Market gasps a breath.

Well that didn’t take long. Tuesday's post was about reaching the point of maximum fear and, voila, since then the markets have gone ballistic. The old favourites that is, not the likes of USD/JPY.

Today is probably the first time that many, me included, have looked up from the brexibollocks to take note of what's going on in the rest of the world, as the rebound in markets has allowed us to surface and gasp air. How long it will be before we can grab another breath is mote. So what caused the bounce? From what I hear the markets have bounced because -

Brexit is now unlikely - Err No. But an EEA solution is possible and more to the point there is some sense being spoken.
Central banks had said they agreed to stabilise markets and so are obviously buying everything - Big definite ERR NO.
Algos chasing it higher. - Indeed they could be but that isn’t a reason in itself so Errr No.
Stop losses. - Markets always blame stop losses when they haven’t a clue
Month end - It’s like a 'stop loss’ excuse but bigger and can only be played once a month. If it was so obvious what month end flows would be or even are, thee price would have adjusted for them long before. But hey it’s month end, quarter and half year end and a few peoples fiscal year end too.

To those I would like to add my favourite, which is that people are now realising that a Brexit will not mean such a global disaster that even cake shops in Argentina have to close. Basically, a touch of rationality has returned. This means we are at a saner point in the market where we now have to wait for the actual effects of Brexit and political leadership change to occur, seen through data, rather than react to assumed effects. As I cannot repeat enough, assumption is the mother of all fk ups and there was plenty of assumption around two days ago.

Theresa May has a 68.5% being the next Conservative leader and Dianne Abbott has 1.8% chance of being the next Labour leader. How do I know the actual probabilities on these outcomes? I don’t, I made them up, but as proven by every other forecasters running up to Brexit, you can’t be proven wrong by quoting a percentage outcome probability on a single event forecast. For example, if I’d said there was a 99% chance of Remain winning last week would I have been wrong? No. The loss fitted within my 1% forecast of them losing. And vice versa, if I'd said Leave had a 1% chance of winning am I hero for getting that right too? Err well. So from now on I can call any percentage I like and be right. I am amazed that market forecasters haven’t cottoned on to this yet. Give a probability curve of outcome rather than, say, a  digit precise EUR/USD forecast. YOU CANNOT BE WRONG even if you can be way off with your mean.

The rest of the world. It looks pretty calm and is in fact getting a lift as global interest rate policy is being effected by Brexit (more dovish), though the economic effects globally have not been felt. The one thing that does stand out to me is USD/JPY. It dumped on the Brexit global shock wave but really hasn’t bounced that far on yesterday’s rally in risk. Attention may well turn back that way. The UK, for example..cough cough.. has become exceedingly more competitive against Japan with GBP/JPY nose diving 10%. Gosh, all those car factories they have in the UK are suddenly looking even more like a good investment! There was of course a double dig there. One at the population of Sunderland who decided to vote for Turkey Brexit Christmas with regards to their local Nissan plant, but also the other way at those thinking that it’s a sure fire slam dunk that the Japanese would pick up sticks and leg it to Czechoslopolungaria. Which I assume is what the unelected Eurocrat civil servants will be proposing for the name for Europe(East) as "NeuEast Germany" may still grate a little.

But I have gone long of USD/JPY AGAIN. I bought a bit as I bought US Stocks two days ago and though I expect I will probably lose I have come to think of buying USD/JPY as my sacrificial offering to the trading Gods. So just think of USD/JPY as Crastus’s sons in Game of Thrones. I'm sorry but I've been binge watching the first five series on DVD. As a cynical late starter I have been completely smitten by it.  As have the rest of the UK, who have taken it so to heart they are playing homage to it by acting out the whole plot in real life. The parallels  with our politicians, infighting, Westeros (UK) Essos (Europe), the wall dividing and the wild things threatening the south (Scotland) are at once terrifying and exciting. There is such scope to allocate characters that instead I will just leave it to you in the comments column.

I have little to add to sensible debate at these levels and will devote the next few days looking into what's been going on with other neglected global interests. The Russia/Turkey relationship for example and maybe commodities. Dr Copper has been surprisingly perky and oil is back testing highs, which isn a low GBP environment means I should look again at the oily explorer UK toxic waste I have in my portfolio. it should get a lift from 3 angles.

Good luck with Greece by the way. Now that Brexit is done I don't think it will be any more Mr Nice guy. By the way Tsipras is Theon Greyjoy -  which must make Scheuble Ramsay Snow.

Ralph Mellish and the markets - The day nothing happened.

The recovery in the markets in the face of the wall of media predicted doom has me instantly turning to Monty Python's Mr Ralph Mellish and the day when nothing happened!






[Ominous music]

Voice Over: June the 28th 2016 was much like any other summer's day in the markets and Ralph Mellish, a financial correspondent at a broadcasting company, was on his way to work as usual when... (da dum!) Nothing happened! (dum da da dum) Scarcely able to believe his eyes, Ralph Mellish looked at his phone, but one glance confirmed his suspicions. Despite his warnings, and those of his colleagues, there was *no* collapsing stock market. No dismembered debt market trading at record distress. No Sterling Crisis. Nothing. Not a sausage. For Ralph Mellish, this was *not* to be the start of any trail of events which would not, in no time at all, involve him writing a tangled knot of supposition, nor a web article predicting armageddon, which would, had the markets been not uninvolved, surely have led him to no other place, than the central position of economics editor at the BBC.

[muttering voices, News anchor shuffling papers]

Voice Over: But it was not to be (ominous music returns). Ralph Mellish reached his open office space in Medialand, as the FTSE opened at 8:00 a.m., exactly the same time as it usually did!

(door opens)

Enid: Morning, Mr. Mellish

Ralph: Morning, Enid

Voice Over: Enid, a sharp-eyed, clever young girl, who had been with the firm for only 4 weeks, couldn't help noticing the complete absence of tiny, but tell-tale references to the VIX in Mr. Mellish's writings. Nor did she notice anything strange in his Emerging Market references that whole morning. Nor the next morning. Nor at any time before or since the entire period she worked for that firm.

Ralph: Have the new assumed correlations arrived, Enid?

Enid: Yes, they're over there, Mr. Mellish.

Ralph: (faintly) Oh...

Voice Over: But for the lack of any untoward circumstances for this young secretary to notice, and the total non-involvement of Mr. Mellish in anything sensationalist, the full weight of journalistic nepotism would have insured that Ralph Auldus Mellish would have ended up like all who challenge the fundamental laws of the market. On BBC Newsnight being quoted as an 'expert'.

[Ominous music]

Don't Panic, it's just like EU 2012.

Regular readers will know that during the EU crises I wrote on the Macro Man blog as part of Team Macro Man, where we built a ‘Band of Brothers’ type camaraderie as we fought off attack upon attack from EU doomsayers. We hunkered down in our bunkers of analysis and we were blitzed with extrapolation of disaster, shelled with CDS prices, machine-gunned with bond spreads, mined with editorials from economists and gassed with nonsense. Yet we survived and our prediction that there would be no EU melt down, no financial carnage (other than that self inflicted by the other side shooting themselves in the foot) and no need to run to the hills came to pass. But, of course, by then there was no one left to listen as the Disasternistas had headed off to predict that China would economically implode by 2015.

Why that reminisce? Because today I am missing my old TMM buddies. They were the voice that would whisper “Stay strong, friend”, the ear that would listen and the head that would calmly and cooly declare that if I was mad then they were too. Today I need them, as the world around me is as madly suicidal and irrational as it was back in the midst of the Euro crisis. Back then, the panic was due to the belief of imminent collapse of the EU because of internal ineptitude and mismanagement, which meant that one had to run for the hills, or rather Swiss Francs and British Pounds. Today, ironically, it is due to the belief in the stability, power and unity of the EU over the ineptitude and mismanagement of (the once safe haven from EU) UK.

I feel alone taking on the barrage of extrapolationist Brexit gloom that I am being subjected to from every source. The mood is reflecting the extremes of expectation that I last felt during the Euro crisis. My first important indicator is flashing warnings at me. The USIBBI (US Investment Bank Binary Index). As we experienced before with Europe, US opinion tends to be all or nothing and does not do nuance. One for all an all for one, they all agree on outcome and their agreement is usually reflective of the man at the top. This is particularly apparent if you visit funds in New York. They all have the same very strong and determined opinions (and hence positions), even on matters which are clouded in uncertainty. The US intermediaries are peddling unfettered doom and of that I take note.

But in today's world, it is social media that is the source of turbo charged self reinforcement. Facebook, as a friend just analogised, is the social media that does Rational to Panic in 6.8 seconds. No wonder everyone is panicking when they read half of the bollocks on Facebook that relies upon the suppositional extrapolation of assumption. The feedback loop of panic is more likely to cause problems than the reality that underlies actual change. Yet, here we are in a Dyson vacuum cleaner, where the hot air of assumption is spun around at near the speed of sound, catapulting rubbish outwards where it is collected in a transparent container for everyone to see. My FBBI is flashing Red. The Facebook Bollocks Indicator. I think we can agree that the DPI ( Dinner Party Indicator) and TDI (Taxi Driver Indicator) have been flashing alerts for a while as self-declared experts on EU membership have sprung up around us like zombies from the earth.

Here are my 'Things that don't matter' :

- One day falls in £ or FTSE
- Ratings downgrades from AAA to AA (same level as the US) when every other agency did that to the UK years ago. Never forget who caused the 2008 financial crisis when looking at the credibility of ratings agencies.
- Charts of Gbp/Usd posted on Facebook with "I told you so”. These suggest not imminent doom, but that the person posting them knows Jack Sh1t about how things actually work.
- Developed market credit default swaps on countries issuing debt in their local currency.
- Nigel Farage and UKIP
- The FT (apart from FTAlphaville who really matter)

And 'things that do matter' :

- 51.9/48.1 is not a massive margin of victory. That limits just how far UK can detach.
- The choice of EU relationship. EEA is a comfortable ground that many on Leave and Remain side can agree on. It provides the single market.
- Having some leadership. We can even add the England Football team to the Conservative and Labour Parties in the 'Leaderless because of Europe' list. Uncertainty shocks require policy responses. Someone needs to put on the captain’s hat and grab the wheel.
- Mrs Merkel. She's in charge, not Juncker, not Hollande. Juncker resides in the same box as Sepp Blatter in my cupboard of respect.
- Real trade weighted pound being back to where it was mid 2013. It should and likely will, fall further, but probably not by a huge amount. But each time it falls, it saves many jobs
- This isnt the 1970s. Gilts rallied hard, and equities have fallen no further than in Europe, so there is no evidence of the capital flight that would force the BoE to hike.
If Gilts sell off at same time as weakening pound then we're in trouble, but we are not even close to that point. ,

But it doesn’t matter what I think is important as it's the massed ranks of everyone else's panic that will drive things from here. I am sitting alone in my bunker waiting for all of the emotion to calm down. I have my Kevlar gloves ready and have already started to buy US Stocks below 2000 SPX. The world will not end on Brexit and it smells to me as though we are at 'maximum fear'.

If you want a model to trade GBP on you could do worse than using Kubler-Ross.

Brexit Bullet Points

A scatter gun approach to many thoughts.


Manic Monday - The weekend has seen the addition to the unknown of Brexit the unknown of who is leading the UK. Both main UK political parties are, or nearly are, headless. I am expecting GBP to take a hit and FTSE too. Global contagion will follow but should be faded first. Oh, and I cannot believe that this will be a real global crisis because it could be easily solved.--- This was written Sunday night. The Asia open was messy but the bounce back into European open has been fierce and shows the fear factor is being overcome by rational value seeking. I would feel sorry for the media who had their 'market crash/panic headlines ready, but instead will laugh.

If the UK is sailing off into uncharted waters it needs strength of guidance on the bridge. The UK has seen its captain jump overboard and the rest of the crew are drunk and fighting.

OK. I've Just made up a bad joke - "Whats the difference between a battery and the UK political hierarchy. A battery can take charge".

The Remainers are revolting. There is a petition for another referendum. The petition in itself is a referendum and so is of no worth unless it exceeds the total of votes to leave. i.e. 17million. If this is taken seriously before that point them it becomes a never ending circle of possibility for each subsequent losing side. The petition should be looked upon as a book of condolence only and as such  an important part of the grieving process. It's otherwise useless.

The only path to not leaving is the Government turning against the plebiscite and suffering a constitutional crisis. However. with both parties decapitated is that such a big deal for them? Kitchen sink the constitutional crisis on the past incumbent and say you are resetting the counter back to a time of previous normality and starting again.

Scotland. Sturgeon trying to sound stateswoman like going 'carpe diem’ but she doesn’t stand a cat in hell's chance of stopping the whole of UK exitting through existing process so it them comes down to Scotland leaving and trying to rejoin the EU. During the Scottish independence issue the EU said 'No, you will have to reapply’ so the same will apply now and that process will take years. My feeling is that Sturgeons 'not resting until all avenues are exhausted’ is already very near exhaustion.

Longer term. If Scotland were to leave then someone should remind them that they will not be attracting all the banks and finance business from London to a EU domiciled anglo alternative for the same reason that Dublin will fail, namely the EU will insist that a country hosting a bank should be able to bail it out upon failure. Scotland will not have the balance sheet to do this.

London's Sadiq Khan. No way London goes independent from the UK, even with regards to EU. Forget this now. As an aside, more Londoners voted to leave EU than voted for Khan. More noise.

David Cameron went down with a trader's lethal disease. He thought he was bigger than the market.

I would like to announce that my house is going to become part of the Seychelles because all its inhabitants like the Seychelles.

The Youth vote - The outcry that the young who have to endure the decision longer than anyone voted 75% to remain would cut more mustard if more than 36% of them had decided to vote (meaning 27% of them having voted remain) but what is this new idea that votes are life expectancy weighted? Do I get a vote from the grave if they decide to overturn something I voted upon after my death? If you are going to go down that route only 40yr olds should be allowed to vote as they are of the average age.

Bankers leaving London. The rumour of 2000 Morgan Stanley staff departing for the continent was denied but methinks there is a whiff of PAST truth about it, yet no senior banker I know wants to go to Europe. Frankfurt doesn't have the infrastructure or cultural appeal of London and Paris is taxtastic. Both centres relish bonus caps too. A more sensible route is to follow the example of UK manufacturing companies. Keep all the high value idea generation in the UK and outsource the basic grunt work offshore. Thus the EU could well end up with all the cash settlement and transactional business, whose value is collapsing through e-business anyway, leaving the high value decision makers and financial designers in the low tax, low regulated UK. Result.

EU behaviour. On one hand they want the UK out asap. Much like the drunk at the wedding who has dirt on the bride and has hit the groom they don t want them to be heard by anyone else with doubts and off the premises before they can cause trouble. However, Merkel is playing a more lenient hand wirth regards to timing. I doubt it’s through generosity but more because she thinks that extending time might give the UK time to sort it’s mess out and decide to stay.

Racist behaviour after the vote. Dear overseas readers. the UK is no more full of racist scum than the US is of gun toting mass murderers.

Markets. US stocks. A buy soon, before they scream to new highs. They will not melt on Brexit to the point of threatening the health of the US because the US will lean on EU and UK to sort something out ( c.f. that odd 2am Monday morning meeting between Merkel and Tsipras that saw his knees crumble and an agreement reached).

Italy. Signs of solidarity between core EU, but I still love running short Italian debt. Italy you are not out of the doo doo yet, despite the northerns being nice to you during Brexit. Is that your bank you dropped Signor?

Spanish elections. Sorry I have been really remiss on all of this and don't know what to make of it all. But assume that Brexit polarity is helping Spanis polarity.

Anyone noticed Tsipras tooling around in the recent EU Brexit meetings like he's now a big boy? Mate, you are their fag (UK Public School term for lower year boy forced to perform menial tasks for the older boys).

Bank of England rate rises halting housing?  Forget it. There will be cuts and QE on a collapse not rises. Inflation caused by FX is not due to excess demand of goods so monetary policy not an acceptable response. It does more damage.

UK house prices. Conjecture is on a fall but isn't a fall what everyone wanting to buy a house is demanding. Housing is great media fodder as any price move, up or down, is a pain to someone.

1992 when UK fell out of the ERM was the start of the 2nd UK renaissance.

I have just won a contract for a US client beating a US supplier based on the fall in cable. This is a manufacturing contract too that I will be giving to a UK company. This has occurred due to the fall in the pound on Brexit.

Market trades. Going long SPX on its first momentum pause on a fall sub 2000. Same idea with Cable (gbp/usd to the newbies) 1.2500. And selling more BTPs because there is only so much shit the Germans can back via the ECB.

Is the Bank of England now going to give up its 13% capital key in the ECB?

I am completely bored with 'not since the last time' statements, They are of absolutely no predictive power whatsoever so just stop it.

Circular arguments abound based on starting points of assumption. If this were physics, these circular currents would make Fleming's thumb 'fear'.

My final comment -
The UK is full of some very clever people who know what to do in crisis. Don’t confuse them with those in charge.

Cuban Missile Crisis. Sense will prevail.

Humankind has a natural inclination to avoid pain. If UK votes to leave and it threatens other countries' economic stability then other countries will do what they can to alleviate it.

There is punishment and there is mutually assured destruction. It's much like the cold war. Threats are made but when fingers are on buttons they will waiver and deplomacy will take over to avoid net sufferance.

I cannot believe that the EU, whose behaviour has constantly displayed a 'whatever it takes' response to survival, would let a Brexit vote paint themselves into a corner of sufferance.

As any parent knows, threats of punishment before the action are a different matter once the action has taken place. Negotiation and compromise is still most likely.

If we seriously think that,as the FT has suggested, the likes of the Mexican Peso's fate is in the balance of Brexit then something is messed up. Shock is one thing but reality is another. The tertiary correlations should be faded.

Look at this as the Cuban missile crisis. Sense will prevail to protect the majority. If you don't believe me look at the response to the global financial crisis. The masses were forgiven their debt to preserve society.

Position update.. started trimming GBP 1.4000 Sept puts. Watching FTSE to buy. Will buy EM such as MXN that is being slammed on tertiary Brexit arguments. Running short BTPs as that is going to be a slower burn Euro woe.

Psychology over Physics in today's markets.

A few, well quite a few, years ago I found myself selected by the bank I worked for to be on the interview panel for the graduate intake into their investment banking arm. I was convinced that most of the applicants' CVs were describing more than one person, so complete were they in achievement. It all made me feel very inadequate. This inadequacy was only heightened when I found myself sandwiched on the interview panel between a credit derivative expert who had been a top physicist and the head of our quant unit, who I thought I knew quite well, but through the feedback of the interviewees I discovered was a famous academic mathematician.

I had ended up in this position because I had requested graduate trainees for my group. I had also been told that I was exceptional as I had requested candidates with brilliance in psychology rather than physics. The HR department had even called to enquire whether my spell checker had misadapted ‘physics’ on my job specs. No, I wanted psychologists, Ok, they also had to understand maths to some extent but psychology trumped physics or economics. I needed people who could read others. whether they were traders, clients or the whole market. Economics is a tool but it is only an input into decision making and the timing of decision making is crucial in markets. Timing is probably an economist’s greatest weakness.

The financial world has spent the last 15 years staffing themselves with mathematical geniuses but the actions that have caused the greatest disruptions to the global markets have not been mathematical but behavioural. "It has been emotional", as they say. Currently the state of the markets rests upon the outcome of a vote on the UK’s membership of the EU. The way people vote is driven by a stream of inputs used to determine an outcome that is considered right. Right. Learning how to differentiate Right from Wrong is something that has been engrained into us from the earliest of ages. Our parents' lectures, our tuition and every Disney film ever made are geared around training our 'right from wrong' instincts. But with the EU referendum there is actually no right from wrong. It's just a choice in the forest between two paths. Both lead off into the darkness of the future.

The markets are not about deciding which way we as individuals would go, but which way a group would go. If I were an observer trying to predict which path the group would decide to take and were allowed to employ either a physicist or or a psychologist, I would hire the psychologist. Even with perfect information group behaviour can deviate from expectation because of emotional feedback. The physicist would analyse the visible 10 yards of each path and assume the group would come to the same conclusions. Yet how the group came to their conclusions, as to where the paths finally end, would be more greatly weighted by the characters within the group and how they interacted with the others, than the raw data. The proliferation of survivalist reality TV shows is testament to this.

There has been an emotional response to the news over the last 6 days. Opinion has been swung after Jo Cox’s murder and Nigel Farage’s immigration poster, neither of which have changed the underlying logic of belonging to the EU or not (a small sample set can be seen here . But the response in the markets has seen trillions wiped on to global asset values. Unforeseen by physicists, mathematical models or economists the response was instantly predicted by behaviouralists who rightly assumed (I was wrong) how the crowd would react. Behaviour is what drives price, not maths. Though the closest mathematical analogy I can draw is harmonics. Understand harmonics and you'll see patterns in the distribution, frequency and strength of the stories emanating from Jo Cox's murder. Yet overall, the maths is purely an input that behaviour considers before pressing buy or sell, as logic is only a consideration to behaviour before ticking YES or NO in a referendum.

Behavioural economics is rightly taking off as a field. Economics is all about behaviour, right from a supply and demand curve which assumes a rational response to price (which if found to be wrong is excused through inelasticity, where inelasticity equals fudge), to price, where the best traders respond to how others are behaving rather than the technicals of price discovery. Highjacking other’s behaviour is a surefire shortcut around analysis. Why else are the wires so interested in what others think? The best traders I have ever seen are the best psychologists rather than the best economists or mathematicians because who they are watching includes the mathematicians and economists as well as, more importantly, other people pressing buy or sell buttons.

So back to that interview panel I was sitting on. All the candidates had wonderful mathematical analytic abilities but many final decisions were based on the answers to questions, some of which I embarrassedly admit were far from orthodox, that elicited an ability to interact and read the future behaviours of others and adapt their own responses to maximise outcomes. Basically, social and psychological skills.

How are people now going to behave? On the basis that you fade all swings in expectation around a median of ‘meh’, this massive swing back to Remain is probably best faded as, though logic remains logical, emotions fade. The emotional ADHD of the populace is only rivalled by my own. One other consideration is that now that voting 'Leave' has been emotional branded as making you a right wing murderous moron, it is much less likely that such a voter would declare such intention in an opinion poll.

I have rebought GBP puts and gone short FTSE.

Upcoming UK - EU trade negotiations, Monty Python Style.

The French finance minister, Macron, has been on the wires this afternoon stating in no uncertain terms where the UK will fit in the world should it leave the EU. I have an unpleasant feeling that Monty Python may have already scripted any resulting UK/EU trade negotiations.




Boris: Hallo? Hallo!!

Macron: 'Allo! 'Oo is it?

Boris: It is I, King Boris, and these are my trade negotiators. Whose castle is this?

M: This is the castle of my master,  Jean-Claude Juncker.

B: Go and tell your master that we have been charged, by God, with a sacred quest. If he will give us a trade deal he can join us in our quest for a common economic market that retains local judicial control.

M: Well, I'll ask 'im, but I don't think 'e'll be very keen- ah.. ee's already got
one, you see?

B: What?

Negotiator 1: He says they've already got one!

B: Are you SURE he's got one?

M: Oh yes, it's ver’ nice, He has a common economic market and control over everything!
[to the other soldiers:] I told 'em we've already got one! [They snigger]

B: Well... ah, um... Can we come up and have a say?

M: Of course not! You are English types.

B: Well, what are you then?

M: Ah'm the French finance minister! Why do you think I have this out-rrrageous attitude, you silly king?

Negotiator 2: What are you doing in England?

M: Minding your business!

B: If you will not show us a deal, we shall undermine your castle by offering a low regulation, low taxation entrepôt on your borders.

M: You don't frighten us, English pig-dogs! Go and boil your bottoms, sons of a silly person! Ah blow my nose at you, so-called “Boris Keeeng"! You and all your silly English Knnnnnnnnuts!!!

[Macron proceeds to bang on his helmet with his hands and stick out his tongue at the negotiators, making strange noises]

Negotiator 1: What a strange person.

B: (getting mad) Now look here, my good ma--

M: Ah don' wanna talk to you no more, you empty-headed animal food-trough wiper! I fart in your general direction! Your mother was a hamster, and your father smelled of elderberries!

Negotiator 2: Is there someone else up there we can talk to?

M: No!! Now go away, or I shall taunt you a second time!

B: Now this is your last chance! I've been more than reasonable....

M: (to four other aides, standing behind him on the rampart) Fetchez la vache.

Aide: qua?

M: Fetchez la vache!

[the other aides are seen leading a cow... mooing noises]

B:...if you do not agree to a deal, then I shall ..

[Boing! The cow flies over the rampart.. followed by other farm yard stock]

B: Jesus Christ they are throwing the whole Common Agriculture Policy at us.

B:  Right! CHARGE! Charge them.

Rest of Boris's Party: 20% on car imports, 30% on wine imports.  Charge 'em 40% more for Airbus wings.

[Agricultural products rain down on the negotiating team].

Aide: (throwing down a goose) Hey, this one is for your low corporation tax! [and a duck] And this one's for your competitive employment law!

Boris’s party: [hastily retreating] Run away!  RUN AWAY !

I think what you think is...

Yesterday something awful happened. A UK Member of Parliament was attacked in the street and viciously murdered. Shocking and an example of an individual being targeted for what they represent. As far as I am concerned, unless collaboration would be established, there was only one person at fault. The nutter who did it. I am not going to dwell on how much social responsibility the rest of the population has for the actions of the behavioural outliers in our midst but I want to comment upon the secondary assumptive behaviour flying around. Mostly in the markets.

Let’s start with how things looked before the murder took place. Tuesday and Wednesday saw a pick up in Brexit fear. UK opinion polls became consistantly OUTish and denial morphed into fear. Volatility in everything UK rocketed as costs of hedges flew and suddenly all markets were falling. Brexit was being blamed for everything from GBP (naturally) to oil to SPX. You name it, it is all on Brexit. Last night we had two unknowns become knowns with the FOMC shocking the market by not shocking the market as they were pretty much inline with expectations, if not a touch more dovish, but overall the Fed presented themselves as clueless. Next came the BoJ who also did nothing though this was more of a shock and saw JPY head skyward.

So this morning we started with falls in most of the usual suspects, but volatility wasn’t really playing the game. Though betting odds on Brexit were tightening, implied volatility was falling and market prices were stable. It felt as though we had had phase one of the panic and there was correlation break down in the residual down moves.

Then the markets caught the biggest bid they have seen for ages, at which point I was told that it is due to the murder of Jo Cox. To be honest the instant comments were along the lines of “Thats it, game over, there will be no Brexit”.

Jo Cox's murder should be completely dissociated from Brexit. From both sides. It's in the worst possible taste to raise it. But people just can’t help associating and blaming awful events on things they don’t approve of.

The market commentary assumptive tree was basically trying to say.

1) The murderer is representing (and was abetted by) a larger organisation and is not just a lone nutter with a record of mental illness (though that is what he had)
2) Said organisation represents everything that Brexit is about
3) Voting for Brexit implies association with the views of the murderous organisation.
4) People will not vote for Brexit on this basis
5) UK markets will recover
6) Global markets will recover.

Now that's the rough assumption that is being pumped out. The nuanced one is that marginal voters will be influenced emotionally by the events and be more likely to vote Remain than Leave. This confidence in the emotional response is nicely backed up by the real problem of agreeing on facts, leaving emotions a dominant force. But here’s the bit that really annoys me. Have you, or do you know anyone who has, changed voting intentions because of this? There is an arrogance in the expectation that this is going to change other people’s behaviour but not your own. A symptom of commentary where commentators think their behavioural responses are superior to those of the masses. It is a classic version of optimism bias where we always think we are better than others. Whilst we can appreciate that Jo Cox’s death has absolutely no influence on the arguments for or against membership, we assume the rest of the population won’t see it that way and let short term emotion drive their decision over the long term path of the UK. Yet our best reference to how others would behave is probably how we would behave, we can’t all be unrepresentative. If our behaviour wouldn’t change then why should we expect that of others to do so?

Arrogance of assumption backed up by correlation reinforcement in a melange of emotions is a toxic brew. But as we all know, assumption is the mother of all fuck ups. So eyes front, stop gawping, leave the poor Cox family to their private grief and focus on the real issues and especially stop assuming that others are more likely to behave in a way you wouldn't.

However,if I am wrong, I would like to think that rather than move to Remain, large swathes of Undecideds swing, along with plenty of INers and OUTers into a new grouping - 'Walking away in disgust as everything to do with the referendum has become so sordid'. But if they do indeed move to Remain then this may be the Archduke Ferdinand moment, where a senseless murder of a political figure by a crazed loner changes the course of European history. Only in this case preventing the disintegration of Europe rather than causing it.

Given two choices and ignorance, the outcome will be 50:50

If Carlsberg did 'Remain' arguments for the UK referendum it would probably be the one I received this morning from a good friend. I publish it with his permission.

--------------

I have being thinking and I have different take on this now.

It goes like this: Would the population of the UK trust me (alone) to make the decision to Leave or Remain? No, of course not. Why? Because I am unqualified, I have no track record, I have not spent anywhere near enough time considering the facts AND because the two sides advising me how to vote cannot even agree on the facts.

So if you would not trust me, then why should I trust any of you? Multiplying this up by the whole of the UK voting public does not create a statistically better informed decision - we are all ignorant.

What is scandalous is that the 600 professional politicians chosen, democratically, by this population to rule us cannot agree. If David cannot persuade Boris and Boris cannot persuade David then clearly the decision is very very far from straightforward. Indeed it makes you wonder why we should trust them (all of them) with the NHS, defence or welfare if they cannot even agree within their own parties on Leave or Remain.

And very sadly that leads me on to why, for all the wrong reasons, I think we should Remain. Not because I can muster a whole load of sound economic, social, business or sovereignty arguments. Why should you believe me if I did? No, it's because Remain is what we know now and we should not expect millions of ignorant UK voters to make the right choice. Being in the EU may be utterly terrible as many of you say, but when you say we will be better out you just don't know. It's not that you are wrong, it's that neither you nor I are qualified to opine.

Being in the EU or out should be a matter for politicians. The EU is a "how" not a "what". It may be the best way for the UK to regulate its trade. It might very well not. Democratic voting should be about asking the general public "what" they want. Not "how" they think we should get it.

And the current outcome in the opinion polls could be explained by the simple reasoning that if you give a large number of people a choice between A or B, when they have no idea which logical choice to make, and you will get 50:50

A large flock of sheep are eating grass in a field. Two farmers enter the field. One says the grass is greener in the next field. The other farmer says it is better where they are. Then they tell the sheep to decide what to do.

The real response of the sheep should be "You're the bloody farmers!"

The real point is that the politicians should not be asking us what to do in the first place.

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And just to balance up the sides, here is AEP's declaration and reasoning for voting to Leave. http://www.telegraph.co.uk/business/2016/06/12/brexit-vote-is-about-the-supremacy-of-parliament-and-nothing-els/

Binary outcomes and Brexit bookies

The two ‘shocks’ of the last couple of days have been the Non Farm Payrolls kicking Fed expectation into longer grass and a swing in expectation back toward LEAVE in the UK EU referendum. I put the word ‘shock' in parenthesis because it wasn’t really shock shock, more an expected shock, as my last post focused solely on this occurring. http://polemics-pains.blogspot.co.uk/2016/05/re-record-or-fade-away.html . Fading swings in expectation appears to be the winning strategy this year but there are big differences to playing the Fed and Brexit.

Economic data is about tuning underlying views. There is a steady enough flow of it to think of it as the view out of your car's windscreen. A constant stream of little bits of information prompting you to tweak the wheel left or right to keep your car on the road. Every now and again we hit a bigger lump of data, such as the NFPs, which can act more like a moose in the road, demanding sharp avoidance action, but on the whole there is rarely a single piece of data big enough to cause half the cars on the road to crash.

But when it comes to politics things are different. Binary events are the market’s worst nightmare as they can cause instant death to positions. There is no room for avoidance. This loathing of binary outcomes is why the market tries to smooth the path to the outcome by gleaning as much information it can beforehand to make it effectively less binary. In other words to get the inside track on what the outcome will be.

Hence with the EU referendum in the UK, market participants are doing there damnedest to read the minds of the UK populace ahead of the vote with, we understand, fund managers commissioning their own pollsters to compile reports that they hope will give them the inside edge. Here one has to ask how, in such a tightly regulated market, the authorities manage that razor edge of a divide between insider trading and the application of ones own research. In many ways commissioning your own poll is no different from any institution doing its own economic research and hedging its risks based on that research. But in extremis, could an individual be accused of market manipulation for shorting GBP and then voting to exit the EU? No? If there were only 1 voter would you be so generous with your leniency? What if a group of voters realised that they could hedge out the financial risks of Brexit leaving just exposure to political gains? Or realised they could make much more in betting on an EU exit than they would lose economically over exiting? Or the whole of the UK LLC (the financial UK as a whole) pretend they are staying, bet against the rest of the world who are pricing a stay on what they are told, and then vote out? How can the rest of the world afford to take a bet when it's the bookie that chooses the outcome? That would be as nuts as taking out a LIBOR based loan without checking who sets LIBOR.

If Peaky Blinders were real and based in the present I am sure they would be making a killing rigging the Brexit market. Which reminds me of Barney Curley, a real life character who has been a master of playing and adapting the odds. http://www.independent.co.uk/news/people/profiles/barney-curley-nobody-will-win-as-much-on-horse-racing-in-100-years-1988728.html A genius, as exampled in the case of Yellow Sam, where he monopolised the only telephone at the race course preventing on and off track betting prices from being smoothed. https://www.theguardian.com/sport/2014/mar/03/barney-curley-2m-betting-coup

And don’t forget that the bookies also have the final say on whether they pay out, even if you do win. In the case of Brexit I would be very surprised if any vote of less than 55% to Leave actually results in a leave. The ruling bodies, who are pro-Remain, will most likely invoke a masterly ‘We will not enforce such a momentous change on such a marginal majority’. This is now being mooted here - http://www.bbc.co.uk/news/uk-politics-eu-referendum-36457120

With everyone so desperate for clues, it is easy to see feedback loops of information spiral away from reality like eddies from an oar. Who is watching whom. Opinion polls matter but market reaction and price moves are equally provoking. Instead of watching the underlying, people are watching the derivative in a belief that it drives the underlying. A very common mistake and example of the correlation/causality error. Just as a CDS does not define the actual probability of default, rather the market price of implied probability, where the bookies have the price of Brexit only reflects their opinion swayed by an average of all the bets placed with them. The financial markets are a larger example of the same, but with much greater liquidity. Differences in liquidity in markets that track each other is prime hunting ground for market manipulation. For example Mr Big Fund buys large amounts GBP puts, then goes to the bookies and places bets to Exit until the price has moved substantially (though of course actual outcome probability has not), the rest of the market see this as an indicator of actual outcome and sells GBP giving the fund a larger profit in FX than the cost of moving the bookie’s price.

The only way to really work out what is going on is to do your own groundwork. Don’t look at bookie prices, nor financial markets, but talk to your friends and family. Even though they may express biases the interesting juncture is picking up how their voting intentions are changing. It’s the feel of the fluctuation that is most telling.

If you need a living examples of the Prisoners' Dilemma and many other behavioural theories then the EU referendum encapsulates the lot.

Players vs commentators. Is any of it worth it?

Boring isn't it. I've stopped playing in the markets for a while and am instead making my shilling by doing things that people pay me for rather than being part of the zero sum game of pass the money parcel that is financial trading.

If you can find a nice yield then great, lock it down and pick up the coupon. If you can't find yield then stick your cash in a safe, but if you really are desperate you can take a punt on a price going up or down. But think this - There are always very good reasons for prices to go up from here and equally good reasons for the price to go down from here. If this wasn't the case then the price would not be where it currently is - at an equilibrium. So think this through one stage further and end up with the thought that it is all just a fifty/fifty  bet. So what is the point?

Well you are all now mumbling that it isn't a fifty/fifty bet because your insight is better than all the other idiots out there and, anyway, you only have to be brighter than most of the idiots, not all, to win. Well not so fast Sherlock, because unfortunately the market price reflects the idiots' inputs as well as yours. So you are back to 50/50.

No, really, you always make money? God you are good. Why do you need to tell me about it then? Because you want me to give you my money so that you can charge me some of my money for hopefully making me some more money? Ah I see! No, sorry chum.

You may be right, perhaps I can't possibly scout the market for the best buys and the best IPOs but I'll tell you something. IPO's are only ever ever ever worth buying if the seller is distressed. Do you really know more about his business than he does? Why is he selling stock and not issuing debt? He is willing to give away most of his upside in his company ownership to you right now because he loves you? Nah. It's worse than that. He wants to use you to wear the risk and give him cash so he can then go to his bank, show them your cash as proof of assets and borrow even more against it. This is then used to pay huge salaries to the board until the money runs out and the dream dies. Of course some IPOs are winners, just as there are always lottery ticket winners to encourage others to invest in what is effectively a bond yielding minus 50%. Yes folks, nations have been issuing negative yield bonds for years under the guise of lotteries. But anyway, IPO's you can keep them too.

The market is bent. Of course it's bent. If it wasn't bent then the same people wouldn't keep winning. But who does keep winning? Those who charge you for the pleasure of playing - The fund managers. The brokers. The financial journalists. The city real estate owners. The sales guys. The city bars and restaurants. Basically the shovel sellers to the gold prospectors.

Just an aside here, talking of the economics of restaurants and bars. You know who makes the money there? Not the establishment but once again the property owner. He will be able to charge in rent an amount right up to slightly less than the profit the place makes, because that is the marginal worth of the site.

So sell the dream shout the wins and never talk about the losses, unless they are someone else's. If you are good, no let me correct that, if you can persuade other people you are good, they may just one day pay you to have a go with their money or even better, pay you for your thoughts. And that is the risk free trade up until your reputation goes and they stop listening. Selling your thoughts.

Now here I stumble into a key point. There is a huge difference between how a trader, or financial risk taker is measured and a commentator who doesn't take financial risk.

The trader or fund manager is measured by financial return on their investments. If they get a trade wrong they can take their loss and move on to the next trade. A trader does not have to be more right than wrong, in fact he can be more wrong than right, as long as the small number of rights earn more than the large number of the wrongs. They can appear as complete numbskulls by trade idea but still make fortunes. They don't care what people think of their independent ideas as they are finally measured by profit.

The financial commentator is measured by something very different. The financial commentator is paid to be listened to or read. Paid either directly, or more commonly these days, by a company who has an advert next to their words. In this case the commentators greatest risk is appearing to be wrong and losing the trust of their readership. Therefore, why ever take the risk of putting out a view if being wrong can so quickly kill your reputation and it's your reputation that is most important in your peer reviewed position? Your editor decides if you keep your job, determined by the number of raised or lowered thumbs from your audience. Gladiatorial indeed, where the most sensible means of survival is to amuse the audience commentating on the other gladiators rather than having to join in and take a jab with a sword.

But your audience has to respect you and if your audience is one of financial risk takers then, as all good sales folk try to do, empathise with your audience and pretend to understand their woes even if you do not. Cry when they cry, cheer when they cheer and be one of the players. Pretend to be one of the gang, even if you are not. They'll love you for it as you wear the jacket and talk the talk. (N.B. CNBC stripy jacket wearing commentators with thick necks).

Spot the difference -

Wasp                                                                                      Hover fly 

But it all comes to nought when the players notice these imposters don't walk the walk. I mention this because one of my pet peeves is media whoops and hollers as prices move. It's like a financial actor's breathing exercise -
All together now,  "Yeah guys! New Highs! Wooh. Xyzeee really tanking. Not been here since the last time, and... slowly now .. deep delve mumble on Widget corp. Pause.... Gravitaaaaaaas.... Over to Scott... And relax"

But ask any of them for a trading view on the market, just one idea, a teeny morsel to show that they are willing to be one of the boys and you are met by a wall of silence. I know as I tried it on Twitter here  and though three top sports had a go, the silence was deafening. Even after prodding. And that, dear reader is the proof. If you can't put in a call on the market then you really should not be pretending you are anything but a shovel seller. Grow a pair and the big boys then may show you some respect, but until you do, you can take off the gang jacket and get back to selling advertising space.

Now if you are smart, you would now be pointing to my first paragraphs and asking as to why any of the market commentators should put out a view when it's only a 50/50 call. To which I reply...

.... Good point. It's 'waste of time' squared.




Footnote - I am really glad I have so many friends in financial journalism who will of course be laughing along with this post, as I am of course not referring to THEM. There are some fantastic financial journalists who provide cracking insight and analysis for which we are all grateful but this superior breed do not pretend to be market players with skin in the game and don't get over excited when prices move.