Sunday, 22 January 2017

A wall of no worry

The 20th of Jan has been an important date for me for the past 3 years, well before the election of Trump was even a glimmer of parody in comedians' eyes, it has been a turning point for markets. This year it has been even more special. The plan has been that any trend developing over December would accelerate into the start of the year only to reverse about now. As the trend has been Trump, then the 20th would be seen as either a confirmation of the trend or a tear in the fabric of space/time Trumpinuum.

So what is it to be? I missed the live speech due to other commitments, instead relying on my trusty market-o-meter of news, which involves looking at where the markets are and working out what the news was. So first sighting of prices gave me the impression that I hadn’t missed much. Wall Street up a bit, Usd/Jpy flatish, bonds unexcited and everything a bit disappointingly dull. So, I assumed that speech fitted in with exactly what the market was expecting.

I have always believed that Trump’s plan was to get into power by taking the mickey out of the stalwarts of truth, honour, discretion and humility, getting the revs of the shock and awe machine up to 8000rpm, before taking office and dropping into 6th gear for a much more sedate and considered journey at a calm 1500rpm down the next 4 years.

But then I watched the speech and my narrative was hit by a shockwave. Here was the same Trump speaking as though he had just started out on the campaign trail. The repetitious rants about making America great again, the rampant protectionism, the rhetoric without substance and even the paradoxical statements such as “When you open your heart to patriotism, there is no room for prejudice” had me aghast. This was not a Presidential speech. It was one from a man who is confrontational (criticising all around him), stubborn, self-opinionated and lacking any 'how' to add to the ‘what’

How did this fit with the lack of action the markets? The obvious answer is that I was wrong in expecting the markets to expect a statesmanlike speech instead it being exactly what the markets were expecting. Which now has me wondering if the markets or I have the first premise wrong. Mine being that Trumponomics rested upon a steady Trump hand taking the tiller and guiding a changing ship in a different direction, whilst the markets believing that Trumponomics is coming whatever, whether it is as aboard a shiny new hi-tech vessel or a disintegrating hulk of a fireship. But, the way I see it, there is less chance of Trump succeeding in an agenda that will result in outcomes that the last month's market actions are forecasting.

Then came the protests - I have a very pragmatic view on protest marches. They only work if you have a 'plan B' and are a stepping stone to something else. Having neither and you end up much like the Occupy Wall Street event, an excess of self-expression and street theatre. Though I have read that OWS was a success because - "For many participants and observers, though, its more compelling achievement was to embody a minimally hierarchical communitarian polity that combined consensual direct democracy with a high degree of individual autonomy, and also a voluntary sharing economy with the market logics and state service provision that dominate everyday urban life” Err what? Obviously very clever stuff but, meanwhile, JPMorgan is doing just fine thank you.

So, lots of people protesting against Trump is great as long as it achieves their objective of getting rid of Trump or changing his behaviour. Having heard his speech and the attitude it reflects, I cannot see him changing his behaviour until his policies have proved so disastrous in their own right he blames others for their failures and effects changes under the flag of 'Saviour from other’s failures'. Which is actually how he got to where he is. If Trump is a protest against liberal elites then the protests are protests against protests. It's a shame that (to paraphrase an old saying) two protests don't make a right.

As for protest marches against Trump in other countries, they are going to have even less influence over Trump (read 'none') though are probably effective cathartic outpourings of mass grief at his victory, much as the Anti-Brexit marches were and likewise will have as little impact on financial markets - unless it turns towards civil war, which is so very unlikely.

The other main Trump news of the weekend was the ‘so how many were there’ debate. Unlike a ‘guess how many sweets are in the jar’ school fete competition that sees you winning the sweets, there seems to be little point in entering the competition. What is the upside? It really doesn’t matter how many people were at his inauguration as it won't change the outcome of him remaining President for four years. If it did then you might as well scrap elections and have voters turn up in Washington and stand on one side of the river for one candidate and the opposite side for the other, to chose the winner.

The point of the issue is just how much of an issue it has become and how it is being handled by either side. The key observation is that Trump is valuing image over substance again. He is willing to take on the Press over anything that doesn't portray him in a favourable light. He is even accused of halting the National Parks Service twitter feed in response to them tweeting ‘HowManyWereThereGate”. But as is possible in today's news games there is, of course, a chance there was another good reason for that action. A chance.

Boiling the last two days down, I have seen an increase, not a decrease, in the similarities between the way Trump is managing his new estate to a couple of other famous leaders around the world and though it is very early days and far too early to draw any conclusions, I am starting to compile a list of potential similarities that I am keeping an eye on

Running on a nationalist agenda.
Blaming overseas influences for the country's woes.
Blaming your own press for misreporting the truth.
Controlling social media output.
Manipulation of truth.
Showing more conciliatory tones towards Russia.
The belief that forces within your own secret service are working against you leading to you awrranging an organisational Putsch.

Ok, it’s not a very long list, but its a start. Of course, if he finds himself without enough power to execute his will then he could take the Turkish route and award himself some more

"Power corrupts, executive power executes" Polemic Paine 2017

Now whilst my quizzical concerns could easily be debunked, IF I were to do what news wires do with implied causality, (eg. My cat had green eyes. You have green eyes. My cat got run over. Woh, you'd better avoid roads or wear blue contact lenses) I could suggest the USD is going to go the way of the Turkish lira, but then I guess the US doesn't have a current account deficit that needs funding from foreign direct investment, a huge budget deficit and nor is it strapped with vast amounts of debt. (chortle).

But seriously, the theme is that Trump is good for the dollar, primarily because dollars will be repatriated home in a patriotic manner (happened with Turkish lira for a couple of weeks until exhausted and those who had, were soon 30% worse off) and that growth will outpace interest rates which will outpace inflation. And there you have the nub of it. Growth, inflation and interest rates. the balance between the three is critical. It is in any economy but in the new Trump world, it is critical because though there are some strong opinions as to which way they go (apparently all upwards) it will be the relationship between them all that is crucial and the margin for error in predicting the differential derivative is huge.

The expectation for economic wonderfulness has been rampant, you only have to look at sentiment charts since Trump was elected to realise that it’s all on hope rather than reality, because reality has not changed fast enough to justify these spikes in sentiment. Small businesses appear to be those who have invested most in the Trump dream.

Charts shamelessly nicked from my friends at Macro Man 

CEO confidence

Uni of Michigan Consumer Sentiment 

 Small business optimism

So there we have it. Trump's speech has not given me a feeling of calm control. His reaction towards the Press and CIA appears to be as confrontational as ever and this falls upon a country with very high expectations. The markets on Friday took the speech in their stride but plenty of them were looking at each other for solace, with the final pit-prop of belief being the sentiment readings creating a "wall of no worry".

I am still struggling to see how Trump can square handing power to the people whilst stifling the Press and delivering non-crony capitalism whilst imposing greater controls on the free market. If I am not a complete outlier in my interpretations, there should be a lot more doubt today than there was last week and with it a reversal in the sentiment of the Trump trade and, with that, a fall in equities and the dollar.

 The carnage may start right here.

Tuesday, 17 January 2017

The end of the land of the free.

Mrs May has been top of the headlines as The Economist cover once again proved a negative indicator.

The weekend saw leaks of her statement with screams of terror from the usual sources as they sherry picked (like 'cherry picked' but in otherwise genteel front parlours) the headlines pointing towards a harder Brexit. With this came the knee-jerk narrative to sell GBP because that's what the simple programming that is currently being applied demands. This made two assumptions. First that May really is going to sacrifice all ties and the second that the result of a hard Brexit means that GBP should be yet weaker (weaker than the 15%-20% it has already fallen). GBP fell to 1.19something on Asia open only to recover and then languish around 1.2040ish for the rest of the day. This morning's commentary was that she has leaked her speech to prevent a market meltdown. But today saw GBP rally 3% to levels higher than where it was on Friday. What a complete and utter waste of time listening to the garbage on the wires. The only headline worth its salt would be

but you just don’t see that,

I have come to the simple conclusion that the reason that the commentary is so wrong is because very, very few of those commenting actually trade the thing. The reason prices move is because people buy or sell in differing ratios upsetting the equilibrium of the assumed fair price. The reasons that people trade is hugely complex. The drivers behind the individual trading decisions can vary massively. Commentators can not accurately define why GBP is lower or higher unless they have actually spoken to a person who has traded it. Here I am not talking about an FX salesperson who has transacted a trade for someone else, nor even a spot FX trader (who manages flow but rarely knows the ‘why’)  but the fund manager, central bank, sovereign wealth fund  manager, hedge fund or real money PM, or collection of electrons in an algorithm who actually decided to swing the bat. And funnily enough, practically none of them will ever a) want to tell you b) want the fact that they have traded be known in the first place.

As my friend JG said 
"Herewith, the slime trail ident of a clueless commentariat, machines and dickheads".

False news, bullshit, selective reporting to fit agendas and so on. It’s a theme throughout politics, markets, social media and, currently, life in general. Why is it so? Because we are awash with free stuff. Said to be free, but not free. The quality of free stuff is currently so low that I am predicting a backlash against ‘free’*. The easiest form of marketing includes the words ‘new' and ‘free, but 'free' has moved on from 'free’ apps just stealing all your personal data to data that is completely fallacious. Which leads me to believe that the days of ‘free' are near an end. It has started already with many once free publications going subscription and many good bloggers either trying to charge, throwing in the towel or moving to a broader platform that provides an income (e.g. the excellent Macro Man).

Information has a hierarchy of value. Untruth, Opinion, Truth. As with any commodity, the value of which will be defined by supply and demand. As scarcity drives up prices so it will be that the price consumers are willing to pay for truth will increase. I am now willing to pay for verified news that comes with a guarantee rather than a disclaimer.

Ok rant over, back to financial markets.

My mythical turn date is effectively upon us. The first option expiries of the year combined with Trump's inauguration speech. As expiries are tomorrow, I have taken the liberty of front running the Trump speech by putting on a selection of trend reversal positions. Mostly through options as volatility has been crushed. FX, apart from obstinate dabbles in GBP, I have left alone as the dollar has already turned (I do love the EUR/USD 1.1000 magnet, it’s such a parity-party pooper). In equity indices, the FTSE has been in my bag for a few days now but I have added Dax puts, spread over the next 4 months, to back my views that although Europe has growth,  growth is actually going to be a problem with regards to arguments over ECB policy. And for a narrative twist, I am going to invoke my first rule of narrative "Change the subject before they notice you are wrong”. So if I am looking for a turn in markets against the recent narrative then, rather than deny the narrative, the subject will change. Wrong on the market responses to Brexit news? Wrong on market responses to Trump? Then change the subject and Europe is there ready as it's been out of the limelight since Italy didn’t  last blow up.

Emerging markets is where I really should be playing as they have been doing so well, but I am loath to. I'm more willing to wear a downdraft there. My bĂȘte noire of TRY is still proving that political upheaval and fundamental realignment of the political seismic plates swamps charts, oversoldness and historical value measures. The only EM counter-trend trade I have put on is long Mexico ETFs.

Oil is a toughie here. A downdraft in risk should see oil lower too. Add that to the well noted positional excesses and I should really be getting out. But I am still hanging on in there with dodgy oil stocks. I know there a hundred reasons to sell it but I’m going to hang on for $65. Commodities, in general, are frothy but I am looking at them returning to favour as part of the super-cycle.

I only have one comment on the World Economic Forum - The World Economic Forum is now like the Glastonbury festival, where those who go, go to be seen to be going; the headline acts are past their prime; their old songs are nostalgic but their new ones are solely self-indulgent; but, more importantly, it isn’t the performers who set the trends these days - it’s the crowd.

* I include this post as an example of free stuff which is opinion rather than truth and has little value or cannot be verified as true. Read the disclaimer! 

Tuesday, 3 January 2017

With consensus comes conceit.

Well that’s 2016 done and, for many, 2017 might as well be done as well, because it's all just soooo obvious what will happen. All the positions are loaded and Trump bullish investors might as well go into bear like hibernation only to wake up next December to cash in their riches.

But with consensus comes conceit.

US - Trumponomics backed by price action has reaffirmed the belief in the trade, which is always dangerous. Now today we have a piece of news which is cited as evidence of Trump intentions becoming reality. Ford has cancelled its plans to invest $1.6bln in Mexican production instead opting to spend $700m in Michigan thus creating 3500 jobs. The verbiage from Ford said that they had been influenced by Trump. Whilst everyone is holding this news aloft, much as a holy relic to the church of Trump, I am a little more cynical. Does $700m invested in Michigan really buy you the same output as $1.6bln invested in Mexico? If not then the announcement is more like a reining in of future overall production, cloaked under a patriotic statement. For this to be otherwise Ford would be having to wear an instant labour cost differential as well as the continuing effects of a strengthening dollar.

I am going to refeence an old Anglo-Saxon (actually Danish) king of England here, before you just think I'm being rude (though I leave it to you to decide intention), but with dollar strengthening it is going to get harder and harder for King Cnut to hold back the trade tides. Trade occurs because of price gradients. If the gradients aren't that great then simple regulations are fairly effective as the cost of circumventing them exceeds the price differential to be gained. However as the differential increases more is prepared to be spent in circumvention (if this wasn't the case there would be no cocaine in the USA). However, the price differentials are only increasing as the dollar rallies against the rest of the world. Companies may well like to be seen to be paying lip service to the new President but underlying it they will still be wanting to do what all companies are designed to do - make money for the shareholders. So statements like Ford’s have to be picked through. For example, saying they’ve cancelled a $1.6bln new plant doesn't mean they aren't ramping up investment in existing plants. In my eyes, the Ford statement is an offering of flesh on the altar to Trump, but it certainly doesn't mean that Ford aren't planning on eating the rest of the beast.

UK - PMI storming - UK manufacturing is enjoying the benefits of a weak pound. Meanwhile the UK's ambassador to the EU has resigned. If you look at UK news you have to split out the now from the future. It’s much like trading the steepness of a yield curve. Since Brexit, mainstream forecasts had the UK on a steady downward path arriving in, say 3 years time, at a point of Brexit gloom. As we haven’t had any economic doom yet the gradient towards that gloom point is assumed to be steepening as time decays. The PMI is a lift in the short end of the curve and the resignation is a push lower on longer term expectations. A curve steepener in the negative sense. But playing the curve of UK expectations out to three years also has to involve playing the expectation of Europe's future. I.e. its own curve.

Europe - I am a lot more pesimistic about Europe's ability to hold it together through 2017. Not that it will cease to exist in 2017, no, but just that the edges will start to fray again. The EU project has often been liked to the Titanic. A vessel with design flaws that wont be able to weather hitting the iceberg. There has been an interesting twist to this analogy in that a new theory has emerged as to why the RMS Titanic failed to withstand the impact. A fire, that had been raging in its coal bunkers, had weakened the hull structure.  So applying that theory we could say that previous EU crises have not been the iceberg but the fire in the coal bunkers, critically weakening the main structure of the EU leaving it unable to withstand the next shock.

What will be the shock? Italian debt can only be camouflaged in ECB vaults for so long. German/ RoEU imbalances can only be massaged for so long, France can only fudge it’s social economics for so long and finally the ECB can only keep on buying assets for so long before growth and inflation rise to a point to expose the asset buying as not the flagged cure for deflation but as an internal epoxy resin glooped over the cracks between the Core and the Periphery. When the ECB can no longer be seen to be justifying asset buying for monetary policy reasons then the true value of risk premia will return to the markets. Probably the biggest damage that Trumponomics will inflict on global markets is not directly from how the US faces the world, but in potentially removing the only excuse that central banks have for underwriting private investors' risk. At which point the Emperor will be revealed as Lady Godiva.

Trading- I have been anticipating a reversal of markets once the new year is underway marking the 20th Jan as a good potential turn date but as it gets closer I am geting more twitchy towards signs that turns may occur sooner. Today was certainly interesting and has had e start to build shorts in risk. Oil has had an impressive reversal, as has USD/JPY and US stocks from the highs. Add in copper and it is looking pretty generalised. Except for one index which I would have thought with a turn in US stocks, commodities and the USD should be falling comparatively hard. The FTSE. But it hasn't. So I’ve sold it.


Post Script..  Re Ford.
There you go.