Wednesday, 25 February 2015

Exhibit A in the case against Real Money Bund positions

Following in from  the last post where I point to real money being the ultimate casualty in bonds -

I just saw and want to raise as (exhibit A) in the case against real money bond logic. (from a Robin Wigglesworth ( FT Hack) @RobinWigg tweet) which he says is from David Tan JPM Asset Management's head of rates. Here he justifies why the fund is investing in negative yield.

To understand buying German bonds on a negative yield, consider our starting point which is The European Central Bank's negative deposit rate at -20 basis points. For a lot of banks owning a five year government bond at -8 bps is preferable to placing the money on deposit with the ECB at -20 bps. (1) Secondly. whilst as an investor you may allegedly be 'paying to own the bond', bear in mind that if yields drop further, you will get a capital gain to offset the negative yield Therefore from a total return perspective the expected return will be positive rather than negative. (2)

For investors including JPMAM we may choose to own negative yielding bonds by shifting out of 2 year bonds at -22 bps into five year bonds at -8 bps because we see no prospect of ECB tightening in the near term, which would make the trade unprofitable (3). Secondly. we see a very low inflation environment for the foreseeable future. (4) In that context it can make sense to shift from shorter dated bonds into longer dated bonds at less negative yields on a relative basis.

In our view the market is getting used to negative yields. About half the German bond market excluding T bills is now in negative territory therefore investors are becoming acclimatized to negative yields (5) The ECB haven't even begun to buy government bonds and that will further reinforce the current environment.(6)

It is important to point out that Germany is actually running a small budget surplus currently so we would expect net negative supply in Germany for the next few years and at least for the entire duration of the ECB GE programme That means demand will continue to outstrip supply, effectively bolstering prices and holding down yields. (7)

Which leaves me even more convinced that real money are going to get hosed and that some of them are just winding the spring of their own demise even tighter. Let's look at the points I have numbered in the text in blue.

1) Adding duration adds leverage for the same face amount and we assume he is talking same face as he is avoiding being in cash. Adding leverage normally leads to a faster death should something unexpected occur. Interesting that he would rather pay negative yield in Germany than get positive in France on this argument. Also interesting that he isn't saying get a more positive yield by going even further up the curve. 30year? I can only assume that he is aware of a duration/risk payoff that far out but isn't mentioning it in the case of the 5yr. It may be cheaper for him to rent a vault and stick a few billion of Euro cash notes in there at 0% plus rental.

2) 'Bear in mind if yields drop further you will be paid'.  So yields fall, though how much further is a squeeze, and you get your coupon paid by capital appreciation OR yields stay the same and you lose on paying to own it OR yields go up and you are screwed on all fronts. Yet he only mentioned the first case. In fact paying to hold something only because you hope its price will go up is a characteristic of the last stage of any bubble.

3) You don't need the ECB to change anything to make the trade unprofitable. The longer bonds whip around independent of ECB and are more of a measure of expected inflation. Indeed if the ECB does nothing whilst inflation (or just expectation of inflation) picks up the 5yr will rip a hole in your face via expectations and thoughts that the ECB could be behind the curve. One of the cop outs of holding bonds is that you can run them to maturity and not make a loss even if mark to market they appear so in the interim. It is opportunity loss but you get your face value and coupon back at least. This is reversed with a negative yield where the longer you hold them the more you pay, which would suggest that come a turn, the requirement to exit will be greater.

4) It's on his expectation of low inflation forever. Even if JPMAM are right, should inflation expectations change from the rest of the market they will still be hosed. But fair enough at least a viewpoint here.

5) Sounds like my rail company who now feel that because I am used to overpaying for a rubbish service I will be happy to go on doing so forever. WRONG. I have never before heard being used to losing money as a reason to want to continue losing money in a grown-up investment argument.

6) Correct, but we all know they will, so do you suppose that this information may already have moved the price? I do. Remember the Gordon Brown Gold Trade?

7) On the massive assumption that the demand side of the equation stays where it is and isn't at all effected by inflation expectations turning from the current mega-deflationary meme, alternative assets become more attractive (he's a bond guy, so probably only knows his universe), Europe de-stresses, or US rates become attractive enough to outweigh the currency risk of holding them instead and finally, someone wakes up and objects to having to pay to give someone else their money.

I rest my case m'lord that your pension fund is under threat.

RU, a pain in my Bund?

This morning I own up to having pains in my Bund. Piles of it, as Bunds are higher.

 Since I have started building a short Bund position I have been gaining confidence as a) it hasn’t broken higher b) Greece issue is waining rather than waxing c) European stocks are driving higher as faith of a return of growth, or at least no imminent collapse in growth, has returned and there are better yields to be had than in negative rates at the short end of the German curve. I was additionally relieved to see Credit Swiss research calling fo 10yr Bund up around the 1.3% yield by year end.

Against this I have been fighting the oft quoted against me views that QE is coming, which I counter by arguing that that bit of info has been in the price since QE was announced b) European growth is not really going up yet c) The ECB is going to crush deflation through policy stand back d) Europe isn't fixed e)Money needs to be held in Europe and before decisions on allocation are made you hold it somewhere safe , like bunds

I then see this morning that the likes of the Japanese civil service fund is cranking up its holdings of foreign bonds from 2% to 15%, and that makes me quake. Not that one fund is doing an allocation, but that if that thought pattern is repeated throughout Japan then there will be a wave of assets allocated by managers who have no qualms about buying stupidly low yield, having had decades of practice of buying their own stupidly low yields.

Meanwhile in other parts of the 'Who would have thought it' alternative universe,  Irish 10yr is now yielding below 1%, which is making me ask what other oddities there are out there to add to German, Swiss and Danish negative yields, Global MSCI equities hitting a world record high and oil being around $50 bucks. Imagine if in 2011 you had put a trade on that paid off if Irish 10yr was at 1%, Oil at $50 and Global stocks at record highs. You would have been carted off to the funny farm before even being allowed to place it. Once again this highlights why what is consensus today can so swiftly change.

And with that I have just talked myself into staying short bunds.

Greece is on simmer having been on hard boil, so market’s ADHD attention can switch to the next worry. Market worries appear to be similar to PEZ sweet dispensers. Remove the top one and the one underneath pops up to be given as much attention as the previous no. 1, even though it was there all the time.

Yellen and the Fed have filled many column inches with her being read as dovish, or not, or maybe or.. and at this point we see Fed watchers examining the ink density of full stops and the weight of the notepaper it was issued on for upcoming clues. I must be one of the few people who think that micro-tuning Fed timing is one of the biggest wastes of time mankind has ever invented, to the point I should wrap the whole exercise in an App called 'Rate US’ the success of which makes Candy Crush look like Friends Reunited.

For me there are bigger issues out there - and the one that frightens the willies out of me (and could in fact be another reason to buy bunds) is Rrrrrraaaaaaashaaaaa.

- The Ukraine ceasefire didn’t hold.
 - Russia has almost stopped pretending they aren’t there.
 -British forces head for Ukraine as David Cameron issues warning to Vladimir Putin Ok, to train Ukrainians but we know where this leads and this headline has to be the most frightening I’ve seen for a while. Interestingly and perhaps reassuringly Russia hasn’t become a UK election issue. but I just hope Cameron doesn’t think it his political Falklands.
- Cameron is also threatening to switch Russia of the SWIFT payment system.  Russia is already building bypasses around that so doubt they are worried.
- Meanwhile Russia is buzzing European airspace and the US are parading troops 300yds from the Russian border in Estonia.

And yet I feel I am alone with my own childhood terrors of Russian conflicts and nuclear wars. Popular US commentary once again appears to be dismissive and a blind faith prevails that economic sanctions will work (well they effectively did with Reagan’s Star Wars all-in poker bluff in the 80’s) or through military power (all Russia’s equipment is old and rubbish). Everything that Russia has done so far backs up my original belief that threatening Putin makes him stronger. But we are back to a problem we see everywhere. Morals come first these days rather than best outcome. I hate to say this but I agree with the UK Green party in that we need to appease a little. Standing up to a bully is all well and good and works well in US teen movies, but in the real world down a darkened alley having fallen out of a night-club sometimes negotiating to give the mugger a couple of notes rather than kicking off world war three and losing the lot is a sensible option. In the mugger analogy there is an ultimate rule of law over it together with enforcement (someone will later go and track them down and hopefully punish them). With Russia there is no overriding super-authority that can prosecute and punish. It would be great of the US had the power to do something without using Europe as a muddy football pitch again for superpower playouts, but their track record of binary 'with me or against me’ foreign policy has left the world looking like a recently kicked red ant nest. Is there some irony that the EU was originally formed to prevent war yet is now so inwardly focused on petty bickering over who owes who what for the buffet of cheap funding, that they could really screw up over the biggest war threat on their doorstep?

If Dijsselbloem is such a crack EU ‘get what we want’ negotiator I suggest he pops off to Moscow for a chat.

This may sway a bit from markets but it does reflect on what makes people make investment decisions. I find there are those that introspect and those that look wider afield. The introspective appear to be gaining foothold in funds as micro-specialists beaver at individual relative value and quants pour over historic performance and cross correlations but neither of them have time to look up at the non-financial inputs that may hit their asset class  (Russia a good example). This leaves the macro decision to be made by the asset allocator and in most cases that buck is passed back to the client who then turns to a consultant who once again looks back over history. Have you ever heard a consultant pass comment on future global political outcomes rather than drown you in spreadsheets of past performance, diversity and risk measures?

Which leads us back to the beginning. My final hope for my Bund short is that these introspective management views that consultants and real money apply these days has built up a risk in bonds that I can bet against. When the dam breaks real money and the poor pension funds who are matching duration of assets to liabilities are going to get hosed by negative real return. "But hey, we are only following the rules and against benchmark we are.." Yaaawn.

Post script -  I raise exhibit 1 in the case against real money bond logic in a following post here . It is the case made by JPM Asset Management for buying Bunds which I counter point by point.

Sunday, 22 February 2015

Mr. Varoufakis's homework.

Mr. Varoufakis has until Monday to get his homework in to the EU teachers for marking. As this appears remarkably little time to recalculate all permutations of Greek economics overlaid with political agreement, one can only wonder if it will be done in time (perhaps accompanied by excuses of the dog having eaten it, family funerals, spilled greek coffee on it etc). Having heard that he is in fact going to have it ready by Sunday evening one has to assume it more likely that it is being lightly skimmed over, with answers rich on general ideas but devoid of detail or numbers.

With that in mind I can only pray it doesn't turn out as I am imagining it below -

Homework - To be handed in Monday 23rd Feb to Mr Eurocrates
Please answer all questions fully. Deutchmarks will be deducted for incomplete workings

1. 2+2 = ?

That would depend, but I would commit to 1 with room to negotiate to 59 as Greece is suffering a humanitarian crisis,

2. If you have €100 and take away 40% how much is left?

If it is Greek tax, €100. If it is haircut on Greek bonds at the ECB, €0.

3. If you had 1,000,000 public sector workers and you have to take half of them away, how many will you have left? (Please show how you took half away).

About 1.500,000? I would take half away by employing another 1,000,000.

4. If you owe Wolfy 300bio Euros and he would like them all back 

            a) How many do you have to give him?

Some, maybe.

            b). If you have to pay Wolfy his Euros on Feb 27th 2025 and it is now Feb 27th 2015, how many years do you have in which to pay Wolfy?


             c) Where would you find the Euros to pay Wolfie?

 €6.47 I found down the sofa and the rest from Wolfie.

5.  Which mathematical term is used for calculating debt repayments?

Hypoteneuse,  which means essentially "length under", and derives from Latin hypotēnūsa, a transliteration of Ancient Greek hypoteínousa (pleurā́ orgrammḗ), the feminine present participle of hypoteínō, a combination of hypó ("under") and teínō ("I stretch" or "length").The word ὑποτείνουσα was used for the hypotenuse of a triangle by Plato in the Timaeus, but we would prefer to use it with respect to how we plan to stretch and lengthen the terms of our loans under a new agreement.

6. If a ratio is expressed by the first variable divided by the second variable, how would you reduce your Debt to GDP ratio?

By taking intention and multiplying it by sincerity.

7. Which theorem best applies to Greek public accounts?

Fermat's Last Theorem - It is not possible for any power to make some of our numbers equal (or something that sounds like that)

8. If you sell all 1000 VIP Government limousines how many do you have?


9. What is the square root of minus 1?

 How much i imagine i am going to repay you.

10. What is the difference between 300bio and 50bio?

If we are talking debt repayments then it's not worth arguing over, 50bio is close enough to 300bio. If we are talking new loans then I’ll take the 300bio please.

11. How do you propose to reduce your debt levels, increase your GDP, guarantee your creditors repayment, maintain a primary surplus and regain a positive current account whilst reducing capital flight to protect your banks?

I think the answer is 'yes' but our teacher didn’t teach us this, probably as they don't know the answer either.  I thought this test was going to be general economics and politics and not all these specifics

12. This is economics and it does involve numbers, so describe a method for solving question 11.

By selling figurines with amusingly large penises.

Saturday, 21 February 2015

Varoufakis's Neville Chamberlain moment.

Mr. Varoufakis returns home from his summit meeting 

"I have in my hand a piece of paper signed by Mr. Shaeuble"

Friday, 20 February 2015

A Greek Euro departure but Euro based economy.

If Greece leaves the Euro and adopts a new currency then any devaluation in the currency will need to be matched by a rise in domestic Drachma based wage inflation if Greeks are to be able to maintain the lifestyle they currently have importing the same things they currently do. If local wage inflation is below the FX inflation effect than on a relative basis greeks are being paid less than they were. Which is the same as them remaining in the Euro and experiencing wage deflation in Euro terms and a fall of relative wealth.

Whilst leaving the Euro means regaining domestic monetary policy it is probably safe to assume that Greece won’t be needing to raise rates to control growth and that with Euro rates already on the floor there is no room to lower them. Any rate adjustment is therefore likely to be in order to defend FX related capital flows so there is little reason to leave the Euro to regain monetary control. Whether they stay in or out, Greece still has to adjust its relative pricing. This occurs through inflation in local terms or through deflation in Euro terms. Though identical in outcome the difference is psychologicaly and politically very different. Taking a wage cut dents personal pride (it is an individuals decision whether to take a cut or resign) whereas inflation can be pinned on others. Blaming others for your mistakes is a politicians escape route, or even ladder to glory, and one which Putin is utilising to worrying consequence. It is also the catalyst for nationalistic behaviour that can either be used as a focus for productivity (to fight the evil others) or more likely raise anger and destruction.

Greece really can’t blame anyone else for it’s overspend of the capital flows that have come its way, however it can blame others for reneging on implicit and explicit agreements and not seeing sense (a great post here from M. Pettis on the problems of capital flows in Europe). But an exit from the EU and resulting inflation undermining domestic wealth could easily be blamed on the EU. So for Syriza an exit and its wealth destroying effects would be easier to handle politically as well as leaving it clear of debt having defaulted (let’s assume that heir s no point in leaving if debt load stays the stay). But 70% of the population don’t want to leave the EU, leaving Syriza somewhat painted into a political corner. If it leaves the EU against the wishes of 70% of the population it will be hated. If it stays and has to swallow the German pill it will be hated for not brokering the deal it promised. The EU must know this and though the negotiations are currently EU vs Greece over debt, there is probably a sub-plot to embarrass Syriza to the point that they look fools from all sides and are removed from office. Removing the most rebellious EU government within the EU would do the EU master-plan overlords no end of good towards promoting their form of political unity and defuse rising anti-EU political movements who are all watching Syriza as a test case. For Syriza, perhaps being forced out of the EU and having it seen as not their choice would be their best outcome politically, if not the best outcome for the Greek people. This could explain their current negotiating stance.

But there is a half way option. Greece’s economy is so Euro’ised that any EU departure would most likely see the Euro continued to be referenced by the private sector with  goods and services continuing to be priced in Euros. This bypasses the wild volatility a new currency would inflict on business planning and could easily be facilitated by the population running and transacting through offshore Euro bank accounts, thus bypassing any local bank enforcement of Drachma (you only have to go to the Turkish resort of Bodrum to see this in effect where Euro prices are ubiquitously applied). However new currency paid State employees would be the ones to suffer.

If they do leave of course they will be needing a name for the new currency and a new RIC code to identify it. I suggest the ‘Formally Known as Drachma’, RIC code - FKD

Thursday, 19 February 2015

Europe - The tide is coming in. Bunds may submerge.

Today I saw a couple of references to EU equities being a bubble. Which had me asking a few questions

1- Haven't I heard this before, but with reference to the US markets?
2- Wasn’t it only a month or two ago that European equities were seen together with Europe as a whole as the dead men walking of the global markets?
3- Where do we stand with regard to Europe on the classic path to a bubble, specifically on the S curve that depicts most market rallies?
4- How does this attitude shift in equities fit with bonds particularly that in bunds?
5- What happens to Eur/Usd or Eur/Gbp with this?

1- My memory is of course cloudy but at what point did we first hear of an equity bubble in the US with old fashioned valuations of stocks being cited for overboughtness and bubble blowing? I am pretty sure it was when we were around the 1600 SPX level. Since then? well, just look where we are as we approach 2100. At this point I am tempted to revisit a mega long view posted last summer

Equities will keep grinding up boringly, but once past a tipping point, say 2150 on SPX, they will go spectacularly stratospheric in a hyperbolic spike as every Joe piles in on leverage (Zero Hedge rebrands as 'Infinite Hedge'). This happens just at the time that inflation starts to hit which also then careens higher leaving the Fed on the hop, who after trailing the curve for too long will hike dramatically stuffing global markets (includiing EM ) that by then will be fully geared for chasing micro-yield at the expense of risk.

2- The attitude to Europe is shifting. We have the Greece situation hanging over us and the much longer term concern of Russia, yet the Russian situation and any binary risk of shots being fired between East and West still appears to be outside market concern as Ruble is gently strengthening (Oil bounce helping but that looks as though it's rolling over again) and it would appear that Greece is becoming the last stand for the Euro asset bear. Meanwhile a steady asset flow back into Europe appears to be underway, especially from US, as opinion swings from growth doom to one of accepting that nascent growth potential exists. With longer term allocation happening it is no longer a question of 'if' the tide is coming in but of 'how fast’.

3- I would put us somewhere in the middle of the stock S curve, somewhat at the US's SPX 1600 equivalent, but with very sectoral bias towards smaller stocks as some of the mega stocks have been performing more as bonds recently. The rush of the speculator appears to be joining the underlying tide with even bank stock benefitting. I say ‘even' bank stocks as structurally I still don’t see how they are ever going to be allowed to make serious money by state or social system and for the further reason that their bond holdings may be a source of concern as the growth meme moves on to that sector - see next point.

4- If return to growth is the play, and assets are switching from defensive to growth allocation then one would wonder what there is to support European bonds. The peripheries will benefit from a credit function vs the core but the core would be liable to a multiple whammy. Outflows from core into periphery, outflows from bonds to equities and finally outflows from bonds in general on a mood swing on rate expectations from uber dovish to a more normal. the path of US treasuries recently will not be giving much support from a global bond argument either.

5- Eur/Usd is a pig to play on this as rising US rate expectations are balanced by flows and expectations from the above arguments and this opposition could already be visible in Eur/Usd effectively not going anywhere at the moment despite the ‘stronger USD’ idea being so popular. EUR/GBP may be a different story. GBP has done well on Euro safe haven, comparative growth and yield. Yet it doesn't have the strength of underlying rate expectations that the US has, more as robust growth. A switch in European growth expectations could well see a EUR/GBP reversal rather than EUR/USD. ( and anyway, I'm a Brit. We can never see the value of our currency).

Which leaves the last question. What to do? The obvious point of attention for me remains Bunds. they have stopped going up but haven’t started going down. When they do, it wil be very hard to see where the marginal buyer will be coming from with yields where they are. The caveat of course is binary risk over Russia and someone doing somehing competely stupid over greece, like REALLY stupid as basically stupid has been priced in.

Bunds lover the past year  

Bunds recent action 

Monday, 16 February 2015

Todays news and comment - Bloomberg headline style.

Bloomberg's dissociated headlines are legendary to the point of making me wonder if Bloomberg run an internal competition to come up with the most absurd. My thoughts towards this were triggered by today's '"Greek Stocks Fall on Deal Skepticism as Ruble Advances" headline implying that the two statements either side of the 'as' are causal or linked. After a few fun examples were bandied around on Twitter I thought I'd do a brief post solely in the style of Bloomberg headlines, so here we go -

Today has seen oil prices press higher as Tesco sheds 10,000 jobs and USD/RUB has naturally responded by falling as Greek talks fail to reach swift agreement. But markets are otherwise quiet because catholic Europe is on holiday as it's Washington’s birthday. It’s pretty depressing on the Ukrainian front too with the ceasefire crumbling as Apple and Google together now have a bigger market capitalisation than the whole of the Russian stock market.

Elsewhere Denmark mourns another horror shooting in a cafe as UK’s Ed Balls calls for receipts to be demanded to prevent tax evasion.  It’s all heating up in Libya with Egypt retaliating with air strikes as Kim Kardashian threatens a new reality show. This is worrying as low tide is at 10pm tonight.

I have been staring out of the window and wondering what to do as herds of wildebeest trek the dry savannah of the Serengeti and decided to look at buying bank stocks again as Fifty Shades Of Grey dominates at the box office. The problem I have with bank stocks is though they are a normal growth sector play, they are going to be taxed and fined out of any form of outperformance as cybercriminals steal $1bio from up to 100 banks. But with ECB QE just around the corner they should see continued support as the French trial revives the question of prostitution.

China’s data perked up last night but then it’s hard to trust Chinese data as Ed Miliband is silent over hacking allegations, but the commodity sector is worth looking at as Nutella and Ferrero Rocher boss Michele Ferrero dies. I’ve been looking for a bounce in AUD as Hepatitis A caused by frozen berries highlights concerns about Australia's food and hope that any Chinese positives may help as Italians rescue more than 2000 Mediterranean migrants.

It’s certainly not easy to call these markets as smoking skunk cannabis triples the risk of serious psychotic episodes.

The comments column is open for any recollections of the best real 'Bloomberg Assumed Correlation Headlines'

Saturday, 14 February 2015

Macbeth's Oil Bear Witch Project.

A few big names are continuing to call oil lower and cries of $20 are still rife. Now whilst this may indeed occur at some point in the future, their behaviour is beginning to appear Shakespearean with their now infamous lines learnt by rote by all financial commentators.

So here are Macbeth's weird sisters (For the non-Shakesperean the original is here).

Thrice the Saudi Oil Min mew's.

Thrice and once, the hedge-fund whined.

Bear cries:—'tis time! 'tis time!

Down and down oil futures go;
In the poison'd longs throw.
Oil from newly fractured stone,
Margins pared back to the bone;
Swelter'd longs caught sleeping got,
Oil thou'st cursed, just sell the lot!

Double, double oil in trouble;
Prices burn, and frackers struggle

Saudi pumps for Saudi’s sake,
All the rest no profits make;
Rise of new tech on a plug
Fall of Nat, oil sands undug
OPEC talk makes hedges sing,
Sell the call and own the wing,
For a charm of powerful trouble,
Like a hell-broth, oil’s a bubble.

Double, double oil in trouble;
Prices burn, and frackers struggle

China’s growth a toothless wolf;
Supply still pours out of the Gulf
Russia, squeeze the dangerous shark;
Keep Nigeria in the dark;
Global usage falls, it's true
Solar brings new charge to you.
The Stans’ supply, Qatar's eclipse;
Now the Turk, Tartar oil sips;
Figure now birth-strangled Frack
Their new flow begins to crack
Add thereto the Tiger's slowdown,
For the ingrediants of our caldron.

Double, double oil in trouble;
Prices fall, and frackers struggle.

Cool it with producer blood,
Our $20 call is firm and good.

However that is not as it is playing out so far, so to continue for now 

But yet the witch, finds potion weak
A new solution she must seek
For oil now trades at annual highs
To bear witch's great surprise

"It's but a squeeze, don't you fret
20 bucks we'll get to yet"
But the crowd think she's a fool
And call her to the ducking stool

Friday, 13 February 2015

More oil, more growth, less deflation and a 'what if'.

The Brent Oil price time machine has taken us back to Dec 14th 2014 and the excuse of ‘its just a short squeeze’ has been eroded by time. The calls for $20 oil, if they are still beng waved around, have been pushed out from 'soon' to 'some time’. If we want a model on how these calls wax and wain we just have to compare them to the Euro breakup calls that go back to 2011. Great if you have an infinite time frame for your free option of rightness but a nightmare to trade and remain solvent against.

One of the regularly touted reasons to be bearish is the levels of reserves in the US, which I can understand impacting WTI, but the move we are currently seeing is being led by Brent which I assume is outside that SPR mandate. The Brent spread to WTI is really impressive now, so are you really sure US reserve data is massively important?

In my last post in a confused state, I said I had exited long oil trades because they had performed massively in a short term and now it was less clear. However the lack of a roll over (just when it looked like it would roll over) and break to new highs has me looking for laggards in the oil sector, to the point of overlaying Brent and oil stock prices to se what is out there. One or two look as though they have some catching up to do - Premier Oil? And yes, for full disclosure I have bought it this morning on the Brent/stock price spread argument.

But as mentioned in this recent post, it would appear that complacency in longer term oil prices has been the backbone to many deflation trades and whilst the ‘just a short squeeze’ argument was holding out then related trades could be excused any doubt. But with the latest spike I would not be surprised if we start to see some contagion into other asset classes. In old 'Macro Man' parlance - The Pink Flamingo Effect. To start with other commodity linked zombies might perk back to life. Rio Tinto has seen a surge as it is starting to distribute some cash but cash rich commodity companies in general are in my sights.

On to the other thing - Europe. There are so many internal variables involved that it really should not be seen as one trade, even if non-Europeans like to see it a such it needs to be played by sector and by country as there are multiple forces to balance. Return of growth, falling rates, politics, individual country solvency and the usual round of long term structural problems vs short term fixes. If we consider the long term structure of Europe as an Egyptian boy and Euro-policy as a sticking plaster then it is probably best to consider Europe as the mummy of Tutankhamen.

But growth is returning and before you argue, lets at last try to agree it is returning more than most had forecasted in November. And oil is up (did I mention that before?). Is this as deflationary as the markets are currently pricing? Probably not but the question is - is it as deflationary as the ECB is adapting for? With my views on the outlook for Bunds already massively anti-consensus the icing on the cake would be that European data starts to pick up not only enough to steer the market away from collapsing yield expectations but even to, dare I even suggest it, be enough to delay the ECBs first tranch of QE.

Now THAT would be a win for ECB policy, German pride, Denmark, Switzerland and the nonsense of negative yields and a loss, on the red hot pokering level, to just about every consensus trade out there.

Saturday, 7 February 2015

The Prince of Mayfair.

I was asked if I could do a parody of the Fresh Prince of Bel-Air, but based on Mayfair, Hedge Fund capital of London. So, with absolutely no apology to my friends at Mayfair hedge funds, I give you -

The Prince of Mayfair -

Now, this is a story all about how
My life got flipped-turned upside down
And I'd like to take a minute
Just sit right there
I'll tell you how I became the prince of a fund in Mayfair

In Rainham, Essex born and raised
On the broker desks was where I spent most of my days
Chillin' out maxin' relaxin' all cool
And getting inside info out of school
When a couple of guys who played it too good
Said I couldn’t trade 'inside' in this neighborhood
I got in one little fight and my client got a scare
I said 'can I move to your hedge fund in Mayfair'

I begged and cajoled with him day after day
Paying him back points on trades that went my way
He gave me a chance but he said it’s no ticket.
I put my swagger on and said, ‘yeah I’m gonna kick it'.

First class totty, yo this ain't bad.
Got my own brokers too willing to kiss my ass.
Is this what trading in a Mayfair fund is like?
Hmmmmm this might be alright.

But wait I hear they've process, risk measures, all that.
Is this the type of trading that will suit this cool cat?
I don't think so
I’m sure I’ll bust the VaR
I hope they're prepared for the Prince of Mayfaaar

Well, I called up Jimmy and he gave me the shout
And I bought up all the stock, it was a right real rout
I didn’t get arrested, instead they cheered me then
I thought this is easy, so I did it again.
Got made Partner this year, I’m no longer a lout.

Now wear red skinny trousers and buy champers that's dearer
Drive a lambo plated ‘FUND’ and have powder for the mirror
I thought about Rainham and going back there
But I thought 'Nah, forget it' - ‘Now my home’s Mayfair'

My accent’s changed too, I no longer say ‘mate’
Instead to the cabbie "Good chap, I'm running late"
I look at my kingdom
I am finally there
Sitting on my throne as the Prince of Mayfair.

Friday, 6 February 2015

NFP's are like

NFPs are like a beaujolais nouveau. Over hyped, never as expected and forgotten within a week.

NFPs are like a lottery draw. Pick the winning numbers and they'll still be a reason you don't get payed out.

NFPs are like blackened cod. Discussed and anticipated for days before but turn out disappointing and fishy.

NFPs are unlike lightbulbs. It only takes one economist to change them.

NFPs are like snow in England. Rarely as forecast, cause chaos on arrival, but forgotten by the following day.

NFPs are to Fed forecasting as Punxsutawney Phil is to weather forecasting.

NFPs are like the Super Bowl. A small portion of the global population go nuts over them and the rest wonder why. 

NFPs are like lies. The bigger they are the less folks believe them.

NFPs are like Hershey Chocolate. What they consist of is subject to constant debate, the only agreement being that most of it is artificial.

NFPs are like roadworks. Everything stops miles ahead but once you get to them there's no action and nothing to see.

NFPs are like soviet era shop queues. You join in the wait as there must be something worth waiting for. But there isn't.

NFPs are like... well,.. they come every month and are a bloody mess.

Thursday, 5 February 2015

Greece and a Country Leaseback Plan.

The ECB yesterday decided not to accept Greek sovereign debt as collateral and the markets went into flight mode. The fight and flight type, not switching off your phone in the aircraft, though that would have been the best thing to do because as we come in this morning the US timezone wobble has all but dissipated. The 100 point drop in Dax futures and dump in Spoos to 2020 has evaporated and Bunds are back to yesterdays range (phew).

The debate over whether the ECB is within its rights to pull back the favour that they granted to the greek junk bond rated collateral is rife, but the upshot is that it’s the Germans fault and that the game book the EU appear to be playing to is the holy book of Dijsselbloem that was read to Cyprus. And like most holy books it starts off very old testament with lots of smitings and punishings and thou shalt nots. I just wish that the EU would jump to the end of the book where they learn that forgiveness, kindness and understanding is to the benefit of all. If not we can just consider the book as the EU’s “Art of War”.

But back to Greece and some more silly thinking. If Greece were a company, by now it would have had advice from an investment bank, the guys in charge would have set up a new company doing the same, drained all the assets from the original company, including the staff and left the old company as a hollow shell loaded with all the debt and no assets against which it’s creditors can claim.

I assume that all the EU rules are stipulated by country and assume that there is no reference to the size that country is, talking geographically. If there was then coastal erosion, volcanic land creation and rising sea levels would be upsetting all sorts of measures. So if there aren’t then perhaps Greece could do the following. A country lease back.

Greece approaches Spain, as they appear to have similar political outlooks towards the EU, and sells nearly all of its land mass and contents to Spain for a token €1, condensing the existing Helenic state to just one small office, perhaps in the centre of Athens or even on an otherwise uninhabited greek island. This office is now Greece and will now have the all outstanding state debt compressed into one filing cabinet with no assets to repay them and no local liabilities to fund..

The deal with Spain is that this new region of Spain (the old Greece) is leased back to its population for maybe €0.50 a year and granted total autonomy from the rest of Spain, much like the type Catalonia is demanding. The net effect is that instead of the whole Greek population having to emigrate to other EU countries due to local economic cataclysm, causing mass demographic problems, instead, rather than moving the people to the country, you have moved the country to the people. As for debt to GDP ratios for Spain, without the greek debt load it may even benefit them.

This leaves the new Greece debt free, still living it’s own way and still within the EU. It can then try and do a Scotland, and be granted complete independence at a later date and (if you were to believe Alex Salmond) be allowed to remain in the EU thus completing the circle.

Wednesday, 4 February 2015

In the Psychiatrist's Chair.

I’m getting my head in a twist. I need to write down the thoughts and hopefully someone else can tell me what I should do with them or where they don’t add up. So here are the patient notes. Apologies for their schizophrenic nature but they are just an outpouring. 

Supercycles  -  I have always held in the back of my mind are that asset classes tend to work in 7 year cycles - on that basis as commodities ended in 2008 and so should be due a return. And the reverse for bonds.

Commodities are the dead man of asset classes so fits with the above. 

Growth is returning to the world - JPM global PMI picked up for the first time since last June.

Central bank policy is hugely stimulatory (adds to the above).

Oil is 'tabloid' as a story and is beset by the whims of producers and has enormous slack in the steering wheel due to speculative positions as evidenced by a 20% swing over the last few days. That was NOT due to changes in pulling it out of the ground or rate of burning the stuff. It doesn’t change that much in 3 days. So +20% swings on specs make the thing hard to play. So I’ve got out of my long plays and will watch for a bit. 

Metals are a different story. Bombed out and worth looking at for the next big cycle. Africa has taken a hit on EM USD Funding, collapsing oil, poor metals and adding in West Africa ebola and Boko Haram means that Sub Saharan and Pan African funds have been dogs. Tend to think all the functions above will or have abated. So looking at Africa again? Or what about Peru and Chile?.. hmm

China re the commodity story. Have been long for ages against the Mobius style doom-mongers as I believe that that simple stories are too simple in a command economy. But, policy under the new regime is to take power back from the speculators and so long term slowing of investment performance as local leverage is taken out will mean not such a sure bet. But this doesn’t mean that commodity demand from China will slacken as policy is still for growth.

With the commodity story above and mood on Aus being so poor it should be a buy now/soon (see yesterdays post).

EU - Still overdoomed and growth is more likely than more slowdown. Greece will pass and though there may be political ructions and debt shenanigans the populace will be quietly getting on with the growth side. So still hanging on to long term EU growth positions. 

Deflation story is overplayed. Looking for trades that profit most from a sharp reversal in expectations from this front hence Bund trade idea yesterday. And considering what happens in CTA land when low vol trends break the bund market reversal could be really sharp ( even without the ‘you have to pay to hold them story’). Anti-deflation leads back to commodities. 

US - Can’t see equity performance ripping higher. Moves in USD (both ways) will offset performance for the non-US investor. Rate story there is too hard to play as it self adjusts to changing backgrounds.

Japan - avoid. Abe story run out of steam vs expectations and it's treading water so nothing obvious.

Short term - Some big moves that can lose momentum. Oil, wouldn’t be surprise to see it slip and same for equities. Yet looking for equities down in the next couple of days pollutes the bund view. And though I still see the ultimate bond sell off to be sharp enough to hit equities, that is the big move. Before that happens we will keep the equities/bonds reverse correlation. It's also the end of start of month, in other words month start allocations done and we can settle down. 

January has lived up to normal expectations. As suggested here, Everything is a mess in January and not worth setting your direction for the year by. yesterday oil was back at dec 31st levels, Eur/usd was back to pre ECB range, SPX was back around its 2040-60 range and all you needed was EURCHF to be at 1.2000 and you could have imagined that January was just a bad dream.. 

So what to do? I’m actually short Dax and bunds. Sort of self hedging until both go down. If they correlate but both move widely apart  I’ll chop one leg when news changes. Short FTSE for a correction, but that goes against my longer term commodities up thought. 

I hate it when short term and long term views clash and would welcome any suggestions as to what you prescribe for such conditions.

Tuesday, 3 February 2015

Membership Applications to Two Socially Unacceptable Clubs.

Yesterday’s post was a bit of a longer 'maybe' look highlighting longer term risks to the bond markets caused by any sudden change in perceived outlooks for deflation. 'Risk to the bond market' probably has you yawning into your screen as it has to be one of the most over thought, least performing and just downright beaten to death themes out there. The nail in the coffin was 2014 when the trade du l’annee was to be short bonds into the end of US QE. As we know, the result of that trade has left anyone even suggesting being short bonds liable to public pillorying or compulsory removal to the Zero Hedge comments column.

This derision and social stigma has almost pushed the short bond movement underground. I am picturing darkened allies, locked black doors with seedy characters loitering outside. “I’m here to see errrr, Mr Bond”, "and what is Mr Bond's first name?”, "Short’’, ‘Aw'right in you go’. Followed by a walk down greasy stone steps into a seedy cellar where a few tallow skinned, hollow-eyed, men fervently discuss, under a single bulb hanging from a frayed cable, how to short Bunds without anyone noticing.

Though the club has been running for years, I have never been tempted by membership, having been convinced for a while, well since 2008, that standing in the way of the firetruck that was sent to save our houses from burning down was not the wisest move. But with corporate bonds now trading negative yields ( Nestle ) I think it’s time to realise that this is getting as nuts as a really bad trip and someone has to grasp reason and go and put the kettle on.

So what is it with Bunds? They go up as Euro growth falls, they go up as Europe falls apart as spread trades sees them bought vs periphery, they go up as Merkel et al declare no new financing, they go up as ECB announces QE and they NEVER EVER go down. If Germany had any sense they would scrap the Debt/GDP rules on negative yielding issues, issue as much as they can, then send the whole German population on holiday as they don’t have to ever work again because the rest of the world is paying them to do nothing - which would make some European countries livid as the Germans take their well paid jobs of doing nothing.

One twist to the path of bunds has been that policy makers are targeting break-evens.  But we could suggest that break-evens are only falling because people keep buying bonds. And why are people buying bonds? With a hat tip to my old co-author 'Nemo', we can apply Goodhart's Law here and say policy makers' break-even targeting is being anticipated by the market and so they are buying bonds ahead of it. This bond purchasing then pushes the break-even down further encouraging more policy action. The break-even thus becomes useless as an indicator. The corollary would be that should the cycle reverse in anyway, the reinforcement will be reversed causing larger swings in the opposite direction,

So with  that added to my reasoning from yesterday (and lets add that JPM's global PMI just rose for the first month since last June) I think its time to sign the club membership forms and go short Bunds.

Not being satisfied with just buying membership to the ostracised club of short bunds, I am also signing up to the ‘you must be joking, are you nuts’ club of long Aud/usd.

the RBA cut rates today and on top of an outlook that predicts terms of trade to be through the floor on weak commodity prices it was enough to see the AUD slotted down by not far shy of 2%. But this could well be the sharp dump that is worth buying as commodity prices have all put in a recovery today, the USD’s run has run out of steam elsewhere and 2.25% is still infinately more generous than you can get lending to a chocolate company (see above). There is one other reason to buy AUD. When the whole aussie market is treating the words of the journalist Terry McCrann, as gospel you know the world has gone mad.

So having been a member of the 'blasphemous, but now beginning to be grudgingly recognised'  long oil club for a month or so there are two more dodgy clubs I have my membership application in for. However my subscription budget has meant I have have had to resign from the Long Chinese Equity club. It was great fun and hugely rewarding over the past year and I may rejoin at a later date.

If you don’t hear from me for a while, look out for my name to soon appear on a financial offenders registry and for me to be banned from approaching within 1 mile of a financial product.

Or worse,  I suffer this for financial blasphemy

Monday, 2 February 2015

The double risks of an oil rally and the road to 1994.

One of the things I have been trying to get my head around is how the assumed association between inflation and growth has become so strong that many seem to believe that they are one. As a dog is likely to experience fleas finding a flea does not mean there is a dog attached to it. Growth is likely to experience inflation and recession experience deflation. But inflation does not lead to growth and deflation does not need to lead to recession. 

Oil and energy prices are the main cause of the deflation we are currently seeing but that in itself is stimulatory.  Central banks are responding to their deflation gauges by erring on the side of further stimulation. So rather than one countering the other we are seeing Dr.Aghi and his clan administering double the dose. Which is all very well and rather pleasant as long as any growth doesn’t see inflation, or rather any rapid inflation. 

Central banks respond to historic data and could be considered to be driving down the economic highway with their windscreens covered up using the rearview mirror and the instruments to navigate by. Which is fine as long as the curves in the road are gentle but fatal if sharp bends are ahead. My concern is that the stimulation due to deflation caused by stimulatory effects will heighten the chances of a sharp bend ahead. If energy prices were to rise suddenly we would have inflationary effects occurring just as CB policy has adjusted for the reverse. 

Which brings the risk down to a spike in oil. One just has to sum all the commentary and forecasts for oil prices to see that the bias is hugely to the down side which would suggest that the risk of an oil spike is all the more likely. 

Oh look. Oil is rallying hard and is up 12% in less than 24 trading hours. The news event this is being pinned on is friday's data of rig closures and the price move has so far been explained as short covering. Which to your author’s ears normally is a dismissive statement of hope and denial that prices could go higher for other reasons. The risk is therefore for this to run and with it a further risk to sharpening that bend ahead of the policy makers. 

Let’s take a look at the rest of the deflation trade. The most obvious has been the bond markets. The size of the market is gigantically monstrous and yields are pretty close to zero across many of the key ones. My concern is what happens should opinion on the outlook of inflation suddenly shift due to growth from CB stimulatory policies combined with rising energy prices. Coming from such a low yield base and with such huge consensus any exiting of positions could be messy as it is unlikely that there are many people left looking to buy. This could very easily look like 1994 again. 

If we do get a 1994 the effect this time could be much more dramatic and would derail central bank policy and place huge burdens on the elephant  diplodocus in the cupboard. All the bonds that central banks and funds hold. 

As I have regularly remarked, equity prices are not expensive when measured against alternative yields and as such I have been dismissive of traditional measures of earnings and dividends versus price suggesting that equities are toppy. However if we get a serious tip in bonds then that argument vanishes. In which case equities would get caught up in the sell off. 

So where as we saw equity and bond price inflation in the deflationary QE era, we could well see equity and bond price deflation in response to a shift to perceived inflation. Of course whilst this in itself will act as a brake on inflation, it does make one ask where one wants to have ones money parked in a bond AND equity selloff. 

Which brings us back to cash and a safe haven currency that isn’t going to be sold off like mad in this panicky scenario. Take your pick, but a low debt issuing country running twin surpluses would be sensible. There is an alternative and though this goes against my grain, I guess as most of what I have written above could be considered Zero Hedge fodder, let's go the whole hog and suggest buying gold. There I've said it. 

Sunday, 1 February 2015

Borrow Spend Default Repeat (Yanis Varoufakis Ft. Alixis Tsipras)

With apologies to Fat Boy Slim and the crew of 'Eat Sleep Rave Repeat'. Here is the Greek version narrated by Yanis Varoufakis featuring Alexis Tsipras - 'Borrow Spend Default Repeat'. 

"Borrow, spend, default, repeat"
(with Yanis Varoufakis )
(feat. Alexis Tsipras)

So, there was austerity
It was like, kicking off
I don't know what it was doing
But it was sick, man
Like, it was like, no growth
Bare. Like, jobs gone, like fucked
And the EU started strangling us in stupid shit
And we were all like, writhing around on the floor, at least I thought we were
And then help walked in, you know, not like help, like real help, like a deal, like, you know, you know what I'm saying
Like Merkel and the Troika
It was ok. It wasn't ok, we were starvin'.
I hated her, man
To that hate I said Nein!
Like, I hate her and her deals, man
Like, you know, like, no borrowing’ no spending' no defaulting’ she’s repeatin'
There were people rioting I think, and no one listened
They only listened to the EU.
Well anyway, like, we were just suffering and rioting,
And then came this Syriza guy

And this Tsipras guy just looked at me
Told me to be his Finance Minister, I asked why, but all he kept saying was

Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat

Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat

Suddenly I think I'm on the phone
Suddenly I’m telling the others
Gotta do it like this
We just Borrowin
We just spending
We just borrowing
We just spending
We just borrowing
We just spending
And on, and on and on and on and on and on
Got this call, it was Dijsselbloem, BLOEM FUCKING BLOEM, MAN
Sorry dude, to what are you objecting?
I went into his meeting, and the guy was, like, you wanna pay us something?
I'm like no, I'm just looking for a restructure
He's like then get the fuck out of my Union
I'm like, I like it here, I like the funding
 I like your money, it’s long term not hot
So I got him by the arm, and I dragged him onto the street, and I showed him his mess
He gave me all his threats
And all I kept thinking was

Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat

Till, like Tsipras called me the next morning,
Yanis, like, where were you last night?
I was like, I was there
He was like, oh yeah
And then he was like errr, you say we will repay the debt?
I'm like, I don't remember fucking anything, man
I mean, I have like, fade recollections and like, a general feeling of happiness

Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat

So we came out of the EU club, It was dark, and there was night and they were strange times
I was pretty, like, I dunno
But I went to these new lenders as I had no debt, and suddenly it was tomorrow and then tomorrow was today,
And I never missed the EU club as others lent as the economy was banging and the beat was like, really loud,
I was ravin' and suddenly I was singing in Spain, to Podemos, as austerity was killing them too. Soon they were singing

Borrow, spend, default, repeat
All they kept saying was
Borrow, spend, default, repeat
All they kept saying was
Borrow, spend, default, repeat
All I kept thinking was
Borrow, spend, default, repeat

Italy said yo, I'm a debtor too
Austerity hurts but we seen what you do
making good out of your pain
And I swear to god they said

Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat
Borrow, spend, default, repeat

Borrow, spend, default, repeat
Borrow, spend, default, repeat