Saturday, 30 January 2016

January February.

What a January. February is going to start off cloaked in uncertainty too. Just to show how broad my musical experiences (rather than pleasures) are I call upon Barbara Dickson to describe the year so far.

Love the makeup Babs!

I just say the things that I want to hear
And like a fool I believed everything was clear
But now I feel so different, I don't know what to say
Thought China, oil, recession calls all meant doom today

Fed view’s and mine? Miles and miles apart
It got me in the trade
To one more broken heart

January February, I don't understand
Why the markets start by dumping,
Then they turn around, they won't settle down
My P+L is underground.
January February, please just turn around

Wake up, I tell myself but I don't even hear
That maybe growth won’t fall apart this year.
Does the Fed think it matters? 'cause no-one thinks they care
If only they had some way out, a way to anywhere

Their views and mine are miles and miles apart
I‘ve got myself positioned
To one more broken heart

January February, I don't understand
Russia, growth, credit defaulting
But you turn around, you’re going to take me down
My career is now so unsound
January February, are my burial ground.

{financial instrumental}

Japanese inventing money - print Yen out of thin air
If only they had some way out, a way to anywhere

Their views and mine are miles and miles apart
I‘ve got myself positioned
To one more broken heart

January February, I don't understand
Why oil’s up and stocks improving
Why they've turned around. Have you settled down?
My book lies shattered on the ground.
January February, chaos all around.

January February, whoops there goes the pound.

January February, rates at the lower bound.

January February, my position is unsound.

January February, I can’t afford my round.

Friday, 29 January 2016

The Amazon Delta.

Now I am not a multifaceted equity geek, though I know my EBITDAS from my P/Es, but thee Amazon results do not sound like a cracking return. Granted, it beats the return on German Bunds which are currently negative yield out to about 7 years, but it isn’t the sort of profit margin you’d think a behemoth retailer would be churning out. So on that basis - sell. And a resultant 15% vanishes off their stock price.

But though that profit looks rubbish, what I do know is that whatever the profit margin is, even my mother uses them as first port of call for buying commoditised goods. The way Amazon is taking over retail, not owning their shares would be like not owning shares in oxygen. Ah, now here is an interesting point. We don’t own shares in oxygen because oxygen isn’t owned by anyone and is free, though it is exceedingly vital to life. So if we think of Amazon as the ultimate oxygen of retail, providing us with free retail respiration, then shouldn’t we think that though it isn’t making much money at the moment, one day, when they hit the critical level, they can do what OPEC should be doing and start to close the taps on us consumers and crank up margins.

Amazon may be looking like a charity with respect to profits, but it has the capacity to be a complete and utter bastard to it’s users. In this respect owning Amazon shares is a bet on their utter bastardnesss against the likelihood of anyone being able to replicate what they do to act as competition. I really don’t know where the competition is. Ebay is fast becoming the Friends Reunited of online trading and I haven't spotted anyone else on the horizon. So whilst Amazon may be turning in profits that look like a Google tax bill, I am ultimately wary of what the retail Borg can ultimately do. Like most tech companies, it isn't about the actual here and now profit, it is about the rate of change. The delta on the profits.

The next question to ask is 'was the Amazon price reaction nothing to do with Amazon per se but more a reflection on market fragility?’. Was that spat a clue towards a general market sell off ahead on ‘not much’ or a fracture in the FANG complex, or even a spin on a Unicorn / commodity spread? Oil is continuing to go higher and commodity stocks versus tech are closing in on the spread. As with most pieces of evidence left lying around in financial crime scenes, the evidence can be used to support all sorts of arguments. I will, perhaps, use it to support the argument that the last review I left on a Bosch food slicer has been the butterfly wings to the next financial crisis.

There is one other explanation. Instead of manipulating tax domiciles to reduce tax, it may just be easier not to make any profits on which one has to pay tax. Profits may be small, but the behemoth is growing.

Now for something completely different - FX. Something happened yesterday that worried me. Someone said they were watching FX for clues towards other market moves. Now whilst I would grant you that FX moves in emerging currencies in times of stress are important (TRY, ZAR etc) watching FX for signs of anything other than intelligent life is pretty pointless. FX markets spend all their days watching other markets for clues as to what to do as they are, in effect, the overlapping central part of a multi-circled Venn diagram of other assets (FX is NOT an asset by the way. A currency may be, but not an asset). So when I hear that other asset markets are looking at FX for clues I know confusion reigns.

Finally a comment on UK Brexit. I don’t think that all my friends are stupid, in fact I think quite a lot of them are pretty smart on recognised measures. But the one outstanding feature I see is that most of my friends in finance think that they will vote OUT in a BREXIT poll. This process is not going to be easy on UK assets. Whilst many say that finance would emigrate to Frankfurt or Paris on an exit, first I disagree that the exodus would be huge and second I would be buying real estate in Dublin before Paris or Frankfurt.

Thursday, 28 January 2016

Sehr Interessante

Yesterday’s markets were ‘interesting’. Oil made new recent highs, equities made new recent highs and then the FOMC came out and the party stopped. Well it did in equities whilst oil is still looking pretty buoyant. This may be the first crack in that oil/stock correlation mentioned yesterday that has had so many markets excited for a while.

So, the FOMC minutes. What was that dump on them all about? To be honest when I heard the commentary I thought ‘fair enough’ that's about as neutral and  nondisruptive as I was expecting and the half hour pause before things started moving was, in my mind, an indication that the market thought likewise. But this probably isn’t about stripping down the wording from the statement as much an indication of what the market was expecting in a realistic or unrealistic way.

The problem is that we have pretty bimodal distribution of opinion as to what the Fed should do. Those with the Fed  are still pointing to a series of rate rises that the market has not yet discounted, so the FOMC are themselves pretty much one extreme, and then there are those who cite the recent market turmoil as reason enough to hold off for quite a while. Perhaps we should note that the recent market moves are a derivative of expectations of global, basically Chinese, growth (not US) and as such we should ask if the assumption that the Fed react to correct unstable markets still applies if those market moves are being generated by exogenous functions (at this point I suggest we rename China ‘Exogenia’ because when we are talking about exogenous shocks we all know what we really mean). The markets have moved because of China, the Fed is expected to act to quell markets but the Fed is not going to act to counter Chinese problems especially if it is not sure they are actually there. Whilst Warren Soros (yes, that is a deliberate renaming to highlight the over-citing of anyone who has made money in the past) has declared a hard landing is imminent, others at WEF have said this will not be the case.

So I fall back to thinking that the FOMC were pretty balanced but the market wanted more. They are not as concerned about a massive slowdown as the market is but that is a double edged sword. Edge one, great things aren’t as bad as the market thinks - buy stuff. Edge two, Oh heck, the Fed don’t get it, we are all screwed, sell stuff.

I am somewhere in the middle. I still think that the markets are over pricing recession and that the Fed is not blind and will act should it need. With this feeling that doom is still over priced and positions in big money are weighted towards cash then the next move will again be higher risk assets though I imagine that by the time this is read Asia will have sold off making it a pretty hard European open to counter.

Tuesday, 26 January 2016

Oil and stocks. Correlations that work until they don't.

There comes a time when the level of correlation hits a point where people start to notice. They will trade one asset on the back of moves of another asset because the correlation tells them that the two will move in lock step. In doing so they create a positive feedback loop of tighter and tighter correlation.

Algorithmic trading relies on correlations and there are correlations out there that only algorithms have seen and trade on. Some of them will make absolutely no sense to humankind as humankind attempts to satisfy its desire to justify correlations. The correlations algorithms trade on may be so obscure that the human brain would not even bother to look under the stones they are hidden as the number of stones to look under is almost infinite and humans like to apply filters to make the search easier.  But computers? Well computers can look under stones that our logic filters would have discarded as duds. Humans have a desire to understand or justify the correlation before they trade on it. Why? Because justification is the excuse humans raise in case of failure. Without excuse there is little chance of being excused. Many years back we spotted a correlation between USD/DEM and the Icelandic fish catch. In fact it was better than USD/DEM vs Oil. Did we trade on it? No way. We would have been laughed out of the manager's office should we have had to excuse our losses.

Many years ago my friend Gerald Ashley (@Gerald_Ashley), told to me that ‘Correlations work really well - until you put the trade on’. I have never forgotten that and often quote it, normally to 12yr old quants. This statement may sound as though it flies in the face of my original comment that correlations become reinforced by those trading on them, but what it really expresses is the point where that artificial forced correlation caused by the actions of the observer (their trading) can no longer hold down the reality that the two assets are not naturally correlated but had wandered together through chance and at some point will start to diverge again causing mass liquidations of all these herded correlation trades in a classic high volatility blow up.

I raise this thought because of the current "correlation du jour'. That of oil and global stock indices. This correlation is not just real in mathematical terms but also has handy justifications that can be strapped to it to keep the human mind happy too.

Since oil started falling a year ago there have been a few justifications for why it is bad for stocks and the world in general. Without going into them all, let's just say that low oil threatens leveraged debt in that sector that if defaulted upon would have a cascade effect through other asset classes and stop the flow of money. And as we know, stopping the flow of money causes 2008 like events.

The modelling of 2008 is currently very popular and here oil prices are being used as a correlating example to support the thesis that stocks and the economy are going to collapse. Because, look see, oil fell hard in 2008 and look what happened. Well no. Of course not, oil was falling then because of actual and assumed future fall in demand due to a massive slow down of the economy led by balance sheet collapse, added to which was a huge unwinding of leveraged longs that had been chasing an explosive price spike. What happened then was completely different to today’s reason oil is falling which is that supply has exploded and exceeds demand, even though demand is actually rising. We cannot assume that there will be another 2008 because of oil being in massive supply. Quite the opposite.

But back to the Oil/SPX relationship. It has been in place for while as the leveraged debt notion persists fortified with a Chinese story that suggests recession and a collapse in oil demand. All the while the correlation is getting reinforced. We are now at a point where every asset class is looking at the oil price as an indicator.

Odd things can happen when large things are pushed around by small things. Now whilst the oil market is vast it doesn’t take that much to push the price round in $ terms relative to moving the price of, say,  every stock in all the countries whose indices appear to be following oil. Which means that if you want to move a stock market at the moment all you have to do, rather than buying the huge volumes of stocks that would normally be required, is to buy a relatively small amount of oil and have the rest of the market do your job for you on assumed correlations. In simple terms . Buy liquid S+P500 in size and not move the market against you, buy oil in a market moving size (SPX follows), Sell SPX, Sell oil. Which I am wondering if some people (or trading algorithms) may now be doing. Looking at the price action over the last 24 hours and one could wonder.

But back to Gerald’s ‘Correlations work really well - until you put the trade on' comment. I think we are getting to the point where the correlation is going to break down between oil and stock in general. The secondary concerns about what a low oil price will do to leveraged oil debt has been priced. There is no new news there. If investments are destroyed to the point of restricting money in circulation then the Central Banks will act to counter and will restore it. But more importantly, oil does not normally correlate so closely to the stock market, if it correlates to it at all, so the artificial correlation imposed upon stocks and oil due to traders acting and reinforcing that correlation could well be due a blow up. This has been running a while now and when I hear of traders looking at oil for a guide as to where telecom stocks are going I think something is wrong.

It may sound sacrilegious to suggest that some correlations don’t deserve the 'r squared' they are worked out upon, but if I told you that some people think that the world’s economy is based upon iPhone sales would you still tell me I am mad?


Monday went pretty much as planned with everything risky fading again. After the $5 rally in oil it makes sense to give half of that back and indeed the indications of no rally from China yesterday were followed through with a dump there today.

Which leaves things looking pretty grim for prices into European open, with little to see out there to change the down pressure other than price itself. Yesterday's plan was to look for a down day followed by a return higher today yet looking at momentum and mood, what with China acting as a peg to hang your bear hat on, it seems hard to imagine ait occuring as I write. But I am going to stand by that call and look for markets to base somewhere today and resume an up leg.

There is little to back the idea of a turn higher from the ‘new news’ front but my A.I. neuro-algorithmic market timing model is saying it goes higher. What is my AI neuro-algorithmic trading model? It’s an organic base of billions of flexible self linking quantum driven multilevel units each self optimising to search for the most efficient data processing network using a complex set of feedback loops based on multi-particle based transmitters. Yes. My Brain.

So whilst some feel that financial schisms directly lead to economic downturns I will keep calling this a financial overreaction to a potential economic problem rather than a critical economic problem being rightly reflected by current market moves.

"Price in Risk please”…”MINE"

Monday, 25 January 2016

What next? Fade the ratings

Before anything else, here's today's 'Alex' cartoon from 

Not much news apart from 'price is news’. The German IFO missed but is still on a healthy 107 handle but apart from that not much. With little news to talk about the first thought that jumps to mind is ‘don’t short a quiet market’ but when 'price is news’ to the extent that it has been over the past three weeks the news may be quiet but that doesn’t mean the price need be. More importantly in the ‘price is news’ inputs, China markets did not rally - they fell again. China is the missing link to this being a proper market turnaround. Yet the mrket commentary is beginning to resemble a bottom ibeing in as much as long term arguments for selling that were used as short term arguments for shorting are now being pushed back to long term again. We saw this with Europe during it's demise where shorts were justified as 'now'was pushed back to 'one day' with respect to EU collapse yet all those short PIG Sov bond possies were anhiliated none the less. So it is with the rcurrent recession calls. One day you may be right but the ammo we have to make that call right now is much more subjective than recent price action deserves so we have plenty of time for things to shake off the current doom. This is very much like any January. It was only a year ago that Greece was meant to take down Europe.

Without news, we are left with mood. A big big down followed by a big up leaves both camps with arguments for them being right and whilst I am in the ‘up’ camp, the bounce we have had has been impressive enough to drive models out of positions and leave the current status in limbo. I’m working a low probability call that we see more down today and then tomorrow it’s up again. ( 'it' being anything that has dumped since Jan 1). But in general today is a tussle day.

In minor other news, ratings agencies have downgraded oil stocks and it was bandied around as another reason to be gloomy, but I don’t think I am alone in having built a mental picture of S+P and their ilk being a bit of a joke when it comes to stating the bleeding obvious. I had wondered if their complete uselessness as a tradable indicator could be measured and was very grateful to @zatapatique for furnishing me with this little nugget. It’s the price behaviour of CDS, the market’s pricing of insurance against default, in the run up to and then after an S+P upgrade or downgrade, marked as 0 time. The original paper is here

As we can see the market prices have started moving long before any S+P move and the ratings change tends to mark the extreme. So it was most apposite to see the S+P moves in big oil firms tie in with their base and meteoric rebound

Friday, 22 January 2016

16 hours early

Though we all like to pretend we are cool unemotional system and process driven investors, even the hardiest algorithm driven fund management company has the WTF moment when the algorithm or process results in losses that ultimately interact with the most crucial human resultant  - the take home pay of the fund employees. The only difference between dropping  15% of your clients money in a macro, algorithmic or passive fund rather than just spending it on a fund manager holiday in the Maldives is the excuse. 15% is gone no matter what else. I don’t actually know which I would prefer. If I HAD to lose 15%, which fund manager would I most respect. The one whose investments were flat and he blew the 15% on himself, or the one who was so rubbish at their job they lost 15% in the markets.

Why do I mention emotions? Because although the mnemonically challenged  'Polemic Investment Services Strategic Offshore Family Fund’ is meant to be a balanced portfolio designed to weather storms, this week it has been far from that. Feelings and beliefs have been backed to the extent that nights have been sleepless and calls for new underpants regular.

Regular readers will know that I have been touting the 19th of Jan as mythical turn date since the end of last year. So I am hoping that, with the longevity of the call having been so long, I will be forgiven for being out by 16 hours on the base of the markets. Now if I was writing a fund manager letter I would of course adjust that to the latest time benchmark possible. So applying a Pacific time zone I reckon I can explain my miss down to 6 hours.

Of course the greatest debate is ‘is it a turn, is it a correction or is it superman’? A superman being one of those V shaped ballistic take offs that leave the world with a post party paranoia wondering if perhaps someone dropped Rohypnol in their drink, rogered their longs senseless, stole their money and threw them on the street positionless and penniless on a rising market wondering if any of their strange dreams of a mass global financial panic had actually occurred.

Now I don’t know, but my money is on a continued grind higher in risk stuff from the panic lows. My normal indictors of excess doom are pinging warnings (the Peston Bollock-o-meter hit 100 this week) and I haven’t been let down by my prediction of Davos stories of fear, though to be honest I was pleasantly surprised to see bit of temperance with regard to excess China concern. At this point I am going to hand over the reins of the bull cart to my old Team Macro Man compatriot ‘Global Macro Trading’ and ask you to
read this --

I do hope your really did read it

But back to price action.

-Oil is up 12% in a couple of days. But don’t be fooled by percentages. That’s only 4 bucks, which in old money (pre oil crash) is 4%.
-FTSE is up 300 pts (5%) from it futures low on Wednesday as mining stocks are all roaring
-Ruble is up nearly 10% from its lows of the last couple of days.
-Long Nikkei short JPY has done a “Watanabe bounce’
-All other risk assets are up accordingly.

Yet there are areas of worry that haven’t done their bit. China stock price are decidedly ‘Meh’ and even US stocks haven’t caught the blast that the Europeans have - (Hat tip @Draghi). So though I am delighted that we have a powerful turn, I can't believe that we are out of the woods until all the ‘sell the ralliers’ have sold and been stopped out and all the ‘this time it is differenters’ have found that it isn’t. So shall we say SPX back to 2080?

One last point, t"he amount of debt in the world". Something I hear more and more, especially when markets are falling as it’s a great back fitting reason and the "We are about to see the biggest biggest round of default the world has ever seen and the central banks have no ammo left to counter it". Of course they can. They can monetise it. And if you think that’s a sin because it causes inflation then just rethink that thought.

A shame that you cant buy 'fuel card' from BP or Shell that you top up as you would a travel card. Only you don’t top it up in monetary terms instead you add in volume of fuel terms. If they did I’d be putting 10,000 litres of diesel on mine right now. Hmm.. The thought has some interesting optionality to it - much like postage stamps, but I have never known the cost of postage to fall.

Monday, 18 January 2016

Iran. You ran. WEF ran.

Petrol is now cheaper than most bottled water and considering that the price of petrol in the UK is 75% tax, at 99p/litre, without the tax it is rivalling even the most basic everyday ownbrand supermarket water. I do not believe that selling oil on the Iran deal increasing Iranian supply is wise. That news is not new and the Iranian sanction lift has been obvious for months.

The Iran deal has been done and with it comes the first twist in the realignment of Middle East allegiances. Obama is playing the statesman in getting the deal through yet it will most probably be European interests that are first through the door as sanctions are lifted in stages. Iran has historically been the Russian bed-fellow in the Middle East with Saudi Arabia being the American's. Opening the doors to trade with the West will see infrastructure companies race in and a population that has been desperate to have their their aspirations for betterment satisfied rave happy. The Westernisation of a population that was once pretty westernised anyway will continue and as such this is pretty much the best thing the US can do to moderate the country. But my suspicious mind leads me to ask one of you clever readers what is stopping Iran from now acting as a conduit for West/Russia sanctioned goods? Doesn’t take much to change the label on a Brie to Iranian Brie. Or much for Russian oligarch money to get lost in an Iranian infrastructure project built by Siemens. Iran now have one foot in each camp.  Running short Saudi and Long Iran may well be the trade of the next few years.

You Ran
Price action on Friday was pretty similar to the one before. A horror close as the market ran for cover in a dump that has been printing percentage moves daily that would normally encompass weeks. Yet the VIX volatility index hasn't blown up that much. Whilst on one hand, the usual hand, that can be taken as an indication that we haven’t hit panic levels yet and so therefore we are not yet at the bottom, but pos the other hand it could also mean that their isn’t a desperation to buy volatility. Perhaps because there are fewer leveraged stock longs that need hedging. I say leveraged longs as the total amount of longs out there has to be constant as someone always owns the stock.

It is January the 19th tomorrow. That has been my mythical buy date for January. I have long held that this date is the first turn date of the year but have never really had any good reason for it other than US holidays tend to produce turns, so I was most pleased when a good friend offered this explanation to back the theory. It’s option expiry. OK, we know that but why this one? Well it’s the first of the year and option traders are even more averse than usual to show losses on the books. They like to make a loss against existing profits and only 2 weeks in there are unlikely to be many. So they will be hedging even harder than usual resulting in price moves being exaggerated and chased until the expiry is over. Which certainly fits this year's start and though this hypothesis is not yet a theory I will run with it for now.

WEF ran -
Davos is upon us. Do not muddle Davos with Davros, though the leader of the Daleks may well be attending. Bono probably is. I was thinking about how the psychology of the World Economic Forum works and of course it's exactly the same as politics anywhere. People do not go to these events to defend stasis, they go with an agenda to get more of what they want. Which implies change. To sell a story that results in change involves selling a story of how stasis is not an option and to sell that idea the here and now, the present, has to be depicted as sub-optimal. But sub-optimal is never enough to spur people to rally around your cause it has to be stronger than that. As with religion, you have to threaten your audience with doom and damnation should they not follow your reasoning and proposed course of action. Yes, with religion it’s the threat of some invisible unproven being smiting you and sending your as yet unproven non-molecular remains to a spookily anthropomorphic hell of your own worst imaginings. With politics it’s actually pretty similar but involves threats upon your proven humanity.

So with this in mind we can expect that the bias of the commentary coming from Davos will be undoubtedly swung to the decidedly gloomy. In simplistic terms, if there ain’t problems to be solved then who’s going to sign the expenses. So the first mission is to highlight, or when desperate make up, some problems. Which is why the journalists just LOVE it.

Before I leave you, I'll try to get you to cough your breakfast cereals over your screen with this gem.  Jeremy Corbyn is suggesting that the UK get rid of Trident but keep the submarines that are specifically built to launch it. I can only assume because of pressure from the Unions and SNP as the object to job losses arising from its scrapping. Right. This would be exactly the same as banning bullets, but insisting that the gun industry is kept alive as jobs rest on gun servicing. Putin must be pissing himself with laughter.

Standing by to go BOLIVIAN tomorrow (Balls Out Long, Infinite Var, It's A No-brainer) and one trade I am going to involve in that is a market favourite that everyone has probably been driven out of  - Long Nikkei / Short JPY. On a de-stressing that one could fly.

Wednesday, 13 January 2016

Hostage negotiations.

10 US sailors are in Iranian captivity. But worry yee not, we have a plan

So here’s the plan. We buy stocks in US arms companies , law firms and 'Latin American Gentlemen Outfitters (Camouflage our Speciality) Inc" on the idea that (and God knows I might be really miles off with this, but hey, you never know) - One way out of this crisis would be for, say, the US to sell arms to Israel who then channel them as a third party to moderates in Iran who in exchange promise to help to get the hostages freed. The money coming back from the Iranians for the arms could be syphoned off to maybe, just an idea here, support US interests in Latin America who are fighting governments unfriendly to the US. I know that no one could possibly think of doing something so whacky, but you never know it might just be worth a punt.

Or perhaps we should be thinking like a bank finance structuring desk -

So the US buys arms gives them to Israel, who pass them on to Iran who in return ship oil to Scotland to refill their North Sea reserves. Scotland in return send Haggis to Latin America.. no no no .. that can't be right.. So how about .. Iran send the hostages to Goldman Sachs who amortize their ransom demand cash flow, after applying Israeli Factoring discounts, and issue a 3yr mezzanine subordinated bond backed by the final ransom payment, with the coupon payable in Scottish Haggis with a knock in, should the hostages be released, paid in surface to air missiles from the US deliverable in Colombian Pesos. The CIA in turn hedge with a USD/SAR 10delta call.  Does that work? No ?

Or we could do it the Jeremy Corbyn / Dianne Abbott way

So this is what we do .. we’ll write a letter of support to the Iranian jailers who are having to look after the Americans, because if the Americans hadn’t been aggressive Navy sailors, they wouldn’t have turned up in the jail forcing the jailers to look after them on abysmal wages. And on a weekend too.

Or the EU parliament way

So this is what we do .. We table a motion proposing that each member state set a date within 2017 to discuss a further proposal to form a committee of representatives to decide if the progression of the concept of hostage negotiations could be addressed in the planned 2020 EU ministers meeting.

Or the Russian way

What hostages? There are no hostages. We invited a select group of your fine proud countrymen to join us to celebrate their err.. birthdays.. and they are having a wonderful time. They are free to leave whenever they wish but are currently taking a nap in their 5 star hotel rooms. And no, there is no mobile reception around here, it seems to have gone down, sorry.

Or the German way -

So this is what we do .. We invite the whole of Iran to live in our country hoping that the 10 hostages are amongst them.

Or the Donald Trump way

No actually please God no, just forget that.

Tuesday, 12 January 2016

The games at the Colosseum.

It's bad, It's very bad. It's so bad that we know we might as well join the crowds and head down to the Colosseum to watch the great spectacle of the markets being put to death.

Will they be crushed beneath the great weight of falling Chinese demand? Or torn apart between copper chariots,  or scorched to death with burning oil, or will they be Fed to the rates lions? Or perhaps just killed in the stampede of wild sellers?

And so it was on Sunday night (Monday morning to you Kiwis). The show started well. There were oohs and ahhs from the crowd as the South African Rand was hurled to near death, falling 7% in only 4 minutes. Then DM equity futures took a beating falling 2%. The crowd roared with delight when the Chinese stocks walked in and were lanced between the eyes. They were loving it.

The program included a drubbing for the CNY, with the likes of Nomura forecasting a sizeable move in the fix.

(H/T @etleggett for the clip)

But it didn't happen. The CNY just dusted itself down and stood there unharmed. The CNY fix was pretty much unchanged.

And that was where it started gong wrong. From then on all the not-quite-corpses staggered to their feet and started to head off up. By London open equities were pretty flat to up with the Dax having put in a 300 point turn higher from its overnight base.

The crowd were confused but hoping this was just part of the show, the tease, as something was going to come into the Arena and finish the job in style. And lo, the drums sounded, the US arrived and oil came pouring down. 6% down. The crowd screamed and cheered every dollar oil fell. This would finally do for the markets and indeed, they choked, spluttered and fell again.

But then something extraordinary happened. Once oil had done its worst, the markets again staggered to their feet and the last hour in New York saw them revived. The rumours of their death are somewhat exaggerated.

So, enough with the commentary, what next?  Clues -

- Spikes blow off in the basket cases such as ZAR. All the more interestingly happening at stop loss social hour known as New Zealand open only to pull back again in sensible time.
- Continuation of calls for 19 USDZAR and $20 oil (extrapolationists in force)
- Oil doing 6%.
 -China Fix unchanged - defusing the apocalyptic deval camp (please remember to look at the basket not just vs USD)
- Press suggesting this is 2008 again.
- George Magnus on TV a lot. George is a genius on China (follow him at @georgemagnus1) and rightly gloomy, but when they invite him on the whole time you know the story is tabloid.
 -AUD/USD recovering
- Past darlings being ditched - FANG and biotech.
 -High yield holding in.
- Risk appetite indicators at extremes.
- Iron prices recovering despite the headlines being grabbed by copper.
- Stocks holding.
- Baying crowds on Sunday night fully prepared  for Armageddon.
- Tuesday tomorrow
- Huge sell off on price alone for the whole year (a whole week).
- Price is News - it certainly was last night.
- RBS says 'sell everything' and AEP amplifies it
- High yield holding in.
- CNH funding at 70% - most likely due to short positions being squeezed in the face of direct intervention. CNH is back to flat on the year.
- No new bad news, apart from the death of David Bowie.
- Finally I have started getting those emails. You know the ones, from the sort of people you don't hear from for ages but when you do their messages are serious amalgams on all the reasons why the world is about to implode yet none of the reasons listed are new (last emails in similar vein recieved in the first week of  September).

The masterplan had been to wait for Jan 19th for the turn but with the markets having come so far so fast, and imagining the algo boys must be wetting their shorts due to bursting momentum bladders, I have once again jumped the gun and started buying equities in both DM and EM.

The punchiest trade of all is to buy Russia. But the Oil situation is not resolved yet and I'd like to see some form of 4 or 5% bounce before even entertaining that thought.

Finally some comments on the Aramco IPO suggestion

Great for Saudi as it  :
- Diversifies income away from oil
- Amortizes future cash flows allowing them to effectively borrow against future sales.
- Sucks in investors into having a strong interest in protecting the stability of their investment i.e. Saudi Arabia.

Good for investors :
- Allows them to hedge their future oil demand through shared ownership of supply
- An easy way to go long oil whilst receiving a coupon.

Incredibly dangerous for investors :
- Never trust any insider cashing in on future cash flow unless you know they are desperate for short term cash. Saudi may look short of cash but they aren't really yet.
- You are buying a share in huge oil reserves but not in the land or armies that sit on top of them. Ownership of these can change.
- You are taking a view on oil prices and prices can go down as well as up.

Idea for Russia - Buy the lot and then 'protect' your investment.

I am praying that when I wake up tomorrow morning the markets haven't dumped. Goodnight.

Monday, 11 January 2016


Welcome to Notwitter. The site where you don't publish all the things you shouldn't say. Where the things that should remain silent, remain silent. The antidote to twitter.

Technology - 

Our servers are the fastest on the planet and yet the greenest, using no energy to store the globe's countless things not said. Our quantum algorithms compress all of that data to a mind-blowing 0 bytes.

Notwitter currently contains 60% of everything that the globe has decided not to express. Within 5 years that will be 99%. This makes Notwitter the most comprehensive database for the marketing and profiling of nothing on the planet. Should you wish to join us on our exciting journey there will be an Initial Public Offering pricing the company at $15,000,000,000.

User guide. 

To not post that thing you nearly wanted to say but thankfully realised you shouldn't -

1. Just don't press the button that isn't there but if it was would be marked Notweet.

2. Don't even think about it

3. Press 'page back'.

4. Continue with what you were doing before you had that thought.

To search -

Our retinal and neural telepathy algorithms allow the user to search for any notweet just by staring at the screen. The relevant nothing will appear.

Below is a constant stream of user notweets. Scroll to view. Enjoy!

Sunday, 10 January 2016

The cost of the Bristol Pound

On the introduction of the Bristol Pound I wrote a cynical spoof of the life cycle of this new local currency and was subjected to some vehement admonishment for decrying a scheme that was going to bring prosperity to Bristol by 'preventing money from leaving Bristol'.

The idea that preventing your currency from being used anywhere else, thus staying local, supports your economy, if realistic, would see every village, hamlet and even household issuing their own currency. Of course this isn't efficient otherwise economies would have evolved that way naturally centuries ago. Running your own monetary policy, flexible exchange rate and maintaining a belief in the value your currency holds would be impossible. This is why the trend has been the other way with larger currency blocks evolving.

But the Bristol Pound tries to get around the difficulties of managing a different monetary policy by piggybacking that of the rest of the UK by pegging itself to the UK pound. The Bristol Pound is therefore a UK pound that can only be accepted in Bristol shops that have decided to accept it, much like a gift voucher. Or rather - exactly like a gift voucher.

I could go on about the value of local currencies but Tim Harford does better HERE deciding that any benefits are social as a currency pulls people together in a common cause, something a well organised traders committee can do anyway, and not economic with relation to the transmission or retention of money.

Though the benefits are at best murky, the costs of the system are quantifiable and my discovery of the latest Bristol Pound accounts is what has prompted this post. I have been watching their website for a while eagerly anticipating the 2014 accounts but, unlike the 2013 figures, these have not been released at an annual general meeting during 2015. I have not seen any proposed AGM or mention of the accounts on the Bristol Pound website but they are available from Companies House directly - (H/T to  for locating them for me)

So, 2014 -  Circulation in mid 2015 was quoted as Bristol Pounds (BP) 700,000 but let's assume that was the same at end 2014 (though probably less).

Administration costs for the scheme in 2014 were £340,000, up from £78,000 in 2013. 

£280,000 was contributed to the scheme by the government in grants.

The directors' remuneration was £115,000.

That means that in 2014 nearly 50p was spent in administration costs for each Bristol Pound in circulation. If this was the cost ratio for running UK notes in circulation (£66.03bio on 31st dec 2014) the treasury would be paying £30bio per year just to maintain the currency in circulation. If we cranked this up to the GBP equivalent of M4 (as B£ includes an electronic version) the costs would be £1 trillion a year.

So who is paying for this huge administrative expense? It looks as though the rest of the UK population is as profits jump from £1000 to £282,000 after adding in Government grants. So the tax payer paid about 30p towards the maintenance of every Bristol Pound in circulation in 2014.

The net assets of The Bristol Pound are listed as £9,000. If you consider that they have received £280,000 is State aid in one year alone, one could say that the scheme run by non-bankers pretending to be bankers because they don't like bankers is costing the State more in bailouts than RBS or Lloyds ever did on an aid/asset basis.

The scheme is a volunteer led project but there are staff costs (they are hiring paid staff to join in the marketing of the project ). The directors are also remunerated.
taking 15% of the face value of Bristol Pounds in 2014. This puts the odd 0.01% of the FX fixing scandal into perspective.

I can only anticipate the 2015 figures and expect that by then each BP in circulation would have cost £1 to administer. At which point one would wonder if it would have been easier just to hand that amount of cash to the Bristol traders involved.

Bristol Pound have never stated what their performance metrics are other to imply that the more currency in circulation the more successful it is. The part of the CIC report filed citing success solely rests upon the marketing success of the project with no proof of association between the Bristol Pound itself and economic improvement.

But when we consider the costs involved as shown above we should wonder if the benefits justify the scheme as an alternative to using Sterling which has no incremental costs and would have saved £340,000 in 2014 alone.

The lack of publication of the annual accounts on the Bristol Pound website may be due to the organisers not wishing to attract attention to the costs. Indeed there is very little reference to any of the downsides of the scheme anywhere (the wikipedia entry appears to be tightly curated by the supporters) but rather than this being due to a lack of sceptics I assume it's due to those who consider the project a farce just leaving the believers to get on with it.

There is an interesting part to the CIC declaration that needs to be completed annually that asks if stakeholders are regularly in consultation.

As for that part about "making the currency available in more disadvantaged areas", why? Using Bristol pounds doesn't make goods cheaper in fact by definition it must be making them more expensive otherwise users would be buying local anyway without the need for a Bristol Pound to force them to. The disadvantaged areas are just as well served being handed cash instead of gift tokens. 

As the main stakeholders are the holders of Bristol Pounds and those that fund them, us, I would suggest that the annual reports and accounts are of primary importance with regards to consultation and should be raised for debate and at least published on their website. 

Finally as a tongue in cheek footnote - Bristol should beware. Their mighty Bristol Pound is also leaving the community. There is a place on the south Dorset coast taking them.  Which then opens up another point - How would Bristol justify the success of the Bristol Pound in supporting local business if the rest of the UK abandoned GBP and adopted the Bristol Pound instead? A huge circulation would result but there would be no local differentiator. The value of using 'highest circulation' as a success metric is thus disproved. 

Friday, 8 January 2016

Weak week. Waiting.

We are now a week into 2016 and due to the small sample set we can take the week’s moves and also quote them as the month's and year’s moves. Hence promoting "we are down x% for the week" into "down x% for the year", making it sound like a long trend rather than a week's noise.

The year has indeed started with a clatter and though my last post’s musings of what might happen in 2016 included a start of the year dump and references to Saudi Arabia being the lynchpin (or grenade pin) for 2016, I didn't anticipate them being THE themes of the first trading day. Throw in Chinese stock price action, a fall in CNY,  a continuing collapse in oil and all you are missing is a Greek Crisis to have every poltergeist of 2015 returning to scare the heck out of the market.

I have done very little since the end of November and likewise have had little to say. But the extremis of market gloom does appear to be outstripping reality. Now before you start listing all the bad things in the world as evidence supporting the case of my naïvety - I KNOW. But the speed of the flip would imply that we have a crisis on our hands.

But let's separate out a market crisis from an economic crisis. A market crisis can occur when all else is fine but there is a sudden repricing to a new reality. In this case it's anticipation of higher US rates and an anticipation of Chinese demand collapsing. An economic crisis is when growth collapses, people lose their jobs in droves and there is no money to be had. A financial crisis becomes an economic crisis when money stops flowing around the system. Panicking that there will be an economic crisis caused by a financial crisis itself caused by tightening rates, tightened because there is less chance of an economic crisis, and thinking there would be no back tracking on policy to counter both crises strikes me as absurd. I am still convinced that if we got to that state then more money would be printed and injected.

But Western economies are not collapsing although the media do their best to convince us that they are. Notable was the BBC headlining, yes headlining, a -0.1% revision to UK GDP. Unemployment figures in the west are improving. The US NFPs were storming today and the European PIGS are putting in steady improvement figures

H/T  for the chart

It isn’t a melt down. In fact the paradox is that if the US economy was in dire straights the Fed wouldn’t be telling us so clearly that they will be raising rates 4 times this year.  If this is an economic crisis you can forget the Fed hikes, but it isn’t. It’s a market adjustment (and not yet a crisis). The US economy is doing fine, as is the UK, with service industries growing strongly.

At this point someone says that’s the problem. Our manufacturing sectors are out of balance with services and manufacturing is not showing a recovery normally associated with a 'proper' recovery and it's an imbalance needs to be addressed. When I ask people why it needs to be addressed I usually get a reply along the lines of .. well.. that's the way it has always been.

The UK is the second largest exporter of services in the world and the US economy is currently 88% services. In a competitive world it is better to export high value goods rather than low value goods unless you can make those low value goods at such low prices that (price x volume) =  big. Whilst there are countries with populations willing to accept lower wages than us for their day’s work we have to sell goods they can’t. And that is now mostly services.

A case in point is my recent purchase online for one of the kids. A new mouse and external CD/DVD RW Drive. The mouse contains a laser, interferometer, micro computer, wheels, buttons wires and a USB socket. The DVD RW thing contains technology thet could probably have run the Apollo 11 moon landings.  Cost to me, including shipping?

Mouse £0.99. Apollo launching DVD RW £6.99.

Yes this Darth-turbo mouse cost less than 10 minutes of a UK minimum wage, including shipping. I cannot imagine any UK manufacturing plant able to turn out a mouse and a CD DVD RW drive, including shipping, on just an hour’s worth of UK minimum wage labour. My local garage tries to charge £90/hr just to change a wiper blade. So lets stop bothering and keep exporting the high value services.

Once upon a time the UK’s agricultural industry accounted for 90% of the country's economy. It is now about 3%. Should we readjust back to that too for nostalgias sake? As long as we are exporting services that pay for the lower valued manufacturing stuff we buy in then that's fine. Yet services are lost in the data.  The historic way of measuring trade data demotes many services into the invisibles part of  the equation leaving attention resting on the more obvious manufacturing figures. It is worth listening to this excellent BBC radio program ‘making the invisibles visible’ which was out last summer.

But back to markets. China kicked all this off again with a late fall in asset prices on Monday. No new news, just restrictions on shorts being lifted and the rich racing to take their money offshore, apparently. China’s currency has been in the headlines again as it has been allowed to weaken prompting new terror over a massive devaluation upsetting the region. But note that though USD/CNY has strengthened, against its trade weighted basket it is still in the normal range (just). This is best expressed by my old mucker, alter ego and Alma Mater - Macro Man here

Western equities prices are moving. I know that sounds obvious but there has been little else this week to drive that move other than other (Chinese) equity prices moving. But emerging markets are beginning to look cheap (ignoring Southern Africa) however trying to persuade anyone to listen to that narrative in a January is utterly pointless. We are at that point where the man in the crowd with the pitchfork waves it in the torch light at the castle and leads the charge up the hill -  only next to be seen as a town gate pole decoration. January the 19th is still my mythical turn date but I may bring that forward as sentiment is already extreme. Let's see what Tuesday brings.

Oil - This is it folks, we are at that famous economic point called the front leg of the bauhaus chair of supply and demand.

Saudi Arabia has indeed become the centre of attention and a new Iran / Saudi spat has blown up. But this isn't as clear cut as previous spats where the guy in the white is always seen as the goodie. My thoughts on how this one is different will have to wait for another post but suffice it to say that old allegiances are being sorely tested and will change as the fog of complexity in proxy wars becomes even denser. Saudi and Iran are as much proxies to other superpower battles as various Middle East factions are to Iran and Saudi's own spats. 

One last reference to one of my 'calls for 2016' - that sanctions against Russia will be slackened -

As I go to post this, US markets are having another bad close so I remain sitting on my hands. I am not going to sell risk and still wait to buy it. Roll on Jan 19th.