Wednesday, 26 November 2014

EU Add a Magic Money Multiplier to their Liquidity Diagram

The EU has announced a program to pump €315bio into the economy of Europe via a loan guarantee scheme. The actual amount they are stumping up is €21bio.
Full announcement here.


- That corporates want to borrow.
- That corporates are not lent to when they want to borrow.
- That corporates will spend borrowed money on things that are of benefit to others rather than just themselves.
- That if they are lent to and they spend on the right things the gearing for the economy will be 15x.

As I often have to say - "Assumption is the mother of all f**k ups"

It would appear that the sticking point is still within the corporates, who will be the recipients of this facility, where they need to spend on expanding their businesses. Providing yet more cheap credit for them to probably divert to M+A and share buy backs will be great for stock prices but doesn't necessarily mean that they are going to employ more people. The proviso that the loans are targeted at specific projects doesn't guarantee that project or finance substitution isn't going to take place within the recipient companies.

So here is the latest EU plumbing diagram with the EFSI and Magic Money Multiplier included.

Original diagram and explanation here


Post script.

I do hope that any natural recovery in the European Economy is not mistakenly labeled as the successful application of these homoeopathically small doses of EU quackery.

Dark Matter and the Silent Majority.

The recent rally in stocks has seen a mood swing in commentary that would suggest the break of 2050 in the S+P 500 has seen a form of capitulation. We are left with a mood of resignation that ‘everything is just wrong’ but don’t fight it and just accept that the ‘Santa Rally’ is what to expect for the rest of the year. To the point that 2014 has been effectively written off with the focus moving on to placing new chips on the table for 2015 (as indicated by the proliferation of 2015 trade ideas hitting the circuit).

The stream of calls for tops in equities has diminished and those that remain are turning to more exotic arguments that are more witch doctor than convincing. They normally involve a chart of what happened in the past overlayed with a chart of now.

With so many failing examples of what happened 'last time' being used to argue what will happen 'this time', perhaps we should instead be using the 'this time' to reprogram our metrics for future 'next times' instead of always looking backwards and assuming 'last time' is 'this time'.

Financial commentary is terribly focused upon how wrong everything apparently is. Equities shouldn’t be here, bonds shouldn’t be there, you name it and there is a blast of noise from somewhere declaring just how wrong the current situation is. But the inescapable fact is that however wrong it may appear, it is right. It is there staring you in the screen. So where is the dark matter of argument that is needed to explain the difference between the theory and reality?

There is always a bias in what we hear from any quarter (and this applies to politics, environmental issues, justice or I suppose just about anything) as those who think things are just fine tend not to say anything. There is a pain threshold that needs to be breached in the levels of discomfort before the screaming starts. The fact that things that are said to be wrong appear to remain wrong is perhaps proof that the majority is usually silent. If the majority were in discomfort then as a majority they would have said and done something about it. The silent majority is the dark matter.

I have wondered if this idea of the noisiest tending to be the minority could be used (or perhaps we do use it) as a reverse indicator. The more yelling about an issue either on social media or in the news, perhaps the more representative of the issue being one of a minority concern. This can’t be applied to short term events, such as terror acts, where everyone is rightly shocked about it, but where an issue has had time for something to have been done and yet nothing has, then perhaps the idea of it being a minority interest can be applied as the majority don’t care enough to do anything about it. As the market is the sum of the wisdom of crowds, perhaps the noisiest people are reverse indicators when trying to work out what will happen next.

To test the theory we could sample Twitter and see if a majority of tweets have been about the dangers of something happening that subsequently doesn’t. I leave that for you to do as I have already made my own mind up on that point. Unfortunately the most likely outcome is usually the most dull and is the result of slow process rather than shock event (back to the outcome of our dark matter silent majority).

This could also be applied to regulation as well. The loudest screaming about the FX fix fixing scandal has hardly been from professionals but from people in comments columns who often prove no deep knowledge of the situation other than expressing a propensity to scream about bastard bankers, whilst meantime happily paying 15% spreads in the local post office for their holiday money. 'Tis they that should be ignored and the quieter opinions of those that understand the issues taken into consideration.


Never short a quiet market, but as 2014 has shown, never short a noisy one

Thursday, 20 November 2014

A Guide to Making 2015 Financial Predictions.

We have started to see and hear the first glimmers of the 'calls for 2015', with Goldman kicking off the season.  I would imagine that various other institutions and departments have been asked to start preparing their top trades and financial calls, so here is a somewhat cynical guide to the whole process with some top tips for practitioners.


First, there is absolutely no point in this process because who said an exact year, with no positional adjustment during it,  is the way anyone trades these days? If it were then the financial internet, press and even markets or exchanges would not have to exist between Jan 2nd and Dec 1st. Perhaps that's a good idea?

This process is much more like a yacht show where forecasting agencies can show off their shiny products of intricate design and process, wrap them with a glitz of gravitas and sell you a dream that you can sail off into 2015 aboard. If it doesn’t hit any rocks and sink then they hope you will be back to buy a bigger one next year.


The usual first rule of forecasting is never to put a price and time frame in the same forecast. For example ‘Oil will be over $100’ gives you an infinite time run within which to be right and 'Oil will be lower than here in 2015’ gives you a very high probability of being right unless you have unfortunately hit the absolute low at time of prediction.

With this in mind, make sure your predictions are not for where prices will be at the end of 2015, just somewhere during 2015. This leaves you with a year of optionality to either get out or take profit, GS style.

Only publish your exit trades way after the event. For example, you called oil down, oil went down until Jan10th then up for the rest of the year - You cut the winning trade on Jan 10th. Of course you did.


If you have to publish before 2015 then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for 2015 in March 2015, or even later. The first few months of the year nearly always go the wrong way and you will have three months extra information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternatives.

If you can, make the predictions for longer than 2015. Perhaps until 2020. This gives you an extra five years of optionality with regard to the above methods but also has two other advantages. First, you give off a greater air of authority having a six year view rather than a one year view. Second and more importantly, after five years everyone will have forgotten your predictions except you, so if they are wrong it doesn’t matter. If you are right, you can wave them around in success and write a best selling book and set up a large hedge fund doomed to lose all its assets.


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

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


Pick eight prices you are going to call, they can be as varied as you like, calling long or short for each. Then set up 256 new forecasting identities. Using all the available permutations (2^8= 256) one of them is going to nail it exactly. This is who you now are. Wave this one around, write that book and set up that hedge fund.


All forecasts are now couched in as many pages of declaimer as there are forecast. Why not embed a clause within it specifying that these forecasts cannot be maligned and if they are then the maligner will be liable to pay the forecaster $1m. If a Blackpool Hotel can try charging £100 surcharges for bad trip advisor reviews then why can’t you?


If all of the above is too complicated then just repeat the trade ideas that you put out last year, or if you are feeling very adventurous, just write down all the trades that worked during the previous year. It seems to be what most people do.

Wednesday, 19 November 2014

Dr. Aghi's A&E Department - Part II - The Qefibrillator

We last visited Dr. Aghi in the Accident and Emergency department when Dr. Abe had just released a cylinder of laughing gas and led all of the patients, like the Pied Piper,  intoxicated into the night. The first part of the story can be read here Japanese Laughing Gas. Here is the next chapter.


Dr Aghi had finally dozed off, his head on the formica table and the styrofoam cup of half drunk (and now cold) coffee perched at the end of his fingers perilously close to toppling off onto the vinyl that covered floors that met the walls in curved uplifts that make the mopping up of blood easier. The blue-white light of the energy efficient strips bathed the room in a sterile glare but Dr. Aghi's slumbers continued undisturbed.

He was officially still on duty in Accident and Emergency having pulled a double shift. Dr Ben was no longer around having been relieved of his duties and replaced with Dr. Yellen. Dr Yellen had not been long qualified but had been employed on the recommendation of Dr. Ben under whom she had done her tutelage and, some would say, was a little too keen on Dr. Ben’s sometimes questionable treatments. Her bedside manner had also raised questions as it would often leave patients more confused than when they arrived. Having said that, she had proven successful in the addiction clinic having successfully weened the American patient off the morphine that Dr. Ben had all too eagerly prescribed.

But Dr. Aghi had had a long night. He’d coped with a major European road traffic accident, many of the victims being close friends. He’d fought hard and if it hadn’t been for his cajoling of Mrs German into giving blood then Mr Greece would definitely be in the morgue. The rest of the Peripheral family had survived and the incredible work of the plastic surgeon who rebuilt their faces meant they now appeared near normal, though the damage to their underlying bones left them susceptible to further injury.

The lull in casualties since the first release of Dr. Abe’s laughing gas had left Dr. Aghi to tidy up and get on with the associated paperwork of which there were reams. Policy had to be changed after the last debacle but getting policy changed in this institution was no easy feat. The urgently assembled hospital committee had at first been keen to adopt exciting new up-to-date practices but Herr Dr. Weidmann's vehement opposition, citing historic health and safety regulation, had left Dr. Aghi at his wits end.

It was then that it started. One by one the patients started to return to A&E. Dr. Aghi stirred and opened an eye. "Oh no. Not again".

France was first, having refused basic treatment, Dr Abe’s laughing gas was never going to mask the symptoms for long, the quack cures suggested by their mad Uncle Hollande together with the self-administered acupuncture had only made things worse. She looked terrible.

Australia was back too, a can of Irn Bru in his hand. He’d been out drinking again and typically had got into a fight in the queue at the local Chinese after bragging about the size of his exports. He’d had the seven bells kicked out of him and had his wallet stolen but was still mouthing off about how great he was and how his broken legs, bust nose, confusion and probable ruptured bladder were 'just scratches mate' and he’d be alright.

And then, forlornly, Spain and Italy traipsed in. Dr Aghi gave them a quizzical look. Their chronic fatigue syndrome was looking worse. He’d better screen them for cancer.

What was more worrying was that Germany was there too. Germany was never ill but there she was. Always a toughie as her religion meant that she would accept no medication other than a glass of water.

UK was back too, which confused Dr Aghi. On the outside he looked just fine and his personal nurse, Nurse Osborne, was telling everyone just how fine he was. But UK was complaining of a deeper malaise he couldn’t quite put his finger on. Dr Aghi asked a few questions but the answers that came back changed constantly. He immediately referred them to Psychiatry. He really couldn’t handle a delusional schizophrenic right now.

And then the man from the Chinese arrived complaining of a general slow down and slight upset in his, ahemmm, 'hong kong’. Dr. Aghi filled in the appropriate referral forms for the man's local STD clinic but really this guy wasn’t his responsibility, so kicked him out.

And then Dr Aghi’s crash bleep went off. 'Oh shit, I thought he was stable’ he muttered under his breath as he sprinted to recovery. European Growth was in spasms. Yellen was already there with the Qebrillator ready 'Here you are sir’. Dr. Aghi hesitated. "Where did you get that from? They haven’t been passed for use in this hospital". “Sir, you have little choice”. She was right. European Growth was already flatlining. ‘OK, what do I do?”. “You hold these against his financial instruments, press the button and a huge shock of QE will get him going again, Dr Ben is the expert though, I haven’t used one recently”

Dr. Aghi, reached forward to take the paddles when a voice came over the tannoy. It was Herr Dr. Weidmann who had been watching proceedings on the CCTV link. “Dr Aghi, you are forbidden from using the Qefibrillator, put those paddles down and step away from the patient”. “ But he’ll die" screamed Dr. Aghi. “No he won’t, Dr. Aghi. Well, perhaps he will but it will be to everyone's good in the long run. Best to let him sort himself out”. “Where the heck are you from Weidmann? Sparta? Leave the sick on the slopes in the snow so only the fittest survive?”, “ Exactly Dr. Aghi, Spartan medicine is simple and very selective”.

Dr. Aghi turned to Yellen, “Look I’ve bypassed the Qefibrillator. we should be able to get something from the transfusion machine. It will take the poisonous liquidity out of him and replace it with a better liquidity. Give it a go, it may keep him alive until I can get back. Stay there and keep the Herr Doktor away from him".

At this point Dr. Aghi noticed the patient in the bed next to European Growth, who treated him with a bold confident “ Hi, I’m US Growth and though some say I’m a bit peaky, I'm just dandy. Dr. Yellen has given me every support she can, haha”, “My, you’ve grown" muttered Dr. Aghi enviously whilst noticing the sly wink Dr. Yellen gave the patient. "Hmm", thought Aghi, "I wonder if she’s actually screwed him. No one knows yet".

Dr. Aghi arrived back in A+E just in time to hear the sirens. 'Blues and twos, doctor we have a JPFrog coming in”, "Just plain croaked it?' “Yup, declared dead at the scene by the paramedics but the attending doctor wasn’t having any of it”.

The doors to the department crashed open and what looked like a corpse was raced in on a gurney with a doctor administering fevered CPR. A nurse chasing them. “Nurse what’s her name?”, "Japanese Growth”, "what happened?”. "Hit a brick wall”. “At speed?" "No was hardly moving at the time but looks like the wall fell on her. Crush injuries, contusions, no sign of life”

"Ok, you can stop now doctor, the patient's dead”. But the maniacal pumping went on. It was only at the point that Dr Aghi leant down to see the doctor’s face that he realised who it was. "Oh no! Dr Abe, you madman! Nurse, security! Get this doctor off the patient and take him away, He’s caused enough chaos for one day”.

Dr. Abe lunged maniacally. “You don’t understand! She s alive! Alive I tell you! All we need to do is give her one more shot of of of .. where's the Qefibrilator?  I know you’ve got one, it was me that invented it! Don’t worry, yours won’t be powerful enough, I’ll make my own!". With that he raced off down the corridor chased by the nurse and security staff.

What a night, it couldn't get much worse, but a cloaked figure darkened the doorway and entered the department. It was Russia. Dr. Aghi had heard of Russia, he was a homeopathic doctor whose own remedies were at best temporary and at worst lethal. Dr. Aghi had been involved with his patients before. Some had recovered, such as the Eastern family, but Ukraine was still receiving some of his vile medicine despite warnings from the authorities, yet no one dared intervene. Russia had been struck off as a proper doctor some years back. "Can I help?” Dr. Aghi enquired, "No thank you, I'm just here to take back what I left behind".

There was screaming from the corridor. Dr. Abe sprinted back in pushing a huge contraption of pipes and wires in front of him. “This will do it!” and with that he attached his monstrous Qefibrillator to Japan, leapt for the nearest socket, plugged in the mad machine and ..

There was an explosion. The room went dark.

Emergency lighting flickered on casting an eerie glow through the smoke filled room. Miraculously everyone had survived the blast. Except for two. Dr. Abe and Japan lay motionless under a sea of smouldering paper.

Dr. Aghi surveyed the scene in resigned capitulation. He had done his best. He had given it his all but this was the end. Someone else could tidy up this mess. He let out a sigh, took off his name badge and carefully attached it to the disfigured corpse of Dr. Abe. With no further ado Dr. Aghi picked up his now empty medical case and threaded his way through the debris strewn room towards the doors, ducking through the now twisted frames into the cool night air.

His hand dropped into his inside jacket pocket and he pulled out a cheroot and he checked himself for a light but was lacking. Stepping back towards the door he picked up a smouldering piece of paper and put it to the tobacco. The remnants of the new 10 Euro note glowed hard as he inhaled and lit the cheroot before tossing the worthless paper to the ground and ambling off into the dark, dreaming of the fresh Italian mountain air a world away from the chaos. "Who know's what the world now holds for me,  one day I might even be President".

Tuesday, 18 November 2014

Japan. Well that's what happens when you pick the wrong benchmark.

The Vapours song has been done to death with respect to ‘Turning Japanese’ but it has to be put back in its vinyl sleeve (if you own a scratched original like me) as any hints that the West was getting close to Turning Japanese have just been flummoxed as when it looked as though convergence of growth was on the cards - Ka-Bang. Japan hits warp drive and vanishes into its own hyperspace of negative growth leaving the West languishing behind with its growth looking relatively similar to a bamboo shoot on a balmy day.

Back in Spring 2013 I remember writing a string of Japan linked posts and going back over them it really doesn’t feel as though much has changed. Back then our greatest scepticism was that targeting inflation was a poor choice as inflation is a symptom of growth rather than a cause, especially in Japan. The post The Japanese Grand National highlighted the  hurdles that Japanese QE had to overcome and our scepticism towards it doing so. That view has so far been pretty much vindicated. We can have a review of the points made then.

1) The cash injections are indeed huge and as a proportion of GDP, dwarf the US actions. On this basis alone decrease in the cost of money through the huge cash injection will dilute the money/goods ratio. But global connectivity spreads the flood increasing liquidity everywhere just as the US actions did. The melting of the Greenland ice sheets means sea levels in New Zealand rise a bit. Japanese banks may be queuing outside the study of the BoJ ready to have their orders to lend spelled out to them, but TMM wonder how much of it will ultimately remain domestic as the real demand for credit is in the West "Roll up, get your cheap funding here", rather than within a domestic culture that saves rather than borrows. The flow out of yen to achieve this moves the affect to FX (2). We are already seeing the liquidity tsunami with Japanese lifers hoovering European bonds at the expense of JGBs. Check France / Japan 10 year spreads today. (Note - remind Eurogroup to write thank you letter)

 No reason to believe that this isn't still the case though the yield differentials have narrowed dramatically so the pressure for leakage is lessened. 

2) FX driven inflation tends to be a one off shock, unless you can get your currency to crawl lower but then the incremental moves are just smaller. It's all good, but do it too much and things start getting bad quickly, either due to a lack of investor confidence or trade partners setting up tariffs. FX driven inflation can be seen as the wrong type of inflation if it doesn't drive wage demands higher but locally stifles purchasing power.

As suggested this appears to be what is happening and the lead/correlation between FX rate and inflation is real. Indeed it looks like growth tracks usdjpy, but not straight usdjpy, it tracks the rate of change of usdjpy. If usdjpy stays flat for a while growth falls. Perhaps this latest fall in growth is the  106-109 usd/jpy pause and we are seeing it reveal itself laggardly. Which if true, should see the new spike to 116+ reflected in a rise in next quarter's GDP figures. Which might be why Abe pulled the trigger early.

3) Expectations of inflation rising will most probably first be seen through the FX function, which as we said could be transitory (unless this goes Weimar). So once the FX starter motor of inflation expectation is done a continued domestically driven inflation has to take over. As with the west this will have to be associated with wage inflation which we know can be extremely stubborn and culturally even more difficult to kick off in Japan. 

Yup, wage growth has been extremely stubborn and it isn't good inflation unless it comes with wage growth. And nope, there doesn't seem to be anything apart from FX led inflation around.

4) Propensity to spend now rather than later. If, as we gather, the BoJ is hoping to increase inflation in the service sector we wonder how increases in inflation expectations will increase demand, as most services are not hoardable. A consumer who anticipates the cost of haircuts going up cannot go and get his hair cut 20 times now in order not to have any later. The same applies for most of the service industries that we can think of. Entertainment, accountants, lawyers, medical services, transport, maintenance - it's all time spaced. So what do you do if you are a consumer who thinks inflation is going to go up. You don't buy tech as that depreciates faster than jpy can. Once you have bought a car a year early, and the furniture you were putting off, maybe had a holiday, there is little else apart from putting on financial hedges. Property? Japan considers property as a depreciating asset and "An unusual feature of Japanese housing is that houses are presumed to have a limited lifespan, and are generally torn down and rebuilt after a few decades, generally twenty years for wooden buildings and thirty years for concrete buildings" and is taxed as such. However this could imply that the price of the land that they are built on rises. 

The dread part about this function is maybe that early growth was just this. The Householder stocking up on single purchase durables and now is done. Day to day services cannot be purchased early and hoarded. So what next?

5) Real rates are very important to the investor as a measure against returns, but TMM would suggest that to the man on the street the cost of a loan on something he isn't going to sell again (so won't consider for asset growth - see furniture, household stuff) is the cost of loan against how much more he thinks he will earn in the future. Wage inflation rather than CPI. So if wage inflation stays flat (as it has in the UK) then his real interest rate will not be negative. This is where the investor, who is always looking at resale value is very different to the consumer, who as a "consumer" by definition won't have anything left to sell on. 

No wage inflation to devalue debt. So borrowing not perceived to be cheap. No joy here.

6) And where do they save? Overseas where the yields are and you are hedged against the expected FX driven inflation. BoJ policy change does not remove the incentive for Mrs Watanabe to borrow locally and buy Aussie bonds. It may even increase it.

If you know the next wave of JPY is about to hit then US Treasuries look damn attractive, especially as your neighbour who bought them a year ago is sitting on a 17% return in yen terms.

7) Domestic investment will react to FX moves as wage costs become more competitive. We see no problems with this last fence. In fact once this occurs the finish line of growth is clearly insight. We just have to hope that all the other fences have already been cleared.

Well we couldn't see any problems at the time as global competitiveness in a world of growth would have been expected. But the world is slowing and there is no sign of a race to switch production to Japan.

As said at the beginning of this post, the primary problem we saw and still see with Abenomics is the assumption that a symptom of growth (inflation) is a cause of growth. It now looks as though the result of Abenomics is higher inflation (success) but no growth (fail). Which is of little surprise.

It would look as though Abe is either going to have to go further than backing down on sales tax and issuing further Yen tsunami alerts and do something about the culture of Japan where 'saving' is an Olympic sport, and demographics would suggest that a healthy dose of immigration would be like a shot in the arm for balancing both the demographics and also diluting cultural habits. It's either that or a one way trip to the cabinet with the family sword in it.

But there is a glimmer of laggardly hope. The rise in USD/JPY seen over the last few weeks and the collapse in oil prices may be storing up a surprise lift in GDP for the next quarter.

Finally it really does feel that we are due a follow up to the 'Japanese Laughing Gas' post too, now that Dr Aghi has been proven correct and all the patients are back in A+E after they have come down from their Abe laughing gas high.

Maybe tomorrow.

Sunday, 16 November 2014

A Reply to Lucy Kellaway's FT article on FX Traders.

Lucy Kellaway published an article in the FT today covering the attitudes of FX traders based on the style and content of the chat room exhibits cited in the latest fix fixing investigations. There were references to her own experiences in the markets 30 years ago and the boorish testosterone behaviour then and how it applies to FX today. The article is here.

I have left a comment as I feel that many broad brush assumptions are being inexpertly applied to FX at the moment. Here it is -


Whilst I agree that the conduct shown by the miscreants is appalling and their testosterone exhibitions further undermine the poor reputation of anything 'City' I would like to make a few points.

The laddish behaviour of the '80s was endemic across society at that time and I feel that though your own experience of it was within FX, that doesn't mean it was limited to FX. This also applies to the present day. FX has had the regulatory microscope focus down to individual chat screens with every written letter now being exposed in public light. The lack of evidence of such behaviour in other areas of the City does not mean it does not exist. It just hasn't been looked for, but it's there. And of course it exists outside City activities as much as it does within. I am sure an estate agent, footballer, car mechanic (so many I'll stop there) can tell a tale or two. If every profession had their every communication examined then there would be similar horrors emerging from the earth at a rate reminiscent of Zombies Dawn of the Dead. 75 solicitors were struck off in 2012 (last figures I saw) without much comment.

I do excuse these poor souls the spelling inaccuracies you mock. They were never hired for their written communication skills beyond quoting numbers and they were writing for each other, not a public audience and certainly not at a journalistic level. If a message is understood then the time spent correcting it is superfluous, especially considering the time pressures most of them work under.

The cockney rhyming slang you quote is also not so much an indication of FX boys keeping a dying language alive but more the application of market abbreviation that first originated in the days when cockney rhyming was more a fashion. Just as the term 'Cable' isn't an indication of the continuation of language forms used when the first transatlantic cable was laid, but more a 2 syllable abbreviation of the unwieldy 24 syllable 'British pound sterling against the United States dollar using sterling as the base currency' Every profession has its nicknames and colloquialisms. FX is the same.

I suppose the saddest thing about all of this is how once again some stupidly outrageous behaviour by some has brought disrepute on the all. FX has changed hugely since you experienced it in the '80s, Lucy.
I just wish this small sample size of cretins hadn't given you the chance to use assumption based on extrapolation to imply that the behaviours that treated you so badly all those years ago are still endemic today.

Saturday, 15 November 2014

Wicked Game

A warning. This post is a personal recount of music infection. It is not a financial post and has very little message other than to infect you with a wonderful song,

Last night I drove 250 miles from the West Country to my home in the south east of England. It was a wet and stormy evening with the journey made all the worse by the collapse of the infamous M25. The journey turned into a road trip in its own right, an epic of Quixotic episodes and out of body experiences as I passed unhindered on cunningly selected B-road bridges over Hieronymus Bosch motorway scenes that I would otherwise have endured, but as usual I found fortitude and vigour with BBC Radio 4. First I was amused with the News Quiz, then shocked by The Archers, then confused with 'Front Row' (seriously I am sure they make up most of the arty things they talk about as a laugh) and then riled to fury by 'Question Time' and the politicians on it who once again reinforced my belief that no one should be allowed into public office unless they have spent at least 10 years working in a real job.

So I switched to Radio 1, normally reserved for the teenage kids. At 10pm Pete Tong kicked off with his dance mixes at which point the large can of Red Bull I had consumed 30 mins earlier (as a prophylactic against pulsing whiteline and rain lashed screen-wiper induced hypnosis) kicked in. The rest of the journey home was a heart thumping beat induced rave of euphoric emotions whilst trying to keep within a reasonably acceptable percentage above the speed limit. And before you ask - No, it was just Red Bull and it didn't give me wings (but I won't be suing because I am not a moron unlike this moron)

So this morning when I got in the car Radio 1 booted up just when I was expecting sensible Radio 4 news.  I was just about to switch over when I heard this, which changed my day. Chris Isaak's 'Wicked Game' has always been an all time favourite song but here it was in an awesome  chillout/house female vocal version.

And that was it. It's been in my head all day. On returning I Googled to find out who/what/where had produced it only to find a selection of covers by females that I then felt compelled to sample. And the hands down winner was this, which was a joy to find as it was by another top fave band London Grammar, who I have been following for longer than should be expected due to their Nottingham University origins.  Hannah Ried's range of vocals is so impressive and this must be the most emotionally expressive version I have ever heard.

Having heard that and been blown away, I moved on to Pink's version. Which I endured for about a minute thinking that the guitar drop-tone fades were the record deck playing up.

And then Lana del Ray's overly trying whispered version where the production was poor compensation for a  poor attempt. That didn't last long.

But I was soon rescued by Heather Nova with a homely 'on the ranch' fireside purer version

After a most bizarre Gregorian chant/ house beat mix version which I only include for bizarre amusement -

I was back into the ethereal with celtic version with Karliene (Don't understand why the galleon in the picture has a modern Rib with outboard on the back though)

So I have a day full of Wicked Games and I hope that this odyssey through a song that has stuck in my brain hasn't meant that you are now equally poisoned. But if you are, then let's at least make the last version the one that sticks. The best one, so here again is Hannah Reid and London Grammar's heart melter.

Friday, 14 November 2014

Strange Correlations

Everyone likes a good correlation and whilst perusing a favourite site, 'spurious correlations' , I came across two topical ones. One involving oil imports and one involving non-commercial space launches (in regard to the most amazing Rosetta probe achievements).

But I have spotted one or two of my own recently. Sorry I haven't got  charts for them but through intuition, if not maths, I am pretty sure they are highly correlating. So do with them what you will.  - 

The price of oil and the distance between the Rosetta probe and comet 67P. (The Rosseta probe/comet distance leading oil prices by a about a week).

The number of poppies around the Tower of London and rainfall levels in the South West of England.

Global leaders in star trek outfits and the level of global tensions.

Number of times a politician says "Let me make this very clear” with how unclear what they are about to say is.

The number of tanks that are entering the Ukraine from Russia with the amount of tanks that Russia says are not.

The amount of action the Japanese take to stimulate their economy and the amount the Europeans don’t.

The height of leaves above the ground in autumn and the price of oil.

The popularity of bankers and  the pulse rate of Paul Newman.

The size of the Bank of Japan’s balance sheet and the distance from earth of Voyager 1.

The expansion of the universe and how long it takes to speak to a human at an EE phone company call centre.

The propensity for a driver to wear a hat whilst driving and the number of cars stuck behind that driver.

The percentage of bears who populate blog commentary forums and the percentage of bears that shit in a forest.

The price of rail fares in the UK and the rate of deflation in everything else.

The luck of Mark Carney in leaving the Bank of Canada for the BoE and the economic outlook of UK less that of Canada.

The celebrityness of celebrities on 'Help I’m a celebrity get me out of here’ and the number of ebola cases in the US.

Unemployment levels in Spain and the interest rate you pay on a credit card.

The number of times you have to say hello to your wife when answering the phone when busy in order to have said hello nicely enough and the complexity of the task you were busy doing when the phone rang.

Wednesday, 12 November 2014

Comments on the FCA Report on FX Wrongdoing

The FCA has announced its report on FX market misdoings and its associated punishments for wrongdoers.

The most important part, in my eyes, was the bit referring to 'triggering clients' stop losses'. This transgresses the original Fix fixing and opens up the biggest can of worms imaginable as to general FX practice. I would also suggest to the FCA that the wrongdoing doesn't stop at the banks' doors with many 'clients'  applying dubious practices. Many of them FCA regulated in one form or another.

I have written about how Regulation has killed the FX star before but here I would like to go through this report and make a few observations. Original in small italics, comments in normal text.

 The Financial Conduct Authority (FCA) has imposed fines totalling £1,114,918,000 ($1.7 billion) on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations: Citibank N.A. £225,575,000 ($358 million), HSBC Bank Plc £216,363,000 ($343 million), JPMorgan Chase Bank N.A. £222,166,000 ($352 million), The Royal Bank of Scotland Plc £217,000,000 ($344 million) and UBS AG £233,814,000 ($371 million) (‘the Banks’).

Why only five? As we will see the report goes on to identify generalised market malpractice.

The G10 spot FX market is a systemically important financial market. At the heart of today’s action is our finding that the failings at these Banks undermine confidence in the UK financial system and put its integrity at risk.

As much as the commodity, equity, bond, credit and all the other markets that haven't had this level of investigation aimed at them.

In relation to Barclays Bank Plc, we will progress our investigation into that firm which will cover its G10 spot FX trading business and also wider FX business areas.

Looks like the worst is saved 'til last. There's gonna be a lynchin'.

In addition to taking enforcement action against and investigating the six firms where we found the worst misconduct, we are launching an industry-wide remediation programme to ensure firms address the root causes of these failings and drive up standards across the market. We will require senior management at firms to take responsibility for delivering the necessary changes and attest that this work has been completed.

So others were up to it too but have escaped with a 'patch it up don't do it again'. The mention of root causes rightly implies that something isn't right with the way that institutions have had to do FX in order to survive.

This complements our ongoing supervisory work and the wider reforms to the fixed income, commodity and currency markets which are the subject of the UK Fair and Effective Markets Review.

Ah, FX isn't alone. In that case stand by for fines in other markets that will dwarf  these FX fines. Commodities, watch out.

Between 1 January 2008 and 15 October 2013, ineffective controls at the Banks allowed G10 spot FX traders to put their Banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The Banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.

Bank's putting their interests above that of the client? Name one large company that doesn't. Companies are there to make money, not to be a social service. Fully agree that breaches of the other points should be punished.

These failings allowed traders at those Banks to behave unacceptably. They shared information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate G10 spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.

Yes. Caught bang to rights - Guilty

Today’s fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks in this way. We have worked closely with other regulators in the UK, Europe and the US: today the Swiss regulator, FINMA, has disgorged CHF 134 million ($138 million) from UBS AG; and, in the US, the Commodity Futures Trading Commission (‘the CFTC’) has imposed a total financial penalty of over $1.4 billion on the Banks.

This paragraph smacks of 'haven't we done well, look at the large fine, we are heroes, don't say we aren't doing a good job in trying to shut the gate, even if the horse has bolted and been frolicking in the paddock in front of our eyes for years.

Since Libor general improvements have been made across the financial services industry, and some remedial action was taken by the Banks fined today. However, despite our well-publicised action in relation to Libor and the systemic importance of the G10 spot FX market, the Banks failed to take adequate action to address the underlying root causes of the failings in that business.

Once again the root causes. Perhaps they should examine what the FX market is and realise that bad market practices have evolved because it is an unregulated collection of market stalls rather than an exchange that does not charge commission (though at this rate it may have to).

Martin Wheatley, chief executive of the FCA, said:

“The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system. Today’s record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.

Not game the system to boost profits or imperil the wider UK financial system? The whole UK financial system and all its institutions are built on gaming the system and regulations.

But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor. This is essential to restoring the public’s trust in financial services and London maintaining its position as a strong and competitive financial centre.”

 "London maintaining its position as a strong and competitive financial centre". Unfortunately one of the reasons most  these transgressions arose was due to the fiercely competitive element of London that you wish to preserve. Any future regulatory action must make sure that doing business in the future is not so onerous that companies head off to the Far East or lesser regulated market. The only answer is GLOBAL regulation.

Tracey McDermott, the FCA’s director of enforcement and financial crime, said:

“Firms could have been in no doubt, especially after Libor, that failing to take steps to tackle the consequences of a free for all culture on their trading floors was unacceptable. This is not about having armies of compliance staff ticking boxes. It is about firms understanding, and managing, the risks their conduct might pose to markets. Where problems are identified we expect firms to deal with those quickly, decisively and effectively and to make sure they apply the lessons across their business.  If they fail to do so they will continue to face significant regulatory and reputational costs.”

"This is not about having armies of compliance staff ticking boxes" That is exactly what it's about.

Clive Adamson, the FCA’s director of supervision, said:

“The supervisory measures that we are announcing today will help make sure that real cultural change is delivered across the industry, and that senior management take responsibility for ensuring that the highest standards of integrity operate across all of their trading businesses.”

Help, but in no way guarantee.

The FX Market 

The FX market is one of the largest and most liquid markets in the world with a daily average turnover of $5.3 trillion, 40% of which takes place in London. The spot FX market is a wholesale financial market and spot FX benchmarks (also known as “fixes”) are used to establish the relative value of two currencies.  Fixes are used by a wide range of financial and non-financial companies, for example to help value assets or manage currency risk.

Fixes are not used to establish the relative value of two currencies. That is done by the dynamic market. A fix is an inaccurate out of date attempt at a snapshot of roughly where prices have been and  though it's applied to some trades, it is not actually a tradable price. Anyone who uses them as a way of  booking real trades needs to understand this. Unfortunately due to its application as a benchmarks in many funds, clients have more concern about deviation from the benchmark rather than the actual level of the price. This has naturally opened up behavioural imbalances.

'Turnover of $5.3 trillion, 40% of which takes place in London' The FCA should ask themselves why they had no clue until now about the basics of this market, or were they negligent in turning a blind eye?

The FCA’s investigation focused on the G10 currencies, which are the most widely-used and systemically important, and on the 4pm WM Reuters and 1:15pm European Central Bank fixes.

The FCA’s findings

Today’s action shows that we will not tolerate conduct that undermines the integrity of this crucial market or the wider UK financial system.

Once again, 'we are big and in charge'

We expect firms to identify, assess and manage appropriately the risks that their business poses to the markets in which they operate and to preserve market integrity, whether or not those markets are regulated. Although there are no specific rules governing the unregulated spot FX market, the importance of managing risks associated with spot FX business through effective systems and controls is widely recognised in industry codes.

As it remains an unregulated market translates to "Do your best, and if at some point we decide it wasn't good enough we'll fine you"

We found that between 1 January 2008 and 15 October 2013 the Banks did not exercise adequate and effective control over their G10 spot FX trading businesses. For example policies were high level and firm-wide in nature, there was insufficient training and guidance on how these policies applied to this business, oversight of G10 spot FX traders’ conduct was insufficient, and monitoring was not designed to identify the behaviours found in our investigation.

Yes, it is cultural and goes to the top.

The right values and culture were not sufficiently embedded in the Banks’ G10 spot FX businesses which resulted in those businesses acting in the Banks’ own interests without proper regard for the interests of their clients, other market participants or the wider UK financial system.

Traders at different Banks formed tight knit groups in which information was shared about client activity, including using code names to identify clients without naming them. These groups were described as, for example, “the players”, “the 3 musketeers”, “1 team, 1 dream”, “a co-operative” and “the A-team”.

Morons, in a Darwinian as well as regulatory way they deserve what has happened to them. One would hope that those indicted include management for lax controls as well as those directly involved

Traders shared the information obtained through these groups to help them work out their trading strategies. They then attempted to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements). This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate it had bought that currency for in the market. If successful, the bank would profit.

Ok, this is where it gets interesting. 'and trigger client "stop loss" orders'. This moves away from the original Fix fixing realm and enters a whole new universe of possibility. If triggering client stop losses is punishable then every financial market should be quaking in its boots, with some of them having to put out profit warnings as revenue will collapse (Looking at you early monday Far East markets). From now on clients can expect dreadful slippage in any stop losses they put out there once they are triggered.
This topic is worth a post in its own right.

Firms can legitimately manage risk associated with client orders by trading in the market and may make a profit or loss as a result. It is completely unacceptable, however, for firms to engage in attempts at manipulation for their own benefit and to the potential detriment of certain clients and other market participants. Our Final Notices include examples where each Bank’s trading made a significant profit.

This makes no sense. Can they or can't they trade against client orders? Where is the boundary between the first and second statement? Unfortunately 'manipulation' could be seen to occur with any proprietary trade as every trade effects price. There is no clear guidance as to how a 'profit' is separate from 'own benefit'. If the boundary is 'significant profit' as suggested in the last sentence then it implies that the issue is 'how much it is acceptable to profit from a client order' rather than if it is allowed at all.

In setting the fine for each Bank we have considered, amongst other things: the Bank’s relevant revenue, the seriousness of the breach, each Bank’s disciplinary record and response to the wider issues around Libor, the degree of co-operation shown by each Bank, and knowledge and/or involvement of certain of those responsible for managing this part of the Bank’s business.

We have also increased the penalty to reflect specifically the seriousness of the risks posed to a systemically important market and the failure across the industry to learn the necessary lessons about tackling these risks, given the similar failings which arose in the context of Libor.

The Banks agreed to settle at an early stage and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount the total fine would have amounted to £1,592,740,000 ($2.5 billion): Citibank N.A. £322,250,000 ($511 million), HSBC Bank Plc £309,090,000 ($490 million), JPMorgan Chase Bank N.A. £317,380,000 ($503 million), The Royal Bank of Scotland Plc £310,000,000 ($492 million) and UBS AG £334,020,000 ($530 million).

Our investigation lasted 13 months, involved over 70 enforcement staff and unprecedented cooperation with domestic and international regulators. We welcome the Serious Fraud Office’s criminal investigation into individuals.

the FCA are justifying the level of fines and trying to highlight that it was diligent. Though the fines are nothing compared to what the US would have nailed a European bank for, it's not a bad sum for 70 staff for a years work but  nothing like the amounts that the banks have made through this sort of practice over the lifetime of the London FX markets.

Tackling the root causes

It is clear from our findings that there has been widespread poor practice in the spot FX market. The FCA has sought to take swift enforcement action against the worst offenders, and has today announced it will carry out an industry-wide supervisory remediation programme for firms to drive up standards across the market.

Sounds a bit like a company selling the strength of its future order book. 'The FCA has orders for the next decade and will be expanding'.

The FCA is already conducting broader reviews of how effectively firms reduce the risk of traders manipulating benchmarks and ensure confidential information is not abused, and will also look at how firms manage conflicts of interest. We will use our findings to inform the remediation programme as appropriate.

Good, about time.

The remediation programme will require firms to review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of a sufficiently high standard to effectively manage the risks faced by the business. The work at each firm will depend on a number of factors, for example, the size of the firm and its market share and impact, the remedial work already undertaken, and the role the firm plays in the market.

Back to - "This is not about having armies of compliance staff ticking boxes" That is exactly what it is about.

In some cases, the reviews will extend beyond G10 spot FX, and we will require firms to explore any read across into FX Emerging Markets, FX Sales, derivatives and structured products referencing FX rates and precious metals.

Here we go, open the flood gates. May I suggest that, if the FCA wish to apply the same criteria they have used in this case to other areas, they take a look at market behaviour around option expiries, binary option triggers and extend it to the futures trading in all major markets beyond FX. Limitless possibilities.

And also PLEASE include the 'client' side. I am sure that the bad practice doesn't stop at the doors of the banks.

Senior management will be asked to attest that action has been taken and that firms’ systems and controls are adequate to manage these risks. This will ensure that there is clear accountability and senior management focus on the specific issues at each firm where the FCA expects to see change.

Removing even more incentive to ever being a senior manager in a bank. The smart ones, if they haven't already will have packed their bags for less onerous responsibilities leaving the mediocre and average to carry the can.

The FCA has played a key role in developing internationally agreed regulatory standards on benchmarks including work by the International Organisation of Securities Regulators (IOSCO) and Financial Stability Board.  We are actively engaged in developing EU regulation on benchmarks and co-chair the UK Fair and Effective Markets Review which is considering wider reforms to the fixed income, commodity and currency markets.

The FCA equivalent of 'Just call Saul'?

An Ornithologist's Guide to the Sudden Market Silence.

Something very strange happened yesterday that was quite out of character for the markets -


But the silence that really would have caught my ear, had it not been silent, was not so much the price action but that of the commentary streams. Was it my imagination or have all the doomsayin', top pickin’, crash wishin', cabin buildin’, gold buyin', gun totin’ Bearsieeeeess  fallen silent for a little longer than the prerequisite two minutes at 11am 11/11 for Remembrance? And come to that, their bullish antagonists too?

Recent market pauses in price cacophony have been compensated for by a dramatic increase in the volume of rhetoric from those arguing as to whether things go up or down from here. So the comparative lull is somewhat calming. Or is it? Perhaps it's as calming as that silence in the countryside before your only companion in these woods miles from anywhere remarks how strange it is that there is no bird noise. At all. At which point the staccato minor chords of the film score are completely unnecessary in their warning of impending horror, as one's own sympathetic nervous system has already started to gear one up for pant filling flight.

But rather than sprint off screaming back to the car only to trip over some creepers and fall into an old buried church to face a clan of possessed Satan worshipers (i.e. check out the Zero Hedge website), instead we should turn ornithologist and find out why the birds are indeed so quiet. Let us see -

Ahhh!!  A Norwegian Blue - Not much explanation needed as Ornithology 1.0.1 teaches that any unconscious Norwegian blue is just shagged out after a long squawk. It would appear that this specimen has been screeching for tops for so long it has collapsed exhausted.

Cuckoo - Grown fat being fed in its adopted home of financial TV shows with its gaping mouth calling doom looking for reward. Having kicked all the opposition out by bullying and harassment, it now finds itself all alone because even the guardian parents are fed up with this thug who doesn’t make sense and don’t want to feed it any more. So the Cuckoo’s nest is silent.

Fat Turkey - Thanksgiving is just a week away and rather than waste breath on recounting old arguments perhaps its easier to say nothing until Black Friday provides more to vocalise over. If it lives that long.

Chicken - Confidence lost in all self-belief. The rules just haven’t worked in this market so until it can work out a set of new functioning rules it’s probably best to retreat under a bush and sit this one out.

Dodo - As dead as itself. Hunted to death by the Stoploss bird with its fearsome scream ’Sorripalurout’. There is only so much getting it wrong before the stop losses will finally kill you.

Pink Famingo - Ah the famous Pink Flamingo. The silence from the Pink Flamingo is due to its very nature. It has wandered far from this market off to find different ones to disrupt, leaving silence behind it.

And for those birds that sing on high and call for mates to join them in the sunny skies? Why is there silence from them?

The Sky Lark - Its high pitch repetitious trill, normally uninterrupted on sunny days has vanished. Why? This bird has suddenly grown a fear of heights having ascended so fast and would rather, just maybe, not take so much risk and take it easy pecking seeds on the ground quietly if thats ok by you.

The Hawk - His normal prey, who he likes to think he can rip to shreds having caught them on the wing in a weak argument, are now silent, so with nothing to betray their position he has moved off to his perch hoping for easier prey at a later date.

The Albatross - Flying behind the market on up breezes this bird is considered good luck, but kill one and you are doomed. But not as doomed as the Albatross. And this albatross has seen a sailor fiddling with a cross bow of internal market stresses that could well take it down. So it too has made like a cloud.

So far from being a portent of doom the silence of the twitterings is easily explained. Or, to sum it up, a bird in the hand is worth two in the bush. It’s coming up to year end. Bank a profit, cut a loss and shut up. 2016 will be here all too soon and the screaming in the aviary wilL once again BE driving us nuts.

Tuesday, 11 November 2014

How do you know when the bottom is in for commodities?

Basically we never do until we are far enough above the base to recognise it as one, but the cynic in me is starting to see some signs that we are close to a pause if not a bounce -

ANZ sharply reduces its 2015 target for iron ore from $101/tonne to $78 after prices move down from $101 to $76 in the last 6 months.

Citi sharply reduce theirs further to $65 in a leap-frogging motion. On the comparison between the two banks I do wonder how much influence  'not wanting to upset your local client base' has on published price forecasts. And anyway, if  their forecasting has such swing errors should we be bothering with them in the first place?

China is cited as bearish and not buying inventory (so when demand does kick in they will have no buffer and will have to buy fast).

BDIY ( Baltic Dry Shipping Index), the chart that only seems to be wheeled out in disasters, puts on a quiet 65% rally in the last three weeks without anyone mentioning it leaving it 100% up from July.

Tullow Oil stock starts going up again despite oil not bouncing.

Folks sell the whole of their High Yield portfolios because of the impact the energy sector has had on them, without caring that they are throwing babies out with the bathwater.

UK newspapers speculate about sub £1/litre fuel.

'We Buy Gold' shops sell up (courtesy of @BasonAsset twitter)

Thieves stop stealing copper wire and start replacing the lead on the church roofs. Ok not there yet, but at least the number of phone and train failures in the UK due to copper theft has dropped dramatically.

Winter comes to Europe.


One last call before I go, and it's a bubble call related to corn. Not to corn itself but to a derivative - It is pretty clear that there is a bubble in popcorn making when there are more popcorn making startup companies run by ex-private schoolboys than farmers growing it and producing it in more flavours than there are zinging hipster tempting retro marketing slogans framed in pastel colours on the packaging. In the UK the market is estimated to be worth £55m a year so by my my rough calculations that's only enough to support 12 Tarquins and three red trousers.

When popcorn pops, don't say I didn't warn you. Where's the regulator?

Tuesday, 4 November 2014

This Week in Pictures



Unanimous ECB 


US Stock Market 

EU on UK membership

Democratic Midterms