Friday, 31 July 2015

French Management.

I have just returned from a delightful few days on the sunny Mediterranean island of Ibiza. At this point, if you have heard of Ibiza, you will be probably readjusting your perceptions of this author as visions of large throbbing nightclubs, drug fuelled raves, foam parties and beaches covered in tattooed european muscle and scantily clad ladies flood your stereotype receptors.

Well, I am happy to report that there is another Ibiza. One of massive isolated luxury villas, frightening expensive beach bars (dripping in cool), superyachts (my word, the bays were rammed full with them) where time can be spent lying on shaded terraces, dipping into empty infinity pools and dining on the most exquisite food.

I am also happy to report that I can’t afford the latter or cope with the former, so sat on less expensive terraces in less expensive villas looking at other people’s superyachts and sipping just a couple of drinks at the Blue Marlin and ordering the pizza rather than lobster before my credit cards stopped working. It was delightful and relaxing none the less.

But dozing in the Mediterranean sun, the distancing from the markets and reducing the inputs whilst freeing the lolling soporific thought processing appeared to be more profitable than the high frequency overdosing of every single bit of news that most traders and screen jockeys are subject to. I managed to close equity shorts and go long on Tuesday open and have just reversed that trade on the Friday open on very few inputs. This is a theme I have found echoed recently by other ex-City Gods who have also found their predictive powers of market moves have become easier since they rid themselves of the clutter of IB chat inputs, the stream of Bloomberg headlines that nowadays appear to have a random red function to them as Bloomberg's talent for spotting what is important or not is becoming positively UK Labour party like. I am, of course, referring to the Labour Party’s instance that the most important issue in the world now is the use of the word ‘swarm’ by the Prime Minister.

The practice of moving attention away from 99.5% of the issue by focusing on an irrelevant 0.5% of the issue is classically political and I think we have all seen it used in dealing rooms when a cock-up occurs to attribute blame to the person chosen to take the fall. Pricing models might have may have failed, bank process may not have been in place, management may have turned a blind eye or implicitly encouraged, the phones might have been dicky and the client a duplicitous bastard, but some poor sod will be going down and reported to the FSA because he didn’t use the correct shade of blue pen when signing the deal slip. I have particularly found this method applied in French banks as the French do tend to have a skill at picking out the irrelevant 10% of an plan to stall it or trip it up.

Having worked in said institutions it wasn’t until too late in my management careers with them that I worked out how French project management varies drastically from the Anglo method. In the Anglo world to solve a problem, lets say bridging a gorge, the team allocated the task first assess all their needs (how much timber, ropes, man hours, pully blocks etc) and present the plan to management who then sanction the allocation of resources and the project goes ahead. However this isn’t how it works in French management, who are famous for asking the question "That is all very well in practice, but what about in theory"

The French method is for management to mumble that it might be a good idea to cross the gorge. Any plan presented to them by an underling is studiously ignored, instead all teams below are then expected to scavenge resources - read as 'fight each other, steal, stab, betray and compete for’ - to build a structure to cross the gorge which is constantly under attack from the other teams trying to steal its components and make it fail. Whilst this is of course hugely inefficient it has huge benefits for management. If it fails then it was not their responsibility as they never sanctioned it, but if it succeeds then it is their success, with the winning team leader, who is now proven as a vicious backstabbing bastard, being promoted one step up the ladder.

This should come as no surprise as it was Napoleon who most effectively employed this management technique, making sure that all his generals were fighting each other enough to leave his own position safe from threat. There is one other person who may be a skilled master of this technique too, a man whom I once met and was depressed by his propensity to talk about the size of his personal wealth over business issues. He is now Chairman and recently self appointed CEO of a large UK clearing bank. I think they even have a branch at Waterloo.

Tuesday, 28 July 2015

Commodities - China plays a blinder, Gen Y are renters.

Back in 2006-7 commodities were on a tear and oil was following not far behind. Speculators were hoovering them up as part of a the next great asset theme that was, like most new asset classes, based on the fact that the price had already gone up so it must be an asset(I wish you add here that foreign exchange is not an asset. A foreign currency can be but being told by your friendly FX salesperson that playing the currency markets is an asset is nonsense). Buying commodities for speculative or investment purposes is a game of storage. The commodities that are on their way from miner to end user are syphoned of into a metaphorical and often physical storage tank and held to be sold at a hopefully a higher price. When the markets turn this tank of speculative holding is off loaded adding to the supply. Rather than smoothing price moves they are exaggerated.  

The love affair with commodities is well and truly over. Many of the largest producers have been through a phase of hand wringing and CEO dumping as avarice induced supply investment has lead to Wiley Coyote moment of self induced collapse. The lags between investment decision and outcome are painful and you only have to look at the Baltic Dry Index to see what a pre-emptive glut in ship production has done to shipping prices. Through all of this I think China has played a stormer. I know that there is a natural tendency to believe that China has little  control over its behemoth economy (Exampled by recent Chinese stock moves) but in the bigger plan I do think they know what they are doing. With commodities they have sucked in Australian commodity producer hubris and spat out the bones. 

If I had a 20 year plan I would have done exactly the same. Allowing the idea of massive future demand to proliferate catalysing investment in new supply at an unprecedented level. At the same time watching speculative demand drive prices even higher adding further justification to the Capex spend. But once greater supply comes on line you then reduce your demand and watch the price of the commodities you ultimately need collapse. The speculative storage tank drains in a panic pushing prices down further and the reaction hits the stock values of the producers. 

I mentioned in my last post that this stage of the commodity market is much like a breath holding contest. The strongest companies will survive with the weakest drowning (much as we suppose the Saudi oil policy has been) leaving the survivors with a scorched and fertile ground around them on which to build even stronger. The current commodity price collapse is similar to the misuse of antibiotics. They wipe out 95% of the bacteria leaving the resilient MRSA types with no competition and fresh space to colonise.

I know this is speculation but the next logical step for China is to buy up distressed commodity providers for a song. Not the commodity, the company and infrastructure that supplies it.   

But what of core demand for hard metal things and all the stuff that is made from commodities? Global demand is weak it is true, but there may be another trend arising. Aspirations appear to be changing with the arrival of Generation Y, they appear to be a generation of renters rather than owners with little desire to own one of everything. Perhaps this is born from having to live in ever cramped accommodation where it is impossible to store a lawn mower ( even if they had a garden), chain saw, workbench, ski kit, surfboard or garaging a couple of cars. Not a bad thing perhaps as I survey my garage suffering a lifetime of power tool purchases that probably see action once every two years. Renting when needed is a much more efficient use of materials. As they say, if it flies, floats or fulfils a rare need (I had to change that) - rent it. 

Perhaps the West is reaching an end to its insatiable demand for personal stuff. We have an overhang of it as my garage is testament to. Give the next generation a phone, a laptop, superfast broadband is a shoebox sized apartment, with a Starbucks and artisan burger dive next door, no car and they appear to be as happy as Larry. Suggest to one of them that they buy a large house with 6 acres for the same price as that shoebox and they ll run a mile at the thought of having to look after it. Perhaps the common theme is that the next generation cannot be bothered to look after anything as it gets in the way with enjoying themselves or earning money in jobs that program machines rather than making them. 

Thursday, 23 July 2015

Summer Ramblings

Amy Winehouse, Back to Black. Or rather going back to oil, as the Black is in the Red. The first dump in oil prices was always going to see support from those looking for supply to fall in response to price. It didn’t. The bounce was mainly short covering and we are now seeing a more realistic pricing to supply. This time we could make new lows.

Resurgence of High Yield/ Oil linked concerns. Companies and individuals can only hold their breath for so long. The first dip was manageable out of cash reserves or lending lines. This second dump is like being pushed back under water just after you broke the surface but before you managed to catch a breath. Nasty. Minor oil stocks reflecting this pushing to lows below those seen when oil was $6 lower than here.

The bauhaus chair model of oil supply and demand is proving valid with price sloshing around between the horizontal sections with no supply side change.

Individuals in the oil industry are also going through a capitulatory transition. Friends I have in the technical side of exploration have given up hope and are running out of cash and are seeking any jobs to plug the gap. 'FX Taxis’ faces competition from ‘Oil Taxis’.

Having said all of that my gut says oil will pause and bounce after its recent move lower, as my pertinent leading dodgy oil stocks stopped falling 2 days ago.

Commodities - Much like oil the second wave downwards is doing more damage than the first. BHP and RIO now coshed to new lows but I feel that the big boys finally falling is part of the last move. Fact of the day. The earths crust is 5% iron and 8.3% Aluminium. Ok, I know it’s density of distribution and cost of purification that counts but it’s still worth reminding people of when they go on about global shortages of stuff.

Almost as good a thing to remind people of as the population of New Zealand. Last night the newswires and twitter-sphere was alive with NZ rates news. I love New Zealand to buts ('bits' in English) and would happily spend the rest of my days there, but for Joe Blogs speculator or Mr Large US bond manager, it is worth remembering that it has a population the size of .. errrr.. West London or let’s say 1/5 that of Sao Paulo, or many major Chinese cities you have never heard the name of let alone can pronounce once you have. The NZD is a great currency to trade, it moves, it has yield, you can pretend you know what it’s going to do by watching esoteric Fonterra dairy price auction websites and you can even pretend you know where New Zealand actually is on a map, but let’s remind all those armchair dairy farmers in the FX market, that it is a tiny economy and a tiny island but the danger is that speculative flows can at times become positively Icelandic. The only contagion that could ever come out of New Zealand is via hot money lost. It could sink without trace and the only ripple in the markets would be a 4 foot break on a beach in the Cook islands. Don’t worry NZ, love ya really.

Gold - So it’s a metal that, much like bitcoin, has no relevant method of valuation other than the price it is at. Large collapse or rally so what? It’s immaterial to all other than those have been buying everyday since 2011. Gold is the ultimate buy and hold as the reasons expounded for buying it never go away. A religion in as much that it is selling a dream afterlife, but you’ll be dead before you see it.

‘Techapple’ - So they didn’t kick the ball out of the park, but I’m reading the price response to the poor figures 2 days ago as much as a comment on the state of tech indices. Flighty and fidgety. With gold and oil falling and Tech rallying it was all looking so late 1990s. But to be honest tech is a nightmare unless you are on the inside. Oh, that's illegal isn't it, in that case I guess Bono is a financial genius. There was me thinking he was just a jumped up singer man with over inflated impression of his worth to the world with good connections. Silly me.

Greece - EU policy has been to cover the turd on the Greek beach with a towel. Still sure the EU just want the problem to go away until September so they can all head off to Antibes for their nice August break. 'Nightmare on Ellas Street 3' is in post production. Odds on any Eurocrat doing the decent thing and spending their holiday in Greece? They should make it compulsory. As banks make their employees do a day’s fence painting in the local community centre so they can tick off their 'caring for the community’ marketing spin, so EU should send employees to Greece for a day’s pro-bono work. For anyone who hasn’t yet worked out why Greece can’t work go and read up on the Mundell Fleming model and realise that the only escape valve is capital movement which is exactly what the EU is strangling.

What else? Ah yes - Jeremy Corbyn leading the polls for next UK Labour leader. Can we really, one day, see a global leaders summit consisting of the world’s mightiest statesmen and there amongst them a guy looking like a 1970’s Open University lecturer?

Thursday, 16 July 2015

The Pluto Crisis.

I asked the simple question this evening "Has Pluto been reclassified as a planet again yet", having witnessed the meteoric, or perhaps 'planetary', rise of Pluto's popularity. Its exclusion from the Solar System swiftly turned into a Twitterfest of analogies with the fate of Greece. Rather than leave that 'fest to fester in the ADHD black holes of past tweets I thought I should assemble them in one place in memoriam. So with huge thanks to my sparring partners @sanderwagner and @zatapatique for the wittiest in the list and to assists from many other dear friends, here is -

The Pluto crisis timeline -

Pluto only accepted into Solar System after GS made it look bigger than it is.

"The solar system is 'irreversible'", says Sun.

Pluto to hold referendum on accepting gravitational pull of Solar System in exchange for sunlight.

UK's opposition MP Dianne Abbott signs letter of solidarity with Pluto in its fight to break free from laws of physics.

Pluto to temporarily #plexit the Solar System if it doesn't follow path of other planets.

Asteroid belt divides planetary attitudes towards Pluto.

#Plexit is not an option

Jupiter blames Plutocrats for astronomical breakdown in trust.

Alpha Centauri puts pressure on Solar System to come to an agreement over Pluto. Worried about destabilising Milky Way.

"I’m not going to tell you. It’s somewhere on this moon." Pluto on existence of a new plan to stay in the solar system without accepting gravitational pull.

Jupiter and Pluto locked in precession until agreement is met. Gravity of situation not to be underestimated.

Sun proposes plan for all planets to lend mass to Pluto until it can grow by itself.

Pluto's newly discovered water to be privatised under new plan in exchange for another eon of continued sunlight.

#ThisIsAnEclipse starts to trend.

"I shall wear the astronomers' loathing with pride" Pluto.

Gallifrey informed it will also contribute mass to Pluto even though it's within the constellation of Kasterborous.

Ambrose Evans Pritchard: "Pluto reinsertion poisons solar system as backlash mounts against planetary servitude"

"An imperfect solar union" says asteroid.

"Ill conceived from the start. How can you have one central sun for such vastly different planets?" -Nobel prize winning astronomer.

Tuesday, 14 July 2015

Proof of Alien Activity on Earth

I am somewhat stunned at the resolution of the bijou Greek debt problemette. The idea that resolution, after extreme dissent and acrimony, was only found once Merkel and Tsipras were locked in a room under compulsory orders to come to an agreement is just bizarre.

Just what was in that room that persuaded the two leaders to come up with a proposal, by themselves after months of team negotiations, that was guaranteed to alienate both of them from their electorate? Was the Pope in there revealing the apocalyptic third secret of Fatima? Or was it just the US secret service revealing all the goat photos they have on them both? Or was there a representative from Nevada’s infamous Area 51? Because I have had to reach into my drawer, pull out and dust off my tin foil beanie (last employed when I spoke to my estate agent) to filter out some of the radiation that the EU is trying to use to take over our minds.

The deal is less permanent than applying Polyfilla to the Grand Canyon (though there’s an advert idea for Polyfilla) with the divisions now apparent across Europe as gapingly wide and deep. What a load of bollocks.

This newfound EU skill in bullshit diplomacy has even been extended to foisting EFSM Greek rescue contributions on the UK. How clever is that when they should be trying to curry favour ahead of the UK EU referendum? OK, perhaps Schaeuble is wanting UK out before they are even in the Euro, but he’s too clever for that. It must be a higher level of control .

So my highest ranking probability for outcome for all this, or as the banks like to put it, my 'base case', is that this planet is indeed populated by a master race of aliens. Eat your heart out Von Daniken, David Icke, Christian Scientists and all you nutters trying to dig through ancient archeology for proof, you been wasting your time. You have to look no further than the recent activities at very high levels in Europe for proof of alien existence and their influence on this planet.

And if you don’t believe me? Ask the former Canadian defence minister, who probably came to his conclusions whilst at a European Summit. Dan Brown? There's a book in this for you.

A list of things the Aliens are obviously responsible for

Nazca Lines.
Greek referendum.
My missing socks.
EU proposal to Greece.
Flight MH370.
Tsipras's U-turn after a mind replacement.
Enforcement of EFSM contribution on UK.
French foreign policy.
Greek government's interpretation of how to represent the outcome of the referendum.
EE Customer service.
Greece’s acceptance of EU proposal.
London tube driver unions.
German finance minister's planet conquering psyche.
Donald Trump.
Jeremy Corbyn’s ouburst on Channel 4 (his lizard face was almost seen). 
Chinese stock market.
Iran nuclear deal.
End of the dinosaurs.
The Bristol Pound.
Mass hypnosis of the Greek populace after the EU deal.
Everything in the Daily Mail.
30 miles of inactive roadworks on the M3 - obviously an extraterrestrial signalling device (see Nazca Lines).
Mark Carney’s paralysis over UK rates.
EUR/USD exchange rate
Artisan food markets.
The Tunguska event.
EU summits.

Monday, 13 July 2015

Last week in pictures.

Deadline devaluation - Quick thoughts on the procrastinations

Deadlines come and deadlines go. But deadlines really aren't what they used to be. Much as red lines in Greek economic policy are as flakey as dry chalk on an old wall, EU deadlines are as dead and liney as a snake on speed. Sunday is past and there is no deal. The Greeks have two days to implement changes as lack of trust means that reforms now come before the money. Once in place there will be a further deadlines before which to complete new agreements in time for further payment dates towards the end of July.

Meanwhile the stranglehold on the banks via ELA will keep the pressure on the Greeks to do something. Delay is no longer a negotiating advantage to Greece. It now works in the EU’s favour.

I am still waiting for it all to boot off on the streets of Greece. So far material supply shocks with respect to imported goods haven’t filtered through to the shops (well in any meaningful way) but it can’t be long. The video of Tsipras going home to have his own Neville Chamberlain moment with a piece of paper even more onerous than the one Varoufakis returned with, is going to become a classic in future ‘how to sell’ courses. We are yet to see whether it's a success or failure example, but either way it’s going to be a corker.

France - Germany rift widens. As discussed many times in this space France has vested interests and frightening Deja Vus to defuse. France going behind the Germans' backs to ‘help’ the Greeks with their proposal (read as ‘cheat at their homework’) has done nothing to foster trust between the two. We know that France will do anything to protect its Eurobaby, but what is less understood is that so will the Germans. Even if it requires an amputation.

Hard response to Greece fits in with any German plan to use Greece as an example to the other villagers southern countries. A rotting corpse from a lamp post. Whilst this may focus the minds of the politicians and populace of the peripheries, it will have a destabilising effect on their debt. If Greece is hung out to dry then the threat function of what can happen is equally reflected through their bonds markets. These now have to reflect the additional risk of being cut adrift so yields will jump higher. If you are constantly threatened at gun point, you may well be more willing to comply, but your life insurance premium is going to rocket.

It also means that at the first hint of slowdown, recession or budget squeezes the vigilantes are going to really go for the peripheries with less fear of meeting a coordinated EU defence.

Markets - Friday had all but discounted an agreement, let's say 90%, the highest hope function of the past 3 weeks. The ship is back on the rocks and pricing of equity and European bond markets should be heading back to the disaster style levels but they have opened up on the futures as I write only marginally down (Spoos down 12). But Eur/usd is steady and no-one really seems to care that much. Odd. Odd to the point I am shorting index futures on a feeling that the move lower will be pretty sharp.


Post script - 8.30am Ldn
I wake to find a deal has been done, it may be a classic European fudge based deal but the markets love it and I m sitting on losses.  But even if there is a deal between the Greek Government and the creditors there still has to be a deal between the Greek Government and the Greek people. As the Kaiser Chiefs sang "I predict a riot"

DIJSSELBLOEM: ASSETS WILL BE TRANSFERRED TO FUND TO BE RUN FOR PROFIT AND USED TO PAY DOWN DEBT; TO CONTRIBUTE TO BANKS RECAPITALISATION. That sounds like asset stripping into a non sovereign entity controlled by Creditors. There is monetisation of assets. In other words leasebacks. Like a few islands? Mykonostadt? Corfurt? Rhodesterdam?

And finally, the latest picture of the deal signing with Mr Tsipras and Mr Tsakolotos about to take their seats (left) .

Sunday, 12 July 2015

2011 Euro redux -

We may be heading for another case of can kicking but it is worth remarking on how far the can has already been kicked. I was looking through pieces I had written back in 2011 on the Macro Man blog as Eurocrisis Part 1 was kicking off and I was struck by just how apt some of those posts are today as they were then. Merkel and Germany were getting just as much flack for intransigence as they are today.

So here are three pieces I wrote back then that are worth resurrecting

First Tennyson's 'Charge of the Light Brigade'

The Charge of the Euro Brigade.
First published here Oct 2011

Half a year, half a year ,
  Half a year onward,
All in the valley of Debt
  Rode the unfunded
'Forward, the Euro Brigade!
Charge for the loans they said:
Into the valley of Debt
  Rode the unfunded

'Forward, the Euro Brigade!'
Was there a bond unpayed?
Not tho' the Eurocrats knew
  Some one had blunder'd:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do or die:
Into the valley of Debt
  Rode the unfunded

Spending to the right of them,
Spending to the left of them,
Spending in front of them
  Follied and blunder'd;
Storm'd at, all rushing to sell,
Boldly they bought and well,
Into the jaws of Debt,
Into the mouth of Hell
  Rode the unfunded

Flash'd all their policies bare,
Flash'd as they turned into air
Shattering the investors there,
Meetings and summits while
  All the world wonder'd:
With policy of mirrors and smoke
the global economy they broke;
Chinese and Russian
Reel'd from a rate cutting-stroke
Shatter'd and sunder'd.
Then they rode back, but not
Not the unfunded

Selling to right of them,
Selling to left of them,
Selling behind them
  Follied and Blundered
Storm'd at, all shot up to hell,
While investors continued to sell,
They that had bought so well
Came thro' the jaws of Debt
Back from the mouth of Hell,
All that was left of them,
  Left and unfunded

When can their story fade?
O the wild charges they made!
  All the world wonder'd.
Honour the blunders they made?
Honour the Euro Brigade?
  Forever unfunded!


And looking back at this take on Sinatra's 'Lady is a tramp" with regards to the German Chancellor

That's why the Lady is a Tramp -
First published here Oct 2011

She gets impatient, over the Greek debate
She'll never rescue, lazy people she hates
She loves to tighten, just don't do it late
That's why the lady is a tramp

Won't go to Athens, there's nothing to see
Doesn't like crap games, with the ECB
Won't compromise, with the FDP
That's why the lady is a tramp

She loves the free, free Germany
Export ecstasy
PIIGS broke, but it's "OKE"
Distrusts the French, they're not in her camp
That's why the lady is a tramp

Doesn't like dice games, with the Finns or the Nords
Rides in Mercedes, not Seats or Fords
Will dish the dirt, wont sign the accords
That's why the lady is a tramp


And finally back to Tennyson, Merkel as the 'Lady of Shalott',

The Lady who Shall Not.
First published here Oct 2011

On either side of Europe lie
Yields on bonds that reach new high,
All up on "risk", not CPI,
And all pray for a bailout by
The place that just won't spend a lot.
And up and down the people go,
Gazing where the credits blow
Yet hope a lead the Germans show
So please don't say "shall-not".

Knuckles whiten, lips a quiver
Little rumours dance and shiver
Through the markets, run for ever
About the union they may sever
Will they please just spend a lot
Four bust nations yet o'er all towers
Committee rule that lost its powers,
Yet up against this mess now cowers
The Lady who "Shall not"

Thursday, 9 July 2015

Eurodome! Two men enter, one man leaves

With the Greek negotiations fast becoming one of face saving excercise for both Germany and Greece, Schäuble and Tsipras are becoming the competitors in the Mad Max Thunderdome. Two men enter, one man leaves.

Welcome to another edition of Eurodome!

Announcer -Listen on! Listen on
This is the truth of it.
Fighting leads to killing,
and killing gets to warring.
And that was damn near
the death of us all.
Look at us now, busted up
and everyone talking about the end of the Eurozone.

But we've learned by the debt
of them all. Eurotown's learned.
Now when men get to fighting,
it happens here.
And it finishes here.

Two men enter, one man leaves.
And right now,
I've got two men.
Two men with a gut full of fear.
Ladies and gentlemen, boys and girls. . .
. . .dying time's here!

He's the ball cracker.
Financial Death!.
You know him. You love him!
He's Schäuble

The challenger,
Direct from out of the Wasteland.
He's bad. He's beautiful.
He's crazy!
It's Mad Alex !

Eurodome's simple. Get to the
money, use it anyway you can.
I know you won't break the rules.
There aren't any.

Remember where you are.
This is Eurodome.
Your voters are listening, and will take
the first man that screams.


Two men enter, one man leaves!
You know the law!
This is Eurodome!

[A violent fight ensues resulting in Mad Alex pinning down Schäuble]

Crowd Kill him!

Onlooker - No, no! Look at his face!
He's got the mind of a German.
It's not his fault.

Mad Alex - I'm sorry.

Schäuble -This wasn't part of the deal.

Mad Alex - Deal?! What do you mean, "deal”?

Europa - You must have tasted it.
It was in your hands.
You had it all!

Mad Alex What do you mean, "deal"?
No more Euro, This place... finished!

Europa -No, little man.
We've only just begun.
Do you think I don't know the law?
Wasn't it me who wrote it?
And this man has broken the law.
Right or wrong, we had a deal.
And the law says,
"Bust a deal, face the wheel."
Bust a deal and face the wheel.
All our lives hang by a thread.
Now we've got a man
waiting for sentence.
But ain't it the truth?
You take your chances with the law.
Justice is only a roll of the dice...
...a flip of the coin,
Fix lt.

Mad Alex - You run Eurotown.
You fix it.

Wednesday, 8 July 2015

And down again

And there you have it, everything rolled over soon after the last post and we started the European open testing lows again.

News and comment has seen even the nice Mr Noyer saying that with no agreement ELA will have to be stopped and that he is very concerned over the outcome. It's naturally unsettling to hear the pilot of the plane warning how scared he is of an imminent crash. In fact the chorus of 'very concerned’s has spread through all official ranks all the way down to minor UK MPs. That must be the political equivalent of a theme going ‘Tabloid’.

Though the potential outcome probabilities for Greece have not changed overnight, expectation appears to have, with many more expecting Sunday to be a rubber-stamping of an exit visa into the Greek passport.

Meanwhile the other shock function to everything has been China. A move down in the stock markets of 30+% has noise levels rising to 'deafening' and the wealth destruction involved vs book value from the highs is, on paper, huge. But (and here I get beaten up by many of my Financial Twitter friends), considering where the market has come from and were it is back to, I am not as concerned as they think I should be.

Wealth construction/destruction is indeed assymetric but all the money that has actually been lost has to have gone somewhere. Leverage is the killer though and there are two types of leverage on a stock bubble. Borrowing to buy the stock originally and borrowing against the book value of the stock to spend on lifestyle. Now in the case of housing bubbles, which are used as an example of wealth destruction when bubbles break, there were huge knock-ons as increases in book values had been used to borrow to spend and change lifestyles which were then exceedingly hard to readjust down. But in the case of Chinese stocks they were at this level earlier this year and I find it hard to believe that the rally has had time to cause dramatic irreversible lifestyle changes.

Leveraging to buy causes debt stress for those that bought but for every penny spent on a stock someone recieved that in payment. The move down has been redistributive as far as the real non-book wealth goes. Companies issuing at the highs cashed in, those selling cashed in but we are only hearing about the losses. Even those losses for the unleveraged aren’t that large. If we look at Chinese fund returns since Jan1 2015 we can see that they are down but not a lot.

I thank my friend @BrokenBanker for the following - 

which is about the same as we have seen in FTSE on which we haven’t heard a squeak. 

We know that catalogues of Chinese stocks are closed frozen holding them from dropping further but the shape of recent falls is panic and the volume of noise over it is at crescendo. Everything associated with a strong china trade has been washed out too with iron ore making 5% distress moves. Of course if you are in agriculturals it's the other way around. 

The concern is that China is not able to control an economy that is under pressure as well as a stock market crash. But China is China. The Chinese Government controls everything and has proven constantly, to the despair of China bears over the last 5 years, that control often produces results that are unwanted to the speculator but very much wanted by the controlling regime. The better question is not whether the Chinese can control things, but what they want the outcome to be. The terror reported upon the faces of Chinese stock brokers and punters may well be what they want. And driving the speculative longs out of the commodity markets has just made the deliverable a lot cheaper. 

And now what do we do? Risk was indeed sold off heavily from the last post, the distress noises first thing this morning was high again. Price action this morning has seen things stabilise and now that the US has opened up it's interesting to see SPX stuck around that gamma target of 2060. Whilst my feeling is that a Grexit on Sunday is very likely I have never underestimated the EU's ability to protect it's baby even if it does involve schemes and policies straight out of the Twilight Zone. With this in mind I have taken back shorts bought some bombed commodity/china linked suff and will step back off the field and into the stands for the next four days. Unless of course something breaks before then.. or I get bored.  

PS.. Gone a bit quiet from the German corner. Someone trying to gag them with a star spangled banner? 

Tuesday, 7 July 2015

Cyclists and Juggernauts

The rule of 'fade the mood’ has been playing out wonderfully over the past couple of weeks and if the fade of bad news on Monday morning wasn’t impressive enough, fading the Varousectomy induced rally was stunning. To cap it all, the firework of volatility gave us a third thunderous blast as markets ripped back higher (from a position that looked pretty horrific at one point) to the oohs and aahs of the watching crowds and the WTFs of the participating traders. 

Playing the rule of fade we should now naturally be looking for everything to fall over again tomorrow or Thursday, but before we do let’s just add a few things together. 

First the anatomy of today's dump. Though things started quietly, there were early signs of bond switches that probably wouldn’t be picked up on indices but were interesting, High price bonds of high coupon were being sold and low price bonds with low coupons of same credit and duration were being bought. Why? Well one would imagine that if you were to think your bond were ever to take a haircut and be worth, say 50c in the Euro, then you’d rather have paid 90c for it rather than 120c. 

Meanwhile oil continued to slide. Oil stocks have suddenly accelerated lower and my normal bellwether strange ones are now only just off the lows they reached when WTI was at $44, indicating something deeper going on.  US equity futures had pushed higher overnight and were looking perky most of European morning, looking as though the US was bored of Greece and happy to start the buyback without Europe, but when they opened everything melted. 

This handily married up with news that Greece had not brought their homework to the EU summit, instead saying it was in the post. This appeared to catalyse a dump that many had expected on Monday only to have been squeezed out of. The dump itself was a good old fashioned risk off dump across everything. Even Gilts rallied 2 big points. The anatomy of the dump was looking great until 4.30pm London close when everything did another volte-face. 

As I write, most equity indices are back to their starting points on the day and other stress indicators have bounced similarly well. I would normally read the price action as a clear indication that a bottom is in and the only way is up, citing candlestick hammers, mood blow offs in 'risk everything', margin call clear outs and the rest of the momentum indicators I watch. But in light of the fade rule of the past few days I can’t believe it. 

Though Greek news might be boring to the US players, it is not over by a long chalk and I must insist we all refer back to rule 1 of the EUroad :- The French, Spanish, EC, Greeks etc are like cyclists, being more harm to themselves than other road users, whilst Germany, ECB and IMF are 18 wheeler juggernauts about to turn left ('right' for my EU/US readers) at the lights without checking their mirrors, to be ignored at your peril. Especially if you are a cyclist. 

France, even if it is being backed by the US, can say what it likes but an ESM decision has to be unanimous. Germany and the Northern brethren are key and though the US has considerable clout over Germany, particularly with regard to defence in a time of Russian sabre rattling, Merkel has to be aware of her position too with regard to the domestic voters

I have just read a fascinating piece by Abrose Evans-Pritchard. I normally ignore his Eurodoom pieces because of their monotonous nature but this one is fascinating as it is stating, as fact, details about Syriza's dire position. Detail that would be just too divisive to make up. It claims that Syriza have got themsleves into a jam not having wanted to win the referendum but are now forced to go to Brussels and only return with a debt reduction deal or face uprisings against them at home. Which is much the position Merkel is in as she too cannot now be seen to back down. We have two leaders who have both been pushed into the gladiatorial arena with their baying supporters demanding a death. Whether it be at the hands of the other or at the hands of the crowd should they return unsuccessful, one of them has to be seen to go down and the German has the better armour and a longer spear. So whereas before the referendum Tsipras was damned if he did and damned if he didn't, he's now dead either way.

The EU has a track record of anaesthetising problems to sleep with a cocktail of filibuster and complexity of solution and though we seem to have another final deadline, Sunday, I am pretty sure that if someone were to check the patients ECG it would already be seen to be flatlining. 

So wherefore markets? This melt and bounce can be partly blamed on huge option gamma in S+Ps around the 2060 area whipping up short term moves but also on the latest about turn on opinion with respect to a deal. But, please see rule 1 above of the EUroad, the noise is once again coming from the French and EU Politicians with not a squeak from the North as far as compromise goes. So until we hear  something consiliatory from the Juggernauts I am still looking for another fade, but this time an even bigger one. 

Watch out below

Footnote - It looks as though a late bid has come into the auction room from the red corner. Russia saying no problem if Greece want to borrow from BRIC bank

Which reminds me of this post from January which now stands more of a chance of playing out as a reality, Greece remarries Europe, steals the joint bank account and runs off with a new partner

Updated Trading Aphorisms

Updated Trading Aphorisms

OLD - Buy Low Sell High .
NEW- Buy Low Buy High and demand the authorities intervene when the market drops 30%.

OLD - Cut your losses and run your profits
NEW- Cut your losses and find another career.

OLD - Never a lender nor a borrower be.
NEW- Both a lender and a borrower be by lending to low quality risk, repackage the debt into credit tranches and selling them on to pension funds taking at least 5% for yourself on the way .

OLD - Look after the pennies and the pounds will look after themselves.
NEW- Look after your penny.

OLD - Compound interest is man’s greatest invention
NEW- Compound interest is man’s greatest nightmare when deposit yields are negative.

OLD - Buy support, sell resistance
NEW- Sell support buy resitance, there are bound to be a load of stops on the other side.

OLD - The trend is your friend
NEW- The trend is your friend until it runs off with your money and your wife

OLD - Never sell a new high
NEW - Never sell a new high as the UK Government is making it illegal to sell new legal highs..

OLD - Sell in May and go away
NEW- Sell in May to move the fix and be put away

OLD - You don't become poor taking profits
NEW- You don't become poor taking profits, unless they don't cover the carry.

OLD - Never double up on a loser.
NEW- Double up on a loser and then sue the issuer fourfold.

OLD - Always check the small print
NEW- Never check the small print, just sue for misselling.

OLD - If in doubt, ask.
NEW - If in doubt, don't tell anyone and do more until you take your bank down.

OLD - Yield = coupon/price
NEW - Yield = coupon/price + hope - haircut

OLD - Discipline discipline discipline
NEW - Discipline Compliance HR

OLD - The charts don't lie.
NEW - The charts don't lie about the past but they do about the future.

OLD - Scale into your position.
NEW - Leverage x500, buy Chinese stocks before its too late, adopt your fetal position.

OLD - Trade with your head, not your heart.
NEW - Trade with your head, not your junior. He can't fire you if you lost on the same trade.

OLD - Never invest more than you are willing to lose.
NEW - Never invest more than you are willing to lose, unless you are Germany lending to Greece.

Monday, 6 July 2015

Tsipras after the Varousectomy - Jaffa or Studmuffin?

First a quote from the man whose name I borrowed for my own. (h/t JG for bringing it to my attention)

"Power concedes nothing without demand. It never did and it never will. Find out just what people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them; and these will continue until they are resisted with either words or blows or both. The limits of tyrants are prescribed by the endurance of those whom they oppress.” Thomas Paine

Let's look at what happened in news and markets over the last 12 hours.

-No Vote - Instant conclusion Greece is out of EU and no deal possible
-Base cases of banks swing to Grexit, though bank base cases are as solid as jelly these days and ought to be examined under high frequency trading regs.
-Equity futures were down 2% shortly after Sunday night/mon morning open.
-They recover into Monday opening when suddenly Varoufakis steps down. Or rather is pushed under a bus by Tsipras on the basis that there is more chance that Eurocrats will reopen deal talks if it isn't with him.
-This is naturaly seen as positive and a pointer towards a willingness to satisfy EU conditions for further debate.
-The markets then stepped up their rally and we are now trading at levels that would be considered normal in any other day.
-Twitter and media reek of disappointment and Robert Peston once again gets it wrong when calling for market disaster last night.

This is not how I saw it panning out. The original plan was to see markets dump, the media hype go into overdrive and continue recycling late Sunday comments from Germans that a deal was even further away, culminating in a blow off spike of nastiest tomorrow only to see a forced rescue/resolution kick in from the EU and a bounce ensue. But the ‘Varousectomy’ bounce has changed that and I am now wondering if this is a resell level for further disappointment as the markets have so suddenly swung to pricing a compromise.

But what compromise?

The No vote hardly opens up room for compromise from the Greek side even if the new Greek finance minister is a great guy and is much more pro EU. The vote has not so much even Tsipras a mandate, as he claims, to negotiate a deal that involves debt forgiveness, but locked him in to only being able negotiate a deal that involves debt forgiveness, which was the red line that the EU would not cross in the first place. So what’s new? The room for compromise is less than it was before the vote unless the EU backs down.

Will the EU back down? On the face of it there is no reason for them to change their stance. If anything the chances of it are lessened after being told No by Greece (I was very surprised even the regions dominated by tourism were such strong No supporters). The quality of German rhetoric appears unchanged but the volume of their rhetoric does appear to have been turned down this morning whilst that coming from the French appears to be turned up. The French / German interface is the point to now carefully watch for clues towards EU compromise. Though I can’t for the life of me see why negotiations now stand more success just because the Greek Turkeys have voted for Christmas.

So now I wonder if the price recovery we see is totally a reflection of discounting good Greek news or encompasses anything else. But I can't see it (what with China shakedowns and oil tanking)  other than fighting a fickle short term positioning. That positioning is now most probably set for yet another swing as German hardline attitudes are reaffirmed indicating that, despite what Tsipras is saying, his potency has been reduced after the Varousectomy and he  is now firing blanks as far as the EU negotiators are concerned. The Jaffa of Athens.

So perhaps it is best to play the game that has seen us fare best throughout the whole Greek debate. Fade expectations and expectations now appear to be for a deal. This week's price action already looks like last week's.

Sunday, 5 July 2015

Oh! We don't want to lose you but we think you ought to go.

In 1914 a recruiting song was published to encourage men to leave for the front. I can hear this slightly different version emanating from Northern European halls after the Greek referendum. It may even be the only response Varoufakis receives to his proposed renegotiations.

We've watched you playing tricks, and every kind of game
At spending and never paying, you men have made your name,
But now your country calls you to play your part some more,
And no matter what befalls you, we shall love you all the more,
So go and launch the Drachma, as your fathers did before.

Oh! we don't want to lose you but we think you ought to go
For the Euro nations need it, now you’ve voted 'No'
We shall want you and miss you but with all our might and main
We shall cheer you, thank you, bless you when you come back again.
Oh! we don't want to lose you but we think you ought to go
For we've all lost our patience, now you’ve voted 'No' 
We shall want you and miss you but with all our might and main
We shall cheer you, thank you, bless you when you come back again.

We want you from all quarters, well the South, but not the North
From whom you want more billions, they say you can go forth
You may have thought we failed you when you were in distress,
But your answer to a Union, was clearly not a "Yes"
And so your name, in years to come, we’ll blame for all this mess.

Oh! we don't want to lose you but we think you ought to go
For the Euro nations need it, now you’ve voted 'No' 
We shall want you and miss you but with all our might and main
We shall cheer you, thank you, bless you when you come back again.
Oh! we don't want to lose you but we think you ought to go
For we've all lost our patience, now you’ve voted 'No' 
We shall want you and miss you but with all our might and main
We shall cheer you, thank you, bless you when you come back again.

It's easy for the Germans to stay at home and shout,
But remember there's a duty, so you will be kicked out.
The odds against you staying are now set at four to one
We cannot rest until you see, your duty's to be gone
And the EU commission's duty, is to see that duty done!

Oh! we don't want to lose you but we think you ought to go
For the Euro nations need it, now you’ve voted 'No' 
We shall want you and miss you but with all our might and main
We shall cheer you, thank you, bless you when you come back again.
Oh! we don't want to lose you but we think you ought to go
For we've all lost our patience, now you’ve voted 'No' 
We shall want you and miss you but with all our might and main
We shall cheer you, thank you, bless you when you come back again.

Friday, 3 July 2015

Homemade Economics

PPI in China is currently running at 5.8% which means with growth running at 7.1% the real rate of growth when discounted by nominal USD funding costs is pretty close to 4%. Which is all well and good in a period of cyclical normality but in the current phase of endogenous credit bipolarity makes the outlook extremely vulnerable. 

In fact looking back over the last ten periods we can see just how divergent it has become, as this chart clearly shows

Exhibit 1
Chinese growth during periods of endogenous credit bipolarity

But China isn't the only problem. With growth slackening in developed nations, despite strong housing data (Bulgaria's housing index was up 84% last year) and demographics pointing towards a bulge bracket of 27yr olds taking up cycling, the Johnson rule would suggest policy makers are in no hurry to re-adjust the base level measurements we have experienced since 2008. 

 Exhibit 2. 
Base level adjustment discounted by Johnson rule

Austrians would naturally argue that such a case is experiencing unstable equilibrium with monetary inputs dragging E to the left and P to the right leaving a widening gulf of O. But no evidence of such can be found in recent sample sets. Even when adjusted for circular deformity, we can clearly see that O is regular and remains unwidened. 

Exhibit 3 
Regular and unwidened O

Which brings us back to exemplary dysphasia in unemployment. Whilst unemployment amongst 12 year olds remains stubbornly high in developed nations, partly due to domestic education policies and partly though wheat prices, it can be argued that a 6.8% carry on invoice defaults and credit tightening across the whole parabola induces slowdowns in raw material consumption where Yx = Dx /&.T$ + (JP@. (9)). Which is not at all intuitive, 

Exhibit 4 
Not at all intuitive 

If we are to see any form of resolution to Europe's distagflationary epaulettes, they will have to come from the supply side. As Mikany and Jelb have shown (Distillation of Postulates N.Mikany and B.Jelb 2001) upswing delays in offsetting inventory cannot be expected to serve as the moment around which growth will pivot. 

Exhibit 5 
Growth not pivoting 

In conclusion, the mesoform displasticine payoff between domestic policy adjustment and bank liquidity is unlikely to change in the near future. It does, however, imply that shocks to demand in overweighted bilateral economies should be expected. Unfortunately, through experience and the application of Newtonian fluid mechanics we see little that can be done to circumvent such exogenous shocks. 

Exhibit 6 
Newtonian fluid mechanics failing to prevent exogenous shocks

This post is, of course, all completely made up bullsht, but probably not that much more so than half the stuff we have to read from some esoteric sources and probably just as helpful. More fun to write though. As it's holiday time for our American cousins Happy Holiday and may your Greek vote go with you!

Wednesday, 1 July 2015

Famous Greek quotes from history.


 A Greek deadline is like the speed of light. The closer you get to the harder it is to reach.

You know how children's immune systems are screwed up these days because the don’t play in the dirt anymore? Well the same goes for 25 yr old French quants.

Does the GBE/GPE trade in the fix?
GBE = Greek Bank Euros . GPE = Greek Pocket Euros.

You can be sure of two things you in life - Death and journalist looking for a crying Greek person, preferably by an ATM.

Using option terminology we can say-
Greek ATM is OTM

Tsipras is an oximoron

Famous Greek quotes from history - 

Harold Wilsonos

"The Euro in your pocket is worth the same today as it was yesterday. Shame I can’t say the same about the one in your bank account."

Tsipras Caesar 

Friends, Germans, Countrymen. Lend me your Euros.
Et Tu Coelho

Neville Chamberfakis 

"I have in my hand a piece of paper signed by the Chancellor of Germany ….Errr hang on where did I put it?

Muhamed Alios 

Float a new currency, Stung by ECB.

Martin Luther Kyklades 

I have a dream that one day this nation will rise up, read the 90 pages of complex proposals set before us by our EU creditors and have the economic understanding and intellectual ability to not only fully comprehend them but to cast judgement on them in full consideration of the fact that we might royally screw this up

Bill Clintofakis -

1) - Let me say this again, I did not have financial agreements with that woman
2) - Indeed I did have an agreement with Frau Merkel that was not appropriate, in fact it was wrong. It constituted a critical lapse in judgement.


Euro, or not Euro: that is the question:
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles,
And by opposing end them? To die: to sleep;

Alas poor Yanis, I knew him well.

Henry Thefifthikis

Once more unto Brussels, dear friends, once more;
To close the wall up of our Euro debt.
In peace there’s nothing so becomes a man
As modest stillness and humility,
....... But that really isn’t me.

Winston Churchillopolous

Never in the field of European debt has so much been owed by so few to so many

Demosthenes 342 B.C.; Athens, Greece
Tsipras 2015 A.D.; Athens, Greece (he doesn't even need to change this one)

It is this fate, I solemnly assure you, that I dread for you, when the time comes that you make your reckoning, and realize that there is no longer anything that can be done. May you never find yourselves, men of Athens, in such a position!