Tuesday, 14 February 2017

Quincunx policy making. Quincunx markets.

It's been a while since I last posted as I have been waiting for the realisation that Trump was not going to be a shoehorn to economic prosperity to dawn, as his extremes either shock the rest of the world into moving away from buying US assets or his changes collapse in a cloud of impracticality. Neither of which has happened.

My simplistic de-Trumping plan has turned from a binary game of all on / all off into a multi-dimensional game of chess. Hard Trump and Soft Trump, to borrow a Brexit phrase, are forms of Trumpism that are swarm like and ever changing. The strength of policy swings on a Tweet. With foreign policy we have seen back peddling from 'hard' as the one China policy appears to have been acknowledged, Japan declared ‘best friend’ and Canada told that Trump is only planning ‘tweaks’ to NAFTA.

Yet the rhetoric against the likes of Basel III remains as strongly worded as ever and the deregulation of US banks could cause some of the greatest strains between the US and EU. Since the 2008 crisis regulations have been seen as much a moral crusade as one of practicality. Dodd-Frank and Volker, though nice ideas, were never fit for purpose and the laws of unforeseen consequences have produced all sorts of schisms, whether it is liquidity holes in corporate bond markets or just ridiculous generalised reporting conditions on markets that were not exchange based. So getting rid of these, or at least watering them down, would be a sensible compromise between practicality and moral protection. At least that’s the line I am willing to excuse the panel of top bankers currently advising Trump with.

Basel III is a bigger issue. If McHenry’s letter to Yellen is properly representative of new policy then it hits the EU head on. The EU has been proudly touting its new banking regulations which should identify weak banks (yes, done in style) and be part of the path towards a unified European financial system, whilst also allow the politicians to wave a huge moral flag in triumph. But what happens if the US banks are suddenly told they don't have to play by the same rules? They instantly have a competitive advantage unless the EU backtracks and loosens Basel III in response - Highly unlikely fot them to do such a massive U-Turn just because Trump has pushed them into a corner - or they immediately remove the US’s European banking licenses if they don't comply.

This is al the more interesting coming in the wake of Brexit where apparently the US banks are threatening to up-sticks for continental Europe, well let’s be honest, it’s a threat as none of them really want to go. France may well be offering sanctuary to US scientists and the world's bankers, but if it were really that great they would have gone there already.

There is a small version of the State of Liberty on the banks of the Seine in Paris and I was wondering if they should attach a plaque to it similar to the famous one in one in New York -
Give me your scientists, your bankers, your huddled masses yearning to breathe free, the wretched liberals of your teeming shore. Send these, the visa-less, Trump-tossed to me, I lift my high tax rates besides the red tape.

But if the US banks aren’t going to be playing to Basel rules there may not be that tide of bankers. Indeed, the UK would be looking pretty as an intermediary between the two. It would also support another idea I was nursing, the introduction of an offshore Euro market in line with the original Eurodollar market. If London launched such a beast the EU would not be able to control it yet it would provide a method for EU unregulated institutions to fund and lend Euros just as the Eurodollar market did for Russian held dollars when it was established. The great thing about the City is that it has thrived on bypassing regulations, or rather, creating the most efficient systems to mitigate their impacts. It's what it thrives upon.

But back to the markets, I am lost. I see risk piling up everywhere except in the markets, which are driving on upwards. I don’t need to list the European stresses but I think this sums up the EU's position pretty well.







There are so many possible outcomes to current uncertainties I am looking at the markets as a quincunx-  not a Harry Potter creature but another name for the 'bean machine' devised by Sir Francis Galton.




The box itself could even be used as a metaphor for Trump's policies. An Executive Order, or even just a tweet, is dropped in the top and it rattles down through so may deflecting processes that, though you think you have an idea where it is heading, the policy's final resting place may be some way off where it started.

Add in the rest of global politics and you end up with so many variables, or pins in the box, that the sum of paths may well mean that there are not any fat tails, but the standard deviation of the resulting distribution is a lot wider than volatility pricing is currently suggesting.

I am buying volatility now rather than direction. I was, or so far have been, wrong on that.





Tuesday, 7 February 2017

Markets move as man skis in Austria.

I'm on holiday in a ski resort in the Austrian alps. This means I have no time to read any in-depth market commentary, instead, I am glancing at twitter and headlines that are depressingly dominated by the old 'x happened as y happened' implied correlations.

So here are my own equally honest, but equally unuseful, ones describing today -



**European futures fall pre-market as tourist heard mumbling "Oh God, do I have to get up now?"**

**European equities rally on the open as porridge and coffee consumption rises.**

**US futures mirror European gains as ski boots tighten.**

**Oil falls as blazing sunshine lights up mountain tops.**

**USD/JPY rallies as snow conditions judged near perfect.**

**Turkish Lira weakens as hot chocolate and brandy sales rise.**

**Copper falls as multiple tight parallel turns impress.**

**Rio Tinto rallies as Woah, sorry mate, are you OK?**

**Gold falls as I think I’ve pulled something.**

**VIX loses ground as it's decided to have an early lunch.**

**Greek borrowing costs rise as wine, beer and pizza sales spike.**

**Austrian inflation much higher than expected as bill arrives.**

**US futures extend rallies as debate over where to go next continues.**

**USD/RUB higher as UK/Russian relations thaw on chairlift.**

**Italian stocks steady as disagreements break out as to whether you said take the red run after the pylon or turn right down the black back to the valley.**

**USD/MXN extends gains as he must be here soon, he can’t have got lost can he?**

**US treasuries slip as I do.**

**Zinc up as laughter breaks out.**

**Chicken consumption falls as thighs ache.**

**Bitcoin goes up as skiers go down.**

**Schaeuble says "We don't want to punish the British for Brexit” as British order Jagermeister and tequila yet state 'No, seriously, I'm not drinking that whatever it is’.**

**BTPs recover as ski boots discovered to be perfect dance shoes.**

**Mindspace falls in extended hours.**

**Markets close heavy as it can’t be 10pm already, can it?**

**Sterling rallies as loss of wallet is expected to restrict overseas spending**



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

 **GBP RALLIES THE MOST SINCE THE LAST TIME EVERYONE SAID IT WOULD FALL**
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. http://uk.businessinsider.com/ford-ceo-why-were-killing-plan-to-build-mexico-plant-2017-1
There you go.

Tuesday, 27 December 2016

Strictly Come Financing

"Strictly Come Dancing" , or 'Dancing with the Stars' as it is known in the USA, has dominated the Christmas TV schedule this year but has, thankfully, finally come to an end, The program's formula of teaming up celebrities with professional dancers to convince a panel of experts that they are great dancers has been highly successful but perhaps it is time for a change, so here are some ideas for next year -


Strictly Come Economic Forecasting - Where celebrities team up with professional economists and try to convince a panel of experts that they have any more clue than anyone else as to what happens tomorrow, whilst performing multiple U-turns.

Strictly Come European Central Banking - Where celebrities team up with professional European central bankers to impress a panel of experts every month that they are capable and willing to do whatever it takes to keep the European banking sector alive by performing a choreography of crazed twists and gyrations, known as the Can-Can.

Strictly Come US Central Banking - Where celebrities team up with professional US central bankers to convince a panel of experts that it is they who influence the future marks awarded by the panel, not the panel, by predicting what the panel will award in the future without consulting the panel. If they get zero points they award themselves 10 points for not being wrong. It's all very confusing.

Strictly Come Fund Consulting - Where celebrities team up with professional fund consultants to charge a panel of investors for their knowledge of past performance without making any commitment towards future performance whilst reassuring the panel that other panels are similarly benchmarked and the marks they award will not be seen as out of line with industry standard.

Strictly Come Financing - Where celebrities team up with professional financiers and try to convince a panel of online investors to award them dollars for a cash burning operation by performing a dance based on dream and fantasy.

Strictly Come Macro Fund Selling - Where celebrities team up with professional hedge fund salesmen and try to impress a panel of experts into paying 2 and 20 whilst they lose the panel's initial investments.

Strictly Come Futures Trading - Where celebrities team up with professional futures traders and try to convince a panel of judges that they can shout loudest and have the thickest neck whilst dressed up in stripy jackets.

Strictly Come Technical Analysing - Where celebrities team up with professional technical analysts and try to impress a panel of judges with a series of Fibonacci levels and randomly drawn lines into not giving them 10 points because that looks overbought on the RSIs and the Bolinger bands suggest a retracement towards 6 points before the Elliot 3.a.i takes effect.

Strictly Come Algo Trading - Where celebrities team up with algorithmic trading platforms and have 5 nanoseconds to convince a panel of fund consultants that they always make money.

Strictly Come Regulating - Where celebrities team up with professional regulators and try to convince a panel of experts that they really can prevent future banking crises and stop market participants from interpreting the rules to maximise their own gain, by making up rules that make the audience laugh.

Strictly Come Compliancing - Where celebrities team up with professional compliance officers and tell a panel of experts they can only award marks once they have completed online training and had the marks they plan to award submitted to a further panel for pre-approval only after proving that the marks are publicly known before being awarded.

Strictly Come Financial Televisioning - Where celebrities team up with celebrities to convince a panel of celebrities that they are experts on finance.

Strictly Come FX Broking - Where celebrities team up with FX brokers and get so smashed up on a night out they can’t find their way to a panel of experts.

Strictly Come Binary Option Trading - Where celebrities team up with spread betting companies, lose all their money, then try to convince a panel of experts that they didn’t know better and so deserve compensation.

Thursday, 22 December 2016

SA Q'n'A

The investor site 'Seeking Alpha' approached me for my thoughts on 2017. I was delighted to respond but felt as though I wasn't much help as I still believe it's too early for huge conviction trades, so please don't go through this post looking for 'get rich quick' nuggets of instruction. Hovever, it does give a feel of my current mood.

Here is their article

---------

After a long and winding 2016, we reach another holiday season. As we have done for several years, we are checking in with some of our top authors for their views on the coming year and beyond. Our panel includes experts on a range of different asset classes and investing strategies. As always, the focus is on an overall approach to portfolio construction and investing outlook.

We continue this series with Polemic Paine, an inimitable voice on the markets who doesn't consider himself an expert, but a sanguine cynic towards beliefs peddled by others for their own benefit. He also believes in building up one's own framework of economic, trading and personal values from first principles and experiences. A nice companion piece to this one is his recently published article, A Guide To Making 2017 Financial Market Forecasts.

He responded to a few questions from Seeking Alpha Editor Rena Sherbill about the markets and what investors should look for in 2017.

Rena Sherbill (RS): How would you describe your investing philosophy, broadly speaking?

Polemic Paine (PP): Focusing on behaviour rather than the maths. Mean reversionist against consensus doom or boom moods. Looking to buy in the darkest hours and sell in the brightest.

RS: As we approach 2017, are you bullish or bearish?

PP: In every meme you can find an asset for which the meme is bullish and equally as many for which it is bearish. As we approach 2017, I am neither bullish nor bearish on stock indices and do not want to be heavily positioned in much at all right now. For bonds just swing that view in reverse, but as I am neutral on those too I am doing nothing. I am waiting for the next panic to buy on or euphoria to sell into.

I don't think we have either at this point though I do detect an assumed conviction in the market as to what a new Trump world will actually mean, though these arguments are mostly extrapolations of guesses. So, if anything, I would be looking to sell US equities rather than buy. But not yet.

RS: To which index or fund do you benchmark your performance?

PP: None, other than absolute return. Benchmarks are an excuse to lose other people's money. Benchmarks are buck passing exercises that pass the investment decision back to the investor. The only benchmark anyone really cares about is absolute return. Risk adjustment is fine for the present as knowing what your risk IS important, but when you look back in time you don't give a damn what your risk WAS, all you care about is what it returned.

RS: What is your highest conviction pick heading into the new year and why (can be a long or short idea)?

PP: Now is too early to be convinced of any market trend. My highest conviction trade is that the first moves of January will be the wrong ones and worth fading. The Trump reflation trade is this year's consensus conviction trade and it will only gain further traction through feedback reinforcement as institutions publish their 2017 'trades of the year.' If we look back over the past few years there has been a tendency for the market to come crashing out of the new year starting gates and throw money behind these themes.

This drives prices that reinforce the belief that the trade is correct, only to see them crash and burn and be totally wrong by March. January 20th(ish), or first expiries, has often been a turn date and this year that date is even more important with Trump's inauguration speech. If you are looking for something more tangible on the markets in 2017, I am pretty convinced that a major speculative attack on Europe will occur. I just don't know at what time or on which day.

RS: Which domestic/global issue is most likely to adversely affect US markets in the coming year?

PP: Domestic - as yet unknown policy changes to trade deals, immigration and corporation tax.

Global - US international relations, specifically with Russia and China. It is worth watching Turkey in this respect as it is where many political interests meet. I also consider that a speculative attack on Europe could become contagious to US assets.

RS: Which countries/sectors/asset classes are you currently most bullish on and why?

PP: As mentioned before, I am not at a high conviction level towards anything at the moment and think it unwise to be so until we have more information about what the future policy rules will be. But if I have to be bullish on something let's try...

UK - Despite the outcry over Brexit, the UK economy is still outperforming much of Europe and the rest of the world. I have been long GBP for a few months now and still feel that the UK will end up with a soft Brexit. The biggest threat to UK growth may not come from Brexit, but a cut in US corporation tax which would see the UK's global competitive advantage for capital squashed.

Emerging Markets - Traditionally we have an emerging market crisis in January / February but it's been kicked off early this year by Trump and his promised protectionist policies. However, protectionism will only drive the cost differential between EM and the US wider and though you may think that you'd like to pay minimum wage in the US for plastic goods to be made, when the realisation that that is 20 times as much as many places in the world, your moral compass may be interfered with by the cash magnet in your wallet. While someone is willing and able to do your job for less than you, you are in trouble. Artificial trade barriers may be a short-term solution but the fluid dynamics of trade mean that new routes will be discovered to give the consumer the goods they demand at the cheapest price.

RS: For investors with a long-term horizon and a reasonable risk tolerance, what is the correct mix between [relevant] asset classes?

PP: 60/40 for the simple fact that it has consistently worked. The real point here is that asset class performance is more governed by the investment within that class than simply by asset type. There are equities that behave like bonds, look at European infrastructure projects, and there are bonds that behave like equities, look at high yield, low credit, corporate bonds. We haven't even mentioned Cocos.

The key is not so much the correct mix of assets by bond/equity/commodity/country, etc. but how the selections are made within those portfolios. A bond portfolio can weather down drafts if it is all placed in very short duration bonds (cash is effectively a zero coupon perpetual bond) and the same with equities by utilising sector plays.

RS: How have potential changes to the tax code affected your assessment of interest-paying investments?

PP: They haven't. As I am UK-based I am pretty immune to the vagaries of local US law.

RS: What advice would you give to a 'do-it-yourself' investor looking at [xyz] opportunities in the present environment?

PP: Read books on behavioural economics. Assume that any data you know everyone else knows already (otherwise it would be inside trading). In today's algorithmic-driven markets you will never be the first to act on a piece of data. Classic analysis is always in the price. Look for an edge and nowadays it is nearly all behavioural. Understand what makes others buy and sell, the more you understand about the drivers of different types of investors the more likely you are to predict and anticipate their behaviour. The easiest way to lose money is to be a do-it-yourself investor who knows slightly less than everyone else. You will become the market's next meal.

RS: What are the major catalysts for markets in 2017?

PP: Politics. Whereas the last few years markets have been focused on predicting the minutiae of central bank policy, there are now bigger issues at work. It's all well and good to play games when you know what the rules are, but the rules are changing and are as yet unknown. So, focusing on politics I would suggest Trump's inauguration address on January 20th, Russia/US relations, Turkey, European elections and cartel deals (OPEC).

However, and this is a big however, there was very good money to be made in 2016 by buying the political risk into the event and then selling the market risk (i.e. buying risky assets in the markets) immediately afterwards as political risk was underestimated and the resulting damage to the markets of the outcomes overestimated. This may well have been learned, so the likelihood for 2017 is that political risk will now be overpriced.

RS: Which asset classes are you overweight? Which are you underweight?

PP: As mentioned above, generalising asset classes is a bit of a red herring. I am longer cash than normal as there are too many unknowns; however, I am scaling into long emerging market positions (equity and bond, unhedged FX) and I am particularly interested in Mexico, Korea and South American commodity countries.

RS: Any additional considerations you'd like to share with readers as they ponder their investing strategy in 2017 and beyond?

PP: Be nimble. New information is constantly appearing and trying to predict where we will be in year's time is a fool's errand. The most important thing is not to be sucked into the game of thinking that the 30th of December is a magical date at which one-year forecasts and investments have to be made. If you really want to put a forecast out on what to do for 2017 I recommend waiting for March. Doing otherwise, as most investment banks have found out, is asking for trouble.

Finally, the most important thing of all is to listen to as many people from as wide a background as possible. Do not fall for the reinforcement bias of surrounding yourself with people who think like you. This was the error that led to so many being shocked at the outcomes of Brexit and Trump. For most people it was not a surprise; they were the majority that voted for them.

Tuesday, 13 December 2016

It's all down to one man.

It’s really too early to start calling the world of 2017,  considering what a monumental start we will have to it after a monumental finish to 2016 but I am beginning to build some thoughts.

The first thought is more of a reminder of just how far prices move on expectation of change rather than actual change. This might sound obvious but when you see just how far they move before anything concrete ever emerges to back those moves up, you have to realise how far they can come back down again should the thing not happen. I have often mentioned the slack in the steering wheel when it comes to oil prices but the leeway between expected, i.e. speculative, and actual outcome is now being demonstrated in just about every other asset class.

If I were to carry this point further it would morph from ‘point’ to a treatise on the anatomy of bubbles and that is pretty boring so I’ll stop, especially as I am not saying that the current moves have led to bubble status in anything really. So instead I‘ll revert back to the what has changed vs the what is expected to change.

Oil prices. This year we have seen oil trade a 100% range of its low. It got down to mid-twenties and then shot up to the high 50s, so the range has been pretty much 100% of its lows Now let’s put this in perspective by considering what has actually happened to the state of global supply and demand. The tweaks have been marginal and the whole range and been predicated to expectations of future supply and demand. So, guess work. When we can have such huge swings in price just on speculative tea leaf reading without yet having had any real change in supply and demand I really do wonder as to the value of debating the odd $5 move here or there. It is noise. Moreover, I wonder whether it is worth debating any of oil price moves when they can be swung on a whim.

The same is now happening in equities. An interesting comparative to oil is Deutsche Bank stock that last January was suffering exactly the same price punishment as oil and, likewise is nearly 100% higher than where it bottomed. But what has changed? Nothing really, just the expectation that all the dreadful things that were expected to happen haven’t happened. And now we look at the global stock markets, and indeed the global markets everywhere, where the past month's massive moves can be traced back to one factor. Donald Trump.

Equities, commodities, bonds, you name it, all of the huge recent moves can be traced back to the assumed actions of one man. Wow. Wow. Wow. Thinking how the belief in one man can change worlds is scary because it either involves dictatorial oppression [insert lists of global leaders responsible for genocides etc] or the invocation of messiahs and religious leaders. Or a bit of both. I know there are some out there only too happy to place Trump in either of those camps but for me he is one man with some ideas and those ideas will only ever reach effectiveness if he has the support of the structure around him to implement them. That means that a lot of people have to also think his ideas are good ideas and that the side effects of their implementation will be worth enduring.

But my key problem with this whole idea that Trump is going to reflate the world, drive growth and asset prices is that if the answer were so simple why hasn’t anyone tried it before? Nothing is that simple.

So with nothing being simple and the pendulum of expectation now so totally and utterly swung to the reflation trade the risks are what? That it either doesn’t happen at all due to the self-regulating way that policies that have to pass through bodies of committee rubber stamping get squashed, amended or dampened, or that it does happen and the law of unforeseen consequences opens a new set of Pandora’s woes.

This all boils down to a single thought. The markets will chase this consensus reflation trade when the New Year begins, especially if we haven’t seen a fall before then, only for the positions to reverse on 20th of Jan. Why the 20th? Because that's when it normally happens and this year it ties in with Trump's inauguration speech. I’m not saying this is a bubble in the true price sense but I can smell all the behavioural ingredients in the pot.


Friday, 9 December 2016

2016 - The score card.


As it's December and before I think about next year, let's score last year's test sheet. I did publish some thoughts on 2016 back in Dec 2015 which can be found here, or we can just go to the marked up, in bold, version below.

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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. AS PROVEN. 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. As they are this year

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. Or even president-elect 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. I think we can score that as a HIT.

-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. BIG FAT HIT. I would love the UK to join NAFTA instead. Well, many laughed when I wrote that but it’s become a ‘thing’ 
If Turkey can be considered part of Europe then why not UK part of the North American continent. And a valid ref to the absurdities of Turkey/Europe relationship which has been killed by the EU’s handling of the coup.

-Europe will continue to politically melt like a lump of fat on a hot plate - From the bottom. HIT. Populism is rising ( Italy, France, Austria etc) at the base of societies whilst the top try to wish it away. The only hope is that economies grow fast enough to defuse nationalistic unrest. HIT And so far it has, a recovering economy funded by ECB morphine has so far mellowed the nationalistic risings so that they remain below violent unrest. Greece will become an issue again in June. MISS but I do think there was a large incentive to keep Greece on track through the Brexit referendum.

-China will be just fine but relations with the west will continue to cool politically. HIT, The Chinese economy still hasn't succumbed to the woes perpetually peddled since the Aug 2015 devaluation. Relations with the US have just taken a battering with Trump, on top of the South China Sea developments.

-Something will happen in the oil markets to see prices rise,  HIT a $20 target was pretty widespread this time a year ago, the breath holding contest between marginal producers is going to see drownings. HMM.. Some but really not that many. Or someone forcibly goes in to turn the taps off in Saudi. Was never really likely at this point

-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) YOU CAN MARK THIS ONE. Inflation has picked up towards target AS oil has risen ( Bloomberg style headline implication there) but  am too honest to say 'because'  though it has been an input . I am beginning to wonder what the ECB is actually following these days and am worried that they are still too busy protecting balance sheets to notice that they really ought to be reining in QE on a purely economic basis. 

-Iran becomes more of a friend to the west MEH, it depends upon who you talk to. The EU are still keen but Trump's threats to tear up the nuke deals could put as back into the dark ages here, though I don't think it is likely. putting further pressure on Saudi Arabia. Well, Boris Johnson started that yesterday, in a Don Quixote manner, but it's hardly policy. 

-Saudi Arabia will come under someone’s cosh in general. Too many points of interest coincide at Saudi Arabia. I want to roll this one over to next year 

- The West reduce sanctions against Moscow. I don’t know what will be the catalyst, but something will thaw relations. MISS (so far)  I'll let this call roll over to next year to see if TrumPutin is a bromance or a cage fight. 

- Equities will have a shake down at the beginning of the year HIT and there will be the usual 'EM is going to collapse' call (seems a regular feature of Januaries) HIT but then you scoop them up with both hands. Probably on the 19th Jan. HIT, BULLSEYE, BINGO, though I was 6 hours too early on the call, but I challenge any investment bank to have called a dump and the day it would turn in a yearly forecast. 

- Banks will continue to morph into old fashioned post offices as they are squeezed between regulation and Fintech. HIT - RBS has become, as predicted a while back, the British Leyland of banking, only allowed to provide post office banking services.  The intelligent output of Universities is now going to where it always should have gone, science, engineering and creativity. HIT

- Inflation will be back. HIT, and back with a fury in future expectations. It's sometimes hard to remember just how ingrained the markets were with deflation only a year ago. 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. But judging by the ECB, BoJ and suggested Trump fiscal policy, the cash portals are still wide open. 
--------------------

So all in all, on top of mid-year calls for a Brexit win, a Trump win and market bounces thereafter, it has been a pretty good year all round at Polemic Capital LLC.




I did also include some sillier things that   would have LIKED to see happen in 2016, so let's have a look at those too.

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- 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. NOPE, in fact I like Amazon now. Christmas won't be possible without them. 

- SKY TV go bust. NOPE not yet, though many I know have spent 2016 trying to leave them. 

- 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. FAT CHANCE, tumbleweed still blows down the cordoned off sections. 

- People will fix your computer rather than telling you how to do it. Yes oh Yes, I found a shop that takes in your laptop and fixes it without charging an Apple based price nor referring you to a 3hr long Youtube clip of a Canadian telling you how to do it yourself.

- Trump and Putin meet in a cagefight - on the basis that two men enter and hopefully neither leave. Still could happen see bromance/cage fight outcomes mentioned above

- Politicians are fined for every proven untruth they tell. Check your stats folks... DREAM ON, Trump would have a bigger debt than the Fed balance sheet

- 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. Not yet, though apps are improving.

- 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. Far too sensible, never happened. 

- 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) STILL WAITING, though self-drive cars are where the money is being thrown. 

- Battery energy density break through. Not yet. Musks's gigaplant producing Li-Ion batteries is probably safe for another year though Na-Ion may be next. 

- Someone invents a new class of antibiotic. Unfortunately not

- Scotland gains independence whether they like it or not. Unfortunately not

- Peak Political Correctness occurs when my offence at your offence causes stalemate in the Ombudspersons judgepersonst. Well in a way Brexit and Trump wins probably did mark the peak of political correctness. 

- People reading from 2000yr old books stop trying to change my life. MISS They still try, but have now been joined by people I just generally don't agree with. And there a lot more of them. 

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No surprises there really.

Wednesday, 7 December 2016

A guide to making 2017 financial market forecasts.


I have posted this before but repost this slightly updated version as it is exceedingly pertinent considering what is landing in my inbox as various institutions and departments have been asked to start preparing their top trades and financial calls for the next year. So here is a somewhat cynical guide to the whole process with some top tips for practitioners.

WHY

First, there is absolutely no point in embarking upon this process because only an idiot would put on a trade on Jan 1st and not look at it again until 31st Dec, with no positional adjustment during it.  If everyone did this then the financial internet, press and even markets or exchanges would not have to exist between Jan 2nd and Dec 1st. Perhaps that's a good idea.

This process is much more like a yacht show where forecasting agencies can show off their shiny products of intricate design and process, wrap them with a glitz of gravitas to sell you a dream that you can sail off into 2017 aboard. If it doesn’t hit any rocks and sink then they hope you will be back to buy a bigger one next year.

HOW

The usual first rule of forecasting is never to put a price and time frame in the same forecast. For example ‘Oil will be over $100’ gives you an infinite time run within which to be right and 'Oil will be lower than here in 2017’ gives you a very high probability of being right unless you have unfortunately hit the absolute low at the time of prediction.

With this in mind, make sure your predictions are not for where prices will be at the end of 2017, just somewhere during 2017. This leaves you with a year of optionality to either get out or take profit, GS style.

Only publish your exit trades way after the event. For example, you called oil down, oil went down until Jan20th then up for the rest of the year - You cut the winning trade on Jan 20th. Of course you did.

WHEN

If you have to publish before the end of 2016 then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for 2017 in March 2017, or even later. The first few months of the year nearly always go the wrong way (as 2014, 15 and 16 have shown) and you will have three extra months of information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternative sources of advice.

If you can, make the predictions for longer than 2017. Perhaps until 2022. This gives you an extra four years of optionality with regard to the above methods but also has two other advantages. First, you give off a greater air of authority having a five-year view rather than a one year view. Second and more importantly, after five years everyone will have forgotten your predictions except you, so if they are wrong it doesn’t matter. If you are right, you can wave them around in success and write a best-selling book and set up a large hedge fund doomed to lose all its assets.

WHAT

Of course what people actually care about is probabilities of outcomes and though I have often suggested that forecasters publish their own probability curves of price outcomes they still seem to stick with razor sharp defined price targets that, by definition, they are bound to miss. So best to put your 1 standard deviation range around a call. No one will mind and may prefer it. Either way, it won’t matter but does give you a wider chance of success.

Write exactly the opposite of the GS forecasts. If framed under the conditions of the first point you will still have opportunity to get out at a profit at some point and if you can show a profit against GS your views will be spread wide and far and you will appear on Financial TV,  more because most people enjoy seeing GS look like a mug than your views being spectacularly right. If last year is anything to go by then you will have outperformed them by March. 

Finally, even though the regular market faces of doom-mongering are beginning to be treated like quaint village idiots, remember to have an absurd couple of low-delta calamity calls in there. They can be camouflaged in sensible calls and will only get noticed if they are right.

WHO

Pick eight prices you are going to call, they can be as varied as you like, calling long or short for each. Then set up 256 new blog, Twitter, Seeking Alpha or some such identities. Using all the available permutations (2^8= 256) one of them is going to nail it exactly. This is who you now are. Wave this one around, write that book and set up that hedge fund. There are plenty of people out there still being dragged out for comment because they happened to have the lucky dice come up their way in 2000 or 2008. It could be you next year.

WAFFLE

All forecasts are now couched in as many pages of disclaimer as there are forecast. Make sure that each of your calls has 16 pages of arguments and appendices behind it. Come to the great reckoning there is bound to be something in this small print that can be held up as a caveat. E.g. 'though we call for US 10 year yields to go to 6% in 2017,  should the Fed not raise to 5%, GDP not hit 10% and unemployment  not fall to zero, we may see this trade underperform". Better still create your own benchmark and reference against it. "We see the suggested portfolio outperforming the Polemic risk-adjusted emerging developed market average weighted corporate bond fx hedged equity benchmark by 30 basis points on a chronological biased heuristic". Complete nonsense, of course, but a get out of jail free card when the time comes.

However don't forget the 'unforeseen events' excuse, such as Brexit or Trump which, though unforeseen by you, were foreseen by the majority of the population, proven by the fact they voted for it.

REPEAT

If all of the above is too complicated then just repeat the trade ideas that you put out last year, or if you are feeling very adventurous just extrapolate the last month's moves.  It seems to be what most people do.


Monday, 28 November 2016

Less of moor, more of less.



I've returned from my self-imposed solitude in the wilds of England. If you want to find a place in the world where normal physics doesn’t seem to work, other than the Japanese economy, try the moorlands of England where water resolutely refuses to run downhill, instead producing hanging gardens of bog. I always thought that bogs occurred in hollows, not on 30% inclines on the sides of mountains. But I have found that setting off into the wilds in drizzle and mist is more invigorating to the soul than a sun lounger on the beach of a tropical 6-star resort. And a damn sight cheaper. But the moorlands and ancient stone pubs with fires that haven’t been extinguished for 160 years, that reek of apple-wood fumes, ancient ales and a long dead wet dog, have left me cleansed of the ways of the markets. I have had the metaphorical biro of destiny inserted into my reset button of reality. I have been left off for five minutes and then restarted. I have had my factory settings restored. I have been machine rebooted, had my hard-drive reformatted and even had my screen returned to an Apple store in Exeter, only to find it still in Exeter due to an Apple policy of not being able to know how to use a post office.

Sorry, my lyrical metaphors were starting to show signs of the return of my core operating system of bitterness and resentment there. I must be getting back to normal. Yes Apple store in Exeter, your cheery and right-on tee-shirted beardy youthful front-end enthusiasm has failed to cover the fact that you are run by a despotic corporate megathon and you are unable to act as independent agents to the great machine by popping down to a post office and sending my repaired machine the 200 miles to where I now sit having failed to have it ready by the promised time.

Oh well. Markets. What’s been happening then? Let's start with my cheeky short in the Dow. Stopped at the highs. Don't you love it? Right and what about all those positions I closed. USDTRY, much higher. damn. USDJPY much higher damn. FTSE - higher good. BTPs - was stopped on the pop higher. Damn but no worries really. GBP - hasn’t really done anything. Oil - one of the few I kept . .Up! Thank goodness we have a winner. The others were opportunity cost rather than real cost and a profit is a profit as we used to say. Though nowadays a profit is something that is worth staying very quiet about or someone else will want it.

I remain pretty clueless as to what to do at these levels. I'm sure that if I dig deeper tomorrow into the minutiae I will find something to get overexcited about and end up losing money on, but the bigger picture seems pretty balanced. As balanced as a marble on a pyramid. The feeling I expressed in my last post is still applicable. The market thinks it knows what will happen next though, in reality, we are at one of the greatest unknowns we have had for a while.

Brexit - Unknown. In fact, it reminds me of how I used to study. Have a vague idea of what I was going to do but get a little bit worried that I didn’t know where to start and that then built into a rising panic of time constraints that made it even harder to start until all of a sudden there I was in the exam not having done any work and not wearing my trousers. Or was that a dream I had last night? Either way, it’s the same madness.

Trumpton - Unknown, but probably pretty clear to me that he is going to be much more moderate than at first feared. Probably the biggest threat to his welfare won’t be from the liberal lot protesting his extremes, but right wing extremists protesting his liberal betrayal.

Frankreich - That Fillon fellow is a right Thatcherite isn’t he? I almost choked on my croissant when I read about his proposals. Cop a load of THIS. It's straight out of current Tory party policy, though I am not quite sure how his wishes for French immigrant limitation fits with his eager support for the EU. I thought that was the major sticking point on Brexit. I’m none the less having my fiver bet on him in the next elections and though I have done well on my Brexit and Trump bets I am not going for the Le Pen triple. But whoever wins it looks as though there will be more pressure on the old EU guard to change. I wonder if the UK can procrastinate long enough over Brexit to see the EU change into what the UK wanted in the first place, so we can then stay.

Italy - Nothing to add on the referendum. It’s been well discussed.

Japan - running according to plan. Waiting for the fiscal stimulus to hit via the pegged JGB door. Funny how the market reacts completely differently to the chances of Trump going big on fiscal stimulus than they do to Abe.

Emerging markets in general - It's traditional that January sees an irrational fear that emerging markets are going to blow up for them only to rebound in March. The Trump effect has brought this somewhat forward. The impact of strong dollar, trade barriers and a potentially rising USD interest rate have seen this trusty triumvirate of woes cause a slide in EM bonds, equities and FX. However, two things. First, I doubt that the reality of Brexit and Trumpism is going to be as bad in reality as currently feared and second, more importantly, no matter how protective a policy is designed to be it will not make the cost of labour cheaper in the DM countries relative to the EM ones. In fact, in restricting immigration, those who would have moved from EM to DM as smart labour are now going to have to be paid to remain in their country of origin to produce that good that your local folks really can’t do without but are too proud to make themselves for 50c an hour. I am looking to buy EM again. I haven’t done enough work on it yet, having only just returned, but probably anything other than Turkey.

Cuba - '90-year-old man dies of old age’ is hardly much of a headline, but once again everyone appears to wait until someone dies before outpouring their feelings towards them. Why? I’m sure the person who is dead would have benefitted more from hearing them when they were alive. There is no trade in Cuba other than buying everything they are allowed to sell you before they are allowed to sell it to you.

Other stuff - I’m only just getting back up to the slow speed I normally run at, give me a chance, but overall I am still looking to fade the Trump bump. And, as usual, I've committed the trading crime of repositioning my last stopped trade. Short Dow.

Right, I'm down from the moors and back to the big smoke of London and all them there bright lights and fancy folk with their fancy ways...

Monday, 14 November 2016

Positional update. Closing down sale.

I don't know if it's the weather, a streaming cold or my disdain at the bipartisan rantings everywhere that have me pretty depressed today. I have been lucky in the markets but I am getting to that point where  I can't outguess what everyone else is trying to outguess. Because guessing is a lot of what it is. Uncertainty is what we have, not certainty.  Yet much of the market is trading as though the future is certain.

My only conviction is that the path for bonds has finally cracked. It won't be a straight line path so there is still room for pain, but Trump has nudged them over an edge they were already standing perilously close to. How that pans out for everything else though is dubious. A controlled slide, as part of a reflation adjustment, is one thing, but my fear is that this goes all rather nasty in a hurry and acts like a cluster bomb in the market triggering unpredictable secondary explosions all over the place.

But, for now, as I am cold, shivery, annoyed and generally in a confused and foul mood I am shutting things down.

Update on the last 'positional' post ->


Long USDJPY - instigated at the end of September after the markets had decided to buy yen post-BoJ when perhaps it should have been selling as described here http://polemics-pains.blogspot.co.uk/2016/10/yen-bomb.html. Happy to run this. CLOSED IT. +6.5% is enough, for now, it's getting mainstream.

Long USDTRY- Long since the coup after the initial pull back to 2.96 area. My core beliefs that Turkey is in trouble re regional positioning and FDI flows vs trade deficits is unchanged. Seeing it break up through the post-coup highs to now trade around 3.12 looks like we are finally on the move. That 'CB may not cut' move from 3.10 to 3.06 was indeed just a buying opportunity. http://polemics-pains.blogspot.co.uk/2016/07/turkey-they-think-its-all-over-it.html  CLOSED IT. 

Short BTPs - Short since the ECB in September and going well in the run up to Italian referendum and a general rally in global bond yields. the 50yr BTP auction appears to have been a watershed moment for them. I go along with the general concern that bond markets are the nuclear waste of monetary policy and their toxic legacy is not easily disposed of. RUNNING FOR A LITTLE LONGER, BONDS ARE BUST, BUT LEFT TIGHT TRAILING STOPS NOW.

Long Oil - Its had a good run and is now languishing around the 50 area and I am not so sure about another up leg but I am still biased for higher as no one really seems to believe that OPEC can get its act together. Whilst developed markets demand may be substituted with renewables I can’t forget the exploding global population in the poorer countries who as they emerge from abject poverty are going to be buying a moped, cultivator, generator or old car before they get wired up to a renewables grid. Oil burning is still the first step out of poverty.
RUNNING IT, could hurt and looks rubbish, but oil always does before it turns. 


Now the messy bit - Long GBP via EUR and USD. EURGBP is onside and less of a worry than the cable part which has been whipping around like a cow’s tail in a fly infestation. I am one of those flies trying to hang on to longs but it is hurting. I am spending far too much time watching price action and willing to cut sub 1.2050. 1.2250 has been behaving as a very difficult area to break and some of the short-term price action on any approach had that feel of ‘someone is working a lot to go over time at that level’ feel to it. CLOSED IT. Bored and it's priced for Trump. Will look for dips to rebuy but will depend upon news at the time.

Short FTSE - It’s been correlating well inversely to GBP, which was the original plan to be short it and long GBP, but it’s now underperforming the GBP moves looking weaker on its own. Which can be read a couple of ways. First, its global equity weakness coming through in general not helped by bonds are looking iffy (higher bond yields, higher borrowing costs for highly leveraged debt etc). OR and this is confirmation bias at it’s best in my brain, It's showing that the belief in GBP weakness is fading otherwise everyone would be buying FTSE, No actually, I don’t think I can bend that one to fully fit. CLOSED IT.

Meanwhile in commodities, though I haven’t been talking about them, some buried deep long-term structural positions are heavily weighted towards commodities, mostly through producer stocks. Rio has done well and the rapid rally in coal prices has caught a lot of folks out as coal had been pretty much written off as having any use in the new energy world. But Chinese stockpiling must have breathed new life into the east coast of Australia to the point that the AGDF ( Aussie Goes Down forever) trade may be worth playing against. Copper has been pretty much range bound and though I tried buying bounces 6 notes ago it won’t be on my radar until it breaks properly. Supply side seems to be driving price more than demand. But overall I am happy to run long commodity position sin the deep dark recesses of guy bottom drawer trades. STILL LONG IN THE DEPTHS OF THE PORTFOLIO but after the recent run its become more lottery than pure conviction. I'll close the drawer and ignore it all. 

Trump to win bets. I'm very happy to let them expire worthless, and hope that they do, but still think that prices may well rise during the election themselves which ill give an opportunity to sell DON'T NEED TO TELL YOU WHAT HAPPENED TO THESE.


So that’s it. I'm going to vanish off to wild and windy solitude for a few days to regain my soul. 

Pol 

PS.. As a parting lottery ticket I have shorted dow at 18907 and put a stop at 18985. Pure lottery and I won't take a look until I'm back. 

Sunday, 13 November 2016

It’s all about the branding.


I went to the Hoxton Hotel (Hipster Centerville, London) the other day to interview new creative staff. The whole area has changed dramatically since my first student holiday job there for a spivvy life insurance company that I thought was a proper City job. It wasn’t, it was branded as a city job because it involved money, insurance and was on the edge of the City of London. However, the clients who were sold life insurance were also fooled by the branding and presentation of a product that, though wrapped in original and genuine bullshit spun from tobacco aged insincerity, were, in reality, being sold a handful of cheap ingredients priced at a very high margin.

Which means that Hoxton really hasn’t changed very much. The place is alive with wooden stores lit by retro-filament bulbs selling things at a high margin. Artisan burgers, bread, gin, beer, more gin, coffee, gin, sandwiches, wood things, furniture, clothes, more wood things and bicycles oh, and gin. Though the UK is fast heading towards a gin-based economy, there is a limit to how much gin a population can drink. Hogarth has already shown us where this ends up.



But if I were to join the fad of converting any old space into a gin distillery, I would probably do so in one of the now deserted old trading floors in the City and start producing my own product - MarGin. Such astute branding would lay open all sorts of witty strap lines to woo in the financial punters:-

MarGin call? Yes please, with tonic.
MarGin on the rocks.
MarGinal returns.
If 25% of your property portfolio is MarGin, make sure the other 75% is F’ever t’REITS. (OK, that’s a bit stretched)

Anyway, enough of the next business plan, as I walked back towards Bank from Hoxton, swiftly crossing from the land of wood and filaments to that of glass and LED, I was wondering if the methodology employed for selling bread at five times the normal price could be the saviour of banking, where margins have been crushed and profits fined away. I have written before about how finance, in its way, already relies on hints of artisanal methodology, comparing complex financial products to Himalayan Pink Salt (here) noting that building expensive complexity out of basic products is at the heart of financial engineering.

Yet that is where the artisanal similarities currently appear to stop. Perhaps it would be a perfect time to try to employ more of that feel. Walking into a banking hall full of bearded, skinny jeaned, check-shirted folk selling loans piled up and mispriced from tables hewn from living trees may be a little too optimistic but bringing back banking halls of marble and brass with clerks wearing waistcoats and sleeve garters may be more the thing. With fear of cyber crime being such a reality, especially after the Tesco Bank raid, why not go the whole hog and introduce rows of clerks with hand-written ledgers and get rid of the computers altogether.

This could be the new Barclays Hoxton Branch (rather than being the old Barclays Norwich branch)



If people are willing to spend £49 on a bottle of artisan gin or £6 on an artisan loaf I am pretty sure that they would be happy to pay 50% APR to borrow £100,000 using a handcrafted loan based upon a bond used by the Medici’s in the Renaissance. Never mind the APR, appreciate the timeless quality!

There are plenty of brands that are currently considered so unfashionably difficult to handle they could do with the same treatment. Artisanal estate agents (I am told that in Italy they do exist) or Artisan Call Centres where an old yokel with a rich rural accent tries to get you to claim for whiplash you didn’t suffer from your gin still.

But it’s the darker side of politics I am now going to move on to. The root of this post came from my annoyance at the biases that are inherent within Twitter. Not that the individuals I follow are biased, well they are, everyone is, but the way one ends up following or being followed. I really want to follow people I completely disagree with and probably disagree with me so that I can get a balanced feel of the opinion of the world. But they obviously won’t follow me, unless they are also following my thought process. How do I find them? Most of the people I follow will have been biased for the same reason but  one degree of separation further on. If you don’t believe me, look at your twitter feed and tell me that the views expressed there are a fair representation of the 50/50 split that is the reality of the Trump/Clinton outcome. If they aren't then some natural biasing has occurred. This biasing is, I detect only getting worse, the number of folk I know leaving Twitter because they are fed up with the self-righteous abuse they get for expressing their views is rising. They just can't be bothered and their views will never be heard. Twitter has become a Petri dish of society where different bacterial colonies fight it out trying to colonise as much of the space as possible.

So I have a twitter stream that is mahooosively upset that Trump got in, HOWEVER, they also get very excited about gin, overpriced olives, new restaurants and Borough Market (for non-London readers Borough Market is a place vendors manage to sell smelly food for the cost of small houses). So would it not be an idea for Trump to rebrand himself as an artisan to curry some favour back from this group? In many ways he is already artisan, he is a genuine throwback to the olden days. But in many others, he is not.

The rise of non-centre politics, in general, is an interesting exercise in branding with far left and right already adopting the nationalistic tendencies that prefer to project clean and wholesome living and, dare I say, artisan ideals. Putin’s bare-chested mountain man, the left’s wholesome, rugged jawed steelworker and the right’s check-shirted lumberjacking Arian. In some respect, both extremes are selling the return to old-fashioned glory days. Putin has done it win Russia and Trump is doing it in America. Both are calling for the return to the good old days when their countries were great. The only problem is that time was when both of them were only a gnats crotch away from loosing nuclear armageddon upon the world.

The world may want change, but unfortunately looking backward and trying to recreate the sunny days of our youth is just not possible. Yet the selling of the artisan dream is based on that projection and caters for our deep desire for security. As the world starts to look less secure, the draw of the artisan is heightened yet the only things artisans secure are the wallets of artisans.


Thursday, 10 November 2016

A Narrative narrative.


It’s been a week since I last posted,  a post provocative enough to even inspire the mighty Paul Krugman to comment upon it. As one kind soul suggested to me ‘Sir, that, I assume, is your first cited reference from a Nobel Laureate’. Indeed it was and will probably be my last and, though only featuring in his twitter stream, I will bear it with pride and add to my CV.

My flippant reference to the dire consequences of a panel of economists writing a letter of support being the kiss of death for the supported, was part of a similarity I was drawing between Brexit and the election and this is what Mr. Krugman disagreed with. His argument was that the US election was about personalities, not a rejection of authority. Whatever. Trump won and the parallels are now being drawn more than ever over the rejection of authority. Indeed most notably by those who lost as they can think of no other logic for them losing because, as with the basis of the economists' argument, there is no logical reason for anyone to act otherwise.  So this leads on to the greatest parallels between Brexit and the election - the demonstrations on the street rejecting the democratic outcome and the hand-wringing from the journalists, pollsters and economists who got it wrong. I mention economists in there because though they are totally and utterly useless at politics they were still out there making the calls.

What do economists, journalists, pollsters and fund managers have in common? The answer is ‘herding’. Not wanting to be seen to be out of line with their peer group is common amongst all. Fund managers don’t want to deviate too far from their benchmarks in case they are wrong and economists don’t want to make wild forecasts in case they are so wrong and deemed maverick and unreliable. Pollsters? I just haven’t a clue how they can be so wrong, but Rory Sutherland made an interesting observation I hadn’t thought of involving telephone polls - "Having caller ID (like carrying stamps in your wallet) correlates with conservatism". And if you have caller ID you are less likely to pick up the phone to an unrecognised polling company. However, amidst the grief thrown at the pollsters, I doff my cap to Nate Silver at FiveThirtyEight for steadfastly refusing to be browbeaten by everyone attacking him for his Trump leaning predictions. And then finally there are the liberal journalists who are paid by organisations with causes to back and also, as the career of a journalist is secured as much by peer-review as readership numbers, want to appear as one of the in-crowd.

Peer-review encourages herding. Whilst peer-review may be a worthy ideal, after a few generations of it, you have the equivalent of six-toed inbreds running the show as their self-selection weeds out new genetic material and we end up where we are. Elites, cabals, clubs, packs, societies, clans -  all happily reinforcing their own beliefs by only talking amongst themselves and not to the rest of the world. Indeed, as in many clans, conversing with others is to be discouraged as it may threaten the core beliefs. Here we can widen the example to include any religion.

So, in summary, it would appear that once again those who thought they knew better didn't. Too many smart people believed that stupid people wouldn't be stupid. Which was stupid. A basic distribution curve should tell you that if you think you are smarter than average then the volume below you will be greater. Insular thinking is not representational. You may be smart but if you don't understand those around you then you are going to be screwed by democracy. Of course, if you don't then want democracy you are welcome to open up that can of dictatorial worms.

So where do we go from here? As @StockCats tweeted "The sad thing is that the media is going to to ask the same people that got everything completely wrong what they think happens now”

This is probably just as apt in financial markets. At 4.55am London time on Wednesday morning things changed. The Dow futures were down around 700 or 800 points and then started to climb up 1200 points.

In that time we have swung from set of beliefs A

- It’s antiglobalisation - sell stuff
- It’s globally destabilising - sell stuff
- He’s barking mad - sell stuff
- US is screwed - sell the dollar
- He’s racist, sexist, deceitful, abusive uncontrollable and unpredictable - sell stuff
- The wall, Mexico - Sell Peso!
- It’s the end of the world as we know it - sell everything, but buy Yen, CHF and gold

To - (as the rest of the day saw prices scream higher) set of beliefs B

- Infrastructure spending - buy construction.
- It’s inflationary - sell bonds
- He’s going to have to borrow - sell bonds.
- He’ll go after the tech crowd who opposed him - Sell tech stocks.
- It’s deregulation for corporates, - Buy mainstream stocks ( dow)
- It’s eco-dirty, - Buy dirty stocks
- it’s anti-price control, - Buy pharma
- he’s going to bin Yellen so rates more likely to go up - Buy USD
- Europe is going to be hoisted upon its own protective petard - Sell Euros
- Other trade tariffs - Buy Manufacturing USA
- He likes the UK - Buy GBP
- Mexico , actually, nah, that won’t be great - keep selling Peso.

 In the space of 36 hours the markets have swung from “Trump will destroy stock markets” to “Trump will be great for stock markets”. Yet nothing has changed apart from narrative and there is no better growth hormone for narrative than price. Prices have rallied so the narrative is proven.

If you want a visual representation of financial market participants you can't do much better than this




So I am left here looking at the trading psychology of it all. The move from A to B has been dramatic and though I am not saying that I disagree with the belief B (I don’t, hence fading the sell off) I do think that it has become too easy. We are 36 hours into the selection of the President elect and the financial world believes the script is written and there to follow. The Trump story has trumped all other concerns, faded are the headlines for GBP which is now trading at 1.2550 and 0.8680, Brexit has been out Brexited ten-fold by Trump. All the other gnat bites in the market have had their itches eclipsed by the comparative pain of having your leg eaten by a lion. Even Deutsche bank shares have managed to sneak off under the cover of Trump to rally over 14 Euros and copper looks as if it is really breaking out to the upside. The only asset that hasn’t moved, having been frozen in the headlights, is oil.

I am therefore awaiting the markets to realise that we are only reading the preface of the narrative at the moment and whilst we may think the work is factual, there is nothing to say that we haven’t embarked upon a work of fiction where guessing whether there will be a happy ending is far too premature.

This isn’t a Disney story, it’s Game of Thrones.