Tuesday, 28 June 2016

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.

12 comments:

Robert in Chicago said...

I am totally serious: Why are you not gleeful? You think you have a counter-consensus analysis edge, bolstered by having been right before in a very similar situation, you know how you should trade it, and you are just waiting for the right day to put it on.

Polemic said...

Robert - I'm British. We don't do glee. At least we don't express it unless we have just beaten Australia at some sporting thing :-)

Unclear Wessels said...

Man, you're on fire today! Amusingly, I'm in process of trying to cancel my FT subscription. After 15-ish years they finally got my goat with their coverage, and I was reeeeally trying to be patient. I normally try to read the full spectrum, from where the left nutters end to where the right nutters begin, but FT's gone properly Morning Star-ish these days, so must be chopped. You can get the Sunday Times delivered and the pints you need to go with it for the same price. Amusingly, there is no way that I could find to cancel this subscription through their site -- would be hilarious if that means the FT is breaking some EU law.

Also great point re: sterling and jobs. Had an enlightening discussion yesterday with some people living in the South West who were surprised to find out that farmers all around them were rather unhappy about the strength of GBP all these years. Makes you wonder what other basics remain misunderstood.

Anonymous said...

I enjoyed ur article. I get it, there is no repeat of 07-08. Are you just saying you are bullish vs. current max fear or will you actually buy the dips earlier than dip buyers?

Polemic said...

anon 01.49 .. remember that bit in the post about understanding nuance?

jbtfd said...

@Pol - I'll be your friend. Keep buying the dips (with sensible risk management & profit targets)... With markets responding largely to media melodrama, and Central Banks ready to backstop any serious fall, I am doubtful that this is 'The End Of The World As We Know It'.

Cityhunter said...

Pol,

I agree very much on the sentiment swings regarding political risk. One thing I would like to point out though is the scar on growth. UK heading to recession, dragging down the feeble Europe continent and perhaps the rest of the world. If the recession beast does come out it would take helicopter money to turn around things...This is the big thing behind the cloud.

Anonymous said...

FBBI - priceless

northshore said...

The offering was binary and I chose out, but really just want to meet back in the middle. That being somwhere between whatever one's observation of winner/loser angst is - globalisation vs protectionism, establishment vs proles, rentseeker vs waged, regional vs national, demographics vs social pressures, economic vs cultural etc etc.

I'd guess into the middle is where we'll end up through compromise, else there'll be too few winners for sustainability either way. But giving the ignored electorate (pals and families I grew up with here and in n.europe) a stronger negotiating hand is fundamentally what my vote was for, in UK and wider EU terms. A risk - yes. Naive - perhaps, we'll see. No panic or jubilance here.

I Will Never Accept The Terms of Service said...

Cityhunter: "heading to recession, dragging down [...] perhaps the rest of the world" is what we've kept hearing, over and over again, during 5 of the last 0 worldwide economic collapses. It's easy to stay on an even keel if you just remind yourself of the following:

- Europe's economy has always sucked, nothing's changed. DB & Schauble have been following deflationary policy for a decade, and anyone who's still long EU is a twit;

- The UK deindustrialized in the 50s, now they're the economic equivalent of a third world nation with the world's largest kleptocratic banking elite grafted on its butt;

- The entire world economy is driven by the US housing cycle. Full stop. The UK won't affect the US housing cycle. Full stop;

- Generally, the world kleptocracy takes constructive action to heal itself whenever a crisis threatens them. They adopted Keynesian stimulus in 2008 FFS! Quit piddling your panties and learn to buy the dip.

Hotairmail said...

"Buy below 2000 spx"....well played Sir. Again.

Anonymous said...

SEE ALSO

“This poll confirms that nobody wants to put themselves in the kind of mess the British have created for themselves,”

http://www.bloomberg.com/news/articles/2016-07-04/eu-support-surges-in-denmark-as-brexit-scare-spreads-in-nordics