It’s been a while since I wrote a post. I could pretend it was because I have been on holiday. It isn’t. It’s because I really haven’t felt there's been anything of note to change my view of the world. My last post was titled 'Wrong Wrong Wrong' and I do feel as though I could add one of my own long-running beliefs to that. The way the Turkish lira has gently strengthened has caught me on the wrong side.
However, I have a right right right with my expectation of an unwinding of Brexit hysteria. Carney’s 4th of August move was so predicted I put a bet on it not happening. A small loss but I still felt it worthwhile as his ability to do the unexpected, or rather not do the expected, has been magnificent. I thank him for his actions as they have reduced my mortgage costs by 25% (1% to 0.75%) but I can't help thinking he has reacted to his own induced panic rather than anything proven. Of course, anticipating is the job of the BoE but I am interested at how the reputation of BoE forecasts appears to have gone from ‘pretty lousy’ over the past few years, to 'God-like' over Brexit.
I have been waiting for August data to appear because there was no point protesting the validity of July’s PMI’s as the armageddon brigade were waving sharp objects and their eyes had turned sparkly blue (a Game of Thrones ref there). The recent rebound in the UK data, manufacturing and service PMI’s, employment, housing, even the low inflation so far, has driven the army of the dead back north of the wall. But their screams can still be heard in the distance.
The Stark warning that Winter is coming may yet be true. But an Indian summer is upon us now as now is not the winter of our discontent. Well not mine, anyway.
I haven’t been tick watching markets as I haven't been that engaged. It's a fine thing to step back and have a financial form of out of body experience, looking back down on the chatter as you float above it, wondering what the point of all that noise is. Nothing has really changed. The hunt for yield drives on, data comes out, people jump and shout but then get bored and everything mean reverts. NFPs are a class example. They are like a solar eclipse passing over the market. They cause excitement and even panic but all they really are is a big fade. And in the background, the SETI project of Fed watching grinds on. Yeeeeeaaaawn.
On irregular visits to Twitter, I note excitement every now and then as a stock index somewhere puts in a 0.nothing move lower. Which backs up the general theme of ‘most hated stock rally for ages’.
The low volatility environment has many saying that volatility compression through funds selling vol, to fund underperformance, will lead to a vol explosion. I can empathise with this but it doesn't mean there has to be a massive move in underlying. Implied volatility can do some mighty strange stuff all on its own. High vol is read to lead to market price falls and low vol is read to lead to high vol which leads to price falls. Did you notice a certain bias in reporting there?
We all talk about negative yields and how it's all part of the great plan to drive money into more productive parts of the economy, but with low volatility and making a basis point in financial markets harder and harder, I wryly wonder if crushing vol is a clever master plan to drive workers into more productive parts of the economy. There is an irony in fund managers and traders bemoaning the lack of yield when all they would have to do is leave and get a job in any other field. Margins in non-financial businesses are measured in 10s of percents rather than 0.01s.
We now have G20 upon us and the changing shape of real global political power is much more interesting than Fibonacci levels in weasel poo prices. The longer term concerns of a changing landscape with regards to international relationships has been judged by the markets as immaterial until they get an economic data point to react to. Even if Greece don't get another EU payment for a while, or Turkey raises the Hammer and Sickle over Ankara or China links their mainland to Los Angeles through geo-forming, no one will really care unless it is reflected through Fed policy speak or NFPs come out 100K +/- from expectations.
I am still fascinated by Turkey. I still see it as the keystone or lynchpin or even grenade pin, to the many many current issues. From what I gather (no names, no pack drill) subterranean diplomacy is a hive of activity. The Russians are in there like Flynn, and the Europeans are busy trying to repair the damage of late support. The EU did not see a coup coming and their response was disastrously delayed. They will now have to over compensate in acquiescence as they still need a refugee deal but are now negotiating with a stronger counterpart backed by their old foe. The coup has been a wake-up call not only to the West, but Erdogan himself who now owes his life to the Russians and despite an appearance of authority is fast learning some of the basics of governance needed to successfully run a country of multiple cultures. He is restructuring his advisors, both domestic and international and has a stronger hand than ever to play the Uzbek game of mix and match when it comes to international courtship.
I have been short of Turkish lira and intend to remain that way for a while as it will be a while before foreign direct investment has the confidence to return to counter their trade deficits. But play this right, which I feel he is, and Erdogan will be able to extort favors from all sides. Who will open the bidding?
It is still interesting to see that GBP/TRY is much lower than pre-Brexit which obviously proves that leaving the EU is judged much more serious than having a dictatorial purge, moving away from ever joining EU, cozying up to Russia and changing the shape of Western/ Middle East politics.
Trade ideas? Is one allowed to even hint at trade ideas in this regulated market? Oh, hang on, I'm not regulated. Or am I? Or was I? Or rather will I be? For if I will be, I could possibly be prosecuted for breaking rules when I wasn't and didn't have to abide by them. The Apple dilemma. Or FX dilemma. Politically motivated retrospective legal action is today's great game. I am sure that the next step is when the authorities go 'Minority Report' and start fining start-ups billions now for tax avoidance they may carry out in the future should they become hugely successful.
Of course, I can't advise you, but I can warn you that if you have the same positions as me, (long a bit of oil, long USDTRY, long Trump to win and short Eur/Gbp) then you may or may not lose or make money. Why am I long Trump? Because the odds had closed to 20% on smart people betting that stupid people won't be stupid. Which is stupid.
Apart from that, I have little idea, though it is becoming abundantly clear that though economics is all about predicting behaviour, economists are appalling at predicting behaviour at political tipping points.