Playing it by the minute.

These are the sorts of markets I usually enjoy. I am pretty useless at the micromaths of investment, but that's ok, their are thousands of micromath geeks out there in investment land running every ratio possible to tell us what happened in the past and pretending it is the future.

The science of finance maths geekdom can be considered similar that of the astro-physicist. The astro-physicist is pushing back further in time to figure out what happened before the big bang, his time constraint being the big bang itself towards which he is ever slicing finer segments of time, but as with Zeno's paradox, never being able to get to the big bang itself. The financial maths geek/gonk is working it in reverse, analysing all data back to the beginning of time in order to model the future but can never ever quite get to working out the present because all his inputs are from the past, however close to the present that past is. In this respect all models are doomed to fail unless someone invents a way of harvesting data from the future (at which point you won't need to model it because you can see into the future anyway.. errrr).

But my point is that when we have markets like this, the game changes and using a highly polished rear-view mirror and a ridiculously accurate speedometer does not compensate for having the windscreen covered and you crash on a sharp bend. What you need instead is an overview of everything and much like a general in battle, those standing on the highest ground, with the most powerful telescope and greatest experience will win the day. Before I get too bogged down in analogy all I am trying to say is that  quants hate these markets, behaviourists love them.

Price action today. As you probably detected from the last post I cut all risk shorts, the ones that I could in the early hours and the others when Europe opened. So far so good and it panned out as expected, the media queuing at every ATM (if the Greek's imposed a levy on all foreign journos filing at ATM's it would go a long way to defying the crisis), and mainstream hooting and hollering about the financial worlds imminent collapse. And we bounced.

But then something happened that worried me, all was going swimmingly until we ran into RK's rule. RK's rule was developed by a good friend and it applies to the price action between 3.00pm London ( 10.00am NY) and 3.30pm. It basically says that the way prices move during that period will set the trend for another certain time period. There are of course nuances and caveats that have to be applied but me telling you all of those would be reducing it from  RK's rule to an AF's (Any F'ker's) rule and that wouldn't be fair.

At 3pm Ldn the market rolled by which time confident dip buyers were getting more confident  and my space of media fading was too crowded for comfort. So basically I got back short again in equities. As the US markets rolled some of the biggest moves were in sectors that could not be easily linked to Greece woes. The large fall in the Nasdaq was indicating more of a general unwind of leverage trades which is the healthiest sign of contagion panic there is. When these sorts of moves get going they find it hard to respond to minor headlines from the original stimulant.

The US find it very hard to do nuance, especially when it comes to Europe, and it now looks as though the "Europe is finished" school of thought is back in fashion. A dangerous belief however tempting. Schadenfruede should only be enjoyed after the event and should never be anticipated, as its anticipation ruins the chance of its outcome.  The 'Europe is finished' may have been the backbone of the US moves but the US became a generalised risk run and that is of concern

Coming into European time zone again US indices have put in a small bounce and appear more comfortable. They have effectively lifted a cheek, broken wind and settled back down again feeling more comfortable and less bloated. But Europe are now looking at the moves in the US and putting a new catalogue of factors into their reasoning. "US off? Tech off so much? Hang on the US is beginning to lead" And this is now the worry. Greece may have catalysed all of this but we now have to watch everything as the great leverage trade of the last 3 years 'could' unravel. It is only a small could at the moment but we must watch every crack in the building for further movement. If the US markets don't respond to nuances of good news from Europe as fast as they should then this is a good sign of a bigger shake down. But for now, everyone has had their chance to react, and though as I write european stocks are playing US catch up, Bunds are off and US is holding onto its overnight small gains. Turnaround Tuesday or at least 'Stabilising Tuesday' is at the moment and  I stress ' at the moment' where I place my money.

But I am currently watching every asset I can and their interactions with each other for signs of real contagion rather than just assumed contagion and am playing longs and shorts like a day trader. And why not? 2% daily swings in a market that pays yields of 2% per annum are hardly to be ignored.


And finally - I give you the ultimate Greece remover

Do not open until Eur/Usd is at 1,1150, FTSE at 6650 or Dax at 11200

Dearest friends, 

            I will be long gone by the time you read this message. It is just past midnight and, as I lie here awake, unable to sleep through the angst of a life of turmoil, I stare out upon the screens of doom and lament. I despair of news that the world is about to suffer an apocalypse as the angels of hell rain down upon the financial markets. A doom foretold by the angels of economic death, in the names of Munchau and Evans-Pritchard, as foretold not minutes ago by telegraph. I wrack with pain at the idiocy of those once again looking for basis swaps to indicate the imminent collapse of all things European and I shrivel in a fetid corner away from the horrors of those crying the end is nigh. So here dear friends, I say goodbye, for I have taken it upon myself to sever my shorts and be done with this life as a bear.

Right, that’s enough theatre.

A few points, though it's now only 2am London time.

Eur/usd has not cratered. It is in the midst of the range it has been in for the last 4 months.
Today there is more chance that the Euro is a little more German and a lot less Greek.


EUR/USD daily candles as at 23.00 BST Sunday night

The Dax is currently trading only a smidgen below where it was a week ago last friday before last Monday's hope rally. It is still currently higher than the levels it was at 18th/21st June.


Cash Dax (off the futures) daily candles  at 00.30 BST Monday

Interestingly it's the FTSE that has broken recent lows instead, perhaps as GBP roars on the 'safe haven' trade. Sorry, I wont believe that unless I see London house prices soaring on European 'run away' demand again.


No matter how libertarianly anti EU some of the rising parties in other periphery countries are, the public hang drawing and quartering of Greece (lets not debate whose fault but agree that life in Greece is about to get tough for a bit) is going to be a bit of a wake up call to those wanting to go over the edge. Portugal may not approve of the beating their cousin is getting but I bet they are glad it isn't them. All of this boils down to me thinking there is less likelihood of further imminent EU departures  so you can forget all this sell the crap out of periphery bonds stuff after this first kneejerk, unless of course you are selling the crap out of them for more solid pre-existing reasons such as inflation, growth, market positioning etc..

You may well be asking how I can swing on opinion of the markets only just two days ago having suggested violence on the streets of Athens is only days away. I stand by my predictions for Greece but expectations have swung dramatically though bad to apocalyptic. Three days ago no one seemed to think it possible, but now that outcomes have come out as they have we have the reverse of last Monday.

Yes folks, it was exactly one week ago that the markets were rallying hard as some Frenchmen were saying all would be fine. Sounds pretty silly to have even believed them now doesn't it? But we are just as likely to have an overshoot the other way with regards to  expectations vs outcome.

All global markets have fallen so far. The Nikkei is off not far shy of 2.5% and SPX is off 1.5% right now, but you don't have to go far back in any chart to see that these are not game changing moves. Oil is down a bit, hardly reflecting an imminent collapse in demand caused by a global slowdown caused by Greece.

The biggest problem out there for Monday is panic with the media is throwing fuel on the fire, and dancing around singing Hallelujah.

Background factors to consider:-

Equity manager have been running record levels of downside protection.
Firedoors and bulkheads are in place in Europe with regards contagion.
Liquidity for all non Greek areas of EU is just fine. Compare with Cyprus blow up.
Greece is less of a fear and now more of a reality.

In summary:-

Yes it's happened
No it won't destroy the Euro.. this time around
Yes, it will give the EU a kick up the arse and hopefully push them towards reforms.
No, peripheries are not going to blow up in the next 6 months
Yes, Americans don't get European greyness and will assume the worst tomorrow.
No, some Americans don't know where Greece is.
Yes, it is another classic example of what happens when borrowing someone else's currency (even if you are are led to believe it's yours too)
No,  all Euros are not equal - The Euro in your Greek bank account is worth less than the euro in your Greek pocket.

And finally, - the worst is now being assumed and the worse than worst expected. So yes, markets will bounce.

I am standing by to buy back my shorts and may well have done so by the time you read this post.

Oh, and let us spare a final thought for the poor portfolio managers and funds who had tidied up there books, got their weightings all correct and given performance guidance ready for today's half year end when, boom. Greece happened.  Rebalance that, if you can.

Night night.

Cries I can’t hear but I know are out there:-

Cries I can’t hear but I know are out there:-


Hellenic debt isn’t the same as Greek debt is it? It is? No way.. Shit

Ok, I want a complete breakdown of our Greek exposure. Huh? Why is it too late?

Ok, cut all credit lines to any company ending in ‘os’  no matter where in the world they are domiciled (from any bank credit director).

What the fk is going on in Greece? Where’s that intern Spyros, he’s Greek .. Oi Spyros.. WTF is going on?

The CDS will pay out won’t it? You bought the CDS FROM the Hellenic republic? It was cheap? You wha…'

Don’t worry sir, my model shows that the chances of Greece leaving the Euro are a 6 sigma event as it hasn't happened before, so we should be absolutely fine.

Sun cream, shades, swimmies, evening casuals, cash lots of cash and errrr .. food, bottled water, riot shield.

Darling, does this mean that we will have to use manchago instead of feta in the Ottolenghi salad?

Mwuahahahaahaha.. (in a German accent).

Does this mean that they are in or out of the European League? I’m sure we were playing them in the 3rd round.

So is my delayed Athens departure to Dubai on Norwegian Air covered under the EU air compensation agreement or not. (Ken V).

Duty free! We can do Duty free! Oi Doris, get me another 10 bottles of that green shit and 600 Mayfair smokes.

Olives, go long olives! Or is it short olives? Where are research when you need 'em?

Well when I arrived you were in the EU, what do you mean I now have to pay $2000 for a visa?

Hello, Kalamaki Marina? Errr, can I reflag? No? My yacht is where?

Darling, did you pack my red trousers? (clueless lawyer on the way to the Peligoni Club)

Tell them I’m dropping the bid for the 20yr Piraeus base contract from €200bio to €10bio (in a russian accent)

Danny, get me a 3 minute clip edited down. I need an emotional highs 'n' lows montage of Greece’s EU membership for the end of the 6pm news. Yes like the World Cup one. No you can’t use that.

FIND ME CRYING PEOPLE!!! (editor of BBC news)

Mate, I wouldn't mention that 15 yr cross currency-swap you did for the Greeks in 2001 on your CV.

Gas pipelines, hmmm. Forgot those. Good thing they aren’t going to go through Greece.... YOU WHAT?

So in FKD’s* that's still €3 for the small coffee (Any greek cafe owner)

What do you mean you can't switch the ELA off? The lever's stuck?

Boys, it's Christmas! (all financial lawyers)

Look, just read from the sheet down the phone like this "Mrs Kritikos? Our records show that you may be entitled to FKD* 56,000 compensation for being miss-sold entry into the EU,  or exit out of it"... There, got it?

You don’t know how to spell Dijsselbloem or Varoufakis. Where have you been?

And tell all London sales and trading I want them in by 4 am Monday. There is money to be made. I don’t give a fuck that Singapore is in, they aren’t going to rape our clients, that’s our job.

Call me when the Albanian Lek hits parity with the FKD*.

He says he can’t find the refugees, they appear to have gone home.

Get me EUR/FKD* calls!


*(Formally Known as Drachma)

And so it came to pass. Greece part n

And so it came to pass..

that Tsipras and Varoufakis returned to Greece having been unable achieve their objective of debt forgiveness and were faced by political unrest from all sides.

I have just found  this in our unsent card drawer, it’s of a 1968 ‘Punch’ cartoon. 

This is not a huge surprise, having expressed massive disbelief at the markets' behaviour last Monday, it is reassuring to know I wasn't going mad. Before we go on, it is worth noting again who the main protagonists of immediate negotiated success were. Remember? Hollande, Sapin, Moscovici (who is still holding out hope) and anyone French. I suggested back then that they have their own self interest at heart as their own finances aren’t in the greatest of shapes. Their socialist government has already been through what Syriza is going through, but to a lesser extent - being forced to U-turn on extreme socialist ideals (taxes) and suffering from an overweight public sector and excessively generous public pensions deals. France has the power to pull out of the nose dive but Greece hasn’t (the French must be crossing their hearts). Yet despite the excuse of sympathies, this is not a great piece of PR for the French, leaving them looking very out of touch with what is going on.

But back to the Greek referendum. The path that Tsipras has taken in announcing a referendum on July 5th is logical but devisive. If you are damned if you do and damned if you don’t then pass that decision on to someone else and avoid the problem. The consequences of this referendum may well lead to Greece leaving or staying in the EU/Euro but that outcome is only implied and the Greek government will be very careful not to have any such specific wording appear in the question. The ‘let the people decide’ option implies gloriously fair leadership but is more a smokescreen to cover a fast retreat from responsibility. This option lets the masses decide and is wrought with danger

- The deadline for IMF payments is 30th June, well before any referendum outcome. If the EU/IMF allow a stay of execution until the results are in then they are laying down a dangerous precedent. 'You don’t have to replay your debts on time if you are having a collective think about it’, which could lead to industrial levels of deadline avoiding referenda. My cynicism already has me imagining that, as the referendum would not be complete until all votes are counted, delays from some of the far-off islands could be magically extended ad infinitum.

- The EU proposal is composed of highly technical detail that, with all due respect, will lead to the populace being asked to vote on something that they just don’t understand. Much as if I was asked whether to cut the red or blue wire to defuse an atom bomb. This could be seen as the greatest financial misselling crime ever as Tsipras is asking the whole population to make a life changing financial decision fully knowing that they are not in a position to understand what they are committing to. "Our record show you are owed FKD 56,000 due to the Grexit misselling. TXT 2015 to claim".

- The EU may, indeed some say they have, withdrawn the proposal making it impossible for the Greeks to know what it is they are actually voting on. If the Germans wanted to get really nasty they could even hold their own referendum on whether they will even provide a deal for the Greeks to base their referendum on. It would be even more interesting if the whole of Europe could vote on the content of the EU proposal as plenty would vote to see German creditors take the pain.

But the biggest problem is social unrest. When a government divests itself of responsibility, passing it back to the populace, the populace no longer has a well armed central pillar of anonymous authority against which to protest. Instead, with the government washing its hand of the problem, the rival sides take to the streets and take to each other. We have seen riots in Athens before, but these have always been directed with solidarity towards the government. When opposing marches meet and realise that they are opposing each other, rather than the government, it gets very nasty. To an extent we saw this with the Scottish independence referendum, where the campaign became very personal, pulling on nationalistic patriotism, morals, personal bullying and turned neighbour against neighbour.
In many ways the election of Syriza was very similar to that of the rise of the SNP. They represent a rejection of overseas lordship rather than reflecting the differences of local political feelings.

And just as with UK politics, beware of any opinion polls. As with the UK election people will be more willing to project moralistic and left wing biases but, when push comes to shove, will vote for their personal best wellbeing (that is even before we discount now evidenced herding behaviour of polsters). It is being publicised that the UK’s Ladbrokes betting company is pricing deal rejection at 1/3 on, but bear in mind that this price is being set by UK betters and, like CDS, does not represent actual probability of outcome. Just the implied. Also, as with CDS, the price contains a hedging bet component.

Having raised the subject of betting companies, they are one of the few places other than banks where you can hold your money on account. I had already supposed that this weekend Greek retail sales will  go through the roof as Greeks max out their credit cards as they are not able to withdraw their cash from banks, but a cleaner trade would be to set up and load up online betting accounts using credit cards this weekend. Online poker sites, expect your deposits to rocket.

Cash points are being emptied and all focus is now on the ELA which is the lifeline keeping the Greek banking system going. To the Greeks it is a gushing pipe of Euros that they are withdrawing as fast as possible in cash, yet to the Europeans it is a severed artery that needs to be staunched. What happens to the ELA on Monday is key as we are heading down the Argentina route fast. As with Argentina, the Greek government is soon likely to have to issue IOU’s. A form of debt that is enforced rather than bought. These IOUs effectively become a shadow currency reflecting where any new currency would trade. Though priced in Euros they would trade at a discount to reflect credit and political risk and that discount would match the discount that any new currency would be subject to as the determining factors are the same. These would easily transition to any new currency of the ‘Formally Known as Drachma’, the FKD.

Next week is going to be see a disorderly market open on Sunday night unless the EU/IMF back track (v unlikely) and it will not be long before opposing groups start to clash on the streets of Athens. Not something I want to see, but something I expect. After that? Get out your Argentina play book and sprinkle it with Russia dust.

---

Post script - Dijsselbloem has just spoken for the Eurogroup and his statement and Q+A can be heard here. It's good to listen to as you can pick up more of his exasperation than just through the text. The basic tone is 'We are done with this shit'. I do hope that the constant references to Tsipras as 'The Greek member' were meant as double entendre.

Cell culture and hive minds.

One of the greatest realisations I have had on leaving 'normal' life in the city is that life in a large financial institution is much like that of a bee. A bee starts life as a pupa in a cell, fed and nurtured to have only one function that is preordained by said nurturing. Whether it be as a drone, a worker or, by social selection, a queen. Such it is with the modern world of banking.

Once upon a time the banking hive celebrated the individual, the creative spark , the maverick that could accidentally cause positive change. In effect a rogue gene that was needed in the process of evolution to enable the further selective advantage of the organisation. But, correct me if I’m wrong, has the system we now see before us moved from one of natural evolution to a system of clonal genetic selection?

The mavericks and the geniuses that are the spark to spur advantageous evolution seem to be far between. As is the space they are allowed to develop in, if they are even allowed entry. Whereas the creative and IT spaces have nurtured creative spirit, the finance hive has narrowed the comb cell space of speciality to the point where evolution is only driven by top level planning. The populace of workers below are shackled in smaller and smaller pigeon holes of speciality that has restricted each participants view of the big world to that of a specialist cog in the machine. A machine that they are not expected to shape, form or evolve in, rather just provide function.

The quantification of financial function and the repression of individual thought through management planning, HR backward drawn matrices further compressed through a tightening framework of regulation has born a hive of lost souls, and more importantly lost intellect, in a ‘Matrix’ style farm of human intellectual energy.

I remark on this because I am growing constantly aware of genius that is being cast aside from the once great institutions because they just don’t fit the tight matrix structuring that a modern institution demands. If they are looking for an employee, the demand is for highly specialised individuals to fit  highly specialised slots leaving those with broader but less intense abilities outcast.

In effect two types of skills distribution-

The specialist with clear cut edges of ability and interaction

The broadmind with a central skill but a probability curve of connective tails (much like the probability cloud of an electron).

Employing pegs for holes is fine as long as you are sure that the pegboard you, as management, have created is perfect. But it is a rigid structure unable to change without top down master decisions.

Yet that isn’t how we have found that the most efficient form of information evolution or processing occurs. The development of artificial intelligence has shown that algorithmic behaviour, or interactions providing feedback, at the base  level mean that efficient evolution can occur naturally, in effect self healing or evolvoing, before the top level control (management) has to interact. But for that to work you need an overlap of information and processing ability provided by the tails of skill sets that a peg specialist lacks.

Which makes sense, for who is more equipped to effect necessary change than those at the level of understanding involved. Pull that back to looking at management versus employee and though management may think they have an overview of the ship, if the engineers in the engine room aren’t capable of communicating the engine is likely to seize unless the captain of the ship also wants to get his hands dirty understanding the finest mechanics of its operation.

The need for a broader set of skills within individuals is hardly ever measured by a human resources team who are briefed for a best fit, rarely taking into consideration the overlaps. Big banks have headed this way fast and it leaves them unable to adapt or evolve because they have restrained all the variables that provide constructive evolution. Without it they will die.

The regulatory pressures and influx of HR driven pre-concepts at financial institutions has meant that they are losing some of their greatest minds. Those that didn’t quite fit or could see further than the cell in which they lived and asked questions that challenged a management that didn’t quite understand the system they were running were dragged out like deformed pupae and discarded by the clonal work force. Or using the ship analogy, those that cried ‘iceberg' were swiftly removed from the crew.

This is happening in fund management too. Individual specialisation in investment techniques has left  funds understaffed with those who can see the whole picture. The performance of macro funds has now started to outstrip that of the main indices. No great surprise to your author who suggested  in January (here) that 2015 would see  macro and sector selection, once thought dead and buried, rise again this year at the expense of index trackers. But the fund industry has also not only not been training new macro thinkers, preferring quants, but has lost some real talent too.

So what has happened to the bank and fund creative talent? Interestingly the more I explore the territories of the 'once-financial', the more I stumble upon enclaves of genius, hunkered down in bunkers of self doubt, wondering if the apocalypse of financial change will ever see them prosper again. Sad but true, there is genius out there, but broken from the supportive framework that they grew upon, they are full of doubt and without structure around which to regrow. The coral polyps looking for a rock on which to grow after the reef shattering financial hurricane.

Which has me feeling that there is a synergy to be had. Pull them all together under a sheltering umbrella of a new structure. A collective that is a hive mind but built on individuality, but with some underlying key rules. 1. No w@nkers. 2. No pressure unless you want it. 3. To fit in with your own life style.  The ultimate work life to keep the brain alive and contributing, yet provide a lifestyle that doesn’t involve 7am to 7pm workdays. Well, not if you don’t want it. The Kelly’s Heroes* of finance.

This is just the time too. Banks are having to separate research from trading and God forbid a sales person expresses an opinion for chance of being sued for a catalogue of misdemeanours. Advisory may be considered a free service by the client side but if they don't pay for it and the sell side can't be rewarded for it through trade volume as per latest regulations then we are due a Mexican standoff.

 At which point Kelly's Heroes enter stage left.

*If you are too young to have seen that film, dig it out and watch it. 

Greece Balls and the €330bio island.

So there I was not believing that the end to the Greece issues could be solved with one piece of paper at the 11th hour. A piece of paper that would save face for all and provide a viable future for the country.  But then Mr. Market told me I was wrong.

The ripping speed with which markets took off has, so far, not abated with those who thought the Greek problem a hinderance to getting on with the rest of life seeing the risk of Greece causing a Euro crash diminishing to such a tiny level they can now be considered past.

It would appear that Greece have offered a tax package that keeps the EU creditors happy and is acceptable to the Greeks. Balls it is acceptable to the Greeks, but this is standing at the edge of a cliff with a gun to your head type of stuff.  Accept and live a little longer under serfdom to the Eurocrats, or jump over the cliff and hope that you survive the fall into a river that washes you away to safety.

The problem is that there appears to be no debt forgiveness in the deal and without it the Greek debt load is pushed further up the hill growing larger, with the reality of repaying it moving ever distant. The risk of it running them over is only increasing.

The other problem that Greece has is that EU rules measure many determinants in respect to GDP so there are two variables that move to satisfy the lenders. With GDP falling so hard it makes it near impossible to maintain debt (or pensions) levels without tripping over the rules. What is more, cutting the debt or the spending relative to GDP just drives GDP down further and we end up with the vicious spiral Greece is in as confidence collapses. Raising taxes as proposed, even if they are collected, hits GDP as well. Rebuilding GDP needs a rebuild of confidence that requires a plan that is perceived by all not to be can kicking. There is no way new industry is going to move to Greece, or even that which has fled move home, until they know that the long run outlook has been fixed or guaranteed.

This needs debt to be relieved or buried in a structure to rival that of the sarcophagus being built over the remains of Chernobyl. The current debt load has such a long toxic half life on it that it effectively needs to be taken out of the equation and buried.

The EU are normally rather good at this sort of thing. OMT, QE buy and hide schemes being good attempts, but lets think more creatively. How do they forgive the debt whilst being seen not to forgive the debt?  The issuer needs an asset on their books whilst Greece would like it not to be on their books at all. And this is where I think about the idea in the US that was popular of issuing the 1 trillion dollar coin to bypass budget impasses. Could Greece do something similar?

So how about this - If the Greeks were to sell an island to the EU creditors for say the €330bio Euro they owe, the creditors would have an island worth €330bio on their books and the Greeks would be clear of their debt. Of course mark to market on the value of the island would be moot but then when has a central bank ever used mark to market on its long term assets? As it would never be sold its value will never be tested. As for intrinsic value, an island has more value than an electronic record of debt ownership. It could even be rented out as the most expensive private island in the world (or set up the ECB HQ on it, or the EU parliament) and thus yield more than zero. Considering the ECB and Germans are happy with negative rates this should be seen as a bonus. As for credit risk on it? Apart from military threats and rising sea levels as it's theirs there is no one to default on it.

Of course such a thing would never happen and we will be left waiting another six months for the Greece balls to all re-emerge again,

They think it’s all over. It is .... Not.

We have had comments overnight that the new Greek proposal is much more solid and is a basis on which agreement can be reached. No details, just that.

I note that the two most quoted sources are Sapin and Moscovici. They are both French. France has never been the most aggressive opponent of Greek deals and looking at the state of their own finances I can imagine that they must be only too aware that hardening on the Greece line may not be in their best interests if France, with its own perilous finances, were to find itself in a similar position.

The people we need to have agreement from are the Germans, IMF and ECB.

But the equity markets appear to be trading as if a deal is done with the Dax up 380 and even the Ftse up 95 points and these moves have become self reinforcing with that belief. Yet Bunds are pretty unchanged and EUR/USD is now trading below fridays close, so the picture is not complete.

From what I gather volumes in equities are not that great, which leads on to the wondering if the move is as much algo driven with perhaps the self reinforcing social media monitoring machines picking up a storm of self reinforcement. Or perhaps I am just scratching my head as to how all the reasons for expecting no deal can evaporate without us hearing a squeak from Schaeuble, Weidmann, the ECB or Dijsselbloem.

ELA has been upped this morning, which is also seen as commitment but though the chances of a deal MAY have increased, to guess it in equities and deny it in bunds and FX appears odd. To suggest that everything is fixed and we can move on is absurd. We have a patch of hope appearing based on the Greeks folding and the normal modus operandi EU of face saving and redefinition, but it is hard to see how anything that is tough enough for the Germans is compatible with saving Greek faces.

I have just pressed the ‘yours' button on this morning's rally. Of course I am ignoring the other modus operandi of EU - Play the leaks ( Sources say).

The ins and outs of the ins and outs of Greece

We should all change tack now. Opinions as to the outcome of the EU/Greek negotiations are pretty pointless as. let's be honest, none of us really know now do we? So on that front it may be best if a moratorium is drawn over the outcome guesswork and instead we just express the reasons we would like them to stay in the Euro and why we would like them to leave, as I am sure, like me you have reasons for both. So I'll kick off -


Why I do not want Greece to leave the Euro

- The pain and suffering that the populace will go through.
- The security consequences to the area and the secondary consequences to NATO - if they can behave like this to EU then why not do the same with NATO.
- The knock-on effects it will have, if successful, in driving left wing separatist agendas in Spain and other southern countries leading to factional fighting.
- A general rise in nationalism and divisions within European nations resulting in a destabilised Europe which can be leveraged by Russia and ISIS.
- The mobile phone charges on holiday in Greece would go up, that is if the mobile phone networks were able to afford to keep running.
- Every beach that isn’t covered in refugees would be covered in Russians.
- Zero hedge would never STFU.
- Travelex would take half my holiday money at the airport bureau de change.
- Turkey would get cocky.
- A Greek exit would be Breaking Bad. Not as a coincidentally analogous name, I mean the last episode in the TV series. We’ve spent years following its every plot twist and then it will all be over. The only upside would be waiting for the Spanish and Italian spin-offs and hoping that they live up to the original.


Why I would like Greece to leave the Euro

- It would get it over and done with.
- It would give the Greeks a chance to sort out their own mess.
- It would mean the Greeks would have to take responsibility for their own mess.
- It would allow a new floating currency to take the strain, as it always should have.
- It would be a dent in the arrogance of our illustrious EU leaders.
- It would show that the Euro is a bad idea without structural and fiscal reforms.
- My Greek holidays would hopefully be cheaper, if of course I would still be allowed to go there, or it was safe to do so.
- Coffees would no longer be 3 Euros each.
- We would be allowed to bring duty free back from Greek airports into the UK again
- The Germans would lose a lot of money.
- My short term shorts in FTSE would see a short term benefit.
- Once debt free they can borrow from the east and set up a new Singapore style tax haven, attract global HQ’s from around the world and stick two fingers up at the EU.
- It would be a small fillip for a couple of old 1990s FX traders who can come back to trade the FKD again (Formally Known as Drachma).
- All the greek millionaires responsible for having drained off the national wealth and now living in other EU countries will no longer have automatic residence rights and will have to go back and find their overseas wealth under the scrutiny of the Greek tax man (compare US IRS overseas powers).
- Even less chance of Turkey joining the EU.


I now have the World War 1 song going through my head "Oh we don't want to lose you (but we think you ought to go)'

The EU's final prayer

The EU's final prayer


Our EU, that we’ll make heaven,
Callow is our name.
Though problems come.
Bugger all will be done
In Greece as it is in Berlin
Pay us this day our outstanding debt,
And forgive us our Tsipras’s
As we won’t forgive those who default against us,
And lead us not into temptation,
To take him outside and crush this weevil .
For this is our kingdom,
Our power, and our glory,
For ever and ever.

Diversifying is -

We so often hear the consultant preach the benefit of diversification. Either within a fund, a portfolio of funds or even as a business hedge for large corporates. 'Diversifying' has become almost as much as a 'get out of jail free' excuse as 'for tax reasons' to explain away some pretty appaling investment decisions. There are funds out there that continually out underperform and we all wonder who the heck would invest with them. Well, it's those diversifying. 

Diversifying is - 

Investing in things you don't understand as well as the ones you do.

Investing in things that you hope will directly correlate on either’s upside and inversely correlate on either’s downside.

Never having to say you are sorry.

Investing in things that a 12 year old quant told you would reduce your known risk, whilst your own brain worked out it increases your unknown risks.

Investing in things that your fund administrator tells you that you have to because you aren’t allowed to hold the rest in cash.

An excuse to invest in things that you can use for your personal enjoyment, even if they won’t ever see breakeven. E.g. "darling I've just diversified our pension into a Aston Martin Vanquish and a boys sailing holiday".

A cunning ruse to make sure you don't underperform your benchmark, or overperform it either. At all. Ever.

Buying Greek debt because you own German.

Investing in things that you think reduce the risk on the portfolio as up until now the correlations have worked. But don't. e.g. diversifying your buying of a house on the San Andreas fault and selling Californian earthquake insurance as both been really profitable over last 6 years.

Turning a into b, or rather Alpha into Beta... if you are really lucky.

Investing in a bit of everything, like betting on every horse in the race, but then wondering why you are net down after the event.

An excuse for not really having a clue.

Firing a shot gun from 100 yards at your stock list to make your portfolio picks once you've worked out you don't have a clue. The grouping is a handy measure of diversification to show your consultants. 15 inches is pretty good.

Ordering a load of different curries to share even though there’s only one you like.

An excuse for buying up the dick at the golf course’s company at way over the odds just to fire him.

An excuse to buy the golf club as well so you can ban him too.

An excuse to fire staff.

A way to sound as though you have so much money you don’t know what to do with it all.

A word that has earned your fund consultant more by saying it than you have by applying it.

A rubbish way of telling your spouse you have been unfaithful.

A welshman writing lyrics

EU playing 'Monopoly' but don't want the game to end.

Once again Greece took the headlines overnight with the longest game of 'Deal or No Deal' resulting in another empty box being opened. Tsipras has odds that really do look as though the board is covered with tiny payouts. The audience is screaming take the money yet no, he presses on in the belief that the jackpot is still available. 

Meanwhile news volume picked up overnight to a level that has drowned out nearly everything else in the markets. I offer my own chart of news noise, the Greek/EU news-o-meter. 

Whilst that is my own fun perception, here is a real analysis of Positive vs Negative news from my friend @thalesians

Greece is like a drug that we are adapting to where the market will need stronger and stronger doses to yield a reaction.  I do wonder how many long term players are still playing with their positions on the back of it all. We have been in this situation before and the worst that can happen is that the EU drop a few hundred billion EU. Which probably doesn't matter that much as they are the ones in charge of their own printing press. 

As we have seen with every other EU crisis, the policy makers' preferred modus operandi is the one so often used at the end of  game of Monopoly - the Monopoly life support gambit. This is employed when one of the players goes bust yet no one wants the game to end, so all players vote to allocate each player a fresh chunk of cash from the bank equal to an amount that will take the bust player back into operational solvency. OMT was just such a threat and EU QE is working example. It is being employed to bale out those that need it but also benefits those that don't need it, such as Germany. We end up with the EU game rolling on as bankruptcy is avoided, but the core problems of the discrepancies in relative wealth remain unaddressed.

The EU employ a simple default test, modeled on the duck test, to make sure that the game roles on -

"If it looks like a default, sounds like a default and behaves like a default... it's a restructuring of long term liabilities within a new framework"

Now back to market response to the news. Every morning when I wake I test out the old saying 'show me the charts and I'll tell you the news'. As I as I scroll through the markets I do a mental cross correlation and try to guess what news has broken to result in the numbers I see before me. It's really not that hard. 

Weekend news is somewhat different as we have it before the markets open, so in these cases the game is slightly reversed where we play 'we know the news, how far will everything have moved by Monday morning'. 

This morning I was guessing, not so much the number but the rate of change of the number, i.e. vol or the dx/dy gradients of the charts. European markets reacted as predicted; periphery spreads widening, equities falling, EUR/USD down and a general lesser knock on effect into global markets. So far so good.

Yet momentum fell dramatically later in the session and stabilised around London midday prices, indicating that the news has had it's impact and we can start looking for other pointers to play with. However we must bear in mind that those who did jump on the momentum trade who are now finding it harder to stay in without further price moves to pay for the position. We haven't had any. 

Meanwhile the US has just printed a stella housing number with the NAHB index up to 59. US equity indices have been steadily retracing upwards throughout the day. Which makes me think that the Greek news has done its worst and Greek news has been adapted to. One last glance at my news-o-meter would suggest that the next risk is for some good Greek news. 

Europa's Tower

A quick Saturday poem -


Europa's Tower


Visionary, silent, mountain topped
Sauron eyed, a clock that’s stopped
Crack whip to rouse the sleeping flock
Call the mass, yet listen not.

Cross the bridge when bridges come
Acknowledge not that they're the sum
Of mismatched goals and strident plan
To tether all. Man by man.

Deep dungeons home repress’d thought
The minds which free could not be bought
All gathered dark, now coven plot
Bring down the tower and stop the rot

A creak, a groan, earth tremors make
As ancient forces, tower shake
Shackled wills, stress break free
Foundations shake cracked ivory.

Master’s will, it will be told
Though brave and honoured was too bold
As boiling magma deep below
Wells and fuels volcanic show.

Scorched before and scorched again
The plans for one Euro'pean.
Oh barren ash, oh fertile ground
Spread fresh seed, let life found



Polemic Paine

Short term market thought picture book.

Market thoughts

Lets go short term and run with a few things that have caught my eye to make me think we are near bounce levels in some popular sold off favourites.

Bunds - The trend for global rates is for higher yields but this bund bear is looking at the price action over the last two months

and marrying them to the volume on the comment-o-meter (a general impression of how much comment the fall is attracting) as illustrated by this chart,  kindly provided by Nordea's Martin Enlund ‏@enlundm. Bund price vs Google searches for "German yield"

The data 'surprise' of EU inflation is now out, so that's now in the price. Yield now at 1% is around a more normalised level. The intraday price action so far and the pause in panicky moves in other assets has me looking for bounce. 

And with that goes the DAX 

10% falls since the peak that are also tallied into the falls in bunds as those that are regulatory tied to holding bunds have been hedging through DAX. US equities, most noticeably the Nasdaq bounced from yesterday's spiky lows and so no reason to look for global influences to pull DAX lower today. Let's add the comment-o-meter that yesterday lit up with ' DAX officially in a correction after 10% sell off.  Well that's as good a buy signal as anything so looking for a base bounce here too. 

And oil is going back up too

And some oil stocks have room to catch up ( Premier oil -PMO) 

FTSE has fallen 

as commodity stocks have fallen ( RIO) 

But oil is up and woaah ! Look at copper bounce 

It's Wednesday. Yesterday was Tuesday (do I win 'genius of the day' award for that observation?). I like Turnaround Tuesdays and reffing Nasdaq again. Tuesday = Boioioing bounce. 

So I like FTSE on a bounce re commodities and the above mentioned European equity lift. 

Currencies? Mugs game. If you can pick your way through EUR/USD over the past 3 months then you need a medal 

Same for AUD/USD 

Last comment - UK property market is very disjointed.  Demand for low priced house is very high but outside London middle/higher end is stalled.  As with equity markets out there, expectations ( in this case driven by the election results) are not being matched by prices.  This (Hat Tip JG)  http://www.douglasandgordon.com/blog/one-month-on-how-has-the-election-affected-the-london-property-market/ is worth a read. 

So in summary - Looking for a pause in the last 10 day sell offs in European equities and a bounce in Bunds. But this is short term stuff as the macro out there hasn't changed, there has just been an adjustment of expectations towards it.  

Remember  [insert bland 'back your view' trading aphorism here]

Productivity ain't what it's cracked up to be.

One of the most interesting articles I read in the Sunday press was 'Fussing parents rear a generation of no-copers' http://www.theaustralian.com.au/news/world/fussing-parents-rear-generation-of-no-copers/story-fnb64oi6-1227386987994. (this may be subscription site depending on your settings - also available from the original in the subscription Sunday Times)

This highlights a generalised problem where the next generation of workers have had their expectations of celebrated individuality and of lauded success, arising from a cosseted youth, lead to a generation that are really not very good at working for anyone else. They are taught to challenge, great if productive but much more likely to be disruptive, they are taught that their individuality is celebrated (get over it, it really isn't) and they are taught that they can expect the world if they do well in education (well they have been told that a degree education leads to a wonderful job). Is this output really prepared for the corporate world? Or, more importantly, do they really want it as perhaps their are newer alternatives? Perhaps the rise of the freelancer and self employed or the growth in small businesses reflects this move, as the dream of self-determination is much more achievable with the rise of facilitating technology.

The path to employment efficiency reminds me of that time management analogy of golf balls in a pint glass, with marbles, sand then water added. The small business outsourcing and freelance component of employment being the sand and water between the pebbles of permanent employees. Rather than decrying a tendency for individuals to move from employment within the quasi-slavery of modern corporate behemoths, with their top heavy biases of self-aggrandisement, the move should be welcomed.

Yet if this is a more efficient way of allocating labour resources why is productivity falling? Poor productivity is regularly cited as a canary in the coal mine when labour data is published but is that a problem or a natural consequence of the lifestyles and employment terms the populace prefer?

Individualism, free thought, and self determinism is drummed into our young by social mores, the media and reflected success seeking parents, yet the big world of employment rarely celebrates individualism as individualism is not the easiest fit within an institution that, by dint of it’s very existence, is reliant upon others to pursue its corporate management goals of rewarding the shareholder and the cascade of management beneath. When it comes to coping with individualism a compromise is achieved,  but be sure that the compromise is normally biased towards money buying off individualism. This extends to the payoff for other employee needs, but no matter how hard a corporate may stress their care for their employees, it only extends to reaching the maximum payoff along the curve of the employee's output vs their benefit received.

And we all have a payoff curve. That of job satisfaction plotted against income; where income represents delayed benefits, whether that is free time enjoyments or is stored as savings to buy time that you don’t have to work, such as an earlier retirement. Think of something you would really hate to do and put a price on how much you would have to be paid to do it. Now think of something you would love to do and put a price on how much you would accept to do that as a career. Those are the two ends of your curve. Completing examples in the middle will result in your job satisfaction versus income curve and I would wager it would look something like this

As this is basically a y=1/x graph it doesn’t matter which axis is labeled as which but let's assume the x axis is job satisfaction and the y axis is income.

As an individual when you are negotiating for a job you want to pitch your curve for maximum income for level of satisfaction whilst as an employer you want to pay the lowest. So you want to be employed as the green line but you want to employ the blue line.

If an employer is to increase job satisfaction they will only do so a) at the efficient points in the curve that produce the maximum fall in wage demand and b) the facilitating of which doesn’t cost more to implement than the savings in reduced income demand. There are long tails on the graph where job satisfaction goes up yet the earnings required never hits zero (we need to pay for the basics in life) and where there are some tasks that no amount of money will compensate. One aspect job satisfaction, other than having a warm office and free coffee, is not actually having to work yourself to death and to take it relatively easy. To be able to pop out for a long lunch,  do a bit of internet shopping or even have 10 weeks holiday a year or at least not work 15 hour days. But this is the part of the curve that a company doesn't want to pay out on because it is actually reducing productivity.

The demand from economists and employers is that we need higher productivity from our labour forces and that lower productivity is bad news. Is it? It may represent less income for those that demand higher productivity from others but the individual expected to produce that extra productivity may be more than happy to forego it. I have just had a most enjoyable non-productive weekend. In fact some of my happiest times are when I am least productive. I may be less competitive but I am a darn sight happier.

Are our cries for greater productivity doomed to failure because the population doesn't actually want to be more productive? The work/life balance is changing and though big corporates demand greater efficiencies, there is a quiet revolution as the hive of small business and working individuals expands. This may be less efficient with regards to productivity but it may be a damn sight more enjoyable.

Call's for increases in productivity are similar to those from champagne socialists. Someone else can provide it, not me.

Liquidity - The market is not a third party price guarantee system.

I first made most of these comments on liquidity 8 months ago, but with so much comment flying around after recent bond price falls all highlighting the dangers of no liquidity I feel it essential to raise them again.

There is a lot of concern, correctly, that liquidity in some markets is so dire it could lead to some serious meltdowns. Eyes were on High Yield via the energy sector but are now on bonds in general, especially after some deservedly sharp Bund moves and Mr Draghi's comments that we should get used to bond volatility.  But should we be concerned about a meltdown caused by low liquidity? The normal response is "Yes of course! Prices will collapse and there will be high volatility and and and" but am I allowed to ask “So what? Does that matter?"

Before we go any further it is worth refocusing our minds on what a market is. Though the world is used to seeing tight prices flash upon their screens and have come to expect to be able to deal on those in an instance let us remind ourselves that a market is a meeting place of willing buyers and willing sellers. It is not a third party price guarantee system.

If there is a meltdown in an asset it's triggered by a lack of people wanting to buy normally associated with an adjustment in perceived value (though the first waves of a bubble burst are more associated with everyone being fully leveraged owners incapable of raising more funds to buy). When there is no liquidity (buyers) prices pass through where people think fair price sits (otherwise they wouldn’t be moaning of no liquidity) to prices which they feel are unfair or downright silly and don't reflect actual probabilities of default or yield outcome. Which begs the question "why are they selling at values that they think are absurd and moaning that it's due to lack of liquidity?".

It can all be boiled down to money management rules creating large gaps between actual outcome probabilities and priced probabilities. This is particularly true in systems that use price as an input of probability in the first place, as we saw with CDS prices being quoted, wrongly, as actual probabilities during the EU crisis. So we could argue that any huge swings in pricing caused by a lack of liquidity will punish those who have to employ short term money management rules over those that can take a sanguine long term view. So rather than all being bad, it creates opportunity and acts as feedback hopefully moving fund management away from the, sometimes cretinous, short term consultants' tight risk rules back towards a more balanced macro big picture value view.

But what about the losses? Well if the true price that reflects future outcomes has indeed moved then tough. That is nothing to do with liquidity and is to do with a step change in value due to changing information and is a fundamental investment risk. The fact that the price has stepped, rather than glided down giving you a chance to exit at a better price, is because the market is pricing information efficiently and does not owe you any favours.

For those being forced to sell below where they see as the real price, due to no liquidity, their loss must be someone else’s gain as those selling must be selling to someone else who is picking up a bargain. So the negatives due to bad liquidity are offset by someone else’s positives.

So if there is to be a bond meltdown due to a new reality then fair enough, the information about supply and inflation is there for everyone to see. But if it is due to poor liquidity with no large change in fundamentals then I look forward to buying some at stupidly low levels caused by some VaR calculation that pulls upon volatility as it's major risk measure saying 'spew at any cost'. Thank you.

The wealth destruction argument is different. If leverage is involved, which of course it is, then book values will tank and no doubt the value of that book has been used to borrow to fund some other asset, which then has to be sold. That is the transmission risk to other asset classes and in the case of bonds doubly so due to their price directly feeding back to the cost of all leverage. But once again that isn't a liquidity problem, it's a mispricing problem and the inability to wear deviations from reality due to the constraints of leverage or irrational performance benchmarking.

It's not liquidity that is the problem, it's once again leverage.

---------
Finally, as a follow up to the Bund collapse, I wonder how the JPM Asset Management head of rates is getting on after his "why we are buying -ve yield" comments in February http://polemics-pains.blogspot.co.uk/2015/02/exhibit-in-case-against-real-money-bund.html. Pensions must be screaming.

A Worry of Small Things.

Greece - Tsipras threatening to pop the EU bubble  can be read a few ways. 1) cornered and threatening to go nuclear but won’t. 2) Greece really is looking for non EU alternatives such as China/Russia. 3) I have just read an Ambrose Evans-Pritchard article and been taken in by his normal doom-mongering.

Whether 1 is a precursor to 2 or not, 2 is now considered a much higher probability outcome than when we suggested it would play out this way in January

If we are at option 1 then we are near the end game and so volatility should rise. If we are at 2 then the EU ship is about to be torpedoed below the waterline and though the officers say they have built sturdy airtight bulkheads you don’t buy a ship with a torpedo heading towards it no matter what you are told about the bulkheads.

*during the writing  of this we have had a rumour and a denied rumour that something may or may not be announced re a Greek agreement. the thing about rumours is that they can’t be undone. They can be denied but they will never be erased. Just like buying a barrier option with one bank and selling it to another. Future prices will be influenced by it as either bank hedge it even though it nets to flat.

The reaction of the EU to David Cameron’s change proposals is probably much more important an indicator as to EU sensibility than the Greece/EU battle. Greece/EU is a now a fight in an alley whereas the UK/EU is more of an Oxford Union debate. So if Cameron’s approach is rejected out of hand under Junker’s ‘no change’ policy we can start to consider the EU leadership in the same vein as FIFA's.

If the EU were the FIFA

EU’s president would be elected internally behind closed doors.
EU would insist that they are never wrong.
It would be impossible to change the undemocratically placed man at the top.
EU would act above the law, or just change them.
EU would impose their rules with no respect for national boundaries.
EU would impose their rules with no regard towards local democracy
EU would cost its member states millions a year to maintain.
EU representatives would have generous expense accounts.
EU would be driven by one country one vote no matter the size of the population.
EU would have no plans for change.
EU’s president would lie and deny doing so instead of lying and then owning up to ‘lying when the going got tough'

Oooh errr, that's worrying. Interesting that France voted for Blatter.

But back to markets.

Greece has been a festering wound that I have tended to fade the bad news spikes but we are getting to the point (see above) where it is weighting the negative.

Oil - Despite friday’s jump higher my belwether oil stocks are lower. That is interesting and is pointing to a lower oil price. Iraq output heading higher but you wonder who is controlling it.

Stock performance - We have had a year of going nowhere yet throughout it, weightings have been building and sentiment indices moving yet higher.

EM - Stuck in a rut.

US data - it’s not rockabilly.

EU data vs mkt expectations - we have had the swing in Europe sentiment from uber-doom through reality to a more balanced position that is now slightly overweighted positives. Without further EU growth momentum to justify this there is room for a fall back in sentiment.

China  -Volatility there is nuts showing we have now passed cleanly through sensible investment to that of hope. As said before, the less transparent the reality of an investment the higher the quotient of hope its performance rests on. If you are investing in China, long or short, because you think you have an edge or data you can believe in you are either delusional, an inside trader, a lier or a member of the Politburo.

Commodities - All of my commodity linkin' inflation toting' growth expectin' ore diggin' equites stopped going up a while back and are rolling over.

Global leverage - you hear it everywhere - Tech stocks, oil wells, margin requirements, margined positions as a whole, subscriptions for IPOs despite the rising number of non-performing issues.

To boil it all down, the general increasing application of leverage into non performing positions or acquisitions with a fading momentum of global growth to bail them out is the key concern. But I can see lot of small worries massing and an attack from a swarm of small things is always much harder to counter than that from a single elephant.

I'm getting out of not only spec stuff, but anything leveraged and even long standing old favourites. Safer to be in cash and lose some opportunity for a while.