Sanctions Through the Ages

As the US announces new sanctions upon Russia let's have a look back at sanctions through the ages.

Thermopylae

Battle of the Catalaunian Plains

The Viking Raids

Rorke's drift

El Alamein

The Death Star

How some hope it will work this time

It's quiet. Too quiet. Time to buy puts.

I know, I normally quote "never sell a quiet market" but this may be too quiet.

Up until now I have been happy to run with the theme that the market is in denial of an up move and price would grind out the bears. As such indeed bad news has been ignored, or rather it has tried to be traded but the response of the market is to keep on its steady course which created the behavioural learning feedback loop of desensitising further bad news. So in effect bears have been ground down and have been emotionally stopped out though prices are pretty unchanged over the past couple of months.

So with markets desensitised and beginning to think that bad news isn't bad because the markets haven't dumped, our risk is that instead of an 'unknown unknown' coming and kicking the markets lower, we are perhaps much more likely to have a 'glaringly obvious, but previously discounted, known' coming back and kicking us in the teeth. Which will be a real double whammy to market psyche as there is perhaps little worse than trying to justify to you superiors why you missed the bleeding obvious. So what will it be?

Well Ukraine has not gone away and is getting worse. The West is threatening to use it's economic deterrent of sanctions that has become their weapon of choice over armies and nukes presumably egged on by their successful implementation over Iran. But will they really be the stick to hit a Russian president who appears to be playing a short decisive game rather than one of longer term siege ( as with Iran) where sanctions have a greater impact. Much like a threat of "I'm going to fine you $10 per week for a long time rather than fine you $1m up front" doesn't have much impact if you are expecting the issue to have been resolved to your benefit within the month.

There is a nagging fear I have that something may well happen this week. Why now? Well Putin is busy playing a shorter game and playing the national hero. If you are playing on past glories then what better day to re-brand in the Russian populace's mind as a day of glory than May Day. So though it is currently camouflaged as Gazprom price rise day, it may involve something else.

If we add that fear to normal May resolutions, a ridiculously low Vol that is beginning to look like low vol complacency (see above), and a NZD that may be showing signals of a general risk off as it has started to move down on nothing, then this punter has decided to load the boat with a ladder of puts in DM equity indices out to 1 month and has even put on some eur/usd one month 1.3600 puts where vol, as Macro Man points out, is at basement levels. But if nothing has become clearer by this time next week will be looking to lift them all.

Banker's Bonuses. Where do Morals Stop and Practicalities Begin?

This last week has seen the subject of banker's bonuses come screaming back to the fore again. First Barclays shareholders registered protest against the decisions of the bank's own remuneration committee but failed to gain a majority to force action. Then came RBS where the ultimate shareholder has voted unanimously with the one vote "I, George Osbourne, declare" that their bonus cap of 100% of salary shall remain in place.

First the Barclays case. Barclays is a public company in as much as it is publicly listed and shares in it can be bought by the public should they wish to do so. Many members of the public do indeed own Barclays shares and have the right to vote as shareholders over issues such as overall renumeration or delegate that responsibility to those they feel better positioned to make those decisions for them in the best interests of the company and therefore themselves as shareholders.

RBS is more a super-public company. It has publicly listed shares that can be bought by the public as well as publicly listed shares which have been bought by the State which is very public money indeed, but this money has not been invested with everyone's blessing. It is this second tranch of share ownership that is causing the problems as unlike the individual shareholder who can express individual free will to sell their investment this tranch is effectively being run by committee which by its nature becomes one of consensus.

Ruling by consensus is not usually a recipe for success when it comes to solving a crisis where strong leadership is more often needed and it is verging on disaster when those making the decisions in the case of RBS are not doing so for the benefit of the bank or the shareholders but for their own political careers. The decision this weekend to reverse previous indications that the government would allow increases to 200% of salary (as they have allowed with Lloyds in which they have a 25% holding) smacks somewhat of political dealing within the coalition as a sop to the Lib-dems and their bank hating Vince Cable.

Nick Clegg commented that - 'A loss-making bank that is basically on the kind of life support system because of the generosity of British taxpayers shouldn’t be dishing out ever larger amounts of money in pay and bonuses and, you know, it needs to continue to come down.’ And a Government official stated ‘Under this Government's long-term economic plan bonuses are down, the banks are recovering and the economy is growing.’

Now did you notice what the Government official did there? Though true facts, the way they were stated delivered an assumptive correlation of "Bonuses are down SO banks are growing and the economy is growing". And this leads us to the value of limiting bonuses and the question that do bank bonuses really make much difference to profits against the deafening roar of the core problems that the likes of RBS are trying to overcome?

Most of the arguments against bank bonuses appear to rest on the moral rather than the pure financial as I can't remember if there has ever been a media piece on the effect of money saved by cutting bank bonuses on the dividend payout per share. Now your author gets a bit autistic when it comes to moral arguments and prefers to ask questions about the importance of the underlying evidence and much more importantly the veracity of the equality applied to any moral cases.

Lets look at some of the arguments being put forward:-

Big bonuses are bad as they engender a widening of inequality in pay - A fine point but if this is the basis of capping bank bonuses why do we very rarely hear of this argument  being applied to other professions - let's say lawyers or accountants or if you want to keep this in the state sector - the pay of senior BBC journalists. Or even the self-made man. This argument is more one of socialist personal beliefs and the easiest solution would be to apply a supertax on everyone earning over a certain amount as this is not banker specific.

But banks are different from other industries as they are deemed too big to fail and so therefore have a hidden subsidy of the "bailout put option" given by the state. They thereby have to adhere to the EU 100% cap. - This has been a bone of contention since the crisis but it is worth noting that not all banks are the same. If this applies to all banks then there is little point in being a small bank that could be allowed to fail yet still pay the premiums of assumed rescue insurance. This will drive the evolution towards fewer big banks that are too big to fail rather than encouraging competition and diversification of bank risk across a wider sector. There is also little point in overseas banks who have never been bailed out, nor needed it (large asian or middle eastern banks) establishing arms in the UK or Europe even if their lending could be locally beneficial.

But banks aren't like other private companies, they provide a public service without which we would all suffer and so they have a duty to provide it and with that comes a duty not to profiteer and over reward themselves for doing so. - And at last here we have the problem at the core of all of this. What is a bank? Is it a social service or is it a private company whose only responsibility is towards its shareholders? Whilst many will say that every company also has a responsibility towards its customers, so therefore an implied social responsibility in this case, it could be suggested that the responsibility towards the customer is only a secondary function of the responsibility to the shareholder as if you lose your customers you lose your business and the shareholders lose their money. Ryan Air is a good  example of profit vs customer responsibility thresholds. Perhaps the banks had done too good a job in the past projecting the caring sharing image of sheep for many to really believe they are sheep forgetting the existence of the wolf beneath wearing the sheeps clothing to the point that there is now a belief that banks have a duty to be sheep. Taking this analogy one stage further, if we kill all the wolves will there be any sheep? For this is the next point raised about bank bonuses -

 Bankers don't need to be paid all that money as there will always be someone else of equal capability willing to be paid less to do the same job. Which raises the question that if that is the case then why hasn't the cut throat efficiency seeking machine of city finance and particularly the large banks with their continual drive to reduce costs not already found this font of cheap labour and utilised it? Having worked in the industry for years I have yet to find that golden institution that pays out one cent more than it has to in order keep a productive member of staff in their seat.


We shouldn't have institutions as important to our society as banks run by people solely motivated by money. It drives moral hazard and focuses on short term gain rather than long term reward. - After a gaffaw of incredulity over banks being run by people that aren't motivated by money, the question is shouldn't that apply to every institution or the whole of society and not just banks? We are back to socialist ideals rather than bank specifics. But back to banks - Whereas a doctor should perhaps be expected to find reward in curing people as well as the pay, or an engineer find a reward in the process of his creation a bank's product is money so someone motivated by something non-money is unlikely to ever want to enter a word solely involved in money. However the point about long term incentives is absolutely right and fair, to the point that the politicians arguing the case should themselves be forced to act for the long term benefit of the country rather than just the next election, but the long term incentives being introduced to replace large instant bonuses are hardly incentives at all. If my experience is anything to go by the deals offered on long term share structures instead of cash bonuses are often severely skewed to the banks benefit. For example, the right to the longer term payout is not only lost on voluntary resignation from the institution but also on redundancy or dismissal which dramatically increases the incentive for a bank to turnover staff faster and lets not forget the chance of clawbacks should someone completely unrelated to your side of the business screw up. The long term incentive is often worthless.

If a bank doesn't make a profit why the heck is it paying any bonuses at all? Basically for the same reason it pays salaries. The argument of no bonuses if no profit could theoretically be extended all the way to "If no profits then no pay at all" and so the company folds as everyone leaves. So if we agree that that example is too extreme then there has to be a point of logical compromise inbetween. But where does this lie and how is it chosen? This is where some delegation of judgement has to be extended and whilst it is morally easy to say that if a company has no profit then it should not pay a bonus one has to look at what you want the company to achieve the following year and who you want around to help you get there. Inherently the company itself is going to have the best view on where it stands against its competitors in the field of remuneration and what it has to pay for any specific post whereas the shareholders will have a more woolly perceived view, so the bias should be to let the company make that decision within its remuneration committee, with perhaps a caveat that the remuneration committee has to be sufficiently distanced from those over whom it is making the decisions. But there is a deeper issue. Earnings are never smooth across an organisation's units. How do you cope with wanting to reward an individual who has regularly contributed hugely to your bottom line when the institution itself has made a loss through other divisional errors? If they take their team elsewhere you will be that amount worse off probably resulting in a bigger loss. There is a strong case for recognising people who prevent even bigger losses. This is the risk RBS is now taking. Talent is leaving and despite cries of good riddance from the peanut galleries it will impact the banks ability to recover from losses. Which brings us back to the problem of RBS. It is caught between having to make a profit to repay the tax payer who bought it and the moral strangleholds that the taxpayer/politician imposes of how it thinks a bank should be run rather than how a bank can be run to survive in an internationally competitive market. The same sort of consensual interpretation of nice verses hard nosed reality can be blamed for the current plight of the UK's Co-op.


One last question back though - does anyone actually know how dreadful most jobs in the City are? Yes there are abysmally poor jobs out there but if you add up the stresses, short life expectancy of a job, hours worked, bullying, abuse etc I am pretty sure that if there wasn't that lure of the lottery ticket pay out the talent and intellect queueing up to get in at the university milk rounds would dry up pretty quickly. Even at the later end of the age scale I know many who if they are clever enough to adapt are leaving the city as the reward vs enjoyment payoff has rapidly changed with both reward and enjoyment dropping hard. But this may actually be the point of it all. There is a huge pool of intellect sucked up each year into the world of finance and if you were to believe that finance is just the oil in the wheels of the rest of the economy then that is intellect that perhaps could and should be better employed in something more productive but this argument could and has lead to tomes being written and is probably a good point to leave this tricky subject.

Gamma Chameleon

With option gamma driving the equity markets I can't get a particular song out of my mind.



You're a trader hedging deltas all the day
If I knew your strikes then I too could play.
But I'm a man (a man) without conviction,
I'm a man (a man) who doesn't know
How to sell (or buy) your contradiction.
I hate your flow, I hate your flow

Gamma gamma gamma gamma gamma chameleon,
You buy then sell, you sell then buy
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Oh the spreads and strikes you'd give away
Added value to the street, I used to say
That your trades (your trades) would show direction
When you bought ( you bought) I'd just go long.
But your flow (your flow) now whips forever.
Strings me along, strings me along.

Gamma gamma gamma gamma gamma chameleon,
You buy then sell, you sell then buy
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Every day is like survival (sur-vi-val),
Where my colleague (my colleague), is now my rival
Every day is like survival (sur-vi-val),
Were my colleague (my colleague), isnow my rival

I'm a man (a man) without conviction,
I'm a man (a man) who doesn't know
How to sell (or buy) your contradiction.
You come and go, your bloody flow.

Gamma gamma gamma gamma gamma chameleon,
Why don't you slow, your evil flow.
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Gamma gamma gamma gamma gamma chameleon,
You lost my love, long time ago.
Profits would be easy if your flow's weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Gamma gamma gamma gamma gamma chameleon,
Hope your books blow, that'd be a show!
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Questions Questions Questions!

Will EU QE be more like US QE or Abenomics or something else?

If it's something else could Euro actually go up on EUQE due to bond portfolio inflows, stimulus to growth stocks or just a credit improvement as rubbish is bought?

If the EU are targeting FX levels and yet they have a projected growing current account surplus is it going to reignite the battle of EUR/CHF where Switzerland are also battling a strong c/a ?

How swiftly will any IMF Ukraine money end up in Putin's back pocket through him squeezing them dry through Gas prices?

Should there be a cut off in how far back historic ethnicity or past land ownership can be realistically considered in current disputes (and should any country that has 100% inheritance tax be allowed them at all) ?

Are the US's warnings to the world on various issues becoming a little thin?

Am I right to be losing faith in all sides of the Ukraine issue?

If Scotland devolves what happens if the occupants of the Scottish Borders decide they want to be part of England? Does it go Crimea?

If independence wishes are fractal, how small can you go yet maintain rights to self determination? Kensington and Chelsea would have gone independent years ago on economic grounds. Remember "Passport to Pimlico"?

Will the BBC's economic editor Robert Peston declare an economic indicator and the level it needs to hit before he will admit the the UK is not a basket case.

Why are the UK's Liberal Democrats given so much relative airtime and assumed to be the 3rd party when they only have 7% popularity.

Is it possible for Nick Clegg or any Lib Demmer to consider that the UK could leave the EU and still do good trade with them (see Norway, Switzerland)?

When will someone declare Bitcoin mining environmentally unfriendly as they realise that the likes of KnCMiner's had a March Electricity bill of $450,000?

If all that electricity ends up as heat should Bitcoin miners instead sell subsidised electric room heaters to the poor in cold countries that are actually small Bitcoin mining computers sending their results back via mobile data?

How much extra CO2 gets breathed into the atmosphere by London Marathon runners and how much more environmentally friendly was I by lying still in the sun?

Why couldn't Samsung have made the Galaxy S5 just that little bit better to make it a no-brainer.

Why don't they fit silencers ( mufflers) to chain saws? Is it a man thing like the audio boost to engine noise in some cars?

Why don't car manufacturers build solar panels into the top of dashboards in cars to keep your battery topped up rather than use them just to melt your Mars Bars.

Is the south coast of Devon in the UK one of the most beautiful places on earth when the sun is shining?

Farm shop economics.

Today's Polemic pain is far away from Ukrainian destabilisation, or biotech dumps or China slowdowns or ECB unconventional actions,  though as some have asked "what is unconventional about implementing a monetary policy that everyone else has done already?" to which my reply is "the Germans accepting it" because that is about as un-German-conventional as it gets. No today's pain is food labelling.

There has been a steady campaign in the UK and probably in every other over regulated, over litigious, overweight and over civil service staffed country in the world to protect the consumer from products that he/she is deemed too bloody stupid to work out is bad for them. Traffic lights, grids of nutritional daily recommended intakes and ratios of long chain organic compounds all grace the packaging to the point I wonder if they are going to follow the example of cigarettes and insist pizza is sold in plain packaging displaying a picture of the grotesque effects of consuming the product. In this case perhaps a picture of a big fat oaf in a dirty tee-shirt and underpants on a burst sofa surrounded by empty pizza boxes with Jeremy Kyle on the TV. So with all this ubercare and love being extended to the logically challenged food shopper how come merry riot is being led in what must be the biggest mislabeling and misselling scam that has hit the streets since Bernie Madoff teamed up with the Wolf of Wall Street to set up a PPI scheme on Libor fixing for student loans? Namely - Farm Shops.

Many moons ago farmers started, quite rightly, to complain about the effective enslavery they were suffering at the hands of the oligopolic supermarkets. The large buyers were crushing the prices they paid through contractual straightjacketing whilst at the same time raising their own prices to effect huge margins. Something had to be done and so we naturally waited for what happens in any other market with large margins to occur- competitors step in to undercut that margin. In this case who is best placed to step in? Why the farmers themselves. It was not long before the UK saw every village high-street planning its own farmers market and any roadside farm with a spare barn set up a farm shop. Here came the revolution at last so off we set to support our local embattled farmers, but no! Something must be wrong? Has the farmer not had enough practice with the pricing gun? For these prices must be wrong! Surely those canny farmers must have passed economics 1.0.1 to get this far? Because surely the simple requirement to undercut your competitors is that your prices are LESS than your competitors? Not twice as much.

Seriously Mr. Farmer, if you want my business and you want my respect and you actually want to be free from the yoke of the supermarkets and you want  to make serious money other than by levying a stupidity tax on the gullible middle classes then just simply charge LESS than your competition. It's simple really and before you mention supermarket buying power and lower costs let me point something out to you. You are the producer. You can get no lower cost of distribution than already having it in your shed. So if you don't want me to tip off all those PPI cold calling misselling legal companies then act now. If the UK FCA can threaten to backdate misselling actions on pension annuity companies all the way back to when Noah bought an annuity that didn't pay out past his 600th birthday as he thought it would, then a simple case of 3 times the going rate for misshapen parsnips should be a snip.

Having dealt with the mispricing scandal let's move on to the mislabelling scandal. The use of the word "Artisan". If there was such an august body, as there should be, as the National Society of Artisans (regulated by the FCA, SEC and the Historical Society with oversight from English Heritage and the National Trust) they would by now have trampled underfoot and bathed in the blood of the "artisan" infidel.

There was an era when coffee came black or white. We coped when that all changed, but then came loaves of bread. We have just about learned to cope with the myriad of additional strange grain ingredients but just when we have and learned to pay the doubled price for the addition of a thimble of a central american cereal of unpronouncable name, they go and stick the word "Artisan" in front of it and double the price again.Is the addition of the word "artisan" really justification for selling the same article in a  misshapen form for twice the price? No it isn't.The term "Artisan" originally referred to a craftsman who made items or decorations, but the term has now been bent to mean anyone who makes anything by hand. By which frame of reference this blog is now artisanal. Note an artisanal blog not artisan blog, otherwise it would be a blog for an artisan, not made by one.

Yet I passed three different establishments today all proclaiming "artisan bread" on their signs. Without a national regulatory authority of artisanship this just means that someone made it. It could have been a kid and it's actually Play-doe or it could have been Raymond Blanc. So the word artisan is completely and totally redundant other than in price, where the purchaser is expected to have his "fxxk me that's expensive" naturally explained away with a "well it's artisan innit". We surely can't be far off the McArtisan burger at which point the counter resets and a new word has to be found as complete debasement has been reached.

Now back to the farm shops. Guess which word  they are already swiftly prefixing with black marker pen onto the labels of  their already uncompetitive produce?  These boys are smart if not artisanal, though a hyphen after the "s" in that word might fix it. So good luck at your local farm shop.

----

I have spotted this sign locally indicating that even our birdlife is being targeted by the artisanal loafers.

You've Been Warned.

Yesterday I was rather hoping for the bears, or perhaps I should say "correctionists" to get Edward the Seconded by a red hot poker rally but this has instead turned into a red hot poker party with said instrument being gleefully applied to everyone in the room - Bull, bear or correctionist - without lube. I touched yesterday on general April behaviour and using the selective view methodology which I also mentioned I can say that this price action still fits. It's sexy whippy and we know it with more loss of control of the ball by each side than an under 7s soccer match.

China data is rattling some cages and this Citi surprise chart that Gavin Davis tweeted yesterday is pretty startling

It does beg the question "Well what the heck did you expect?" to the point that whoever's expectations they were should be totally ignored in future or sacked. But then I have suggested before that China is just like a currency NDF market - There is the offshore market (what we think is going on), the onshore market (what is really going on) punctuated by the odd NDF Fix where the offshore market finds out how wrong it is. China will probably be just fine. In fact that reminds me of one of the best Daily Mash articles "I'll be just fine, says planet" and like that,  maybe China will be just fine but that doesn't mean you will nor that it cares.

But the US is not happy with China and is again warning them over their currency policy. US warns China after renminbi depreciation . We have heard this before and because of that it's market impact is diminished as nothing really came of the last one. Which brings us to the value of warnings in general as warnings are only as good as the threat they carry behind them (as every small child knows). I am pretty sure that there has been an explosion in the issuance of warnings recently which has led me to tap "warns" into Google News to see what pops up and it's staggering.

But a few -

Putin warns Europe of gas shortages over Ukraine debts
U.S. Warns Russia of More Sanctions as G-7 Talks Ukraine Aid
IMF warns on rising debt levels
EU's Juncker warns over UK hopes of EU renegotiation
British economy too reliant on people spending money, warns IMF
Italian navy warns of 'biblical exodus' in Mediterranean
UN warns Burundi leaders on violence
Dimon warns regulation will push credit costs higher
UN warns of Syria food shortage due to looming drought
Malaysia not impervious to external shocks, warns Najib
WTO chief Roberto Azevêdo warns on trade recovery
Cameron warns against Ukip vote
Don't jump red lights, coroner warns cyclists at Bow roundabout lorry death inquest.

The currency of "warning" is seeing greater inflation than that of "Hope" at a US investment bank . Naturally we tend to instantly make a risk decision based on said warning based on the benefit in continuing against the warning, the cost of the alternative and the probability of the alternative. But there are two types of warning - one which points out a downside that the warner is not proactively administering. E.g. "Watch out, there's a tiger behind you" where the detriment is self administered and the type of warning that involves proactive intervention "If you don't stop doing what I don't like I'll hit you".

We can quickly scan through the above warnings and separate them into the two camps but there is a bit of an overlap where avoidance of what is being warned against will benefit the warner. "'Every other cake shop's cakes are poisoned' says cake shop owner". Unfortunately it's this type of warning that completely devalues the currency of warnings and the most obvious current example is in the Scottish independence issue.

But back to the big warnings. The gas one is probably the one that has me going "Oh God, here we go" the most. Yes Russia needs the revenue but then Europe really does need the gas and though both sides are diversifying as fast as possible (Russia just signed new deals to supply China) it's probably going to go to a Mexican stand off. I'm looking at buying more UK gas fracking stock as if for no other reason Putin is helping the UK Governement's stance towards fracking even if its not an immediate solution. On that subject I would have though that an instant response to NIMBYism would be to apply a geographic normal curve over the effected area with energy subsidies applied accordingly, e.g you are right next to a wind turbine you get free energy with subsidies diminishing by distance. In that case I would be a STIMBY (stick it in my back yard).. oh! Does that sound rude?

Right enough rambling I'm off to do my proper job.

Tell 'em like a man.

Even the Fed and the market's expectations and responses are playing to the mean reversion theory. Fed read as hawkish, market therefore extrapolates more for the next meeting then, lo and behold, the Fed de-emphasises the factors that as the market had picked as indicative of future policy and reiterates those that were previously sidelined and we end up with an out of phase pair of sine waves  of Fed and market expectations that in the long run average out to flat.

But "Vicky" Yellen  should get a grasp on what forward guidance involves as unfortunately she may well be employing a common communication error that, as the first female Chair, we have not seen before. Now before anyone accuses me of sexism I would like to explain. As a caring empathetic soul (however not according to Mrs P) I have sometimes found myself in the position of the shoulder that female friends will lean on when their male amores or soon to be ex-amores, are not responding properly to instruction. The converstaion will inevitably culminate with me asking "well did you tell him that" to which the answer is nearly always "not in those words but he should have known". This is the point I take their hands, look them in the eyes and with as much gravitas as I can muster explain a basic fact of life. MEN NEED TO BE TOLD CLEARLY AND PRECISELY IN THE FEWEST NUMBER OF WORDS EXACTLY WHAT YOU WANT THEM TO UNDERSTAND. So, dear lady, if you really do want to dump him, you say "you are dumped and I don't want to see you again" because phrases like " I really don't think this is working" or " I really like you but .. " leave a sliver of hope on which the recipient can hang their own beliefs.

Fed guidance -

So Ms Yellen can you please note that the market is that dumb-arse boyfriend who will always pick out the bits he wants to hear to substantiate personal biases and if you really want to act as a guide you are going to have to be reading from your basic children's Janet and John , not Joyce's Finnegans Wake.

I am wondering if we might be seeing something similar in China to the headline "China Reiterates It Won't Stimulate Economy". But that is conditional "As long as the economic growth rate, employment and other indicators don't slip below our lower limit and inflation doesn't exceed our upper limit, [we'll] focus on restructuring and pushing reforms". So this really sounds like every other central bank around the world including the Fed, who will "do what is necessary if its necessary but not if it is not necessary". Apart from the ECB of course whose mantra is "we will do what is necessary if it is necessary only once we have realised it is necessary which will be far too late to have prevented market panic." The ECB being like that mad Turkish taxi driver who is trying to light 2 cheroots in his mouth whilst leaning over his shoulder jabbering at you doing twice the speed limit on the wrong side of the busy highway oblivious to oncoming swerving traffic yet still somehow manages to get you to your destination in one piece though exceedingly shaken.

Now on to something else. I had been thinking that the UK's RBS was a sure fire winner for the title of "the next British Leyland" but it would appear that the Co-op is making a strong late run that may well see it take the line. I have never been a fan of Lord Myners since his pension management reform plans effectively forced fund managers to switch from equities into bonds at the bottom of the post 2001 equity crash due to his perception of matched liabilities and risk, all post-event of course. But he has my sympathy with his resignation from the Co-op as the disparate consensus style underlying management structure has decided they don't want to be told what to do. Considering the state of the Co-op this conjures up images of village committees arguing over the colour of the doilies in the tea room on the maiden voyage of the Titanic. No wonder Myners has decided to jump than go down with the ship. In fact I am wondering if the underlying management of the Co-op is made up of the occupants of the Hitch Hiker's Guide to the Galaxy's Golgafrincham B-Ark (the one full of telephone sanitisers and hairdressers).

But back to markets - I guess it is make or break day now to see whether the early post-Fed euphoria will be maintained. With that in mind I'm willing to play the direction today sets as the next trend but harbour my bullish longer term views. April often sees bears try and fight the tape and and end up having to chase things higher so it could be pretty mixed. This could well leave the market bereft of new buyers by the start of May which is traditionally the opening of the European freak show. Cue song "There May be trouble ahead" but before that "Let's face the music and dance"

My search yesterday for a sacred cow that has yet to be slaughtered has led me via a tortuous route to the shores of chinese commodity companies. The china news dip overnight is providing an opportunity to get into China against consensus and marrying that against a feeling commodities are going to lift and adding Alcoa's outlook for aluminium prices I may have found my Cow.

As a tabloid headline would say - "China Chrades Chrigger Chalco Chow".

Anorexic tails, beer bellies and a lost cow.

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First something I am struggling with. Writing "I" instead of "we". As Team Macro Man we decided very early on that we would be "we". It inferred agreement and probably more importantly it implied that there was an august body sitting in reverential committee thrashing out all the pros and con and only delivering the distilled and vetted nuggets of true worth. Which of course was bollocks. Suddenly referring to the "we" in the singular "me" makes me very much aware of a loneliness of opinion and understand the reader's immediate natural assumption that the singular implies no checking, no validity and of course no value. It is perhaps for no better reason that writing in the third person or under a collective makes it easier to express off the wall and out of line opinion. But tempted as I am to adopt such strategy for my own comfort I will not. Yet. But if you find this blog being written by someone termed as "Polemic's therapist" then you can surmise that I may have caved in.

Yesterday was a tad painful at Polemic Towers as your author (see I'm nearly slipping into third person) decided 3 days ago that his cash on the sidelines should be gainfully employed again to usher in the new UK financial tax year. An overweighting to EM has not been enough to counter the short term damage in some of my old favourites, my own sacred cows (A theme Macro Man is running today). But it's early days and compared to the forced liquidation of long/short trades it has been but a flesh wound. But though we (no seriously that is a "we" as in you and me) may have seen many of the market's sacred cows slaughtered over the last couple of months then the unwind of the short Jpy long Nikkei trade is going to be more like the processing of a blue whale on a Japanese factory ship. It has to be the biggest and most comfortable trade that has been languishing on many a macro book and it feels like they have only just started work on the tail of that position leaving me expecting a good old shock and awe 95 handle on Usd/jpy before it's out.

Now talking about tails, it's probably worth looking at investment returns vs risk and expectation this year. I have touched on this before when writing in another place but 2014 is fast beginning to mirror a trait of 2013. That is one of mean reversion. We have had many potential market catalysing blow ups presented to us but after a week or two of predictable panic prices they have all pretty much reverted to where they cam from. UST yields are where they were a few months back, equities too, even emerging markets are OK and knock me down with a feather if the bete noir AUD/USD isn't back within its holding pattern of last summer and at its one year average. Basically Mr Shouty-Screamy has grown horse crying wolf as the markets are leaving the the normal curve Fat-tailers anorexic and mean reversionists with beer bellies. Those tails just ain't happening.

This leaves me wondering where the next reversion will come from, in a way I am looking for the last sacred cow in the field that is making like a tree and to my mind it's hiding somewhere in commodities. But I am late, the moves began at the end of March and it looks as though most of the herd of short commodity trades is already on the way towards hamburgers, being led by the short Aussie equity with short AUD$ trades. Bah..

So basically I'm on a commodity cow hunt and ask, "Where's my cow?".



All help appreciated.

"It's Panic Captain - But not as we know it"

We could consider that what we are seeing is a form of market panic but to paraphrase Dr. McCoy on the USS Enterprise, "It's panic captain, but not as we know it".

The normal anatomy of a panic goes something like this. A price has risen, price becomes news, leverage is employed to extend the gains, an unknown unknown appears to introduce doubt, leverage trades are unwound, prices fall and then price falls shake out even the steadier hands due to money management rules.

This year we have seen plenty of debate as to whether various markets are overbought and though property is the people's choice when it comes to bubbles, in this case we are looking at equities. But as a quick aside I do wonder what happened in popular property commentary between "Property is dead, it has to rally" and "Property is in a bubble it has to fall". Can anyone remember the "Property prices are just right, how wonderful" bit that should logically have occurred somewhere in between?

But back to equities. It has struck me that there has been something very different in this run up in equities to previous ones in that the professional investor circles (and we only need to look at our own dear comments column at Macro Man to detect this) has had a bias towards the belief that equities are generally too rich and so should correct. To the point that retail appear to be mocking the professionals as they lead the markets higher. This, I suspect, has led to a consistent underweight positioning by many professionals that has led to a mix of responses.

First, the indices have tracked higher and general fund performance has under-performed the very visible (and easy to compare against) indices which has pressured funds to invest not so much because they really want to through belief but because the have to in order to remain credible and avoid redemptions in favour of index trackers.

Second, to play catch up, high beta has been sought and as ever that is to be found in the land of the techs, bio or otherwise (remember the more unknown the product the more that dream hype can be built into it).

Third, to incorporate the beta performance yet still maintain an overall sanguine macro view on the markets they have been employing sectoral plays of long high beta and short cyclicals as this "should" partially hedge any overall falls in the general indices that has become the visible performance benchmark (as in in the first point). Going one stage further long DM tech and short EM cyclicals takes things one stage further.

This has all left the long/short equity plays loaded.

Now let's look at what has happened this year so far. We came into January with popular opinion geared towards  DM rallying over EM, a begrudging feeling that equities might still perform ( ref that "begrudging" back to the points above) and a feeling that global growth would continue and apart from a risk that the EM component (that we were selling to fund DM) might cause some general contagion.

By mid January the EM contagion story took hold and we saw the general DM long trade come to a halt, or rather - Pause.

Next Mr Putin decided to don his Napoleon hat which has led to a media frenzy extrapolating that his Crimea adventure will only end once he victoriously enters Napoleon's wedding venue to Josephine in the Orangerie in 3 Rue D'Antin (which may upset any foie gras reception that the current occupants, BNP Paribas, may be throwing there).

Meanwhile, back in homeland USA the Fed stool Yellen has been projecting the image of a UK teenager - to the point that I am wondering if we should call her Vicky Yellen. Her first presser was on a par with this.



However through the "yeah but no but whatever" the message of unabated tapering was clear.

Under normal circumstances one would have expected the above melange of EM, Putin and taperage, seasoned with China slow down and credit fears and general deflation to pull the rug from all things risk. But it hasn't, though many will respond "yet!" I would instead suggest that the resultant panic this time in risk has indeed seen positions dramatically adjusted but that risk adjustment has been where it was piling up in long/short books and DM/EM trades. As has been pointed out in previous posts on Macro Man the rotation in rotation is getting positively gyroscopic in intensity. You only had to open an equity monitor page this morning to see the lack of consistency by sector or country.

 There is indeed panic in the books but it's below the surface of outright equity indices and there will be some more nasty performance figures appearing soon as assumed long/short hedges have been bonfired. Back to TMM's old favourite "If you want a good hedge, go to a garden centre".  However the lack of absolute equity index dump reinforces a view that whilst leverage catch up beta trades are getting hosed the overall market positioning is not monster long and the rule of "path of most positional pain" is indeed playing out but it will not lead to an overall equity melt down.

In fact - playing the path of most pain idea. If markets were to continue upwards what do the stopped out long/short high beta tail chasers do then? That would be a pain in their tails for sure.