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. 
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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.

Wednesday, 2 November 2016

The Economists' Letter Indicator.

As Phil Collins sang a long time ago, "There's something in the air tonight"

I think I‘ve scared myself today. I have long thought that my bets for Trump to win were plays on probability where I was looking to get out of the trade on the approach to the result as things turn out to be closer than first thought. But today, for the first terrifying time, I am thinking that he will actually win. Now I know I am not an electoral college expert, nor a five38 stats-genius, but the way Clinton has handled herself since the FBI decided to open her files has been less than stateswoman like.

This may not seem like much to base my prediction on but for me to be particularly unimpressed, to the point of thinking I want neither of them to win, I should imagine that the Republicans who have switched to Clinton may well flip back for the same ‘they are as bad as each other’ reasons. Basically, those who have decided to vote Trump despite all his extreme err.. extremity, are not going to be swayed to leave by much else. On the other hand, those who are behind Clinton seeing her as a trustworthy pair of hands will be more inclined to switch their way. Voting Trump may appear insane to the intelligentsia but the base of the intellectual pyramid is a lot wider than the top. And, as I have said before, a lot of clever people are relying on a lot of stupid people not being stupid, which is stupid.

When Trump says or does something stupid the noise volume of objection and horror is deafening, which gives the impression that the majority have shifted. But the noise tends to come from those who have decided not to vote for him anyway and are doing their best to detract. The shock and horror noise does not give that clear an indication as to how voting intentions have actually changed. I know that the similarities to Brexit are being debated with respect to poll underestimation, narrative following and herding, to the point that it is fashionable to dismiss it, but I do believe there are huge similarities. If asked which way you are going to vote there is a bias to appear caring, and hence a bias to the Democrats, creating an artificial swing in polls. It’s different in the booth.

But probably the most frightening similarity and, indeed, most important indicator is 'the letter'. It appears to be de rigueur for all polls now to be accompanied by a blessing for one side or the other from, rather than a religious body, a conclave of economists. The latest proclamation is finally here

Prominent Economists, Including Eight Nobel Laureates: ‘Do Not Vote for Donald Trump’
Some 370 economists sign a letter slamming Trump for promoting 'magical thinking and conspiracy theories'

Well that’s it then. Trump is going to win.

As we learned from Brexit (here), a letter of warning to voters from the cardinals of economics is the best possible news EVER for whoever or whatever they are warning against.  It's the black smoke to to those they support and the white smoke, champagne and party hats for those they decry. I am sorry economists, you may well be absolutely right in the long run, but the population gets too big a kick toking on the weed of Trump to care about warnings from Dr. Economics that it's bad for them. It's why people buy overpriced diet products, pay £750 for an i-Thing, buy popcorn in cinemas or small bottles of water for £1.50. It makes no economic sense at all, but they do it. And this is what happened with Brexit.

Even if economists are to be listened to, does that mean they will be followed? If we stripped down the election to, say, a call on whether you want the stock market to stay the same or dump 20% the outcome is very dependent upon if you own stock or not and what your opinion is of people who do own stock. I would imagine that the non-stock owning poor may well outweigh the stock holding rich  and vote for a dump just for some schadenfreude equality leveling. Twitter seems to agree.




And are economists really the right people to use? When did an economics Nobel Laureate ever cut the mustard with your average Trump voter? Now, get a letter together from a bunch of Nascar champions and you might be on to something, but an economist's letter is doomed to failure.

So I am left more concerned than ever that a Brexit-like cold realisation that the unthinkable is thinkable is about to cause a schism in the markets. That WTF moment. We had glimpses of it today and some key Trump-o-meters were on the move. Odds in the bookies for a Trump win have moved up from 15% to around 25%, which isn’t much really, but it's the rest of the financial markets where I am looking for the trade. USDMXN has been pretty much at ground zero and started to move last Friday, but as the collapse widens other assets should start to get sucked down the sinkhole. US equities, oil, USDJPY, the usual safe haven trade of USD trades are on the move.

This leaves me with four choices

1- I run after and jump on the trade train that has already pulled out of the station hoping it doesn’t reverse back in,
2- I wait, hopefully, for the train to reverse back in before jumping on.
3- I realise the train has pulled out so instead leave some ridiculously low bids in some stalwart stocks much further down the line waiting for the algorithmic trade programs to wet their pants, cause a massive selloff and then look for the dust to settle and everything to recover in the medium term.
4 - I look for an asset that is tethered to the train by a coiled rope that will soon snap taught catapulting said asset after the leaving train.

Options 3 and 4 are the most tempting and can be used in tandem.

But What? The VIX really doesn't look that expensive and I'd prefer to buy puts than buy VIX as VIX will probably settle down after the event though the underlying price is a lot lower (see GBPUSD volatility post-Brexit). I am also looking at Bonds. The bĂȘte noire of this season’s asset show. No one really likes bonds at the moment, but give the equity market a big enough shove and there is going to be some interesting safe haven seeking going on. USTs are already on the move but where I am most interested is in Gilts. everyone and their dog knows that inflation’s coming to the UK, global yields are going up, and of course that GBP is a basket case. So on that basis, they are probably the best buy out there if we get a Trump dump.

Monday, 31 October 2016

Is it the machine or the input?

THE US election would be pure comedy genius if it didn’t involve handing the winner the keys to a huge global arsenal of nuclear weapons. To be honest, I glazed over listening to the intricacies of who did what in the Clinton camp as the detail transcends the boundary of concern. Just as the detail of which artery a sadistic murderer cut first is beyond my concern, as I have already decided I wouldn’t be inviting them round for dinner.

The whole idea that democracy results in choosing between Trump and Clinton should really mean examining the process of how we got here. Potentially knocking down the old structure and starting afresh. US democracy is as fit for purpose as a large banks' IT platforms. At least the banks have realised the need to evolve.

In the depths of history when I was a junior trainee probationary assistant dealer (that role would have been titled ‘director’ at a US bank) we had to plug data into a computer each day to work out the associated costs of lending and these were added to client borrowing rates. Because this was a menial task it was given to the lowest ranking staff, whose turnover was pretty quick. Now, the computer itself was impressive, it had a nice green screen and stood alone in a different room. Its awe-inspiringness meant that its output was never questioned. Which meant that the whole system was never challenged. This was a problem because, though the output was valid, the input was not.

As each new junior inputer was shown the ropes, the instructions passed down from their predecessor changed slightly, Only slightly, but an important sightly. The original instructions were to find the values of the input variables and input them. However, at some point the instruction had been passed down that you just input these numbers. From then on variance in the input numbers ceased and hence the output became fixed too. For months the same numbers were input as that was what the juniors had been told to input and what they told their successors to input. So out came the same answer. When it did finally come to light months later, via an accountant in a distant part of the bank, the bank had lost a fair chunk of change.

But the point of the story is that this was a case of thinking the system is infallible but completely missing the human input error. The shininess and the complexity of the machine had everyone believing that the system was pretty foolproof. Which is exactly what we have with the US elections. Though the machine may be huge, complex and exceedingly expensive, someone needs to stand up and question how the output can be so at variance from what should logically be expected. Now, either the machine is broken, or the operators have been feeding in the same garbage for so many years they have forgotten the purpose of the process.

The US has many very clever people living there and I wonder how it can be that they don’t stop the process or put themselves forward as inputs. But I think I know the answer. For the same reason that a real expert doesn’t bother appearing on the BBC News, instead leaving the BBC to interview other journalists or Diane Abbott. There is no upside.

But we are where we are and our only hope is that whoever ends up with the nuke codes doesn't either use them to open up new coal seams in Pennsylvania or use them as passwords to their private online email account, the @imtotallyemailsecure.ru one (sorry I thought it meant "I’m totally email secure, are you”?). It’s still going to be a close call on the night and I will probably buy some USD/MXN as that is the FX Trump-o-meter.

Meanwhile, in the UK someone has decided that Carney must go because his forecasts on the immediate outcome to Brexit have been off vs 'the now'. Oh come on now! If we were to fire or lock up every economist or strategist who had made a booboo with their call, the LSE might as well be teaching gun crime. I haven’t been a fan of Carney’s but attacking him now, before things do get rougher with Brexit, is nuts. Mind you, if he does go could we replace him with Guy Debelle please? Similarly from a commonwealth country (Deputy Governor of the RBA) but brilliant. Probably brilliant enough to run a mile if offered the post.

That’s it for now. Trade ideas? Nah, no upside.

Friday, 28 October 2016

Positional retrospective

It’s been a tense few weeks in Polemic Towers with market positions being whipped all over the place and it has taken a strong nerve to weather through but today it finally looks as though my positions are paying off so it's worth having a look at them again.

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.

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

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.

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 it’s 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.

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.

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.

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.

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

What next?  The only thing tempting me is Short Vegemite vs long Marmite. The spread spread. It encapsulates stupid UK politicians, Long Aud, Short GBP and a long Unilever vs Tesco. And I prefer marmite.

So that’s it. Watching and waiting and wondering.

Tuesday, 25 October 2016

EU Trade Singularity.


The financial markets are preparing themselves for the US election. I know this not because of direct feedback from fund managers, but because I have had calls from various trading entities advising me that margins on my trades are about to go up through the roof over the period of the US election. Which makes a change from blaming Brexit for the price of everything else going up through the roof.

Inflation is coming to the UK. But it’s only Japanese inflation. The type that comes with FX moves rather than wage cost increases and as such is transitory but nonetheless unpleasant. I have already been out and bought everything I could possibly need for the rest of my life and stashed it away in a big barn. Of course I haven’t, but hoovering up car parts for the fleet of old German badged cars on my drive may not be so silly. I may even be able to renegotiate another 5 years of storage space in the garage from my wife for the BMW 328i auto gearbox I have had in her way there for the past 5 years. As I used to say "Well, you just don’t know, dear, when there will be a shock referendum resulting in the UK leaving the EU thus driving up used German car spares by upwards of 20%”. That showed her.

But global inflation is a different beast and though there are signs that it is on the turn it does need to be global and for it to be anything other than just FX driven. It needs to be linked to global wages. China is already pushing prices higher but I am still confident that the world has enough cheap labour to see substitution production occur before the big one kicks in. Unless, of course, we go 'protectionist', which is so de rigueur these days.

If there was a Nobel Prize for ‘Greatest contribution to protectionism’ it would currently have to go to a small region of Belgium that has somehow managed to upset the whole of the Canadian / EU trade deal. I was scratching my head over this until, whilst watching my new favourite Netflix series “A Very Secret Service ”, I realised that it was, of course, because the EU don’t actually want a trade deal at all. It is such a French thing to do. Set up such a complex set of rules that you know there will always be one small one standing in the way of any change. If you want the change to occur you ignore the small thing stopping it and if you don’t want it to happen you blame the small thing stopping it. Finally, if you change your mind, you pillory the small thing that was stopping it and laud oneself for such direct positive action. Sound familiar to the management actions over the LIBOR and FX fix cases?

So either the EU had no intention of getting a trade deal done, which just shows where the protectionism really lies in the world (lets add German blocks on Chinese M+A), or this is a prelude to annexing Wallonia properly into France as ‘punishment’ for preventing the Canadians from speaking French in a more French way, or whatever was in the deal. I do wonder if the UK were staying in the EU, Cornwall could have pulled the same stunt citing lobster competition. I doubt it somehow.

At this rate trade in Europe is going to be solely limited to within Europe and the place is going to vanish into its own trade singularity crushed under the gravitational pull of its own regulation to the point that any negotiation falling beyond the EU event horizon will never be seen again. But the EU singularity is not completely black. Hawking radiation will occur at the event horizon, otherwise called Brexit radiation. Here paired virtual particles pop into existence with the pro-EU one falling into the singularity and the anti-EU particle being radiated out into space before it can be captured. As Canada has found out, approach too close and the huge gravitational tidal forces can rip any deal apart long before it actually becomes absorbed into the EU singularity.

The fate of these singularities is complex. Some theories suggest that they last forever getting larger and larger, whilst some say that they just fizzle away as they continue to radiate away mass through Brexit radiation. Yet a recent theory suggests that they can, due to quantum gravity, explode into white holes, which are the exact opposite of black holes and spew all the mass they have trapped back into the universe. Well, that would be an interesting outcome for the EU if it flipped into a deregulated, open, free trade organisation based on independent countries bonded by common ideals. Wow, Supernova!


Thursday, 20 October 2016

The Brexit Quiz



With the markets basically doing everything they can to look as though they are going somewhere when in fact they aren’t, it may be time to fill the gaps with a Brexit quiz.

Brexit is -

A toasted cheese and gherkin sandwich.
A game very similar to Jenga where you pull out the bricks until the structure falls down.
The nickname of that weirdo in the pub.
A Russian conglomerate
A numbers puzzle on the back page of the newspaper.
An adolescent nickname for a part of the male body

Hard Brexit is

A Brexit you forgot to wrap in clingfilm and left out all night.
A Brexit game where all the pieces are spherical.
The guy in the pub with all the tattoos on his face
The arms arm of a Russian conglomerate
A Brexit you do on the train to impress your fellow passengers
Takes over all rational thought at the time but in the cold light of day is awfully embarrassing.

Soft Brexit is

A Brexit in a bap.
A Brexit game for 2 year olds made of foam.
The guy with the tattoos once he gets a puppy.
The hacking arm of a Russian conglomerate
A Brexit printed on lavatory paper for small room amusement.
Completely normal though you may end up paying your neighbour for a hand to make it work.

Article 50 is

A heaving overpriced bar in the City.
A micro art gallery down the road at number 50
A Kings Road clothing store.
A scrap of clothing in an evidence bag in a murder trial.
A rumoured part of an extraterrestrial housed in a warehouse in a desert.
A Turner prize entry resembling a turd.

EEA is

A country code on the back of cars from somewhere in eastern Europe
A Greek beer
Environmental [something] Agency, whose signs stop you swimming in rivers.
An Australian flightless bird.
What a Canadian replies when asked which phone service they used in the UK.
A US college fraternity house.

Sterling is

A fraction of an old Pound.
An engine driven by temperature differentials.
A rather dapper old racing driver.
The work that our mighty British politicians are doing to make Britain great again
What a local from Birmingham calls a migratory flocking bird.

Single Market is

The old place in town that smells of cows.
Speed dating.
A vinyl record store.
Elon Musk’s ambition with him the only one in it.
The financial equivalent of a black hole.

Eurozone is

A nightclub on Playa De'n Bossa
A boy rap band prounounced "Euros-One"
A remake of the Twilight Zone
A no loitering drop-off area outside St Pancras and Gare du Nord stations
10 cubic megaparsecs of space under the control of Lord Zarg the Destroyer.


Free movement of people is

A Bob Marley song
A marketing strap line from a colonic irrigation provider.
Borderless printing.
St Vitus Dance (ergot poisoning).
A Ryan Air promotion but issuing you the boarding pass will still cost you £1000.

The words "Brexit means..” are always followed by

Brexit
Beanz
What ever you have always wanted but felt too stupid to ask.
An interminable argument based on something unprovable.

How much will Brexit cost/save the UK economy

8
2000
7 googolplex
i
A much as it takes to persuade you to change your mind.

If an economist is asked about a political outcome of `Brexit' they will say

What they want to happen.
What they don’t want to happen but they’ve warned you and it’s going to be a disaster.
It shouldn’t be up to politicians, let alone voters.
They will wait for the data.



Wednesday, 12 October 2016

Soft Brexit. It's not that hard.


I spent a lovely evening in the company of those who participate in financial twitter. Lovely bunch, A smattering of buy and sell side and a cadre of journalists. But they nearly all had something in common. Mention that you thought Brexit would turn out Ok and you were mostly greeted by stunned gasps.  Laying out a route where it could be OK which involved a soft Brexit along the lines of an adaptive EEA was seen as heresy.

Yet this shock was coming from folk who were 'Remainers'. Surely if they were so in favour of remaining they would support the idea of a soft EEA style exit as preferable to the diamond-hard Brexit that the market is expecting (or rather was, I'll come to that later) rather than arguing vehemently that it wasn't going to happen and instead, all their greatest fears were going to become reality. This was a behavioural clue. These Remainers wanted to remain so badly that getting most of what they wanted through an EEA was just too terrible to think about and they'd rather see Armageddon than see things turn out OK against their protestations otherwise.

So, the basic notion that was being proposed to them went something like this -

 May and Rudd completely messed up the presentation of Brexit plans last week, to the shock and horror of all those in Washington on the IMF circuit, but what they said did not mean that heading down an EEA route was out of the question. Whilst the media got excited about the statement about immigrants only being allowed in if they had a job to come to, this is in effect exactly what Norway has in place at the moment. There is a difference between limiting the flow of needed workers and limiting the flow of all people. In fact, if we look at the Lichtenstein model, which the EU agreed to, Lichtenstein can take up to 90 immigrants a year. Now if you pro rata that up to the UK levels it's about 150k. This is over May's target but eminently fudgeable. Heading down an EEA  route removes the UK from under the jurisdiction of the European Court of Justice and instead parks it under EFTA, which interprets European Law for the non-EU members. So that's the open borders and ECJ issues handled.

More importantly, it is pretty obvious, as the Remain argument has pointed out, that the process of leaving the EU is gong to be long and tortuous and needs a transitional agreement whilst everything gets sorted out. The soft option could easily be accepted by all parties under a transitionary agreement. Why would a soft EEA style, or 'EEA lite', route be accepted by the EU? Supply chains.

Supply chains are so intertwined these days that disruption causes 'butterfly' effects around the world. The 2011 Japanese Earthquake was a case in point. The microchip maker Renesas was knocked out and suddenly the main ingredient to automobile engine management systems was unavailable. Car manufacturing around the globe staggered. Even when you did get a car they were only available in certain dull colours as the paint factories were also out of commission. A hard Brexit will not take out physical supply and the effects of price, with respect to tariffs, can also be adjusted for, but the legal complications are going to take much longer to adjust for. Even if top level Euro politicians may be sounding flat-out against any compromise, those around them know that upsetting the global supply chain is worth avoiding if at all possible.

A handy EEA style package sold as a 'transition' would be sellable within Europe as the UK are seen to be under some EU directive but without the benefits, in other words worse off in EU eyes,  whilst it would be sellable within the UK as the immigration issues will have been addressed (remember we would move to freedom of labour within quotas rather than unlimited freedom of movement of 'people' ) and the UK would be out from under the ECJ.

Now the cunning part would be if someone forgot to add a sunset clause, or expiry date, on the transitional agreement. If the transitionary period went well and everything stabilised it could easily be seen as the new norm and any thoughts towards changing it quietly dropped.

So that was  the basis of this evening's debate.

As mentioned in yesterday's post the world is currently discounting diamond hard Brexit, with the US doing what they do best and missing the nuance. The noise from the States has so many similarities to those expressed during the Eurocrisis. It was black and white, though mostly black. We can also note how the US time zone has seen the biggest legs down in GBP over the last couple of days.  So any hint that the ideas discused this evening may be a possibility should see the pound rise fast. If May's speech caused a 4% drop in pound then that could easily be reversed on glimmers of hope for a soft exit, even if it was wrapped in barbed wire at the Tory Party conference. May and Rudd may have thought that they were just rallying the troops at a non-election year conference but they seemed to forget that the whole world was watching. Yet listen to what they said and none of it is inconsistent with current Swiss of Norwegian conditions.

So, having had this debate in the pub, I get on the train home and see this.

#Newsnight has learned UK govt may be prepared to continue paying billions to Europe to retain access to markets and other rights

Boom. What fantastic timing considering what we had been suggesting in the pub and up goes GBP/USD by 150 points. But considering where we have come from this really isn't much (so far). For me, this is a game changer. Yet the newsfeeds and Twittersphere haven't gone wild over it (yet). Probably because, as I found out at the beginning of my evening, the narrative is for Brexit disaster and the idea of a soft exit doesn't fit with that narrative. Well, guess what? The narrative just changed.





Positons -
Long GBP/USD (added)
Short EUR/GBP
Long USD/TRY
Long USD/JPY
Long Oil
Short BTPs
And now short FTSE futures. GBP has rallied and FTSE has hardly budged. FTSE is up on weak GBP and a reversal will see it play catch up with the rest.

Tuesday, 11 October 2016

Oh me of little faith.

Whilst the bickering in US politics continues, I wish to avoid comment and instead go back to the once mighty pound, though I do note that the Trump hedge has just become cheaper.

I will put my hands up to being flabbergasted by the Tory party statements last week. The ones that flabbergasted the rest of the world with their implications of returning to the UK being run along the lines of old golf clubs. May and Rudd’s speeches catapulted international expectation of the UK’s Brexit outcome to one of isolationist arrogance.

Now, one of two things can happen. Well actually one of many things can happen but let’s stick to two. The UK government can learn from the global reaction and bend to a more conciliatory line or they can carry on the path to the 1950s, complete with the dream of a new UK car industry producing 1950’s quality cars (I'll have an Austin Healey please), coal mines, Blackpool holidays and, why not, even bring back Pounds, Shillings and Pence.

I am praying that the feedback of international reaction, via the diplomatic service, bends policy and some of the more draconian members of Cabinet are let go. Liam Fox may be a great chap to go for a beer with, but his understanding of diplomatic nuance is somewhat truncated and from what I gather the civil service has, allegedly, already written him out of process. But when I talk about international reaction I am looking mostly at the US. The EU have made it blatantly apparent that they are playing hardball and the tone of any pre-official dialogue is as intransigent as that expressed by the likes of M Hollande. My concern after last week’s speeches was the shocked reception it met with in Washington. May and Rudd need to adapt.

One of the benefits to the UK is that it makes our exports more competitive. But one has to take care as I am wondering if a large part of the export boost we are seeing is the rest of the World effectively clearing out our inventory. Inventory that has seen its input prices priced at £/$ 1.50 but output sold at £/$ 1.25. there is going to be a sweet spot to buy up everything that has an external price function in it before the FX moves feed through to repricing. So, as UK consumers should be buying up German car parts, Bosch dishwashers, Miele vacuums and Stihl hedge trimmers before they all go up in price, so should overseas companies be clearing out all of our manufactured goods that are currently sitting in inventory. The problem comes when the FX moves feed through and the prices go up. At that point there is a strong chance that the export boom we are currently seeing subsides.

The effect is fastest with goods heavily dependent upon materials and lagged in anything that is labour intensive as wage pressures are normally last in the inflationary line. So services will benefit longer than manufacturing. Creatives in Hoxton, Ad execs in Soho, accountants at London Bridge and lawyers in Holborn are going to be competitive longer than a JCB digger that is reliant on importing 65% of its parts.

With most banks now calling for cable to 1.10 (It was 1.20 until they were forced to extend the pencil line as time over took them) I wonder what it will take to get anyone to buy pounds back. Traditional measures have it undervalued  but markets are forward looking and the departure from the EU is not appearing in  current traditional measures though it is being discounted in the price. My own long term belief is that GBP/USD trades at 1.6000 which is probably a classic example of price anchoring as that is what it has averaged since I started out in the City a very long time ago. 1.60 has been to cable what 1.10 currently is to EUR/USD.

I am certainly not calling for cable to hit 1.60 by year end, especially with the USD so strong on the belief of clever people that stupid people will no longer vote for Trump (dangerous thought process), but with ‘this time it is different’ echoing around and the pendulum of UK government expectation swung solidly to ‘hard brexit’ I feel there is finally room for any change in news to be less negative for GBP. Add to that the massive positioning of shorts in GBP futures markets and I have started to buy it again after any brief losing venture in cable from 1.28 to 1.25. I also note that Gilts actually went up today, but then so did most global bonds.

On to other things - Oil is still going up, this time apparently thanks to Putin suggesting he is willing to participate in slowing production, though my oil friends tell me that due to technical things involving ice in the oil up there it isn’t an easy process. But my worry with Putin goes further than that and I'm very surprised that there is so little concern expressed in the markets at the continued deterioration of relationships between Russia and the West. Why is this? Because the current market participants are too young to remember the abject fear we ll lived during the cold war? Or just that the only real trade to hedge for complete West / Russia war is nuclear bunkers, iodine, guns and gold and to mention that in a serious investment forum would see you despatched pronto.

Is there an ETF that markets itself as a war hedge? Would be quite a thing to develop as you could be pretty sure that if the worst came to the worst your claimants would probably not make it to knocking on your door. Perhaps it could have a trade code ZH1


My Positions.

Long USDJPY
Long GBPUSD (again)
Short EURGBP (fresh)
Long USDTRY
Short BTPs (forever)
Long Oil. (though now seeing potential for a pullback)

Signing off - 'Long Pound Pol'

Friday, 7 October 2016

GBP goes EURCHF. What's going on.

Ok, so I was wrong. Cable was not a good buy two days ago and just to prove me REALLY wrong the marvelous Antipodean time zone decided to ram GBP in a way that hasn’t been seen since the SNB spoofed EURCHF.

It’s the small hours of London Friday morning for me  and the reasons for GBP's freediving world record attempt haven’t yet been formulated. Now I'm afraid that if you started reading this expecting me to tell you what is going on in GBP, then sorry, I don't know. But having worked in FX for a good chunk of my life I can have a good guess at what is now going on in the banks.

First, every salesperson is struggling to call all their clients who had 'call levels’ at zones never expected to be hit, whilst trying to fill orders in systems at levels that they think they can get away with. Oh, hang on, no they can’t do that anymore as they need audit trails. So, they will all be huddled around spot desks arguing over whose order was hit at what. Said spot dealers will be shouting a lot and staring at an automated blotter that is slowly dripping in a queue of trades that their antiquated order and back office system in some far off distant place on the planet is trying to process. Basically, there will be a lot of ‘WHAT THE FUCK IS MY POSITION.. ARRRGH ‘ going on.

Meanwhile, clients will be calling in demanding to know why their stops were done 7% below current market and why no one called them. Because if they had been called they would have bought it back at 8% below current markets because they are all retrospective geniuses.

Managers will be trying to recite the rules of engagement for filling stops but can’t find them so call compliance. However, compliance is asleep because they are mostly based in Head Office and that isn’t in the Antipodes, apart from the Antipodean banks whose compliance officers will be teaching some course to the catering staff on how not to deal with Yemeni banks.

By now the dealing systems will be catching up with what's going on and the spot traders now fit into two categories:-

Group 1 who look at their position screens and see a vast profit who split into groups 'A' and ‘B'. 'A' stays very quiet knowing that sales will want some of the profit if they see how much it is and ‘B' who stand up and declare themselves as trading Gods.

Meanwhile Group 2, on seeing vast losses, immediately write emails to every manager under the sun blaming their staggering losses on system latency and the ridiculous guaranteed stop levels that sales made them undertake. If they are lucky management will swerve the losses into a contingency book, but if they are unlucky and the bank was thinking of replacing them with a 'Raspberry Pi’ algorithm, they will be out of the door by close of Friday.

But back to sales. Those that are still on the phone are quoting the reason for the fall on anything that they feel everyone else is saying because no one has a real clue. They will probably repeat what JPMChase or Goldman say as they reckon that the guys there are cleverer than them and more likely to know. So, clients will currently be being told that it is due to- "Barriers being hit at 1.25, 1.20 , and 1.15" and if they can't even manage that will say "Stop losses”, which is a great generalised term that demands no justification. But some foolish folk will have done a Bloomberg News search for GBP and decided that it is due to the news that fracking had been allowed in North West England. Which is of course rubbish, because we all know that it happened because Diane Abbott was made the shadow Home Secretary.

By now very senior management will have come down to the dealing room. Bearing in mind this is out of London time zone, the senior managers involved will have absolutely no idea whatsoever about Sterling so will ask questions to frantic spot and sales folks along the lines of "Has Brexit been announced?" or "is this is a big move?" The frustrated dealing staff will have to tread a thin line with them, alternating between wanting to tell them to piss off and ingratiating themselves with them as, with the size of the losses they can see, they may well be up before them the following morning.

Meanwhile sales are noted to be only saying, into phones and Bloomberg chats, “But seriously, that’s where it was” and starting to swear at overseas sales coverage who are trying to goad them into either filling their clients better or having any profits accruing through their clients stops reallocated back to them rather than staying in the center that ripped them off did the execution.

The options trading desk will have appeared to have turned Greek as that is all they are speaking, shouting things like .. "Watch your gamma", "check your theta”," where did I trade that delta" and "Oh shit, they said you made money shorting vol. “

For the sales guys with no clients with GBP orders, they will be feeling rather smug and trying to sound intelligent by quoting correlations as to what this should do for other pairs. Such as “Well with the cross correlations we should see a pick up in MXN/CNH vol and our model says that the 3m/1yr calendar spread is the way to play it”, only to find that if they try to get a price from their options desk they are told to "fuck off, haven’t you seen what's going on in GBP?".

So, it will all be fun and games. Do I care? Not a bit. Because I am sitting at home, it’s the wee hours of the morning and I am about to go to bed chuckling mischievously to myself, knowing that London FX sales folk are going to have one hell of a miserable start to the day explaining to their clients why they have just lost 7% of their company's hedge book.

Oh and let's not forget all those corporate treasurers dusting off the wording for their 'due to FX volatility, losses were greater than forecast' statements to add to this year's accounts.



------
Addendum - 15.30 BST.

Oh look,  fancy that "You are filled, yes sir, well someone had to be the low and it just happened to be you"-

So if he lost £15m over a 0.1100 GBP/USD move, face value of the FX trade must have been just over £160m. Not that huge and no where near the £1.6b I first eyeballed. I never was any good at FX.

Tuesday, 4 October 2016

Noise signal in the Pound.

Oh look, the Pound is at levels not seen since the last time and the FTSE is at a number. So say all my twitter feeds over and over again. No comment on where it goes next, just where it is now. Which is as useful as a bag of sick.

One of the most important trading indicators of the last 3 years, in this effectively mean reversionist market, has been journo-noise. Toys out of prams, headlines, panic screaming and pointing at numbers with no reference to what may happen next, other than pulling out a ruler and pencil and implying that something terrible will occur (have you ever heard them do the reverse and imply something wonderful will happen in the future?). I am convinced that journo-noise trumps fast moves, rulers and pencils as a signal and I am convinced that this morning’s cacophony of Sterlingness is a signal.

The price of GBP has fallen and it is assumed that it is related to Brexit. Though the chance that it is related to Brexit is pretty high, it's worth pointing out that no one actually knows for sure. Correlation, causality and all that. The reason GBP is lower is that the natural equilibrium between buyers and sellers has moved. Or in 'spot shag' talk, someone sold it and no one bought it. Now, unless you wish to ask every seller of GBP in the market why they sold GBP you will never know for sure why GBP has fallen. I know this sounds pedantic but though the probability is hugely skewed towards it being Brexit, it is important to know that it isn’t a 100% certainty on which to base secondary assumptions, which is what our brains tend to do with anything over 50%.

Anyone who as worked in the FX markets will know that momentum is a major factor for model trading accounts and they will follow trends no matter what the cause. Technicians will trade no matter what the background and VaR models respect no macro. But we all like to think we know why things happen.

But, pedantry out of the way, if we  take it that the move is Brexit linked, does it tell us anything about tomorrow? The news was out on Sunday. The news was that Article 50 will be triggered. No surprise other than to those still at the ‘Denial' part of the Kubler-Ross curve of grieving. So no, it doesn't really.

Next is the assumption that a weak GBP is terrible, terrible news. Most G7 nations would give their eye-teeth for a currency devaluation. One of the main reasons for the economic stresses in Europe is that Germany is benefiting from an artificially low exchange rate. A weak pound can benefit the UK in the same way. We should also note that attention is always applied to the most spectacular GBP cross. GBP/USD may be at impressively long time lows, but EUR/GBP was toying with parity much more recently. USD strength over the last couple of days is exaggerating cable moves.

Here I may be opening myself up for abuse but I feel that May and Hammond are actually very smart people, especially compared to the last incumbents, and despite the sound-bite sniping that is aimed at them, will handle things in a sensible manner. The fact that they are not telling us their every move is to be expected. I am sure that there are multi-layers of diplomacy at work and, as one of the most important issues for all sides is ‘face saving’, staying quiet and avoiding a 'them and us' media sponsored battle is to be expected. Of course, everyone wants to know what will happen, but as with Christmas, we will probably have to wait for Christmas.

Last suggestion, which I’ve made before - Any comment on where a price is should be accompanied by a view as to why it matters.


Positions -
I am adding Long GBP/USD through today. It could be called an emotional trade but GBP is an emotional trade.
Long USD/JPY from friday, so call that long GBP/JPY
Long USD/TRY still.
Long Oil still.
Short BTP’s still post Draghi
Long Trump to win. Wild prices but back at 25% it still looks cheap as a hedge.