A meandering of thoughts

I have been travelling to places where the real world appears a million miles away, where legions of white shirted chino clad lackeys are testament to the trickle down effect of economics, as they are all ultimately supported by the whims of a few billionaire’s. We may prefer them to be working in hospitals, but those not smart enough to occupy frontline medical care posts have to earn a crust somewhere and why shouldn’t it be in flogging the finest toy, such as a submarine, for your superyacht? Interestingly I sat next to an explorer-cum-investigative journalist on the plane out there who has taken these incredible toys and is using them for global environmental projects. These projects are also funded by the rich and famous. So something good does come out of techno-plaything development. Much as our cars today have design features developed by Formula 1, our environmental changes are being monitored by technology spawned from fun money. Ok, I know you are thinking it, so lets jump to it - does that mean that emission test rigging software started in Formula 1? Errr... No idea. But I can tell you that if you are concerned about emissions then I bet the VW NOx emmisios are dwarfed by the output of the words shipping fleets. To put a bit of emmisions perspective on it -

With VW - The company admitted the device may have been fitted to 11m of its vehicles worldwide. If that proves correct, VW’s defective vehicles could be responsible for between 237,161 and 948,691 tonnes of NOx emissions each year, 10 to 40 times the pollution standard for new models in the US. Western Europe’s biggest power station, Drax in the UK, emits 39,000 tonnes of NOx each year. (The Guardian)

Meanwhile shipping around the EU’s coast alone -

In 2000, in the seas surrounding Europe (the Baltic Sea, the North Sea, the North-Eastern part of the Atlantic, the Mediterranean and the Black Sea), sulphur dioxide (SO2) emissions from international shipping were estimated at 2.3 million tonnes a year, nitrogen dioxide (NOx) ones at 3.3 million tonnes. (http://www.transportenvironment.org/what-we-do/shipping/air-pollution-ships)

NO2 is not pleasant but NO? No, you are having a laugh. They give it to birthing mothers so it can’t be that unsafe. Which also leads to my hypocrisy flag being raised from the touch lines when I see campaigners trying to ban the recreational use of the stuff because a few people have suffocated on it, yet still alcohol is tolerated by comparison.

Now here’s a thing I cant marry up. Read everything financial and you would believe that the world imploded in August and is is now in a very very dark place. But we are seeing divergence here. Not EM vs DM divergence which normally doesn’t last long, but in this case it’s with us financial lot and the rest of the working population. Now I know that Redcar in the UK has just seen a nasty set of job losses associated with the fall of commodity prices, but everyone else I talk to outside finance seems to be getting along just fine. Even the village I live in was a veritable ghost town/village this summer as surprising numbers had gone off on foreign holidays. These may have been booked back in happy January, but the mood on the street still seems pretty upbeat, with restuarants full and people still happy to pay £5 for a bowl of cereals (unless it contains traces of paint bomb). Folks are even still buying oil, as the price, despite the $20 calls and gloom ahead, still tracks sideways. Even the Chinese consumer is getting more confident.

So who does the Fed listen too? “ Well on the one hand… and on the other…" As usual the shouting is loudest from those who disagree with things and the Fed and central bankers are easy game as they rarely shout back. I, for one, am very happy with rates staying low as I have a base rate fixed mortgage and am willing to swallow my academic pride in reasoning for higher rates in return for the selfish payoff of lower monthly outgoings. I wouldn’t be surprised if we are seeing a ‘Tory polls' effect in interest rate forecasting either. Where the Tory vote was probably underrated as it was seen to be immoral to vote Tory, but the actual selfish vote pushed the tick in the box that way anyway, I will stand up with the economic intelligentsia and proclaim ‘INTEREST RATES SOULD RISE!” yet muttering under my breath “Keep 'em low, pleeeease keep 'em low”. Which is how I imagine many at the Labour party conference are feeling as they cheer on comrade Corbyn in a sign of career preserving gusto whilst really thinking ‘Please Lord, make the man see sense and not carry out half of what he is threatening’

Whilst we are on Corbynomics I was just reading the fact check on his speech here https://fullfact.org/factcheck/corbyn_speech_labour_conference-48468 And it brought up a fact that includes an assumption, or rather doesn't include a fact, that sorely twists the truth to the point that it may be clouding important data.

“1 in 7 of the labour force now work for themselves… They learn less than other workers. On average just £11,000 a year.”
This is right, according to the Office for National Statistics. Its latest figures show that just over 31 million people are employed, of which 4.5 million are self-employed. That’s around 14.5% of all workers, or one in seven (measuring over May-July 2015). Its figures show median income from self-employment was £207 a week in 2012/13—which would be £10,800 for the whole year. It hasn’t published a more recent update to this analysis.

There is a magical figure in being self-employed within a one man Ltd company and that is £8,040 per year. This is the maximum that one can earn without paying additional National Insurance contributions but receive NI benefits and whilst staying below income tax thresholds. A self employed person has various means of taking income out of his or her company and taking a salary is probably the least efficient. Though the tax man frowns on it, self-employed folks have a bias to maximise their dividend payments as tax on dividends is zero, the only payment is the 20% corporation tax on the pre-dividend profit. This is lower than the NI and income tax associated with taking it as salary. This may change next year with the government raising the tax on dividends to 7% - a cunning wheeze to stop such loopholes being exploited which will cause many to move to regular salaries thus pushing up the earnings data and 'wage inflation' data next year despite income actually falling due to the tax increase. But the question is where does the statistics office derive their 'earnings' figure from? I have a strong suspicion it doesn't include dividends and, if not, all earnings figures are being skewed downwards, especially as more and more people are becoming self employed and substitute salary for dividends. Corbyn has used this skew in his favour with this fact. Earnings do not equate to income.

But now let's meander back to credit markets and interest rates. The attack on credit by the markets has already started as thoughts of slowing growth and Fed tightening (err does that tally?) identify leveraged slowing companies as the weak point. The weak point near the hinge of the oyster where you jam in the knife hoping to pry it open to reveal the gloopy mess inside (few have pearls). But as with most oyster openings, fingers will be lost. I find it interesting that so far, it isn't the Fed taking away the punch bowls but the markets. In effect the market is acting like a Fed hit-man; removing credit and killing weak companies without the Fed having to do anything. Like a Mafiosa boss, the Fed just has to hint at what it would like to happen and Mr Markets and the boys go and do the dirty work getting rid of the weak. "Wasn’t me officer, I didnt raise rates. I was miles away when they suffered a credit squeeze and I can prove it - Just read the minutes”.

But back to markets. Despite whatever I have thought and do think, equities have played out a classic fall-wedge-fall pattern and I am hurting in the FTSE department. I have been to the doctors and they say it’s due to me being an out of touch with the "new now" and apologise for not having the medical specialism to remove the red hot poker I am currently entertaining in the nether regions. I will continue to bear the pain and though Dr. Market sees no hope in my recovery, I will take some comfort from the fact that markets appear to be at an ebola stage. There have been deaths and will be some more but this downturn isn't going to wipe everyone out despite current prognostications.

Whilst I wait I'll do what most people do when they are suffering and that is to make it fashionable. Just as they have with living in tiny shoeboxes, not having any possessions, wearing over-tight trousers (I also wear over-tight trousers but they weren’t when I bought them) and having itchy facial furniture. The battle of Shoreditch was therefore all the more entertaining to observe as it was fought between two tribes, one who pretend they don’t have anything and want to keep it that way, and the other who don’t have anything apart from i-products and want to keep it that way by forming an inefficient cornflakes and gin based economy.

So let it be known that the most fashionable position in the market is therefore to be long and wrong. But not morally wrong, No! For morally it is only right to support our industries and the hard working who strive to lead better lives. Morally it is better to be wrong in the eyes of the evil market .. Oh bugger it - I can’t keep this politico-moral stuff up. I’m off to buy a pair of skinny salmon colored jeans and by a bowl of cereals, if only I could afford them. but before I do here is some light amusement courtesy of Mitchell and Webb with their take on the introduction of new technology. I assume we can read stone as 'pie 'n' mash' and bronze as 'cereal and gin'



And thank you @kentindell for bringing that to my attention.

Car company LIBOR

The fixing of emissions by VW strikes me as comparable to bank fixing scandals.  

The rules were in place but, as with any regulation, the industries effected do their utmost to play the rules to their advantage. In the case of VW they were obviously hoping that the rules meant that their cars had to pass the test rather than perform to the test outcomes permanently. They adjusted their behaviour to pass the test rather than observe the essence of the regulation. 

Now call me a cynic, but I find it hard to believe that VW were alone in this practice as many car manufacturers produce similarly impressive figures with engines that are no more advanced than VW’s. Much as the LIBOR or FX fixing or PPI misselling scandals provoked industry wide investigations and fines I would not be at all surprised if the VW case initiates the same within the car industry. 

VW stock has been crucified and the reputation of the company sorely hit, but the cost to the business is going to be comparative. Buyers may move to other brands if emission tests results are recalibrated and the outcome makes VW’s uncompetitive, but that assumes that the competition is untouched and not equally branded as cheats. I would not be surprised that if VW go down for this they will try and play a whistleblower role (as bank dealers do in financial scandals) and take down the competition too to keep the playing field level, all be it at a lower level. 

If the banking model is anything to go by, the HQs of all global car manufacturers are going to be hives of desperate activity checking that a) they haven’t been doing the same, b) if they have, trying to bury the evidence or backtrack (can they really remote hack car software and reset it?) c) Contain the fire by finding internal scapegoats, firing them, offering them up as sacrifices to the judicial system and then declaring that they have put process in place to insure it will never happen to them and all is good. 

To be honest I don’t care too much if my car burps out more NO2 than declared in a test as long as I am street legal and the low running costs I am enjoying don’t change. But the tax man certainly does. I may decide not to buy a car if it jumps up a car tax band due to emissions but if the taxman has been defrauded out of billions due to cars being declared at a different tax band to where they actually lie then that is as good as fiddling your tax returns. The pollution issue is minor compared to what happens when you defraud a tax authority and this is where people go directly to jail. 

But it doesn’t stop at pollution emissions. I also understand that sound emissions are as important and only just found out that the cool opposite mounted twin exhausts on nearly every car these days has nothing to do with performance cosmetics but sound emissions. And even there the firmware in the car detects the sequence of manoeuvres  synonymous with a sound test (the distance of the max acceleration, the pause distance and number of repeats) allowing it to adjust for the final test sample. 

The one test that we all have questioned for years (the one we are all most selfishly concerned with) is the fuel efficiency. I am sure that you have to weigh only 10kg and drive the car full of helium along a steel road using solid titanium tyres in a vacuum to achieve some of the published results. 

The level of fines being imposed on large corporates is just eye boggling. I am not sure that car manufacturers will become the next ‘banker’ in the eyes of society but this VW Exposé does little to enhance the reputation of Big Corporate. I do wonder if there comes a point where it just isn't worth being a big corporate. Private employment is seeing a growing trend of freelance and self employment, with groups working as collectives or hive minds of efficiency, so perhaps there is case for huge corporates becoming collectives of small companies. It would certainly make it harder for the regulator to pin a massive fine on them as they would be behaving as a swarm of bees rather than an elephant. Any component being fined could be sacrificed to bankruptcy and a new one grown using a lizard tail philosophy. I just don’t know where that point of efficiency lies.

---------------
Footnote - I have just seen more on the same theme from Francis Coppola http://www.forbes.com/sites/francescoppola/2015/09/22/rigging-emission-test-results-proves-costly-for-volkswagen/

And here is more on the test
http://jalopnik.com/understanding-the-test-mode-that-let-vw-trick-the-emiss-1732175835


And it has correctly been pointed out to me (first comment below) that car tax is CO2 dependent not NO2. Know your pollutants. But I still bet every aspect of testing and firmware will be under investigation. Standing by for engineers incriminating chats to hit the wires.....

Good. That's out of the way.

Opinion is split over the Fed decision though I would suggest the split is not even.

 My first thoughts were -

- If the Fed were FIFA there’d probably be an investigation going on right now into emerging market bribes.
- It's paradoxical that the market moans that the Fed is influenced by the market and then the market moans that the Fed hasn't done what they want.
- Fed cut volatility.
- Perhaps instead of weening the market off low rates the Fed is trying to ween markets off Fed credibility to make it's own damn decisions via the rest of the curve.
- As with China and Greece, 'Fed risk' has to be moved from the acute ward to the chronic ward.

An event risk has just passed and the immediacy of imminent doom slips back and any belief you have as to the long term outcome has to be moved out in a smear across weeks rather than days of future ‘maybes’. The risk may be ahead but it is no longer today. The bears will be arguing that the end of the world may not have occurred today but it damn well will soon and the bulls will be breathing a sigh of relief for now.

Yes OK, but I think we can squeeze in a quick holiday before we have to sell the cat. 

But what for positions?  As mentioned in Tuesday’s post,  the most likely outcome is a fall in volatility and we have seen it coming off pretty hard over the last 2 days. But to expand on that, a fall in volatility normally invokes a period of 'carry creep' where if nothing is going to go wrong right now, yield starts to dominate as the cost of carry erodes shorts on yielding assets. In other words risk assets grind higher and, with the bear call so dominant, a grind higher will be accompanied by wails of pain and disbelief,

Watching the price action in that uber-benchmark of SP500 has been fascinating since the announcement. Up, down, up, down and as with all roller coasters each oscillation is accompanied by  whoops from those on the ride, but the ride ends where it started. So far SPX is within a gnat's crotchet of where it closed yesterday. Interesting to note that the extrapolationists are having a ruler snapping time trying to call the next move with the intraday movements being so wild, but a low close sees the majority calling it lower. Because it closed lower. I am also aware, having been reminded by @NicTrades,  that 'a red market on Fed day usually means follow through the next day'

Technically speaking the 1980-2000 SPX area has encompassed a myriad of important levels and to see the blow to 2020 can lead us to assume that many stops where taken out leaving us room for a resumed fall.

But there is a piece of the jigsaw that needs to play out first and that will be Asian markets overnight. Lower for longer US rates ‘should’ be of assistance to all those Emerging Market countries that have been listed as being most damaged by a Fed rate rise (most of them). With Asia woes having been a major driver of sentiment recently it makes tonight's moves all the more important.

Nothing is easy re markets,  but the Fed is back in the box for a month though I note that Octobers have a tendency to provide market and hence confidence jitters that could give the Fed another reason to delay.

 For now I am going to sit back and brace myself for the deluge of articles telling me why the Fed was wrong. On that note if someone comes across one praising them can they send it to me?

Update 18/9 11am BST - Looking at this morning's price action I think we have stumbled upon a new market's circle of life.

Fed steady -> EUR/USD up -> Dax Down -> DM eq down -> OMG -> Fed steady

Fed day - Only worry about things you can change.

Okokokokok I’ll play.

It’s a bit like going along to a sports event that you have no interest in just because all your friends are going. Or a dinner party with the people that you really can’t refuse again as you’ve run out of excuses. Or the christening party of a work colleague’s child.

Today sees an event that I have no interest in, yet all my friends can’t stop talking about it and want me to join in. As with soccer talk, by the way I am rubbish at soccer talk, the greater the detail of knowledge expressed by a follower, the greater the self-perceived standing of that person. But knowing the maiden name of the goalkeeper’s maternal grandmother is not going to change the outcome of the game. And, I am afraid, knowing anything about the thought process, economic inputs, outputs, shoe size, dietary requirements or star signs of the board of the Federal Reserve will make absolutely no difference to the outcome of today's meeting.

We are all spectators watching it on TV and whilst we may think that our jeering and shouting at the players on the screen will make a difference it will not. If we all switched off and went to the pub with our friends there will still be an outcome without our input. As my wife told me, "only worry abut things you can change”. I cannot change the outcome of the Fed’s decision.

So what is all the fuss about then? Well the function we can change is not the decision, but how we maximise our gains and minimise our losses against the uncontrollable outcomes of the decision. The options  are simple -

1. Take a view on the Fed, mortgage the kids and load the boat.
2. Reduce your risk to zero and go to the pub.
3. Do nothing but pre-write two paragraphs for your next report
       i) Lost money due to unforeseen and blatantly stupid Fed action.
       ii) Made money due to exceptional skill in reading the Fed decision based on knowledge of board members shoe sizes and grandmother’s maiden names.

For some there is of course option 4. Not to personally give a damn as you have no positions or skin in the game, but go on and on and on about your opinion in the hope that should you be right someone will pay you for your opinion next time.

Human nature hates uncertainty, markets pretend they hate uncertainty but actually make all their money from it, and journalists just love it.


(By the way, if you do happen to be a Fed Board member reading this, just email me direct and I’ll explain why my stalking of your daily routines and habits should mean you do what I think you should)

Admiring the landscape.

I’m back from two weeks of bliss on a boat. The holiday was disaster free and ranks as one of the best ever. Croatia is a dream and remarkably we found it cheaper than Greece. Yes I know that there are places in Greece offering normally priced coffee but my ‘Quayside Coffee PPP’ indicator saw Greece at €3 and Croatia at €1.50 this year. Boat stocking supermarket trips were also considerably cheaper, probably due to easy access to Croatian national hypermarket chains rather than village stores. Dining out was much more varied too, Croatia providing a wider selection than the predictable Greek offering of 20 identical quayside tavernas with identical menus. Where Croatia does gouge it’s pound of flesh over Greece is on mooring fees. Greece considers the sea and access to it a basic national right so town facilities are free. Croatia bill you handsomely for securing your boat to anything. But enough of tourist micro-economics.

I am pretty sure that the high US employment figures can be explained away by the number of people employed to comment on future Fed action. I feel like a philistine in expressing the view that I find it all a bit dull. It can be compared to watching a Shakespearean play where the cognoscenti exhibit their literary prowess by laughing just before the clever witticism occurs, instead I’ll just laugh after the event when I've had time for it to sink in and understand it.

China - Down, down, deeper on down




In basic terms this is why the world is terrified.

from http://www.visualcapitalist.com/china-consumes-mind-boggling-amounts-of-raw-materials-chart/

The site also states that "...the country has consumed more concrete in the last three years than the United States did in all of the 20th century". A fact I haven't checked but find jaw dropping.

'Nuff said on China. If you want clever insight read George Magnus - you can find him on Twitter @georgemagnus1

It would appear that the markets are now bracing for global recession with the BAML survey creating stories such as this 'Fund managers braced for global recession'  http://on.ft.com/1NuGgxr 
Which has me assuming that 'braced' means 'positioned'.

Sentiment measures on SPX are also flashing 'it's in the price' (H/T @NicTrades)

In which case we are back to the most basic market game of trading the expectation derivative of expectation of expectation.

But a couple of things have happened this week that make me go 'uhhhm'. The first is related to the anatomy of a crash. When things get nasty everything starts to correlate in a nasty way with regards to down moves. Pretty obvious really as the perceived cause of global disaster is watched by 'Macro Tourists' as the trigger for moves in all other markets. Though correlations are still high relative to long term averages , they are starting to fall.

When I went away every move in Chinese stocks was being shadowed by Developed Market stocks (in particular commodity stocks), yet over the last couple of days this relationship appears to be waning. China had a hefty dump on Monday yet DM markets appear to be shrugging it off. Indeed the techie sector is now even threatening to break upwards through some interesting levels, all the more interesting if you look at the Nasdaq super-low sentiment level in the table above.

Can I read this as a sign of short term punter ADHD? I could try and rationalise it by suggesting that if you were going to get short on the China story you would have done so by now, having had a few weeks to sell rallies and, of course. believing that this is 'the big one' you wouldn't be waiting for a massive rally to sell into. 

The volatility market is still making headlines with remarks being made as to the shape of the VIX curve and the VVIX vol of vol. There comes a point where trading the derivatives of derivatives starts to cause ripples in the deep space of price complexity that becomes detached from the actual here and now of the basic price. Much as using the Hubble telescope to study oscillations in binary star systems billions of light years away may give an insight into the weather next Monday and therefore to umbrella sales but it is more likely that umbrella prices will be more dependent on how cheaply China can make them. 

But the most important thing to remember and mistake not to make, is to recognise that implied volatility is not actual volatility. The VIX et al are measures of perceived future volatility derived from the prices people are willing to pay for options. Actual volatility can be very different. I have a feeling that though implieds are running hot at the moment they are about to be undermined by a fall in actual volatility. A further point is that historic volatility, which is what actual volatility was (not is), is not present actual volatility. 

Currently implied vols in major equity indices are trading lower than historics in the 3 months. (thanks to @BrokenBanker for the Bloomberg screenshots) 

But this doesn't mean that the implieds are too low. It just means that people don't think we will have a blow up similar to August's any time soon. Historic volatility, by it's nature, lags. It's effectively an historic moving average. If it is announced that a currency is to be pegged in a week's time the historic would not reflect the fact that volatility will be 0 until the historic period expired, whilst the implied would probably fall, but not to zero as players would be betting on the chance the peg didn't happen or would blowup, whereas the actual volatility would be 0. 

My general point is that using volatility as an indicator is a minefield unless you know exactly what you are looking at. Implied volatility is partly volatility but mostly a huge chunk of estimated probability. Just look at volatility pricing in the USD/Saudi Real which has a volatility of near zero. As with CDS, volatility is crude tool for financial journalists to twist stories of woe from. 

We all like to yell and scream at high intraday volatility but the best way to defuse the panic is to apply moving averages. Below is the SPX with 2(green) 5( grey) and 10(red) day moving averages applied.

I know I should be using fibonacci numbers as they are apparently magical but looking at the nice normal 10 day (2 week) we can defuse the whole of September's moves back to 'remarkably dull'. I am predicting that falling actual volatility will undermine positions in implied volatility and with it a reverse pressure on the risk parity funds that have been so cited for vol following trades, to actually start buying back.

I am still not playing the 'it's all going to melt by the end of the week' theme even with the Fed in play.

Oil - There has been a renewed call fro analysts that $20 oil is on the way again with Goldman joining the fray. The last time this happened we saw the base (Shakespear's oil bear witch project). We also have another signal. The tabloids are calling for £1/litre petrol in the UK yet the oil chart doesn't exactly say 'dump' to me.

The majority of assumptions are based on the continuation of trends and that is why so many are wrong.

One last thing - There is a very good WSJ series on Tom Hayes and his case the third instalment of 5 being here - http://graphics.wsj.com/libor-unraveling-tom-hayes/3.  the march of the regulator continues and I continue to suggest that if the transparency on pricing demanded of financial institutions were applied to the rest of the retail sector then UK High Streets would, far from being rejuvenated, have to be refitted as jails.

*For financial regulatory news and updates on current cases I recommend following @NewLeafAdvisory on Twitter.