Sunday, 16 July 2017

Bitcoin - Pick a number, any number.


I’m going to write about Bitcoin. Not because I like it, or hate it, just because I rank it as one of the maddest delusions of a market that I have ever known.

A market which is a case study of -

Correlation vs causality
Wealth redistribution.
Randomised social mobility acceleration
Disconnected arguments
The technical analysis of noise.
Cyber crime indices

Bitcoin is the blockchain equivalent of Trevithick's 1802 Coalbrookdale steam locomotive


As Trevithick's machine was the first iteration of a steam technology that was to change the world so  Bitcoin is the first iteration of a technology of coding that will change the way many data management functions are performed. It is also an anonymised payment system.

As a payment system, its value can be calculated in the same way you calculate that of a credit card company - the value of the sum of charges made for the transactions by the company, less the costs to run it.  I don’t believe Bitcoin charge transaction fees so on that basis it is zero and I don’t believe they have any IP ownership of the blockchain idea, so zero value there too. As a stock price is effectively a discounted function of future cash flow and Bitcoin has no cash flow, the value of Bitcoin Inc is zero.

Some say that Bitcoin is a currency. Is it? What drives currency price differentials?

Trade balances - Does Bitcoin represent a trade bloc and so move on trade flows? No

Interest Rate Differentials - Does Bitcoin have an interest rate benefit? At zero interest rate, it has a negative carry against any +ve yielding currency - Mostly no (unless you are Swiss).

Foreign Direct Investment - Does Bitcoin see demand due to FDI into a domestic economy? No.

Reserve Asset - Is Bitcoin a global reserve currency displaying all the criteria needed to be seen as such? No.

Inflation - Does Bitcoin move due to relative supply against competitive monetary systems. - Yes, but with the contraction of global QE this is not moving in Bitcoin's favour. An additional consideration is the uncertainty of the evolution of other competing pseudo currencies or the competitive function of gold or any other non-monetary commodity. Why buy Bitcoin when you can hedge your future demand for an underlying essential directly rather than using an intermediary?

Even if we assume Bitcoin is a currency, on the basis that it can be used for transactions, using the parallel to FX markets the transactional function of Bitcoin is identical to a very very short duration FX swap, where both parties agree on a fixing spot rate on which to base other charges, such as interest differentials. As it is on a micro time scale with no transactional charges, those costs are pretty near zero and the fixing rate is immaterial. It doesn’t matter whether the  GBP amount you need to buy something priced in USD is 1 Bitcoin or 0.0001. You also expect the recipient to really be pricing in USD with a BTC conversion occurring at their end - just doing the reverse action as soon as possible. If anyone is mad enough to price their goods at fixed Bitcoin prices then they deserve to see no business or go bust as folk arbitrage the FX rates.

If a retailer does decide to hold its BTC receivables as BTC then they are taking a massive FX risk. Which is why I read this from an Overstock ($OSTK) exec saying they keep 50% of their BTC received as BTC somewhat of a concern if they see themselves as a retailer rather than an FX punter. So should I be short or VERY short of their stock?

Having decided that Bitcoin technology has no unique value to Bitcoin itself, as it can be replicated by others (indeed the proliferation of crypto-currencies is a testament to this) and decided that for transactions one only needs to rent it for a fraction of a second, then why would one want to hold and store it?

It is said that Bitcoin is a store of value that will only go up as there is a limited supply and the rules of issue are immutable.

Even before the current issue of a bifurcation of the Bitcoin platform is considered, the primary condition for storing value is that the value of your store does not change relative to what you value. Most of us value the security of food, shelter and warmth, all of which have to be purchased in local currency. The value of Bitcoin relative to these things is currently oscillating at +/-30% a month. That is one heck of a risk that leaves even investing in CDOs a preferable store of value.

Yet despite all of my cynicism towards the price of Bitcoin, the price has indeed gone up. When the price of something moves in the direction that the narrator predicted it is used as a form of substantiation of their initial arguments. The ‘see I was right’ view is dangerous for the old reason that correlation does not imply causation. Bitcoin prices can effectively soar on the ‘greater fool’ theory rather than any of the tulip like arguments of long term value holding water.

In some cases, the huge volatility risk is a price worth paying for anonymity. Cybercrime ransom holders, money launderers and capital restriction bypassers may well be happy to run the risk but if these are the sole beneficiaries then you can be pretty sure that society will clamp down on the tool tat facilitates their crimes.

I mentioned in my last post on wine and trade selection that complexity is used to imply expertise and I seen this demonstrated in the complexity of technical analysis that is applied to crypto-currency trading. I agree that technical analysis is a fine tool to apply for market timing and can be used to detect changing behavioral trends but its over-precise application to a market which is impossible to apply a fundamental value to strikes me as futile.

I'll apply a BTC example I saw last night

Technical analyst - Price is approaching huge support at $2000!
Price - Cleanly passes through 2000 and keeps grinding lower.
Tech Analyst - Price has broken huge support at $2000! Next support at $1800
Reality - $2000 was never a massive support apart from in the eye of someone with a pencil and ruler and $1800 is just as likely not to be either.

So what does this tell us? Apart from adding to the belief that Bitcoin price is as irrelevant and unpredictable as a random walk, it tells us that a lot of people are applying a lot of effort in the wrong direction, trying to make free money from a gambling machine.

Does this serve a function to society? In one respect it does - It redistributes money. In effect, it is a steroid to social mobility. As 'social mobility' has become a term that solely reflects wealth Bitcoin is a wonderful way to take from one person and give to another. Poor people get rich and rich people get poor though rich people can get richer and poor people poorer. It is a lottery ticket with the benefit of an average yield of 0%, which is better than the -50% of most lottery tickets and winning the lottery is the fastest way up the income tree, even if many winners wouldn't be classed as moving one jot in the true meaning of ‘social class’.

In summary, I remain of the belief that Bitcoin has provided the world with a wonderful starting point from which humanity will benefit, but anyone buying a Bitcoin for long term investment purposes will end up as rich as a man who ordered 200 of Trevithick's 1802 Coalbrookdale steam locomotives expecting them to dominate the railway age for the next hundred years.

Friday, 14 July 2017

Donnie and the Great Glass Separator

Donnie and the great glass separator


As Trump is now pushing for his Mexican Wall to be transparent, let's have a guess at future news headlines.


-- Pilkington stock resembles Bitcoin during a cybercrime outbreak..

-- Window cleaners paid 250k a year as national window cleaner shortage bites.

-- Wall Street offices remain the most opaque since 2007 due to window cleaner shortage.

-- Microsoft stock trebles as algos misinterpret news of massive new demand for windows

-- Plastic surgeons move to new Mexico cashing in on the surge in facial injuries due to walking into unseen barriers.

-- Convexity within structure causes unforeseen losses. - Wildfires ignite due to sunlight focusing at bends in the wall.

-- Drug prices in US collapse on increased supply as drug dealers can now see and catch the incoming contraband.

-- Mexicans break the world record for mass mooning.

-- Curtain sales soar as design flaws in original plan ameliorated.

-- Trump warned not to throw stones as old English adage upheld by a court in Albuquerque.

-- Algorithmic trading companies use wall as massive fiber optic data feed.

-- Vogue declares glass this year's thing.

-- Opthalmologists argue wall should be corrective.

-- 'Rain-x' hording blamed for 2% rise in US retail sales.

-- CNN mock Fox News story that wall to be double glazed to keep Texas cool.

-- Seaworld petition for double glazing to have 30ft separation with a water-filled interior to create first Atlantic to Pacific dolphin race track.

-- Dolphins trained and fitted with anti-drug dealer missiles.

-- Wall to be semi-mirrored so Mexicans can't look in, but US can look out.

-- Peep-show business establishes 300 miles of booths.

-- Rayban sponsor wall.

-- Anti-discrimination groups march under the banner "The glass is always cleaner on the other side"

-- Glass ceilings ruled legal on glass wall president precedent.

-- China build new Great Wall, invisible from space.

Tuesday, 11 July 2017

Vinicultural Analysis.

For the past few months I have been pretty inactive in the markets, instead parking money in dull old dividend paying stocks as I couldn’t see much else to get excited about.

Since then we have seen various scares pop up and disappear but, like perennial weeds in the garden of information, they sprout and either die or get pulled out. The continuing debate over who put the RU in TRUMP, the noise around how Brexit will or won't happen, the odd resurrection of how China is doomed or Australian property is about to go bust. The regular resurrection of "look at global debt it’s all going to blow up", the odd explosion of crypto-currency excitement based on the fact that the price has moved (normally due to someone using it to blackmail the world's computer users) or we have the perennial oil will dump/rally because xyz. But the markets have been steady. Of course, if you fractalise a chart you can always paint a picture of sharp moves but look at longer charts of much at all and nothing is really that exciting. Even USDMXN is back to where it was a year ago, acting as a class example of how short term trading on really long term ideas nearly always ends in disappointment.

So hence I have been sitting it out, picking up dividends.

There have been the odd opportunistic punts, normally fading fast moves, but I have even closed out my long time favorite of long USDTRY. Turkey is still a major focus for me as it sits at the intersection of so many regional power plays, but with the Justice March now over, media attention will wane and the country reverts to the back burner.

But today I sold US stock indices.

Why? Well, here I have a choice. I can list some complex arguments including charts, spreadsheets, numbers, political insight, positioning information and all sorts of things but is there any point? Explaining why you have put on trades is much like explaining why you like a wine. You only do so if you want others to try it or buy it.

To communicate in the world of wine, a new language has to be learned. One of the terroirs, climates and similes to every possible taste that isn’t wine flavoured - you never hear a wine critic saying a wine tastes of grapes, it's always blackberries, honey, tannins and herbal notes. This language is then used to describe to others, who also understand the language, whether they also should or should not drink it. But if you have no intention of telling anyone else wabout a wine, nor any interest in wines other people like, then you have no need to learn the language. I know which wines I like and I have them on a mental list in order of preference, but I do not need to know that a wine is oaky, citrusy, rich, light, tannic or blackberries with a finish of old dish mops to know, when I drink it, whether I like it or not.

In the world of finance the language of communication is slightly more important as, unlike wine, it really doesn't matter whether I like what I taste, but whether everyone around me likes what I have tasted too, preferably after I have tasted it so that they go out and buy it making what is in my cellar all the more valuable.

So the reams written on financial markets have the purpose of explaining why people like things in the hope that others will follow the trade or pay to read the critics' views, or just as importantly, to explain errors of judgment. Where a stock is purchased but turns out to be corked, the communication  runs along the lines of why, ast the trade idea came from a great house, grown on a terroir of MBA PhDs, lauded by the greatest trade sommeliers in the world,  it really was a great idea but just bad luck that it was pure vinegar to the P+L palate.

The routes to drinking a wine that you like are similar to those to initiating a trade.

1) You buy a plot of suitable land, plant vines, harvest the grapes a few years later, learn how to make wine, make wine and then drink it.

This route is the same as doing your own research. It is hugely time-consuming and you have to be an expert at every point of the process to ensure that errors don't compound resulting with a Balsamic.You run the risks that in the time it has taken your tastes have changed or you have gone bust investing in the infrastructure. This is the losing trade that really should have worked because you have 10 years of records and proof of process, yet you can only offer the excuse that it was really awful as being due to 'unforeseen eventualities'.

2) You follow the critics.

You read the Sunday newspaper supplements and try the recommended wines in the food and drink sections. After a bit, you get to know which critics throw up a higher number of wines you like and so tend to follow their recommendations more than any other. This is the cult of the media guru, the hedge fund god, the big name. But in following them you are always paying more than you should. The critics are already positioned, or their bosses are, and even if you sprint straight from the newsagent to the off-licence you’ll find you've been beaten to it and the shelves are stripped bare.

3) You know a man who knows a man.

I used to know a man the wine industry who specialised in finding the small vineyards next to the big famous ones. Their wines were nearly as good but at a fraction of the price as they weren’t geared for large-scale production or distribution. In finance, the chatter of those perceived to be closer to the big decision makers is deemed more valuable than that of others. Whispers start that a great trade is coming and only the cognoscenti know. And, if you listen to the right people, you may catch a whiff of it too. Twitter is the Tinder of financial gossip matchmaking.

4) You try lots of wines and settle on the ones you like.

You have instinctively grown to know what works for you, though you really can’t explain why you like them to anyone else. Nor want to. You rarely hear of these wine drinkers as they serve wine as a secondary consideration to the main event of the food or a party. They know what they like but won’t ram its wonderfulness down your throat. These are the old traders who just seem to have a gut feeling for markets and rarely say more than "it’s bid" (I like it) or "it’s offered" (I don’t like it).

5) Use a combination of 2, 3 and 4.

This is how things tend to work both in wine and financial markets. Opinions bend according to fashions, fashions are set by style leaders (gurus) and the masses follow. Gurus wax and wane but mostly wax until there are so many of them their value is diluted. Yet to be part of the in-crowd you have to be able to talk the language. To sound more of an authority than the next complexity is exploited. The finer the detail the more assumed the expertise is.But often the finer the detail the less influence it has on outcome and the less it matters.

Apart from methods 1 and 4, one has to learn the language of financial market communications. Either to show one's own prowess, to be followed or paid, or to understand what others are saying, whether it is true or not. Every now and again a critic can trip up, like the CNN lady who claimed this week that Stagflation is a new made up would be the equivalent of a wine critic excusing herself, saying that she just thought that Sauvignon was a typo of Sauterne.

I have sold US stocks. The price can go up or down. 50/50. That is all you really need to know. Why I think they will go down is only important if I want you to also sell US stocks or for you to think I'm really knowledgeable and to be listened to in future.

I really don’t need you to do either.

I just know that I like it.

Wednesday, 24 May 2017

Chihuahua disruption.


I met a great young doctor tonight, he 'scoped my throat because I thought I was going to die. My hypochondria, as it turned out, had merely toyed with 'fish bone graze + general sore throat' and arrived at 'red herring'. Well, actually that was his joke. My joke, after he had mentioned the soaring value of his Bitcoin position, was to paraphrase and throw back at him the old vegan joke.

A- How do you know when someone is long of Bitcoin.
Q- Because they always f’ing tell you..

He is long Bitcoin and believes that the price of bitcoin will revolutionise the world. I asked if he knew a surgeon called Mr. Ponzi. He didn’t. The price of Bitcoin can be anywhere you want as the value of a chequebook is not the value of the number written on it.

So I'm launching a new index to go with the other indices out there. To the DPI ( Dinner Party Index) and TDI (Taxi Driver Index) I add the DrI - the Dr. Index. (A Baltic DrI perhaps? Maybe, but not after Brexit).  The DrI is flashing red on Bitcoin. Mind you, if you are a young doctor and wish to go long of crime then buying bitcoin is probably safer than following Dr. Crippin’s investment advice. Or perhaps my new friend is counting on the NHS becoming a Bitcoin-based service, where you use virtual money to pay for virtual care. Nononono .. a cheap pun, NHS care is unbelievably brilliant when you get it.

But the young are great believers in new disruptive technology and scorn the types of company I had just visited on my way to having a probe put up my nose. I had visited our local Audi dealership to pick a car up from servicing. I usually take my cars to Ken. He is brilliant and for a one man business in an old barn, it's amazing the amount of tech kit he has to cope with all the makes he deals with. Ken charges me £40/hour. Audi, with their one brand kit, charge me somewhat more than £150/hour.

So why did I go to Audi? Because they have devised a new form of restrictive practice. The service logbook is now online with only Audi or Audi recognised (read ‘paying Audi’) entities allowed access to make entries. So to get my electronic service stamp I paid the entry price for a service and experienced the equivalent of the Salvation Army headquarters in the City of London. The similarity? Hugely expensive expanses of chrome and glass sitting on prime real estate, funded by money that shouldn’t be going to purchasing and running glitzy premises, instead, being used to give charity to the poor or to provide spannering services at prices somewhat lower than legal fees.

But Ken hasn't lost out completely, I had an email from Audi near the end of their process. They had a worker go around the car with a video camera and then emailed me the resulting film together with an electronic Audi version of Amazon - an electronic shopping list of all the things they recommended I have done, ready to be clicked and authorised. The design of the site was clever in the way it replicated the easy, one-click "Jeez did I really mean to buy that” sites. They even had a picture of my car in the middle for that ‘look at your poor car, all alone in the garage, if it were a kitten you’d spend anything to make it better now wouldn’t you?’ pressure. I didn’t get much further than the £84 for new wiper blades and £60 for a bottle of brake fluid to be added because, if my car were a kitten, it would have a £100 self-insurance stop-loss on its head when it came to its longevity. Instead I 'cut n pasted' the list to Ken and had it booked in with him for the extras.

So what is going on here? Ken is the friendly man I trust, he gets the job done efficiently and he is a quarter of the price - yet he is not disrupting Audi. Far from it. Audi has created barriers to entry that in the financial world would be considered monopolistic and in Silicon Valley, would have seen Microsoft have to unbundle its web browsers even faster. I have to deal with Audi because of protectionism and I loathe them for it, even if they did give me a biscuit with my coffee as I waited the quarter of an hour to be seen by a service rep.

Disruption? I'm beginning to think that the branding fad of disruption is at the same point internet stocks were in 1999. Yes, it (new paradigm) sounds great but the soundbite is so far ahead of the reality you need the Hubble space telescope to see it. Facebook, Amazon, Netflix and Google are not an example of how successful disruption is but, instead, what a failure it is. Who is now able to disrupt any of them? The plethora of primary coloured adverts (with lots of circles, circles are so inclusive) for disruptive new ideas thought out in a land of ideals are not so much world changing, but more like chihuahuas yapping at the heels of the behemoths. One might get lucky and land a turd on Mr. Behomoth's shoe but most are likely to get kickstarted with a swift back heel into the long grass yelping or get picked up but then quietly taken around the back of the woodshed. Some even take themselves around the back of the woodshed, such as the dreadful Lily drone that I stumped up for 2 years ago only for them to go under with my money.

Another reason I was thinking about the old steady investments versus the new was because of some wise words a friend of mine, relatively new to investing, had said to me. It was probably the first thing he had heard and it had stuck-  "never underestimate the investment power of dividend-paying defensive stocks" - which conjured up Kipling's ‘If’ lines

If you can keep your head when all about you
Are losing theirs ..

Now at that point I always thought the next half line should be ‘…. then go short hats’, but here it's a comment on the old stalwarts. The type of company such as Unilever, who make so many essential day-to-day products they will just keep trucking along paying the dividends. Diversified product ranges all under one competition swamping conglomerate.

The topic of the Unilevers of the world was raised again in my conscious today by Dave Trott’s article in Campaign. He observes that the FMCGs ( Fast moving consumer goods) that Unilever excels at selling are not actually subject to the same form of brand loyalty as expensive consumer durables. If people buy a £5 product and don't like it, they can buy a different one next time and won’t give a thought to the £5 opportunity cost. Brand loyalty is greater the higher up the price point.

So how does the disrupter get high enough up the food chain to establish itself as a brand to be followed rather than a brand to be ditched? It needs to fight all the other newcomers. Tadpole land, where carnivorous tadpoles consume each other in their fight to make it to frog. The more seething the mire, the more energy is expended getting out of it and the less energy there is to take on the beasts that have already emerged ahead. In this respect, it is in the big companies interests to maintain the idea of the disrupter. Sell the dream of potential riches, much as the Investment Bank boss sells the dream to minions that if they work hard they could one day have his job, but all the time benefit from their infighting to protect his own position. Very Napoleonic in management style.

With markets being so quiet, as far as major trends go (get back in your e-box, bitcoin), we are left with streams of news and articles that are much like the chihuahuas of embryonic disrupters. Stories about what may, could or possibly happen if 4 levels of circumstantiality occur. The sands of news are being combed for tidbits of investment opportunity. But, as with most treasure hunting, the bulk of the bleeps from the metal detector yield nothing more than ring pulls which, though they once released a fizz, are now dulled with age. Which is why I am looking at this Steady Eddie, non-attention grabbing boring yielding non-tech behemoths to park my money in whilst I go and pursue more worthwhile interests for a bit.

The idea I am trying to propagate is that disruption is almost fake news. The big boys quietly stride on and are erecting further barriers to defend their positions whilst the new overexcitable disrupters yap and clamour causing the misdirection that is the foremost requirement of theatrical magic.

.... and watch for it in politics too.

Wednesday, 12 April 2017

Orpington Markets

At last, I am starting to form some thoughts and the result of them is pushing me towards sounding like Zero Hedge

There are dark clouds out there but day to day life carries on. One thing that previous crises has taught me is that the world is mostly made up of people who don't care. Their lives are too fraught with their own day to day concerns to change their set ways because of things happening a long way away in both space and time. 'Space' as in 'now but just not here' and 'time' as in 'it did 'happen here once, but a long time ago'. Like a fight in a street, crowds can see it happening but will walk on by minding their own business unless or until the fight turns on them. You may know things are going to be pretty shitty in the future but what do you do? Panic now and run away? Or bow to peer pressure and stay at the party drowning your fears, even if it does mean you have the biggest hangover the following day.

Or it's like falling asleep on the train after that party. You were surrounded on a packed train when you got on but you blink and find yourself alone in an empty carriage being shunted into a siding for the night. How the heck did you miss your stop, only to be left as the last one onboard with a night of cold darkness ahead of you? *For the record, throughout my life of commuting and some pretty big nights out, I have never missed my stop home.

In many ways, the markets are that train home. And we are currently at Orpington. For those of you who live in Orpington please disembark this post here, if you haven’t already at Chiselhurst. Orpington is an irregular stop on our fast line that normally evokes a low groan from non-Orpingtonians when the train stops there as, instead of whistling in and out of London, a stop at Orpington guarantees the train becomes rammed with London suburban commuters. As one old cove remarked many years ago, on opening one eye as the train drew to a halt in Orpington, “Ah, Apache country” and immediately took cover behind an FT.

Why are the markets at Orpington? Because when I look out from this packed train I see Apache country. I feel as though I am watching a movie through the window rather than an immediate reality I am actually involved in. I see visions of potential war, I see visions of EU upset. It’s beyond visions of a 1950’s Cowboy flick, it’s more an animated Dante’s inferno. But I'm behind the glass and it's warm in this train and there are lots of people around me who are also on the train and they don’t seem worried, so I’ll just stay here shall I? This is the problem with buying indices blindly. You are behind a glass wall in a carriage of self-reference and whilst you may see worries outside, as long as your peer group are with you then that reality appears far, far away.

But is the train about to empty after I return to my doze as my fellow travelers decide enough is enough and the future looks too bleak? It’s a game of chicken. No one wants to get off while it's warm and comfy but when they start there will be a rush for the doors as suddenly a phase change of opinion self-catalyses. A seed crystal in a supersaturated solution of bearishness.

So what do I see outside the window?

Russia vs West on the Syrian football pitch. I’m sorry West but your team is looking like Dad’s Army with Captain Donald Mainwaring in charge with Sergeant Boris JohnWilson organising things.

North Korea - they have informed the 200 foreign journalists currently there to prepare for something big on Thursday. As it’s the day of the Sun in North Korea that day I just pray that they aren’t going to make another one.

Europe - or more particularly, France. So we have a rising possibility of the final two candidates in the last vote being not Le Pen and Macron but Le Pen and Melenchon. Now as regular readers know my money has been on Fillon for a while but with the perceived rise of those previously thought not bothering to turn out now bothering to turn out and preferring Melenchon things have changed, there is suddenly the potential of having the far right and far left candidate agreeing on one thing -The EU/Euro has to change or they will take France out of it.

Yet my Fillon bet is not dead yet. The prospect of having two extremes both with anti-EU intentions could mean a resurgence in votes for my runner Fillon. Why Fillon and not Macron?

Well, Macron’s chances have just been blown out of the water. By what? I can proudly announce that the foolproof 'Economists Letter' indicator has just predicted the demise of Macron.

I last pointed to this trusty indicator a week before the US elections (here) when a panel of eminent economists endorsed Clinton. This was on the tail of the Economists Letter supporting the Brexit remain campaign. Well, they've done it again in France - see here - now my French isn’t great but reading that I think they are supporting a tasty new economic croissant that they hope Macron will bake for them.

So that is Macron out of the running, leaving the 'fallen at the first fence' Fillon, up and running again with a clear shot, backed by the moderates. Okedokey, tongue in cheek there, but this signal has been so stupefyingly accurate one has to take note.

However you want to spin this, the chances of France causing a wobble in global markets has increased rather than decreased. If France ends up with the far right or left winner then not only do OATs (French bonds) get toasted and rolled and all the other porridge puns, but Italy is going to be in a right royal mess unless it eats humble Greek pie and bows to every demand Germany makes.

So what do I buy or sell in this maelstrom? I may be late to the Party but I have sold some OATs. Selling pure Euro is not that simple. Yes, it's a wobble for the area but if France leaves the Euro does that make the Euro less or more valuable? It's a bit more German and a bit less French than it was. Which COULD be read as a stronger thing. My view of the ultimate fate of the Euro is that it will never die, instead people will gently abandon it until it becomes, like the holy grail in the Indiana Jones film, a dusty relic in a Brussels catacomb guarded by a representative of the ancient order of the Knights Euro for the ages to come. The rest of the world will move on to new shiny things. Where I will play Euro though is short against GBP. Long term GBP shorts may be suddenly squeezed by, believe it or not, the chance of the UK becoming a relatively safe haven. Now there's a thought.

So being uneasy on Euro, though it is an easy knee jerk bet, I am selling some BTPs again and buying low delta puts in things that shouldn’t be affected but will, no doubt, catch a cold from it all. Especially if I revert back to my Dante’s vision out of my train window, I am looking at SPX puts 2 and 3 months and buying gold.

After many years of decrying the goldbugs, I am buying it. And in true gold bug style, I am going to buy physical, not some ETF stashed in a warehouse a million miles away, and not tell anyone where I am stashing it. Though if I left it in my local station platform vending machine I think it would be pretty safe from ever being found.

So back to the market train. I am at Orpington and I am shuffling for the doors. I want to get off whilst it's Apache country before I get to Dante's Inferno or find myself in the marshaling yards at Folkestone, where a few old colleagues have spent a cold and miserable night comparing Folkestone to Dante's Inferno.


-----
Final footnote - A huge thank you to those who have sponsored me to help YoungMinds. I walked 42 miles over 3 days, not big for you fit young things, but a Saharan crossing for me. Should you be able to make a late contribution to try to get me to my target I have left the page open at https://www.justgiving.com/fundraising/Polemic-Paine
A contribution from an Orpington reader would make my day. though is now very unlikely.

Monday, 27 March 2017

Watching from the stands trying to work out the rules.

It's been a while since I posted, for the simple reason that I haven’t had anything to say.

The world of finance and investing has, for me, been pretty much on hold as I have been so mistrusting of the pace of the equity rally that I haven’t been overly long, yet also aware that mood can drive things way beyond where I think reality lies taking out any stops I may have on shorts.
So it’s been a do nothing month, apart from watching my long owned March 17 put expiries signal the top in the markets. Oh well.

Oil has been on my radar as I have been generally long of the filthy gloop for the past 18 months. What I have found most interesting is the way the price has been behaving with respect to reported positions. Monster longs in oil building even as US inventories built did look odd and a look at the forward curve sharply moving into backwardation pointed to odd things afoot when backwardation normally implies short term supply restriction - which didn’t tally with the inventory figures - unless the inventory was actually captive speculative hoarding.

But the recent falls, which should have been so obvious given the size of speculative longs, were interesting because they took so long to appear. Normally when one sees huge positional extremes either a binary event occurs to justify them or they unwind pretty quickly. This one didn’t. Which has me wondering why and looking for other examples.

This ties back into what has been happening in stocks and is reflected in my apathy to play. Under the rules that I have modeled my trading life upon, this stretch in equities with positions growing to levels not seen since [insert a previous date here] and cash levels in funds falling, a pull back would have been seen by now.

So why hasn’t it been? If I say a binary event has to occur to justify new massive positions then I can label that as ‘Trumponomics’, let's hold that thought for a moment. If I am looking for positional self-corrections to occur then the short term moves should have corrected by now. Is there a new factor? Here I have been wondering if we are seeing a new form of herd behaviour driving prices further out of line from past norms.

I have a feeling that models and passive funds push deviations further from means. Corrective forces are overshadowed by their dumb money and here I provocatively include 'Artificial Intelligence' in dumb money. AI might appear to be awfully clever and is a wonderful new marketing tool - a ramped up version of ‘our model says’ which was the first substantiation to pull money away from those decried ghastly human operators with their unpredictable emotional responses. Well, I’ll have a little side bet that the move to put all the eggs in the AI basket will end up with omelettes. The move to AI will create a new special herding in an AI manner which has not yet been discovered and will not be noticed until it is too late. ’Tis ever the way.

Training machines to behave like humans will most probably amplify the heuristics they are exposed to at inception. The catalogue of behavioural biases we note within ourselves will have to be weeded out by the coders and, I am sorry to say, coders are not the most savant of emotional beings.

But back to that binary Trump function - So, it looks as though Trump is not getting his way at last. It’s only taken two months to work out that Trumpworld is much like ‘Westworld'. A false reality run by robots with the objective of fulfilling punters’ dreams… for a price... finally sending them home poorer to the cold reality from whence they came.

The unwind of the Trump dream in equity land COULD be huge. But there is a twist, as there always is in Westworld plots. What if the equity market didn’t actually go up because of Trump policy? What if it was only a trigger, a narrative trigger, to what was actually a huge final exhalation from the bear meme that has effectively been running since 2008. Now before you vehemently protest that there can’t have been a bear meme throughout the huge equity rally from the 2009 lows, I will argue that this rally has been the most fought rally ever. The dominance of narrative that ultimately stocks will fall again has been constant, passing from bad news peg to disaster post. It only relented at the turn of this year when the mood changed dramatically as the final shorts were taken out and bear towels were thrown in.

On top of this, I have to throw the filter of central bank policy where there is a continued oversupply of money as the central banks are terrified of reversing the stimulus. The Fed because well, they are still Yellenised and afraid of their own shadow; the ECB because of the need to support peripheral debt; the BoE because of their Brexit fears; the BoJ because policy is only just pulling the economy out of a 20 year nosedive; China because they reverse engineer the stats to suit themselves anyway; everyone else? Well, to be honest, the rest don’t count as they are mostly indebted to ECB, Fed or China policy by one route or another and all that changing their own interest rates really changes is their domestic FX rate.

So this doesn’t make plotting our position on the financial maps any easier.

I still see a correction to Trump occurring (we have started), but the level to which markets will fall has been reset but a fundamental jump in really long term attitude. All of this is further clouded by the growing influence of the non-humans. Which leaves me even more inclined to stand clear and leave it to the machines to fight out while I pursue a new career in something creative.

AI is amazing, it just isn’t as amazing as we think it is yet. You can be smart but it doesn’t stop you being pushed over by an idiot.


http://www.bbc.co.uk/news/technology-39397211 Uber suspends self-drive.

Now finally the important bit -

It's been a while since I did anything decent, especially with regards to raising money for worthy causes, but I have been drawn into the story of a friend who I have promised to help with fundraising for a great cause 'Young Minds'. They are a leading charity trying to help the ever increasing number of our young who are suffering mental problems, often unspotted.

I am setting off with them on a coastal walk, but it's immaterial what I am doing as my request is the same whether I do nothing or cycle to the moon - Please, if you have ever enjoyed this income free blog or the odd tweet, a lovely way to thank me would be to help them.

https://www.justgiving.com/fundraising/Polemic-Paine

There is more of the story at that link.

With thanks
Pol



Wednesday, 22 February 2017

Together in our individuality.


I spend more of my time with creative types these days. There is something about them that makes them all identifiable as creatives. In trying to express their individuality they all look the same.

It is true for much of their output too. Though their work may be wearing cheeky coloured socks, the uniform is the same.

If this is the result of thinking outside of the box then perhaps returning inside the box would be more outside it. Their world more a Klein bottle than the free universe they perceive it to be.

It’s tribal clothing. Tribal clothing is spawned from the need to at once be both different (from other tribes) and yet the same (as the tribe).

Mr McKechnie dressed for the part. 
Architects - black round neck jumpers and Saabs, but these days it's Audi TTs. Apple adopted the architect garb for its masters as architecture is perceived to be where art meets science, the image that Apple has successfully adopted. I'm not sure if that is true but in today’s back fitting narrative world I’ll create it as a retrotruth.

Retrotruth is a term I predict will appear as the next derivative of the alternative facts. Once alt-facts have been established they can be back engineered, by the application of Determinism, to derive truths in the past that would otherwise never have been.

I was thinking about going on to talk about financial market specifics but creatives are briefed to give clear messages to influence the behaviour of the recipient. To this point the messages have to be short and to the point. No distractions. This is why adverts tend to rely on images rather than copy. It is rare to see a full page advert that is predominanyly text.

But there is a stronger driver in the fesire to keep the message brief. Extra content not only clouds the message but can be the source of disagreement that alienates the reader. A single part of a published work can undermine the faith that the reader has in the whole.

The greater the number of ideas in a piece then the more likely the reader will be alienated and the les likely they are to carry the message on. Heads or tails, where a 'tails' switches off the audience. A stream of flips is more likely to have a tail in it than a single flip. Stick to single flips.

The shorter the message the more likely it is to be broadcast by others, so the sound bite is born and Twitter booms.

Though an individual is built of many ideas and beliefs, sending ideas out one by one reduces the chance that the ideas pollute each other. The ideas are processed by the recipient in parallel rather than in series.

An author can produce two tweets. A tweet and an anti-tweet. Together they should combine to cancel each other out, just as virtual particles do in the world of physics. But separate them and they can live their own lives in their own tweetospheres, gaining the author followers from both universes.

From a primordial information soup of disparate amino acid statements, we build our own creatures of reality. Genes from different pools reassembled by us for our own bespoke purpose. Yet many of the genes are faulty, the basic news is corrupt or fake as there is no one to screen them. Building our vision of reality from these twisted facts we run the risk of creating Frankensteins of reality.

So it now lies to us to learn and question the very building blocks of our knowledge. If nothing else, the modern information revolution and the corruption of facts is driving us to learn more about the world in order to understand it. We can no longer rely upon others.

Tuesday, 21 February 2017

PMI. Unlimited Supply

If the Sex Pistols ever did monetary economics. Their epic 'EMI' would have been more like this.. PMI


Cash in unlimited supply
And now here's the reason why
It was a monetary game
All the outcomes are the same
What?

P M.I. P.M.I. P.M.I.

Too many people bought the monetary thrust
Too many people bought the ECB trust
An unlimited amount
Too many buyers on account
So?

P.M.I. P.M.I. P.M.I.

Stock bears are crucified
Deflation has all but died
QE's an addition, only ruled by one
Draghi forever, ever, ever

You thought the central banks were faking
With all that money making
You didn't believe they're for real
But look, you buy their apperel!

Don't judge a bond by its cover
It's now all about one number
And blind acceptance of a sign
inflation's just a rising line
Like

P.M.I. P.M.I. P.M.I.

Monetary expansion
With an unimited supply
That is the only reason
Any stock is a 'good buy'

French new high  P.M.I
Japan's a storming P.M.I.
I tell you this number is the game P.M.I.
Every country is the same P.M.I.
Inflation now the pressure P.M.I.
You didn't suss the monetary tool P.M.I.
Unlimited supply P.M.I.
Hallo P.M.I.
Goodbye,

Tuesday, 14 February 2017

Quincunx policy making. Quincunx markets.

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

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

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

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

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

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

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

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







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




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

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

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





Tuesday, 7 February 2017

Markets move as man skis in Austria.

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

**US treasuries slip as I do.**

**Zinc up as laughter breaks out.**

**Chicken consumption falls as thighs ache.**

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

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

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

**Mindspace falls in extended hours.**

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

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



Sunday, 22 January 2017

A wall of no worry


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

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

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

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

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

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

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

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

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

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

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

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

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

"Power corrupts, executive power executes" Polemic Paine 2017

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

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

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

Charts shamelessly nicked from my friends at Macro Man 

CEO confidence


Uni of Michigan Consumer Sentiment 

 Small business optimism


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

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

 The carnage may start right here.







Tuesday, 17 January 2017

The end of the land of the free.



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


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

 **GBP RALLIES THE MOST SINCE THE LAST TIME EVERYONE SAID IT WOULD FALL**
but you just don’t see that,

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

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


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

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

Ok rant over, back to financial markets.

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

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

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


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



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

Tuesday, 3 January 2017

With consensus comes conceit.

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

But with consensus comes conceit.


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

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


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

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

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


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

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Post Script..  Re Ford. http://uk.businessinsider.com/ford-ceo-why-were-killing-plan-to-build-mexico-plant-2017-1
There you go.

Tuesday, 27 December 2016

Strictly Come Financing

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thursday, 22 December 2016

SA Q'n'A

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

Here is their article

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, 13 December 2016

It's all down to one man.

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

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

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

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

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

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

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

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

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