If every EU migrant in the UK were to leave, the country would rise one meter as their weight was removed from the land mass, thus averting future coastal flooding.

Slovenia is the UK’s greatest export market for mice.

Hadrian’s Wall was built with Italian money and so would have to be returned together with compound interest of 1.6 billion rough hewn stones.

France have the right to move their half of the EuroTunnel 30m left as they switch back to the Paris Meridian. This will cause Birmingham to subside.

All UK Friesian cows will be white as there is no longer a need for them to have the black markings that were a requirement of the EU agricultural policy.

The UK will be free to call its 'Kentish Fizzy Wine Like Product' Champagne and any old mushroom a truffle.

The Elgin Marbles will actually be only 3cm tall once you take depreciation of the pound due to a Brexit into account.

All the swallows will have to leave the country on the day of exit rather than waiting for their normal weather stimulated migration. This will lead to a fly plague.

Trams will be able to have their doors on the roof.

If the UK leaves the EU the days will be longer, as will the nights.

If the UK leaves the EU Brussels sprouts will just be called sprouts.

63% of websites will crash due to electrons having problems crossing the border.

78% of gravediggers want to stay in the EU and have signed a letter urging their clients to vote similarly.

Kittens will die.

Everything the UK owns is paid to the EU every year.

Germany is made of mustard and as such is a threat to Norwich.

The only reason it rains in Cornwall is because of EU grants.

If you take one person out of the EU parliament for every person that is in it, there will be none left. This just shows how wasteful that place is.

The UK would have to hand back all the electricity they have received from French Nuclear Power stations.

Since the 1975 referendum to stay in the EEC all the coal mines in the UK have closed. There, that tells you something.

There are so many French people packed into South Kensington they are having to apply for refugee status in Chelsea.

The City of London is totally dependent upon Bordeaux for wine and without it would cease to function.

The UK would save £400bio a year in not having to drive to Tuscany.

The EU is responsible for stealing 18 minutes of your life per night as you sleep.

28 million jobs will be lost on one Devon farm alone.

Latvia currently has rights to your first born under Article 675/b but has never called upon them due to its own high birth rate.

The reason that cars are limited to 20mph on many major London roads is due to Germany stealing UK speed allowances so that they can travel at 200mph down their own autobahns.

Monday, 22 February 2016

Should I stay or should I go now.

Well it’s happening. The world has woken to the Brexit challenge. Much as the UK could not believe anyone would be dumb enough to vote Trump in, but it's becoming a frightening possibility, the US didn’t really believe that the UK could vote to leave the EU, though that is also a frightening possibility. Not so much frightening because of the terrors of what would happen if the UK leave, but more the terrors of what people think will happen should Britain leave the EU.

I know that the press is full of Brexit this weekend and I am pretty sure that Sterling is going to take a dump this week, UK corp get knee-jerk sold, comparisons to early 1980s GBP/USD levels quoted and all hell let loose, but I am not going to go on and on about Brexit other than to say three things.

1-  Cable's natural level is 1.6000.  Cheeky bids 1.20 and below will pay off..  one day.

2 - UK is not Greece so please don't draw up parallels.

3- All of this ->

First, I think Cameron missed a trick in the negotiations. He should have regularly and very visibly jetted off to Moscow refusing to tell anyone why. That would have put the heebie-jeebies up them. But we are where we are and it looks as though what we have is as far as it goes with regards to compromise.

I am not at all decided which way I am going to vote, my heart says leave and my need for security says stay, which is the card that Cameron is playing with his new sound bite 'the leap into darkness’. But leaping into darkness is very often the better alternative to going down with the ship, remaining in a burning building or staying any longer in Sandford.

Sandford. Sandford was the fictitious village in the film 'Hot Fuzz’ where the community was run by the Neighbourhood Watch committee who were a law unto themselves. They ran the village on their own terms showing no mercy to anyone who stood in their way towards - ‘the common good’. It was a village that won ‘best village' award year after year and though everything looked wonderful on the surface the murderous village committee had a cellar full of the corpses of anyone who didn't fit in. In the film an out-of-town supercop arrives to try to clean up the village and see justice done. He won. Cameron hasn’t.

Like most organisations run by committee, the EU has ended up unresponsive to emergencies as decisions are buried in consensus and consensus takes longer to achieve the more there are involved. I will now shamelessly repost something I wrote in June 2012, with the last paragraph further supported by the last three years in Syria.

The feeling that the present system is failing is picking up steam. Of course there is rarely a demand for change when the populace is vaguely contented, no matter how useless the ruling body - it's when things go wrong that the mettle of the rulers is tested. Until a couple of years ago the Euro-project had been an easy run, but complacent growth (funded by sovereign profligate spending, funded by profligate lending) together with a self-regulated administrative budget has created a "Jabba the Hutt" of a European Parliament. Bloated, self important, dictatorial, living in a luxury created at the expense of its subjects only to succumb when confronted by a "Hans Solo" of a problem that they thought was dead. They are completely useless in time of crisis.

So knowing that we cannot rely on European Central Command to make a decision in this time of stress, we look to the European states themselves to unite and provide strong leadership, combined with an ability to make difficult decisions, despite populist concerns. Worryingly, policy appears to be set by consensus rather than coalition due to a misunderstanding that 'consensus politics' are the same as 'coalition politics'. They are not. During World War II the UK ran a coalition government, however decisions were delegated to individuals who were given absolute power in their fields. Trying to run a war on consensus is impossible, yet Greece and Greater Europe are both trying to make some very difficult decisions by consensus, rather than by strong coalition. Not surprisingly they are failing miserably, leaving TMM wondering where the strong group leadership is going to come from.

While we ponder the path of Pan-European rulership as current consensus democracy is failing, we are seeing Arab nations fighting hard to move towards consensus democracy, having shed oppresive dictatorships. TMM do wonder if they will succeed, as we are beginning to surmise a tendency for the success of a democracy to be inversely proportional to the diversity of the beliefs, behaviours, interests, cultures and religions of its populace (Egypt is in danger of bypassing its newly found democracy, remaining in military control). In other words, the more balanced and numerous the make up of subgroups, the less likely consensus politics will succeed. Which is, we suppose, why the oldest "democracies" sort of cheat by becoming two or three party systems where democracy is partially obscured by an oligopoly of power sharing.

The Euro project may have wonderful PR proclaiming a new golden dream of oneness but we can't escape the fact that everyone who joins does it for themselves and never for the benefit of other countries, though of course any resulting benefits to others are trumpeted as philanthropic wonderfulness. The PIGS are in it for having their debt guaranteed (something the UK has never benefited from, nor would being outside the Eurozone), France for agriculture policies and an ability to legislate against competitors, Germany for its imbalanced trade, the Eastern countries for wealth diffusion from richer states and the smallest states for economic and political risk buffering.

The UK has benefitted from trade agreements and seeing their competitive tax structures, whilst residing in the EU, suck in corporate HQs and global manufacturing plants, which has then sucked in European talent chasing the money (oh, and the UK has also benefited from those E111 European medical insurance cards and EU wide policy restricting the amount your phone company can rip you off whilst you are abroad). But it has lost its ability to counter EU legal impositions, with the European Court riding as a higher authority than the highest court in the UK. This is the issue that grates with me most.

I don’t want to lose trade with the EU, but if the UK remains competitive I don’t see why it should. Business follows the money and value. The rest of the world manages to trade with the EU and as a small example, despite EU regulations against solar panel imports, China still does pretty well exporting them.  (The solar panel regulations were, as my friend Paul Barwell famously stated on Bloomerg TV, “Bonkers”. But that is an aside).

It basically comes down to this. The UK is very close to saying enough is enough. This is not a negotiating stance, we are passed that now. Unlike Greece where tactics of threatening to leave were employed to demand more, the UK is thinking of leaving because they can’t get more. Likening the UK to a club member saying they are willingly to stay in the club if they can change it, is fair to a point. But the point is more that the member has given notice to the club that it wishes to leave and is giving it a chance to keep it so that all possible is seen to be done before leaving and canceling its subscription direct debit.

If the EU were FIFA then the UK is one of their biggest sponsors. Though it damages both if the sponsor leaves, if things don’t change at the top then the costs outweigh the benefits. The difference is that FIFA is changing due to pressure from their sponsors.

The divorce between the UK and EU will/would be acrimonious as the EU would have to see the UK suffer as much as possible as a lesson to other member states. As with Greece and Cyprus, examples have to be made of those who fail the EU’s bidding. But if things did go well for the UK, they could take the path of an evolving company. Dynamic staff leave the unresponsive behemoth and set up a new disruptive alternative based on fresh ideas driven by client needs. This could then be realigned in new partnerships (NAFTA would be fun) or expand by sucking in talent from the old company leaving it as a decaying shell. For a light hearted example - UK leaves, Holland joins them, followed by Denmark. Sweden and Finland (they may even suck Norway in, though Switzerland would be a coup), leaving Germany supporting the southern states until even they can’t balance the political vs economic costs and cave in. France meanwhile would have closed the Eurotunnel and a new one would be under construction from the UK to Belgium, who would have seen the writing on the wall and sold their soul to the new high bidder.

Unfortunately this referendum, as with the Scottish Independence referendum will focus on the negatives and scare tactics. Show me the positives, and no Europe, that isn't asking for concessions, it's asking to be shown the member benefits rather than the punishments for digression.

Finally, I don't give a damn which UK politicians are for or against leaving. This is a decision that is cross party, across all classes and is personal. I am not going to have my vote swung by who supports what. Unless, of course, Bob Geldof, Bono, Charlotte Church or that Di Caprio fellow express a view then I am all ears...

Wednesday, 17 February 2016

Short squeeze or base, or both?

You have all seen the charts and you have all seen the distance that stocks have bounced in the last four trading days. A near 10% rally in FTSE and CAC and not far off that elsewhere. The journalistic biases towards hyperbole have been running rife over the last two weeks as the headline writers pursue their favourite sport of tagging together ‘not since {insert last time}’ lines designed to shock and awe, but these have absolutely no predictive powers whatsoever making them completely and utterly meaningless. As are the ‘$bio wiped off market’ statements.

Six days ago we were about to head into price driven armageddon where the faith in central banks was said to be shot, credit was about to take the banks down, recession to bite the world in the back side and NIRP to cause the financial world to vanish into a quantum monetary singularity.

And yet this evening we are back at price levels that have the curious scratching their heads and the stubborn screaming that either the prices will fall again or 'I told you so’.

The news flow was telling too today. Twitter streams, well mine, appeared to turn away from the rally in some form of denial and reverted to in depth quant economic stuff or political news. There was a distinct lack of 'shouty screamy' that would have accompanied an equal move lower. This could be because I have a fair number of journalists in my stream who due to their jobs express the 'shouty screamy' biases explained above as they fight to have their headline gawped at more than their competitors. Or it may have been because everyone was long and relieved that things were going up again (the last thing I believe), or it could have been because they were short and doing impressions of ostriches. Or they where too busy trading to express anything at all, leaving only the professional scribblers to scribble.

I was not surprised to see a plethora of ‘this is a normal retracement in a bear market’ type charts with most of them referring to 2008. Now I am a great fan of charts but there comes a point where a chart is no longer relevant because it is of somewhere else and not where you are. Sure, 2008 patterns can be overlaid and extrapolated but they are not of these parts. 2008 was completely different. The banking system had frozen up and economies were collapsing. Now of course if you wish to follow that chart whilst we have no problem or anticipated problem of money transmission (shhh now in the cheap seats. We don’t),  nor do we have a collapsing economy despite the markets trying to tell us we should, you can. But US data is far from recessionary and it doesn’t look as though Europe is in trouble either. Certainly not to the extent that would justify modelling the current markets on 2008. Following the chart of 2008 is like trying to navigate London using a GPS loaded with the Shanghai road map from 1946.

The tone until today appeared to be 'sell sell sell' on falls as it was doom (attach story to fit) and any rally was a 'sell sell sell' short squeeze. Great if you have deep pockets. As mentioned yesterday the frequency of rotation at which bear toys were being pulled out of the bear toy box to substantiate shorts was rising as none appeared to be whipping up enough fervour, with some even denying each other. Then there was one of my favourite indicators - the pushing of a long term reason to sell short term back out into the long term. This was classically seen during the Euro woes of 2011/12 where the imminent doom call for Euroland was pushed back to ‘well it will happen sometime so I’m right to be short still’. But as with gold, you’d better hope it happens before you need the money to pay for your nursing home. This is a classic symptom of the wall of worry.

So the weighting of ‘short squeeze’ opinion to ‘it's based’ opinion being pretty important as a clue towards future stressed position unloading  I conducted a really basic non-scientific Twitter poll and so far at time of print  this result

Which was weighted more towards 'based' than I expected. Hats off to the 'Don't knows' though

Now for the ever important back-fitted stories to justify this move. Market opinion has done a volte face and is now touting the central banks to launch stimulatory policies and they have accepted that maybe the US wont be in recession by next month thanks to the data of last couple of days. Yet I would suggest that the real trigger was the Chinese lending data showing a dramatic increase in credit supply suggesting that they will follow old paths of inflating the housing market for that all old feel good factor. It started in China, it may end in China.

The oil deal is pretty irrelevant apart form one observation. The Russians and Saudis agreed on something. That is pretty impressive considering that before too long they may well be on opposite sides of the trenches in Syria.

But overall, yes, it was a gargantuan short squeeze and not just from leveraged speculators but long term real money who as the BAML survey has shown have been record long of cash.

There is nothing worse for a portfolio manager than to be forced to chase benchmarks against their core view, but I would suggest 10% moves are enough to force anyone's hand who is looking at a 5% annual performance as being good.

One indictor that many have cited for the panic not having been over on the down side was that stock option volatility has never really risen. the VIX never really showed any sort of panic but I would counter that with the a suggestion that if you are already underweight the cash you are don’t need to buy the hedges.

So where from here? Not easy as the we are more balanced at these levels but the path of pain is set for higher, though there are certainly more people than a week ago thinking the base is in. My overriding fear though is that the last week has seen expectation of central bank policy swing so dramatically from ‘they’ve screwed it’ to ‘they will save us’ that we are now opening up for disappointment. As we have seen so far, central bank policy is oil tanker like in comparison to the jet skis of market expectation.

 It is normally fatal to tell people what you are doing with respect to trades as there is no upside in it. But here goes - With it looking as though the source of central bank hope is China then that would appear to be the logical place to buy. So H-shares, Hang Seng, SHCOMP etc and any knock on regional EM is in play. On the FX side I'm looking for Abe not to disappoint and his recent negative rate move to see a reversal from the ‘Whoops that shouldn’t happen JPY rally’ and a move back to norm. Also I’ll tie in a move in US yields higher pulling USD/JPY up and Mrs Watanabe seeing the dust settling and heading out to off shore yield. And the counter? The poor beaten up Aussie. It’s a favourite for Mrs Watanabe yield hunting, it should get a direct lift from anything positive in China re stimulus both directly via commodities and indirectly from a lift of global doom. If commodities do recover enough it will also nudge the path of RBA rate expectations.

So I am thinking that the recovery FX trade is Long AUD/JPY (That’ll be the kiss of death to it), but this is in no way a trade recommendation!


Post script 8.30 GMT 18 Feb.

Having stayed up to watch the Chinese markets open it was apparent pretty swiftly that the momentum that had started to fade late yesterday evening was not getting another boost. AUD was undermined by unemployment data, though that should be separated out as being old data relative to the latest  market bounces. India did little to support the idea of continued up moves and the open in Europe saw the likes of Rio and small oil producers promptly lower despite indices looking OKish to start with.

With all of that in mind it feels as though the 'just a short squeezer's are going to be creeping back out of their bunkers and selling, but short term whippiness is set to continue as we resolve new direction from these key levels.

Tuesday, 16 February 2016

Bear Toys

2016 has been the year of the doom themes and the themes have been brought out of the theme box as toys are out of a toy box. And like any good toy box when one toy stops working or gets boring it can be put back in the box and replaced with a newer exciting one.  It certainly feels as though the rate of cycling through the popular bear toys in the last few weeks is seeing a market unsure as to which one actually works. But let's have a look in the box

China - Brio train set.

It's an ageless classic. If the modern newfangled toys are out of batteries fetch it out of the cupboard and build a story to fit your own arguments with all your favourite pieces - The SHCOMP station, the currency curves, the debt tunnel and the capital flight points. If you have enough pieces you can even extend it to Australia.

High Yield - The chemistry set.
You are given grown up looking vials and wraps of exciting sounding ingredients that in themselves are fairly innocuous with instructions on how to make them react with each other. The mission of course for most users is to make the biggest bang and to do this you raid your dad’s weedkiller supplies. Though the set is pretty tame, when someone manages to produce an explosion the set is banned from the shops.

Recession - The Lily Drone.

This is the toy I ordered last year because as soon as it was announced it was an obvious 'must have'.  Did it arrive? No, there was something wrong with the original design and though it's now promised to arrive a further four months down the line, I am waiting to see if it ever turns up.

Oil prices - The Slinky.

Push it down the stairs and it keeps going down on its own. Pretty boring really as no one has found a way to make a slinky go up. Not even the Russians. In the end the thing gets in such tangled mess it ends up unused.

Negative interest rates. - The phone game app.

It came free promising to be really awesome but charges you more and more as you play. The final bill is unexpected, huge and certainly not worth your time wasted on the game.

Greece - An old power rangers watch

It had an alarm on it that someone once set but never knew how to cancel. It beeps loudly and regularly from a box somewhere in the cupboard but rather than find it and fix the 'off' function it’s easier to ignore until its batteries finally die.

Italian banks - Tonka Toys. 

You are sure that you broke this 5 years ago but there it is still chugging along. The tyres have come off the wheels, the string in the crane has gone and it is chipped and dented to hell. But no matter how hard you try to break it it’s still going and available for fun when the going gets tough.

Deutsche Bank CoCos - The oversized remote control car. 

Fast and exciting for all of week crashing around into the furniture but the batteries quickly die and replacing them costs a fortune, so it’s left in the cupboard with that huge bank of expensive batteries slowly corroding and leaking over all the other toys.

Total Global Debt - The jigsaw 

When it's a rainy day and none of the other toys can be found get out a trusty old jigsaw and create your own picture using 1000s of different shaped pieces. Bang the pieces hard enough and they will fit but the picture you create might not reflect the one on the box.

US politics - The dust at the bottom of the box

Desperation sets in and the box is empty. Apart from the dust in the bottom. This trusty dust may appear to be dull and boring to the rest of the planet but a seasoned dust modeller can have hours of endless fun fabricating the most convoluted shapes from political statistics and opinion polls to create a wonderful tale as to why the US and hence the world is screwed.

Sunday, 14 February 2016

Back from skiing but the markets are off piste.

Ischgl in Austria. Loved it, but please don’t go there as the bars are rammed enough at 4.30pm, so busy that some poor girls had to dance on the bars and tables. 

So whilst I was away  European banks ended up declining faster than if they had attempted ‘La Face’ or 'the Wall’ or 'The Chute’ that most resorts save for the nutters. Or as our group tend to call them, the ‘Yeah yeah yeah you’ll be just fine’, which is the biggest oxymoron in skiing as it’s reserved to describe the things you will be least fine attempting, resulting in  ‘Oh oh, I’ll call the blood wagon’. Which is where we are with the markets. 

Everyone thinks central banks have lost the plot. The nuts of negative interest rates has resulted in markets having such a hissy fit over their confidence in central banks that they have decided to do the opposite of anything their bossy parents are telling them to do. Fed raises rates, dollar falls. BoJ go negative on rates so the Yen goes ballistically UP. I fully understand that the Yen is not like any other currency as effectively it’s a retirement fund for the population, so in times of stability heads abroad for nice high yield holidays and at times of risk comes rushing home to hide under mattresses. But if you have lost complete faith in a central bank is it normal to hoover up its currency? Is it much like going long Weimar Marks because you think the Reichsbank has lost the plot? Or buying Zim Dollars because Mugabenomics is pants? 

No. The faith in Central Banks is shot, but not to the point of the markets taking suicide pills. Buying JPY is part of the great leverage unwind, as is selling US$, as is selling high yield and selling banks who are built on leverage and as is selling the CDO cubed of leverage, bank CoCo’s. 

The Eye of Sauron is now glaring down on the banks and the case for imminent disaster is built from an amalgam of old euro woes, toxic waste in balance sheets being forced to the surface by negative interest rates, commodity prices and a huge fear that global growth is going to stall to such an extent that, much as with oil prospectors, future global cash flow will not pay the global coupon. So prices are being driven down to levels where future cash flows are priced at the new expectation, which is close to zero and in my opinion overdone. In leverage products these moves are amplified and when you throw in convexity, scary things can happen in products that sound really scary, which scares the hell out of other markets as they may not understand them but do recognise large numbers when they see them.

Big numbers have been bandied around for the size of Deutsche banks balance sheet and the number of derivatives it holds. But derivatives do net off and are not a one sided bet, though the fear is that the correlation matrices that drive the netting blow out. But one should never focus on the face value of a trade as to its true risk. For example, if I wanted to give you $100 now against a bet that the world will end tomorrow you should logically be happy to write a face value of $100 trillion on that as you would never have to pay out. A large face amount that doesn’t represent your actual risk. 

There is a big difference between the value of a bank stock (which may be a crisis for investors in that bank) and a banking crisis where the function of the banking system fails. 

I do not believe the banking system is going to fail though their will be pain for bank bond and stock holders. But panic resides in credit markets and liquidity is apparently so dreadful that proxy hedging through bonds, equities, CDS and anything else that is tradable is causing trouble in other assets. These moves are in themselves interpreted as further disaster which whips things up further and the doom rolls through the markets. I note that we are at one of those points of a panic where each asset class is looking at the next for clues as to where it should go. Equities looking at credit, credit looking at bonds, everyone looking at oil, FX looking at everything and doing it’s usual impression of a girl on a chair who has seen a mouse, then equities and USTs looking at USDJPY and reacting even though USDJPY is following them. All of this is corroborated by the best macro back story that fits to justify the latest twists in liquidity and leverage adjustment but actually overall best represents a confused market that can reverse direction in an instant. 

Liquidity is back in vogue as a problem, but I am not going to express my thoughts again on that as they can be found here, (Liquidity, the Market is not a third party price guarantee system)  other than to reiterate that the market does not owe you the bid you feel you deserve. 

Leverage though is the usual culprit and no doubt there will be calls to regulate against it soon as someone high up will deem it as bad for us as driving at 55mph on a 50mph regulated empty dual carriageway. The analogy of speed limits is not one I bring up glibly as there are many parallels to market regulation where binary rules do not fit all cases and certainly restrict efficiencies. We are best served training all drivers to be experts, letting them work out road conditions for themselves and to regulate their own speed rather than introducing arbitrary rules designed to cap at the lowest common denominator. But self regulation sees the envelopes of efficiencies challenged to the point of instability. Which has led me to derive a 'Polemic Principle' based on the famous 'Peter Principle' of management with a handful of Minsky thrown in.  

 “Markets will always leverage to their own level of instability"

In support of that idea read this wiki post on the Peter Principle substituting in ‘leverage product, risk,  derivative or risk manager’ where fit.  
The Peter principle is a special case of a ubiquitous observation: Anything that works will be used in progressively more challenging applications until it fails. This is the "generalized Peter principle". There is much temptation to use what has worked before, even when it may exceed its effective scope. Laurence J. Peter observed this about humans.[1]
In an organizational structure, assessing an employee's potential for a promotion is often based on their performance in the current job. This eventually results in their being promoted to their highest level of competence and potentially then to a role in which they are not competent, referred to as their "level of incompetence". The employee has no chance of further promotion, thus reaching their career's ceiling in an organization.
Peter suggests that "In time, every post tends to be occupied by an employee who is incompetent to carry out its duties"[2] and [the corollary] that "work is accomplished by those employees who have not yet reached their level of incompetence." He coined the term hierarchiology as the social science concerned with the basic principles of hierarchically organized systems in the human society.
He noted that their incompetence may be because the required skills are different, but not more difficult. For example, an excellent engineer may be a poor manager because they might not have the interpersonal skills necessary to lead a team.
Rather than seeking to promote a talented "super-competent" junior employee, Peter suggested that an incompetent manager may set them up to fail or dismiss them because they are likely to "violate the first commandment of hierarchical life with incompetent leadership: [namely that] the hierarchy must be preserved".

Call in the palliative care team if you like but I'm ready for all that gamma hedging in cross assets that has spilled out of credit to cause as much pain on the way back up as it just did down. Especially in USD/JPY which has seen consensus flip from 130 to sub 100 so fast it's time to see it break up through 115

Monday, 8 February 2016

Gone skiing

I didn't go last year so I am making up for it this year. I've managed to reduce the family ski holiday bill by 75% - I'm going by myself. Well to be honest I'm going with six other fellows who have pulled the same trick. I leave in 30mins for Ischgl so some quick ski / market terms. Feel free to add.

Piste. A groomed slope that should be easy to follow but normally peppered with tumbles. Fed dots.

Off Piste. The ungroomed adventurous mountain slopes for experts only. Emerging markets.

Ski a device you strap to yourself to spread your weight over a weak surface allowing you to navigate down a slope. A futures spread.

Lift - A device to carry you upwards with little effort. Carry trades.

Drag lift. ECB policy.

Chair lift. Jannet Yellen and Fed policy

Bubble lift. FANG

Cable car. A crowded confined space expected to get you to the top quickly though there is normally a long wait for it to get going. Short Sterling long Usd.

Piste basher. A large complex machine designed to prepare the piste. Central bank press conferences.

Slalom. A run consisting of sharp turns. Market expectation of Fed policy.

Ski jump. LinkedIn stock.

Cross country. A long hard slog across the flat with little enjoyment. Long usd/sar.

Snowmachine. Produces an artificial surface when conditions don't support the real thing. QE.

White out. When you can't see a thing. Chinese data

Powder. Perfect conditions rarely found but awesome when experienced. Long bonds in 2008.

Avalanche. When everything gets buried. Too many examples to quote.

Apres ski, Vin chaud, red wine, Jeagermeister, vodka redbull, teqilla shots. A good idea at the time when you are broken at the end of the day and want to get things going, which they do for a mad brief time before the headaches set in. Negative interest rate policy.

Friday, 5 February 2016

The NIRP quiz

10 questions on negative rates

1. With rates around zero, is being charged to deposit and charged to borrow 

a) Stimulatory.
b) Fair.
c) Fiscal tightening in disguise
d) The original precursor to the saying 'never a lender nor a borrower be’.

2. If you could cancel out two countries' economic problems by merging them together would you 

a) Merge Germany with Greece.
b) Merge Japan with Brazil.
c) Merge the USA with Mexico (mostly just to annoy Trump).
d) All of the above. Brilliant idea.

3. If you thought gold was any different to any other 'thing' would you

a) Buy it as a hedge against inflation as it's in limited supply vs uncontrollable fiat money.
b) Buy it as a hedge against deflation as with a zero yield it will outperform NIRP currencies.
c) Buy it because the Brazilians will be buying it for a) and the Japanese for b).
d) Sell it to pay the negative yield premium your bank has somehow worked out they can charge you on your mortgage.

4) Which of the following are caused by central bankers' fallacious beliefs in the effectiveness of NIRP

a) A restriction in money supply through the punitive charges on reserves banks are subjected to on all their lending.
b) The ludicrous rise in stock valuations.
c) The ludicrous fall in stock valuations.
d) The lack of size 9 1/2 socks in your local department store.
e) You not winning the lottery.
f) That extra pint on the way home, sorry darling.
g) All of it. It’s them. You know they control everything don’t you? Even the moon landings that didn't happen.

5) If you were looking to invest in yield would you

a) Have a look at Aus$. It's looking perky and Mrs Watanabe must be looking at Uridashis again in this environment.
b) Buy 10 yr bund whilst it’s still +ve because hey, 0.05% on 10yr risk in Euro sounds great doesn’t it? No?
c) Buy stocks as any stock with a dividend is outperforming cash.
d) Buy a flexi-yield slumber-eezeee kingsize and stuff your cash under that.
e) Use the money to pay for a course in wild survival as that will yield the greatest benefits the way we are going.

6) Which would you rather buy

a) A 5yr bund yielding -10bp.
b) A Premium bond where average yield is -10bp but you have the chance of losing £1,000,000 each month
c) Your normal weekly lottery ticket which has always yielded -50% on average.
d) A collection of CHF1000 notes.
e) Gin

7) When is NIRP NIRP

a) When the central bank charges banks to hold their deposits and reserves.
b) When my bank charges me to hold my money in my account.
c) NIRP is only NIRP when I can borrow at NIR.
d) Credit cards pay you monthly on outstanding balances.
e) NIRP shouldn't  exist until the cost of public transport falls as that is the only true measure of inflation. So never.

8) In a negative rate environment would it be right 

a) To apply it to property instead of announcing a property tax.
b) For pubs to charge charities for the loose change held in those collection boxes on the bar.
c) To insist bankers had bigger bonuses.

9) If cash were to be restricted to prevent the populace avoiding NIRP, which method of restriction would you support

a) Biodegradable bank notes.
b) Reverse lottery with bank note numbers being drawn and those notes cancelled.
c) 5% taken off the amount you request at an ATM.
d) Coat all notes with hydrogen sulphide.

10) If you were a NIRP central banker and went back in time to give a lecture at the LSE in 1984 explaining economic policy now would 

a) Your audience fully appreciate your situation and invite you on their anti-apartheid-support-the-miners march in sympathy.
b) You notice the Dean checking his notes and muttering to his assistant closely followed by security guards sideling towards you.
c) You have cataclysmicly upset the rules of time causality by triggering such global panic about the future the world goes on to plow huge resources into economic research  to stave off the impending doom, depriving all other research of resources causing AIDS, Bird Flu, CJD and Ebola to wipe out the the human population long before NIRP would ever have been necessary.

Wednesday, 3 February 2016

Attack on leverage clears the air.

Part 1 -

"One PMI does not a recession make nor one down day; similarly one day or brief time of disappointing data does not make a recessionist entirely happy" Aristotle 

Today’s price action has been very different to the type of market selling we saw in January. Last month saw a theme of concern that saw China killing growth, oil killing high yield in a contagious manner compounded by a fear that the Fed are on a hiking cycle  ahead of its time - all of which was pointing to a slowdown.  A spore of the R word 'Recession' had hit the richly primed petri dish of market belief. This lead to a USD rally and a hefty sell off in stocks with a grinding fall in bond yields. The sell-offs were dramatic and scary but they were understandable as things correlated as expected.

Today is different. We have seen the trail of assumed future disaster lead to the doors of the banks where twisting yield curves around the zero bound are making their lives a misery. The market is beating on those doors with a determination that has your average punter scrabbling for their 2011 or 2008 play books. Those play books are usually only read for a couple of chapters before they scare the bejeezus out of themselves and panic out of every position, failing to get to the relatively happy ending.

This is where I feel we are - the ‘Help I’m a consensus trader, get me out of here’ stage. Today is smacking of uncorrelated panic focused around leverage. That leverage attack can be seen in the way banks, the home of leverage, are being attacked and in technology which is leading the way down to the point of Unicornicide.  Although the Fed’s Dudley did his best to sound responsive to market turmoil he just managed to trip the dollar up and fast incubate that petri dish of recession belief. Then came the US services PMI which triggered that recession belief to fruit and spore.

Boom! Biological, economic and nuclear financial armageddon all foreseen at once. At which point the markets threw January’s correlations to the wind and just wanted out of their own leverage. How else can one explain maximum recession calling and a collapse in bank confidence fitting with a 10% (at time of writing) rise in the price of oil, which is as plentiful as great crested newts on a UK infrastructure building site?

The market has followed its own form of logical extension to the point of scaring itself out of the very positions it established based on its original beliefs. Yet the real world carries on. PMI data may be slowing but its not in recessionary territory and I do wonder how much of a feedback loop there is with market turmoil causing uncertainty that is reflected in the data which the market then reacts to with more turmoil.

Two days ago I didn’t like holding risk as I couldn’t understand what was happening so ejected it, waiting for something I recognise to  return. I now think I understand. Today saw the wave of market angst culminate by crashing into the beach in a spray of noise and turbulence. If you don’t like that analogy, let's just say it’s had its boil lanced.

And now? Well now I am happy to buy again in the belief that a break down in correlations and such diverse asset price moves to such an extent indicate a panic blow off. There has been a change, but not the massively negative one that most are reading this as.

Part 2 -

Now that market have simmered down a bit let's mull the mad world of negative interest rates, but not so much from the complete absurdum point that I usually highlight but the more rational 'here and now'. This part has been stimulated through conversation with an old friend. The following thoughts are as a result of our conversation.

We agree with the consensus view that this is not a stimulus, at least on its own.  It could be part of a stimulative package if it is combined with a fiscal spending program, because negative rates are arguably a very progressive tax on assets.  Given that 85% of global assets are owned by the 8.5% of the population with > $100k, you can see how this is pretty new.

Before I go on I must note that wealth measurements can be exceedingly misrepresentative. The poorest poor are at 0, yet a US person in a nice house with a nice car and nice lifestyle can be in debt to more than the value of their asset and so be at negative wealth on a net asset value basis. Less than the starving destitute. True wealth measurements really needs to include some PV of future income but of course, no one knows how to measure that, especially not in the times of negative rates.

But also very interesting is the fact that negative rates also tax offshore money.  All the wealthy folks' cash in USD, EUR, whatever in Guernsey or Cayman Islands will be affected by negative rates, no matter how many tax lawyers they have.  So we can see it as part of a creative stimulative package in the event of a recession.

In the near term though, it's hard to see how negative rates will whack growth, unless it's by stymying bank money transmission through the cost of reserves.  But it's worth remembering that central banks are ultimately political constructs and as such will only be able to go down this path as far as the electorate will allow.  If we do begin to see negative effects, as seems likely, policy makers will likely stop at their own volition or will be forced to by the electorate in some way.  For example, if JPY retail deposit rates become noticeably negative, Abe's approval ratings may drop sharply enough for him to tell Kuroda to stop or resign.  In the case of the ECB, a number of voters already seem skeptical of further easing.  Given how the Yen and Nikkei have reacted to negative rates, perhaps Kuroda is already regretting his decision.

The offshoot is that there seems to be a reasonable chance that the immediate tightening effects of negative rates will be limited.  At current prices, one could argue that a lot is already priced in.  For example, Japanese banks are now trading at barely half of book. For the banks that are truly interested in maximizing shareholder value, they could simply let all their loans expire, return the deposits, and pay back shareholders at book value... an almost 100% return.  Whether they will of course is a different story!

Finally - After today's price action, the financial version of the song 'January February' becomes even more apt

Tuesday, 2 February 2016

Too many fires so run away.

The shape of the market bounces from extreme lows fits the ‘that’s enough’ picture, especially in oil where the shape and speed of the rally has had ‘speculator unwind’ written all over it. Real supply is still exceeding demand and any rally on news that OPEC may or may not decide to cut production has to be speculative by definition as current supply has not been cut.

The other great indicator was 'month end'. The run up into Friday's close easily fitted with rebalancing into equities, which have seen their values trounced in January leaving balanced portfolios less than balanced in $ value terms. This all leaves the field open for the next phase of play.

Correlation break down. Over the last week Oil and SPX have indeed shattered their intraday linkages and today's falls look more like a 'sell everything’ day, rather than a causal correlation day. Interestingly Chinese markets had also lost their linkages to SPX. Last week we saw China barely manage to stay afloat as the rest of the worl rallied and overnight it put in a rally that the rest of the world ignored and sold into.

"So what’s your poison today sir? Are you off the old Oil and China? A pint of bitter and twisted a little too basic for you? Can I interest you in a cocktail of Italian banks sir? All the rage with the shorts sir".

Italian banks are the meth of the short addict. When the speed of China or the crack of oil (puns intended) aren’t working why not skulk back to the cave and take a toke on Italian banks. The usual victims are crossing the wires like ghosts of 2011. But banks became zombies back in 2008. Henceforth they will never be allowed to make astronomical sums as regulation tightens the noose on profiteering and risk taking, with social oversight making sure they will get fined or taxed should profits spike. Yet on the down side they will not be allowed to collapse if there is risk of contagion.

Are Italian banks the new oil? Or are negative rates the new China? Or…. what are we watching? Getting confused? Then sell everything and just run to cash and Treasuries. But watch out which cash you buy as some demand that you pay to hold it. Here we must welcome the Japanese to the land of negative rates. Where the Newtonian rules of finance collapse in on themselves to be replaced by quantum finance, full of spooky action and entwinedness that will trigger instant problems in things so far away.

I have been marking myself bullish for a recovery for a while but the price action of the last couple of days has me neutral. Yesterday’s lack of comment was mainly due to the machinations of lifting off the risk pedal. Indeed I am getting caught up in the bear camp. The number of fires to fight is becoming chaotic so it’s time to step back and let things play out.

Yet there is one part of this that is most worrisome. The Fed say they’ll raise whilst everyone else in the world is cutting, even Carney* off the rate rise the pedal. The US bond market is now saying no too, or, with the flattening of the curve saying if you do - it’s wrong. We have two distinct spaces here. Market space and central bank space and they are diverging at the fastest pace I have seen in a while. Central banks are going to have to do something impressive pretty soon as their wayward child, the market, is about to lose all faith in them and head off out the door. The BoJ has not helped by doing the monetary equivalent of telling the market child that the whale liver oil they are giving them will make them attractive to the opposite sex.

Finally - I have at last worked out the way to make money. I always thought the way to do it was to build a successful company. What a waste of time. Instead start a company, dress it up as having a great future and then sell it to a mug for top dollar. IPOtastic? Trumptastic more like.

* Carney is like a bad trader, he buys the highs and sells the lows in a range bound market. If he’d just said or done nothing he wouldn’t have lost his credibility.