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

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

7 googolplex
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)
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 GBPUSD (again)
Short EURGBP (fresh)
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.

Monday, 3 October 2016

Yen Bomb

To parody Tom Jones -  "Yen bomb. Yen bomb. You're my yen bomb.  Everyone is long it just as it all goes wrong".

My friend Ryan Shea wrote a very good piece on the importance of the BoJ's actions soon after they were announced, but work commitments have prevented me from commenting upon them until now. His post is here https://amareos.com/blog/the-fix-is-in/ and should be read in its entirety but I’m going to pick out the nuggets that interested me most and thank him for permission to do so.

His first point is that the BoJ is about to lose all control of its balance sheet-

The reality is that once a central bank adopts a long-term interest rate target its balance sheet shifts from being exogenously determined (ie under the control of the central bank) to endogenously determined. This is because even an institution as powerful and far-reaching as a central bank cannot set both the price and quantity of an asset (Japanese government bonds in this case). If its commitment to targeting the 10-year JGB yield is to be maintained, it must necessarily lose control of its balance sheet[3] as it has no way of determining what excess market demand or supply of JGBs there will be at the target rate as this depends upon the preferences of the private sector over which it has no direct control (influence perhaps, but not direct control)[4],[5].
The amount of JGBs the BoJ finds itself having to purchase to ensure its yield target is achieved could, over time, be potentially significant given they also shifted their monetary policy goal – namely the CPI inflation target – up from 2% to “exceeding 2%… in a stable manner”

But he goes on to point out what he sees as the real reason for the action - facilitation of fiscal stimulus -

Nevertheless, the significance of the BoJ announcement is that they have made a change that is (always was in our opinion) a necessary prerequisite for the successful reflation of Japan’s moribund economy. It is a policy-making stepping stone, but a very important stepping stone.
As we made very clear in the previous post (and numerous others before) Japan’s fiscal position is dire; government debt is on an unsustainable trajectory and given the current level is nigh impossible to rectify via fiscal consolidation. Correcting this problem is not just an economic imperative but it has become a political imperative as well, as evidenced by the emergence of Abenomics. Japan needs sustained positive inflation- it really is that simple. It is just achieving this objective has been much more challenging than widely expected.
If the BoJ is unable to generate sustained positive inflation by calibrating monetary policy at super accommodative levels, then it will require the intervention of the fiscal authority, namely the Japanese government. The BoJ even hinted as much in their statement when they referred to “synergy effects” between monetary and fiscal policy.
Such thinking is hardly new or cutting edge. Indeed, as Tily (2012)[9] points out Keynes concluded as much in The General Theory of Employment, Interest and Money, published in 1936. To wit,
“Keynes’s support for fiscal policy did not follow primarily from any lower bound to this process but from a recognition that a low long-term rate of interest might not be sufficient for recovery. A low long-term rate of interest was necessary to prevent recession, but it might not be sufficient to effect recovery from recession.”
But here is the really interesting bit -
By agreeing to backstop the JGB market, the BoJ is, in effect, facilitating the Abe government’s ability to engage in reflationary fiscal stimulus by loosening its constraints. After all, with the BoJ guaranteeing the price of government bonds, the threat of increased bond issuance triggering a JGB “death-spiral” is completely eradicated[10]. It also removes a more realistic threat that a back-up in interest rates chokes off the recovery as and when it materialises
To those still sceptical about such a reflationary outcome, it is worth noting that a yield target not only facilitates, but is a pre-condition for, outright monetary financing (OMF – or helicopter money in the vernacular); a policy that is very effective because the government can just keep issuing bonds – at a price now guaranteed by the BoJ – to satisfy the demands of any stimulus programme[13].
It is for these reasons that the BoJ’s adoption of a yield target is so significant.

So whilst many appear to have shrugged the BoJ actions off as interesting but really not that impactful (targeting only one point in the curve, cranking up inflationary wishes etc), Shea points out that what they have done may not be money printing but it is laying the path to effective helicoptering of money into the economy via an accounting wheeze that opens up the fiscal/monetary backdoor. He has long been a proponent of the idea that the end game for this phase of central bank action is yield curve control, so I was straight on to him when the BoJ took the first step. His thesis is that it ultimately leads to capital controls.

Commentary on what will happen to JPY since the BoJ has been pretty much focused on the US to JP bond switches with many suggesting that the attractiveness of JGBs has gone up on a relative basis. I can go along with that view to an extent for two reasons -

1- If you have a bond thats price is effectively underwritten via the central bank targeting its price then your risk in investing in it drops dramatically and your incentive to buy it on a risk-weighted basis increases.

2- as my own thoughts would suggest that if you take a bond, and you pin its price at zero you have effectively turned that bond into cash. It behaves in just the same way as cash. Its capital value won't change and it pays zero interest. It is cash. The difference is that this bond can have a denomination of any size you like and it won't take a huge safe to store it in. You could fit a bond who a face value of Yen 12billion in your wallet. Now compare that to a Europe where with the demise of the €500 note you need a fairly big vault to stash away €100m. The BoJ has just issued the biggest denominated bank note in the world which could be hugely attractive to those stashing cash.

However, I agree with Shea as to the ultimate outcome, as these considerations will be outweighed in the end by an upcoming fiscal tsunami BoJ. As he points out -

It is patently obvious from the current level of crowd sentiment towards Japanese stocks and the JPY that this reflation theme does not yet feature on the radars of most investors. This suggests that once investors look beyond the lack of immediate monetary stimulus, and begin to comprehend more fully the longer-term ramifications of the BoJ announcement, there is potential for a very significant price move in both (unlike nominal JGBs).
And back to his theory that the curve pinning trade will be the end game for many central banks -
Regards the global implications that flow from this decision. As we have previously stated the BoJ is a monetary policy vanguard; it has had to be because of circumstance. This remains the case. With global debt levels now higher than they were at the onset of the Great Recession, Japan may be the first country to have entered the era of fiscal dominance(possibly by some margin) but it won’t be the last; currency markets will see to that.
If you didn't read his whole post linked at the beginning here it is again https://amareos.com/blog/the-fix-is-in/   and you can follw Ryan Shea at @BlackSwanEcon

And for disclosure - I am now long USD/JPY having waited for post BoJ JPY buying to fizzle.

Friday, 30 September 2016

The Fast Markets Song

Friday's fun in financial scout camp started by looking in the bear story box and bringing out the old favourite of Deutsche Bank. Which promptly did what nearly every new disaster story has done this year,  it recovered.

Sunday's flappy panic is over Brexit's article 50 being triggered by end of March 2017. Quite why it's such a sudden disaster I am not quite sure, because there was as much chance of the UK not Brexiting as there is of Morgan Freeman ever playing the bad guy.

But it's all good news for the panicky news feeds that will be peddling UK doom. Do you remember the children's playground, fast food song? The one that starts 'A Pizza Hut, a Pizza Hut..' which was the basis for this..

Well, with a bit of tweaking, we can create the market commentary anthem.

The Fast Markets song:- 
(All together now!)

A Deutsche Bank (make a square in the air)
A Deutsche Bank
Brexit flappy panic (flap your arms like you're doing the headless chicken dance)
And a Deutsche Bank
A Deutsche Bank
A Deutsche Bank
Brexit flappy panic
And a Deutsche bank

Oil Prices! Oil Prices! (use two hands-make an "M" in the air, starting in the middle)
Brexit flappy panic
And a Deutsche bank
Oil Prices! Oil prices!
Brexit flappy panic
And a Deutsche bank

A China fix
A China fix
Italian banks
And a China fix
A China fix.
A China fix
Italian banks
And a Chinese fix

Greek bailouts! Greek bailouts!
Italian banks
and the ECB
Greek bailouts! Greek bailouts!
Italian banks
and the ECB

A hiking Fed
A hiking Fed
Falling productivity
and a hiking Fed
A hiking Fed
A hiking Fed.
Falling productivity
and a hiking Fed

High Yield! High Yield!
Falling productivity
And a hiking Fed
High Yield! High Yield!
Falling productivity
And a hiking Fed

A Donald Trump
A Donald Trump
A rising Right
And a Donald Trump
A Donald Trump
A Donald Trump
A rising Right
And a Donald Trump

A Putin! A Putin!
A rising Right
And a Donald Trump
A Putin! A Putin!
A rising right.
And a Donald Trump.

Risk Parity
Risk Parity
A massive spike in Vix
and risk parity
Risk Parity
Risk Parity
A massive spike in Vix
And risk parity

Stop losses! Stop losses!
A massive spike in Vix
And risk parity
Stop losses! Stop losses!
A massive spike in Vix
And risk parity

A rogue trader
A rogue trader
Whopping bank fine
And a rogue trader
A rogue trader
A rogue trader
Whopping bank fine
And a rogue trader

A whopping bank fine
And a rogue trader
A whopping bank fine
And a rogue trader

Failing Abenomics
And the JGBs
Failing Abenomics
And the JGBs

Gold Prices! Gold Prices!
Failing Abenomics
And the BoJ
Gold Prices! Gold Prices!
Failing Abenomics
And the BoJ

Spreads are widening
and a CDS
Spreads are widening
and a CDS

All Panic! All Panic!
I told you so
And I'm never wrong!
All Panic! All Panic!
I told you so
And I'm never wrong!

Sunday, 18 September 2016

Transferable skills - Football manager to bank CEO

Is being a world famous football manager so different from being the CEO of a world famous bank? Let's take a look.

Mourinho on today's match, Manchester United vs Watford 

“I was completely aware that we were not the perfect team, that we had lots of players who are not end products and can make their own mistakes,” Mourinho said. “My only doubt was the way they can cope with the negative moments that come sooner or later. I feel that some individuals probably feel too much pressure and that responsibility.

“But from a collective point of view I only have good things to say about them. If you analyse our three defeats in the last week, we were always the best team in the second half. We didn’t start well today but then in the second half the players showed quality, intensity, desire, commitment and ambition. And we lost again in our best moment.

“I can split this into three factors: one is the referee’s crucial mistakes – that’s not in my control. Against Man City you know what happened in minute 55 [when Claudio Bravo made the challenge on Wayne Rooney], today you know what happened for the first goal, against Feyenoord you know that the goal was in an offside position, so we were punished by these mistakes and I can’t do anything.

“The third thing is what is in my hands, which is the improvement of the team,the improvement of individuals, trying to stop with the defensive mistakes. I knew that I had a task because, for example, the first Man City goal and this second goal today, you can find an incredible similarity.This is tactical but it is also a mental attitude. It’s something that you don’t go there and in a couple of weeks everything becomes perfect. So we have to improve, no doubt, individually and collectively. And that’s my job because lady luck you don’t control and referees mistakes you don’t control.”

Now if we transfer Mourinho from Manchester United to CEO of Deutsche Bank let's see how he gets on

Deutsche Bank vs the US 

“I was completely aware that we were not the perfect team, that we had lots of traders who don’t know their products and can make their own mistakes,” Mourinho said. “My only doubt was the way they can cope with the negative moments that come sooner or later. I feel that some individuals probably feel too much pressure and that responsibility."

“But from a collective point of view I only have good things to say about them. If you analyse our three fines in the last years, we were always the best team later on. We didn’t start well but then in the later period the players showed integrity, intensity, desire, and commitment to clients. And we lost again in our best moment.

“I can split this into three factors: one is the regulator’s crucial mistakes – that’s not in my control. Against the DoJ you know what happened at the last minute [when Loretta Lynch made the challenge on our mortgage book], you know what happened for the first fine against FX, you know that the fine was for an offside fix, so we were punished by these mistakes and I can’t do anything.

“The third thing is what is in my hands, which is the improvement of the team, the improvement of individuals, trying to stop with the defensive mistakes. I knew that I had a task because, for example, the first fine for LIBOR and this RMBS today, you can find an incredible similarity. This is tactical but it is also a mental attitude. It’s something that you don’t go there and in a couple of years everything becomes perfect. So we have to improve, no doubt, individually and collectively. And that’s my job because lady luck you don’t control and regulators mistakes you don’t control.”

Spooky isn't it?

Monday, 12 September 2016

Chemical brothers.

I was just plowing through the Sunday opening prices, that part of a Sunday evening where you watch FX open up first and try to garner a sense of how much emotion there is in the market before equity futures get going, but couldn’t really see much going on. I was wondering what to do with a couple of positions and what to initiate, if anything, but really couldn’t get a grasp on what to do and thought I was going to lose my mind. This feeling of confusion grew until I realised that the subliminal power of the Chemical Brothers track 'EML' was the cause as it emanated out of my laptop speakers. “I don’t know what to do, I'm going to lose my mind’. I don’t know why it’s taken me a year to find The Chemical Bros album ‘Born in the Echoes’ but the first two tracks are fantastic with 'Sometimes I feel so deserted’ an electric tonic to lethargy, borrowing a strong stylistic reference from Swedish House Mafia. 

But enough of the background music, now for markets. 

I was out playing on beaches on Friday so missed the dump and even now I’m not sure what caused it. I get the ECB, indeed I shorted BTPs during Draghi (again, oh widowmaker) but I don’t get the equity dump, it took 24hrs after Draghi spoke to get going which seems too long for it to be purely him causing the shake down.I know it’s September and I know that we all have cupboard loads of reasons to sell equities, those cupboards having been stacked full over the last 3 years, but why now and how far is the fall going to go? 

There has been some messy stuff going on for a while.  JGBs have backed up, Draghi has taken his foot off the accelerator, Brexit hasn’t induced a slowdown demanding global easing, US data is implying a slowdown and all the while, well for the last 2 years, we have had the soothsayers telling us doom is around the corner. Central bankers see themselves as financial environmentalists, guiding behaviour to preserve financial habitat. But they're killing financial diversity and masking environmental signs of trouble. Central Banks are not environmentalists, they are just the opiates of the economy - instead of treating disease, they just mask the symptoms whilst the disease gets worse.  And not just opiates. Ecstasy to masses, MDMA to the banks, crack to the bond market, smack to the politicians and LSD to traditional economists who are having the weirdest trips seeing terrifying things from the future crawling up the walls of worry. 

The central banks are the Chemical Brothers here and most of them are at the point of “I don’t know what to do, I’m going to lose my mind’. 

In one of my posts from last week, I mentioned that volatility could go up without the underlying falling.  I can see vol moving higher again, but I am a bit surprised to see a return of volatility already starting to stir  up the ‘I don’t know what's happening, let’s blame risk parity’ brigade. Which has me believing that risk parity is not the game, though I am smirking at the funds who have sold vol as a hedge against no vol. 

It is September and there are things one could hang a fall on retrospectively but I am not excited about this fall yet. Look at it this way, 50pts SPX may look a lot over two days but it's still only 50pts over 2 months. However, my key indicator as to how bad and how far this could run is if we see bonds AND equities dump. If I wake up and see both getting torched then I am out and running for cover. Deep cover as when bonds and equities fall we are in for a mess that hasn’t been seen in the past years that indicates confidence in CB policy is finally over and the financial world becomes a Hieronymus Bosch painting of fire, brimstone, helicopters, inflation, and worshipers of Zero Hedge (who have quite rightly blocked me on twitter - I wear it as a badge of honour). 

It's midnight here in the UK now Sunday night, I’m going to go to bed and will be buying the European open, hopefully by then everyone will have bigged up a fall and Stop Loss City, New Zealand, will have had their pound of flesh, all Asian traders done what they think someone bigger than them has done (rather than think for themselves) and we have a lovely chance for a 9.30 am London reversal as Asia come out of their K-Hole, as the Chemical Brothers may say. 

Positions -

Long oil, was great , now not so great as risk off. 
Short BTPs. Going well since Thursday. 
Long USDTRY, More good news in risk off environment. 
Long Trump to win - I really wish I had bought because I want him to win rather than just believing he will, but it’s going my way, sadly. 

Wednesday, 7 September 2016

The only iPhone review you ever need to read.

The only reason I am writing this is because apparently no one cares about anything else and a title like the one I've used should be pure SEO gold.

 iPhone launches are like Non Farm Payroll releases. Everyone gets very excited about them but 24hrs later have moved on and are guessing what the next one will be.

Stereo speakers - Unless they produce 150db each, can be spaced 10ft apart and have 12+ inch bass units I don’t care.

The new camera has optical image stabilisation - Useful for the caffeine or 'morning after' DTs. 

 6 element lens with f/1.8 aperture. 60% faster than previous iPhones. The iPhone 7 has a single lens camera; the 7 Plus has a dual lens camera (wide angle and telephoto). telephoto  Useful, I guess, for wedding photographers.

iPhone 7 Plus: New 'portrait' effect on the camera to add depth of field to photo
 No Interest, not a selfie fan.

Water and dust resistant  
Excellent - caught up with Samsung

Longer battery life  Good, but still would prefer replaceable and will still probably die after 2 years.

Comes in jet black, black, gold, silver, rose gold.  I'm not a 14yr old girl.

Headphones will connect via the lightning port. A free set comes with the phone, plus an adaptor for traditional 3.5mm jack headphones
 - Backwards step. Buggered if you lose your adapter or headphones. Can’t borrow others. Go long Chinese copy adapter makers.

And AirPods - wireless headphones (with a microphone) that have infrared sensors that detect when they're in your ear and only play then. W1 chip connects the AirPods to your other Apple devices. The batteries last for 5 hours and the Airpods come with a charging case that holds 24 hours of charge.
We tried this with Bluetooth headsets. No one can be bothered with devices that need separately charging and if you do use them you'll look like a dodgy limo driver. Drawer fodder, or more likely lost on first outing. San Francisco drains will be full of them. A wire stop you losing them.

A10 Fusion chip with a 64-bit four core CPU  
Should I be excited? Or even know what that means?

Storage: 32GB, 128GB, 256GB  - A 256GB Micro SD card is about £140, how much is your upgrade?

Cost: $649 for the 7, $769
or £649 £769 in UK money. A lot for a better camera you can drop in your beer.

Summary - The only thing you need to know about the iPhone7 is that it will be an out-of-date lump of metal and glass within a year.

Will I buy one? No. But then I've never bought one.
Will it change the price of Apple Stock? Someone will pretend it will, but not in the long run.

Spread betting for the masses.

September is a remarkably shitty month for many. Not as shitty as November which has to be up there as one of the grimmest months of the year, but just the thought that you have 2 months of inexorable approach to November after returning from a summer holiday makes September shitty. And that’s without the run up to year end nonsense that will have kicked off with appraisals, KRAs, fawning, backstabbing and general Roman Senate behaviour that is booting off in the glass corner offices of Investment banks. Bonus allocations to management are being decided along with debate as to which tiny teaspoon to use for staff bonuses. Sorry folks, I feel for you. Sort of.

But I think you have to have been on the inside to be able to be on the outside to be able to look back in and be glad you are out. I say this because as my own sanguine attitude towards the glaring hypocrisies of city life (the way the regulator regulates and management manage) only grow, the world around me still appears to consider the wheelings and dealings of dealing in financial markets a holy grail to wealth, happiness, and, believe it or not, intellectual respect. Cough cough.

A wall of cash has pushed personal investment into higher risk products and taken the owners of that wealth down a rabbit hole of financial discovery that could have been penned by CS Lewis. Whilst banks cannot offer the simplest of products to their client base, without carrying out Know Your Client inquiries using anal probes, spread betting firms are happily engaging in providing sharp objects to financial 2-year-olds. The rise of the binary option as a punting tool has been remarkable. The ability to bet on financial markets via traditional institutions has been squashed yet the betting industry is stepping into its place. Very odd. And I still don't understand why any profits on a spread betting account are tax-free yet the same trade through a traditional market is taxed.

The tax advantage, the technical ability to replicate what to all intensive purposes looks like a professional dealing screen and the  underperformance of cash in bank accounts is handing Joe Public all the tools to dress up as a professional city dealer and..... be taken to the cleaners.

The playing field just isn't flat. Spread betting companies may offer exceedingly good spreads in their shadow markets, but look at the funding costs and roll over charges and it all adds up to a tax on playing. The other fundamental truth is that Joe Public just isn't very good at trading either. The proof? The fact that most spread betting companies don't bother hedging any of their client business. Clients tend to lose. This could also be the reason that spread betting profits aren't taxed. Tax deductible losses would exceed taxable profits.

But the lure of the casino is huge. The pub bragging rights on making a buck on long Eur/Usd just seem so much better than saying you won it on roulette. But the overall odds for most punters are similar. With the rise of the punters comes the rise in the financial snake oil salesmen. The 'follow my foolproof way of trading (though if it's foolproof then why the heck am I telling you)' sites. Twitter is alive with promoted snake oil tweets. But there is money in it as I am afraid to say it, the easiest target market to take money off are the not the cleverest. It's depressing to realise that if you want to make a quick buck the the easiest way to do it is to leg over someone not as smart as you.

I can cope with trying to win by coming up with a trade before anyone else acts on it, but to suck folks into a casino of rigged tables seems a little harsh, especially when gambling has been banned at banks and institutions. And gambling it is. Binary options? How many real world exposures find binary options to be the natural hedge? Apart from as ahedge against the other binary options you already bought.

I passed a slot machine arcade in a coastal town in England last week and wondered how long it would be before all the various gambling machines within it would be replaced by dealing screens with betting on financial markets. Why not? A live stream of SPX index prices to bet on is much the same as the higher/lower electronic card games. In fact....

Emerging Markets. They all moved but you got the wrong one. 

Short carry. It never drops more than you put in 

Brighton Pier at 1.30pm on NFP day.

Binary Options - 7 ways to lose faster.  

FOMC - It's always coming around but no winner.

The new precious metals dealing desk .

Yet there is a place for the high octane of risk taking that can be achieved using these facilities. I use them to adapt risk in longer-term underlying portfolios. In fast markets where liquidating underlying assets takes two or three days and involves larger spreads, then a spread betting account is a way to hedge.

But probably the greatest reason I use them is because I am finding that funds just aren't what they used to be. They are either so balanced they don't add any value, or they are so specialised they have passed the risk of asset class selection back to me. Or they are so hamstrung by their own risk metrics that anything fun gets chopped at bottoms or profits taken too early on rallies. And then there's the ultimate curse. You ride out an investment in a fund through thick and thin and just when the market is about to bottom the fund closes down because it isn't performing and hands you what's left of your money back - Looking at you Rennaisance Sub-Sahara and Rennaisance Africa.

I want a good old fashioned broad spectrum punting fund that has balls and is run by someone who is over 21 and doesn't have an ego. Or an algo. And understands politics as much as economics.  And doesn't care what fund consultants think. Oh, and being right helps.  Is that to mich to ask? Of course it is, but answers in the comments section please.

Yours, mine, I is a geezer dealer 'cos I've got a spread betting app on my phone.


Stop Press! - Just out in the FT about spread better CMC markets.
CMC Markets shares slide 13% on worst day since IPO
I hope that wasn't my fault.

Monday, 5 September 2016

Same old same old

It’s been a while since I wrote a post. I could pretend it was because I have been on holiday. It isn’t. It’s because I really haven’t felt there's been anything of note to change my view of the world. My last post was titled 'Wrong Wrong Wrong' and I do feel as though I could add one of my own long-running beliefs to that. The way the Turkish lira has gently strengthened has caught me on the wrong side.

However, I have a right right right with my expectation of an unwinding of Brexit hysteria. Carney’s 4th of August move was so predicted I put a bet on it not happening. A small loss but I still felt it worthwhile as his ability to do the unexpected, or rather not do the expected, has been magnificent. I thank him for his actions as they have reduced my mortgage costs by 25% (1% to 0.75%) but I can't help thinking he has reacted to his own induced panic rather than anything proven. Of course, anticipating is the job of the BoE but I am interested at how the reputation of BoE forecasts appears to have gone from ‘pretty lousy’ over the past few years, to 'God-like' over Brexit.

I have been waiting for August data to appear because there was no point protesting the validity of July’s PMI’s as the armageddon brigade were waving sharp objects and their eyes had turned sparkly blue (a Game of Thrones ref there). The recent rebound in the UK data, manufacturing and service PMI’s, employment, housing, even the low inflation so far, has driven the army of the dead back north of the wall. But their screams can still be heard in the distance.

The Stark warning that Winter is coming may yet be true. But an Indian summer is upon us now as now is not the winter of our discontent. Well not mine, anyway.

I haven’t been tick watching markets as I haven't been that engaged. It's a fine thing to step back and have a financial form of out of body experience, looking back down on the chatter as you float above it, wondering what the point of all that noise is. Nothing has really changed. The hunt for yield drives on, data comes out, people jump and shout but then get bored and everything mean reverts. NFPs are a class example. They are like a solar eclipse passing over the market. They cause excitement and even panic but all they really are is a big fade. And in the background, the SETI project of Fed watching grinds on. Yeeeeeaaaawn.

On irregular visits to Twitter, I note excitement every now and then as a stock index somewhere puts in a 0.nothing move lower. Which backs up the general theme of ‘most hated stock rally for ages’.

The low volatility environment has many saying that volatility compression through funds selling vol, to fund underperformance, will lead to a vol explosion. I can empathise with this but it doesn't mean there has to be a massive move in underlying. Implied volatility can do some mighty strange stuff all on its own. High vol is read to lead to market price falls and low vol is read to lead to high vol which leads to price falls. Did you notice a certain bias in reporting there?

We all talk about negative yields and how it's all part of the great plan to drive money into more productive parts of the economy, but with low volatility and making a basis point in financial markets harder and harder, I wryly wonder if crushing vol is a clever master plan to drive workers into more productive parts of the economy. There is an irony in fund managers and traders bemoaning the lack of yield when all they would have to do is leave and get a job in any other field. Margins in non-financial businesses are measured in 10s of percents rather than 0.01s.

We now have G20 upon us and the changing shape of real global political power is much more interesting than Fibonacci levels in weasel poo prices. The longer term concerns of a changing landscape with regards to international relationships has been judged by the markets as immaterial until they get an economic data point to react to. Even if Greece don't get another EU payment for a while, or Turkey raises the Hammer and Sickle over Ankara or China links their mainland to Los Angeles through geo-forming, no one will really care unless it is reflected through Fed policy speak or NFPs come out 100K +/- from expectations.

I am still fascinated by Turkey. I still see it as the keystone or lynchpin or even grenade pin, to the many many current issues. From what I gather (no names, no pack drill) subterranean diplomacy is a hive of activity. The Russians are in there like Flynn, and the Europeans are busy trying to repair the damage of late support. The EU did not see a coup coming and their response was disastrously delayed. They will now have to over compensate in acquiescence as they still need a refugee deal but are now negotiating with a stronger counterpart backed by their old foe. The coup has been a wake-up call not only to the West, but Erdogan himself who now owes his life to the Russians and despite an appearance of authority is fast learning some of the basics of governance needed to successfully run a country of multiple cultures. He is restructuring his advisors, both domestic and international and has a stronger hand than ever to play the Uzbek game of mix and match when it comes to international courtship.

I have been short of Turkish lira and intend to remain that way for a while as it will be a while before foreign direct investment has the confidence to return to counter their trade deficits. But play this right, which I feel he is, and Erdogan will be able to extort favors from all sides. Who will open the bidding?

It is still interesting to see that GBP/TRY is much lower than pre-Brexit which obviously proves that leaving the EU is judged much more serious than having a dictatorial purge, moving away from ever joining EU, cozying up to Russia and changing the shape of Western/ Middle East politics.

Trade ideas? Is one allowed to even hint at trade ideas in this regulated market? Oh, hang on, I'm not regulated. Or am I? Or was I? Or rather will I be? For if I will be, I could possibly be prosecuted for breaking rules when I wasn't and didn't have to abide by them. The Apple dilemma. Or FX dilemma. Politically motivated retrospective legal action is today's great game.  I am sure that the next step is when the authorities go 'Minority Report' and start fining start-ups billions now for tax avoidance they may carry out in the future should they become hugely successful.

Of course, I can't advise you, but I can warn you that if you have the same positions as me, (long a bit of oil, long USDTRY, long Trump to win and short Eur/Gbp) then you may or may not lose or make money. Why am I long Trump? Because the odds had closed to 20% on smart people betting that stupid people won't be stupid. Which is stupid.

Apart from that, I have little idea, though it is becoming abundantly clear that though economics is all about predicting behaviour, economists are appalling at predicting behaviour at political tipping points.

Tuesday, 26 July 2016

Wrong Wrong Wrong

If there has been one party worse at forecasting rates than central banks it has been central bank watchers, actually we should add the markets though I would put the markets above economists in their forecasting ability. The winning trade for the past 18 months, longer in the case of the Fed, has been to fade expectation into rate announcements. 

Last BoE - Wrong. 
Last ECB - Wrong. 
Last few Feds re-direction of guidance (hawkish vs dovish) - Wrong. 
Last 2 BoJs - Wrong.

Even the Brexit outcome - Wrong. 
And the saddest forecast I think will be wrong - Trump will not be president. 

And while we are on wrong ‘uns -

China to kill the global economy in 2015 - Wrong. 
Greece to kill Europe - Wrong.
Deutsche Bank to sink Europe - Wrong.
Italian Banks (a perennial weed in the garden of economic disaster) to screw Europe - Wrong. 
Emerging market debt to screw the world - Wrong. 
Oil related High Yield to screw US markets - Wrong.
US stock markets collapse due to earnings - Wrong (new highs). 
Ukraine, remember Ukraine? No? Neither does the market.

Okokokok.. so maybe some of them WILL be right, one day, but if you count up the amount lost by 'five minute macro' on all of the above, you have to be in awe of their earning power to subsidise those losses. 

So why have they all been wrong? Basically for a couple of reasons

First reason - The power of negative interest rates has twisted economic behavior in ways that the textbooks couldn't predict. Putting a minus sign in the equations doesn't mean that behaviour does what you think. Elasticity and substitution, the two biggest Econ 1.0.1. fudge-factors, have had to be employed dramatically to explain why things aren't doing what they should do. The numbers head into another dimension, much as i, the square root of -1, invokes in maths. In economics, we head off in a direction that economists really aren't very good at predicting which is the ....

Second reason. Politics. When folk get annoyed enough about their standard of life they bypass economics and instead change the governing rules. If you change the rules of how business is done it can swamp any monetary inputs. Rich mill owner? Monetary economics really don't matter much if your workers put you in prison, steal half of your mill and smash up the rest. Political change is happening faster than anything monetary policy will be able to control. Rules will change and the allocation of wealth is not far from being decided by vote rather than the evolution of business. 

Economists are rubbish at predicting the rule changes. Even if they all think they should set the rules, 

And finally, as for the whole idea of printing money, it's amazing what you can do with a printing press. Caxton (the printer) should be given a posthumous Nobel prize for peace, economics (yeah, I  know technically there isn’t one) and physics for overcoming the first law of thermodynamics by proving perpetual motion can actually exist. Even if it is by monetarist example. 

Tuesday, 19 July 2016

The Turkey Quiz

If you were a British tourist about to go on holiday to Turkey would you

- Go anyway, you owe it to the kids and the beaches should be less busy.
- Don’t go and blame Brexit as GBP/TRY is still lower than it was before Brexit.
- Tell all your friends you are going to Turkey but actually go to Greece.
- Pack camouflage towels.
- Still be paying €3 for a tiny coffee on the seafront.

If you were Jean-Claude Juncker would you be

- Expressing concern over the turn of events in Turkey
- Making sure that a meeting was scheduled for the Commission deputies to table a feasibility study into a further meeting for the Commission in 2020 to discuss the potential impact of the recent events in Turkey.
- Examining the latest terms from Mr. Erdogan with respect to limiting the flow of refugees through Turkey.
- Hoping that nothing blows up in Turkey until August 1st, when you will happily be away for a month somewhere in the South of France.
- Threatening Turkey with non-membership of the EU if they don’t comply with the EU directive on effecting autocratic states.
- Taking keen notes as Erdogan seems to have nailed the transition from democracy to autocracy that you've been so yearning for. Genius.

If you were Frau Merkel would you

- Be staying very very quiet.
- Threaten Turkey with no EU membership if it reintroduces capital punishment, even though you made it clear to the British during Brexit that Turkish EU membership would never happen so please don’t consider it as an issue.
- Be secretly hoping that Turkey opens the flood gates to immigrants because despite the populace's protests, immigration may be the answer to Germany's demographic problem.
- Be building another wall. But this time around the whole country.

If you were a Human Resources consultant would you be

- Wishing you'd got that Turkish contract.
- Wishing you'd got that Turkish contract.
- Wishing you'd got that Turkish contract.
- Arrrgghhhhhhhhhhhhh!

If you were a cafe owner in Bodrum would you

- Reprice all your menus down because the fall in tourism means you need to attract more customers.
- Borrow from Greek economics and double your prices because to make the same money from half the customers you need to.
- Reprice your menus up due to the inflationary effect of a falling Lira
- Continue to charge in Euros as you always have. A small coffee remaining resolutely at €3, because that’s just the way of the world.

If you were the Governor of the Greek island of Kos would you

- Start an import business taking advantage of the falling prices 2.5 miles away in Turkey.
- Sound the alarm as 14 Turkish naval vessels bore down on your island
- Call your cousin in Athens and ask him for the market price on the 14 second-hand naval vessels that have just surrendered to you and are cluttering up your harbour restricting your import business.
- Pack your bags and head for your mother’s place in the Pindus mountains as you are far too close for comfort.

If you were Mr. Obama would you

- Be on the Bat-Phone to Mr. Erdogan personally offering him your every support, including water cannon if he was short of them.
- Be expressing your utmost support for those who support democracy, but not mentioning any names in case you are held to them.
- Be reclassifying one building in Pennsylvania, containing a certain person, as Turkish territory but restricting all access to it?
- Hoping it all goes to hell in a hand basket but not until you hand over the reins to the next poor mug incumbent. By God, both of them deserve it.
- Threatening to expel Turkey from NATO

If you were Mr. Putin would you be

- Praying for Turkey to be expelled from NATO
- Expressing your wish for stability in the region and the continuation of democracy in the country.
- Working out how the changes in Turkey would affect your humanitarian work in Syria
- Skyping your new best friend in Ankara.
- Google map searching suitable sites for your next mega-villas on the Datca peninsular.
- Falling about laughing, whilst pressing the GO button on your ‘Turkey 5 year plan’ control panel.

If you were a US investor in the stock markets would you

- Be concerned over earnings data about to unfold over the next few weeks.
- Be watching the Trump circus and wondering if it will effect Fed policy
- Be looking at the trend lines and buying more.
- Have forgotten every reason you had for not buying stocks when they were 20% cheaper.
- Be 25yrs old and never needing a job as this day trading, long only, is easy.
- Be asking what all this Turkey nonsense is about when it isn’t even November.