"Strictly Come Dancing" , or 'Dancing with the Stars' as it is known in the USA, has dominated the Christmas TV schedule this year but has, thankfully, finally come to an end, The program's formula of teaming up celebrities with professional dancers to convince a panel of experts that they are great dancers has been highly successful but perhaps it is time for a change, so here are some ideas for next year -
Strictly Come Economic Forecasting - Where celebrities team up with professional economists and try to convince a panel of experts that they have any more clue than anyone else as to what happens tomorrow, whilst performing multiple U-turns.
Strictly Come European Central Banking - Where celebrities team up with professional European central bankers to impress a panel of experts every month that they are capable and willing to do whatever it takes to keep the European banking sector alive by performing a choreography of crazed twists and gyrations, known as the Can-Can.
Strictly Come US Central Banking - Where celebrities team up with professional US central bankers to convince a panel of experts that it is they who influence the future marks awarded by the panel, not the panel, by predicting what the panel will award in the future without consulting the panel. If they get zero points they award themselves 10 points for not being wrong. It's all very confusing.
Strictly Come Fund Consulting - Where celebrities team up with professional fund consultants to charge a panel of investors for their knowledge of past performance without making any commitment towards future performance whilst reassuring the panel that other panels are similarly benchmarked and the marks they award will not be seen as out of line with industry standard.
Strictly Come Financing - Where celebrities team up with professional financiers and try to convince a panel of online investors to award them dollars for a cash burning operation by performing a dance based on dream and fantasy.
Strictly Come Macro Fund Selling - Where celebrities team up with professional hedge fund salesmen and try to impress a panel of experts into paying 2 and 20 whilst they lose the panel's initial investments.
Strictly Come Futures Trading - Where celebrities team up with professional futures traders and try to convince a panel of judges that they can shout loudest and have the thickest neck whilst dressed up in stripy jackets.
Strictly Come Technical Analysing - Where celebrities team up with professional technical analysts and try to impress a panel of judges with a series of Fibonacci levels and randomly drawn lines into not giving them 10 points because that looks overbought on the RSIs and the Bolinger bands suggest a retracement towards 6 points before the Elliot 3.a.i takes effect.
Strictly Come Algo Trading - Where celebrities team up with algorithmic trading platforms and have 5 nanoseconds to convince a panel of fund consultants that they always make money.
Strictly Come Regulating - Where celebrities team up with professional regulators and try to convince a panel of experts that they really can prevent future banking crises and stop market participants from interpreting the rules to maximise their own gain, by making up rules that make the audience laugh.
Strictly Come Compliancing - Where celebrities team up with professional compliance officers and tell a panel of experts they can only award marks once they have completed online training and had the marks they plan to award submitted to a further panel for pre-approval only after proving that the marks are publicly known before being awarded.
Strictly Come Financial Televisioning - Where celebrities team up with celebrities to convince a panel of celebrities that they are experts on finance.
Strictly Come FX Broking - Where celebrities team up with FX brokers and get so smashed up on a night out they can’t find their way to a panel of experts.
Strictly Come Binary Option Trading - Where celebrities team up with spread betting companies, lose all their money, then try to convince a panel of experts that they didn’t know better and so deserve compensation.
Tuesday, 27 December 2016
Thursday, 22 December 2016
SA Q'n'A
The investor site 'Seeking Alpha' approached me for my thoughts on 2017. I was delighted to respond but felt as though I wasn't much help as I still believe it's too early for huge conviction trades, so please don't go through this post looking for 'get rich quick' nuggets of instruction. Hovever, it does give a feel of my current mood.
Here is their article
---------
After a long and winding 2016, we reach another holiday season. As we have done for several years, we are checking in with some of our top authors for their views on the coming year and beyond. Our panel includes experts on a range of different asset classes and investing strategies. As always, the focus is on an overall approach to portfolio construction and investing outlook.
We continue this series with Polemic Paine, an inimitable voice on the markets who doesn't consider himself an expert, but a sanguine cynic towards beliefs peddled by others for their own benefit. He also believes in building up one's own framework of economic, trading and personal values from first principles and experiences. A nice companion piece to this one is his recently published article, A Guide To Making 2017 Financial Market Forecasts.
He responded to a few questions from Seeking Alpha Editor Rena Sherbill about the markets and what investors should look for in 2017.
Rena Sherbill (RS): How would you describe your investing philosophy, broadly speaking?
Polemic Paine (PP): Focusing on behaviour rather than the maths. Mean reversionist against consensus doom or boom moods. Looking to buy in the darkest hours and sell in the brightest.
RS: As we approach 2017, are you bullish or bearish?
PP: In every meme you can find an asset for which the meme is bullish and equally as many for which it is bearish. As we approach 2017, I am neither bullish nor bearish on stock indices and do not want to be heavily positioned in much at all right now. For bonds just swing that view in reverse, but as I am neutral on those too I am doing nothing. I am waiting for the next panic to buy on or euphoria to sell into.
I don't think we have either at this point though I do detect an assumed conviction in the market as to what a new Trump world will actually mean, though these arguments are mostly extrapolations of guesses. So, if anything, I would be looking to sell US equities rather than buy. But not yet.
RS: To which index or fund do you benchmark your performance?
PP: None, other than absolute return. Benchmarks are an excuse to lose other people's money. Benchmarks are buck passing exercises that pass the investment decision back to the investor. The only benchmark anyone really cares about is absolute return. Risk adjustment is fine for the present as knowing what your risk IS important, but when you look back in time you don't give a damn what your risk WAS, all you care about is what it returned.
RS: What is your highest conviction pick heading into the new year and why (can be a long or short idea)?
PP: Now is too early to be convinced of any market trend. My highest conviction trade is that the first moves of January will be the wrong ones and worth fading. The Trump reflation trade is this year's consensus conviction trade and it will only gain further traction through feedback reinforcement as institutions publish their 2017 'trades of the year.' If we look back over the past few years there has been a tendency for the market to come crashing out of the new year starting gates and throw money behind these themes.
This drives prices that reinforce the belief that the trade is correct, only to see them crash and burn and be totally wrong by March. January 20th(ish), or first expiries, has often been a turn date and this year that date is even more important with Trump's inauguration speech. If you are looking for something more tangible on the markets in 2017, I am pretty convinced that a major speculative attack on Europe will occur. I just don't know at what time or on which day.
RS: Which domestic/global issue is most likely to adversely affect US markets in the coming year?
PP: Domestic - as yet unknown policy changes to trade deals, immigration and corporation tax.
Global - US international relations, specifically with Russia and China. It is worth watching Turkey in this respect as it is where many political interests meet. I also consider that a speculative attack on Europe could become contagious to US assets.
RS: Which countries/sectors/asset classes are you currently most bullish on and why?
PP: As mentioned before, I am not at a high conviction level towards anything at the moment and think it unwise to be so until we have more information about what the future policy rules will be. But if I have to be bullish on something let's try...
UK - Despite the outcry over Brexit, the UK economy is still outperforming much of Europe and the rest of the world. I have been long GBP for a few months now and still feel that the UK will end up with a soft Brexit. The biggest threat to UK growth may not come from Brexit, but a cut in US corporation tax which would see the UK's global competitive advantage for capital squashed.
Emerging Markets - Traditionally we have an emerging market crisis in January / February but it's been kicked off early this year by Trump and his promised protectionist policies. However, protectionism will only drive the cost differential between EM and the US wider and though you may think that you'd like to pay minimum wage in the US for plastic goods to be made, when the realisation that that is 20 times as much as many places in the world, your moral compass may be interfered with by the cash magnet in your wallet. While someone is willing and able to do your job for less than you, you are in trouble. Artificial trade barriers may be a short-term solution but the fluid dynamics of trade mean that new routes will be discovered to give the consumer the goods they demand at the cheapest price.
RS: For investors with a long-term horizon and a reasonable risk tolerance, what is the correct mix between [relevant] asset classes?
PP: 60/40 for the simple fact that it has consistently worked. The real point here is that asset class performance is more governed by the investment within that class than simply by asset type. There are equities that behave like bonds, look at European infrastructure projects, and there are bonds that behave like equities, look at high yield, low credit, corporate bonds. We haven't even mentioned Cocos.
The key is not so much the correct mix of assets by bond/equity/commodity/country, etc. but how the selections are made within those portfolios. A bond portfolio can weather down drafts if it is all placed in very short duration bonds (cash is effectively a zero coupon perpetual bond) and the same with equities by utilising sector plays.
RS: How have potential changes to the tax code affected your assessment of interest-paying investments?
PP: They haven't. As I am UK-based I am pretty immune to the vagaries of local US law.
RS: What advice would you give to a 'do-it-yourself' investor looking at [xyz] opportunities in the present environment?
PP: Read books on behavioural economics. Assume that any data you know everyone else knows already (otherwise it would be inside trading). In today's algorithmic-driven markets you will never be the first to act on a piece of data. Classic analysis is always in the price. Look for an edge and nowadays it is nearly all behavioural. Understand what makes others buy and sell, the more you understand about the drivers of different types of investors the more likely you are to predict and anticipate their behaviour. The easiest way to lose money is to be a do-it-yourself investor who knows slightly less than everyone else. You will become the market's next meal.
RS: What are the major catalysts for markets in 2017?
PP: Politics. Whereas the last few years markets have been focused on predicting the minutiae of central bank policy, there are now bigger issues at work. It's all well and good to play games when you know what the rules are, but the rules are changing and are as yet unknown. So, focusing on politics I would suggest Trump's inauguration address on January 20th, Russia/US relations, Turkey, European elections and cartel deals (OPEC).
However, and this is a big however, there was very good money to be made in 2016 by buying the political risk into the event and then selling the market risk (i.e. buying risky assets in the markets) immediately afterwards as political risk was underestimated and the resulting damage to the markets of the outcomes overestimated. This may well have been learned, so the likelihood for 2017 is that political risk will now be overpriced.
RS: Which asset classes are you overweight? Which are you underweight?
PP: As mentioned above, generalising asset classes is a bit of a red herring. I am longer cash than normal as there are too many unknowns; however, I am scaling into long emerging market positions (equity and bond, unhedged FX) and I am particularly interested in Mexico, Korea and South American commodity countries.
RS: Any additional considerations you'd like to share with readers as they ponder their investing strategy in 2017 and beyond?
PP: Be nimble. New information is constantly appearing and trying to predict where we will be in year's time is a fool's errand. The most important thing is not to be sucked into the game of thinking that the 30th of December is a magical date at which one-year forecasts and investments have to be made. If you really want to put a forecast out on what to do for 2017 I recommend waiting for March. Doing otherwise, as most investment banks have found out, is asking for trouble.
Finally, the most important thing of all is to listen to as many people from as wide a background as possible. Do not fall for the reinforcement bias of surrounding yourself with people who think like you. This was the error that led to so many being shocked at the outcomes of Brexit and Trump. For most people it was not a surprise; they were the majority that voted for them.
Here is their article
---------
After a long and winding 2016, we reach another holiday season. As we have done for several years, we are checking in with some of our top authors for their views on the coming year and beyond. Our panel includes experts on a range of different asset classes and investing strategies. As always, the focus is on an overall approach to portfolio construction and investing outlook.
We continue this series with Polemic Paine, an inimitable voice on the markets who doesn't consider himself an expert, but a sanguine cynic towards beliefs peddled by others for their own benefit. He also believes in building up one's own framework of economic, trading and personal values from first principles and experiences. A nice companion piece to this one is his recently published article, A Guide To Making 2017 Financial Market Forecasts.
He responded to a few questions from Seeking Alpha Editor Rena Sherbill about the markets and what investors should look for in 2017.
Rena Sherbill (RS): How would you describe your investing philosophy, broadly speaking?
Polemic Paine (PP): Focusing on behaviour rather than the maths. Mean reversionist against consensus doom or boom moods. Looking to buy in the darkest hours and sell in the brightest.
RS: As we approach 2017, are you bullish or bearish?
PP: In every meme you can find an asset for which the meme is bullish and equally as many for which it is bearish. As we approach 2017, I am neither bullish nor bearish on stock indices and do not want to be heavily positioned in much at all right now. For bonds just swing that view in reverse, but as I am neutral on those too I am doing nothing. I am waiting for the next panic to buy on or euphoria to sell into.
I don't think we have either at this point though I do detect an assumed conviction in the market as to what a new Trump world will actually mean, though these arguments are mostly extrapolations of guesses. So, if anything, I would be looking to sell US equities rather than buy. But not yet.
RS: To which index or fund do you benchmark your performance?
PP: None, other than absolute return. Benchmarks are an excuse to lose other people's money. Benchmarks are buck passing exercises that pass the investment decision back to the investor. The only benchmark anyone really cares about is absolute return. Risk adjustment is fine for the present as knowing what your risk IS important, but when you look back in time you don't give a damn what your risk WAS, all you care about is what it returned.
RS: What is your highest conviction pick heading into the new year and why (can be a long or short idea)?
PP: Now is too early to be convinced of any market trend. My highest conviction trade is that the first moves of January will be the wrong ones and worth fading. The Trump reflation trade is this year's consensus conviction trade and it will only gain further traction through feedback reinforcement as institutions publish their 2017 'trades of the year.' If we look back over the past few years there has been a tendency for the market to come crashing out of the new year starting gates and throw money behind these themes.
This drives prices that reinforce the belief that the trade is correct, only to see them crash and burn and be totally wrong by March. January 20th(ish), or first expiries, has often been a turn date and this year that date is even more important with Trump's inauguration speech. If you are looking for something more tangible on the markets in 2017, I am pretty convinced that a major speculative attack on Europe will occur. I just don't know at what time or on which day.
RS: Which domestic/global issue is most likely to adversely affect US markets in the coming year?
PP: Domestic - as yet unknown policy changes to trade deals, immigration and corporation tax.
Global - US international relations, specifically with Russia and China. It is worth watching Turkey in this respect as it is where many political interests meet. I also consider that a speculative attack on Europe could become contagious to US assets.
RS: Which countries/sectors/asset classes are you currently most bullish on and why?
PP: As mentioned before, I am not at a high conviction level towards anything at the moment and think it unwise to be so until we have more information about what the future policy rules will be. But if I have to be bullish on something let's try...
UK - Despite the outcry over Brexit, the UK economy is still outperforming much of Europe and the rest of the world. I have been long GBP for a few months now and still feel that the UK will end up with a soft Brexit. The biggest threat to UK growth may not come from Brexit, but a cut in US corporation tax which would see the UK's global competitive advantage for capital squashed.
Emerging Markets - Traditionally we have an emerging market crisis in January / February but it's been kicked off early this year by Trump and his promised protectionist policies. However, protectionism will only drive the cost differential between EM and the US wider and though you may think that you'd like to pay minimum wage in the US for plastic goods to be made, when the realisation that that is 20 times as much as many places in the world, your moral compass may be interfered with by the cash magnet in your wallet. While someone is willing and able to do your job for less than you, you are in trouble. Artificial trade barriers may be a short-term solution but the fluid dynamics of trade mean that new routes will be discovered to give the consumer the goods they demand at the cheapest price.
RS: For investors with a long-term horizon and a reasonable risk tolerance, what is the correct mix between [relevant] asset classes?
PP: 60/40 for the simple fact that it has consistently worked. The real point here is that asset class performance is more governed by the investment within that class than simply by asset type. There are equities that behave like bonds, look at European infrastructure projects, and there are bonds that behave like equities, look at high yield, low credit, corporate bonds. We haven't even mentioned Cocos.
The key is not so much the correct mix of assets by bond/equity/commodity/country, etc. but how the selections are made within those portfolios. A bond portfolio can weather down drafts if it is all placed in very short duration bonds (cash is effectively a zero coupon perpetual bond) and the same with equities by utilising sector plays.
RS: How have potential changes to the tax code affected your assessment of interest-paying investments?
PP: They haven't. As I am UK-based I am pretty immune to the vagaries of local US law.
RS: What advice would you give to a 'do-it-yourself' investor looking at [xyz] opportunities in the present environment?
PP: Read books on behavioural economics. Assume that any data you know everyone else knows already (otherwise it would be inside trading). In today's algorithmic-driven markets you will never be the first to act on a piece of data. Classic analysis is always in the price. Look for an edge and nowadays it is nearly all behavioural. Understand what makes others buy and sell, the more you understand about the drivers of different types of investors the more likely you are to predict and anticipate their behaviour. The easiest way to lose money is to be a do-it-yourself investor who knows slightly less than everyone else. You will become the market's next meal.
RS: What are the major catalysts for markets in 2017?
PP: Politics. Whereas the last few years markets have been focused on predicting the minutiae of central bank policy, there are now bigger issues at work. It's all well and good to play games when you know what the rules are, but the rules are changing and are as yet unknown. So, focusing on politics I would suggest Trump's inauguration address on January 20th, Russia/US relations, Turkey, European elections and cartel deals (OPEC).
However, and this is a big however, there was very good money to be made in 2016 by buying the political risk into the event and then selling the market risk (i.e. buying risky assets in the markets) immediately afterwards as political risk was underestimated and the resulting damage to the markets of the outcomes overestimated. This may well have been learned, so the likelihood for 2017 is that political risk will now be overpriced.
RS: Which asset classes are you overweight? Which are you underweight?
PP: As mentioned above, generalising asset classes is a bit of a red herring. I am longer cash than normal as there are too many unknowns; however, I am scaling into long emerging market positions (equity and bond, unhedged FX) and I am particularly interested in Mexico, Korea and South American commodity countries.
RS: Any additional considerations you'd like to share with readers as they ponder their investing strategy in 2017 and beyond?
PP: Be nimble. New information is constantly appearing and trying to predict where we will be in year's time is a fool's errand. The most important thing is not to be sucked into the game of thinking that the 30th of December is a magical date at which one-year forecasts and investments have to be made. If you really want to put a forecast out on what to do for 2017 I recommend waiting for March. Doing otherwise, as most investment banks have found out, is asking for trouble.
Finally, the most important thing of all is to listen to as many people from as wide a background as possible. Do not fall for the reinforcement bias of surrounding yourself with people who think like you. This was the error that led to so many being shocked at the outcomes of Brexit and Trump. For most people it was not a surprise; they were the majority that voted for them.
Tuesday, 13 December 2016
It's all down to one man.
It’s really too early to start calling the world of 2017, considering what a monumental start we will have to it after a monumental finish to 2016 but I am beginning to build some thoughts.
The first thought is more of a reminder of just how far prices move on expectation of change rather than actual change. This might sound obvious but when you see just how far they move before anything concrete ever emerges to back those moves up, you have to realise how far they can come back down again should the thing not happen. I have often mentioned the slack in the steering wheel when it comes to oil prices but the leeway between expected, i.e. speculative, and actual outcome is now being demonstrated in just about every other asset class.
If I were to carry this point further it would morph from ‘point’ to a treatise on the anatomy of bubbles and that is pretty boring so I’ll stop, especially as I am not saying that the current moves have led to bubble status in anything really. So instead I‘ll revert back to the what has changed vs the what is expected to change.
Oil prices. This year we have seen oil trade a 100% range of its low. It got down to mid-twenties and then shot up to the high 50s, so the range has been pretty much 100% of its lows Now let’s put this in perspective by considering what has actually happened to the state of global supply and demand. The tweaks have been marginal and the whole range and been predicated to expectations of future supply and demand. So, guess work. When we can have such huge swings in price just on speculative tea leaf reading without yet having had any real change in supply and demand I really do wonder as to the value of debating the odd $5 move here or there. It is noise. Moreover, I wonder whether it is worth debating any of oil price moves when they can be swung on a whim.
The same is now happening in equities. An interesting comparative to oil is Deutsche Bank stock that last January was suffering exactly the same price punishment as oil and, likewise is nearly 100% higher than where it bottomed. But what has changed? Nothing really, just the expectation that all the dreadful things that were expected to happen haven’t happened. And now we look at the global stock markets, and indeed the global markets everywhere, where the past month's massive moves can be traced back to one factor. Donald Trump.
Equities, commodities, bonds, you name it, all of the huge recent moves can be traced back to the assumed actions of one man. Wow. Wow. Wow. Thinking how the belief in one man can change worlds is scary because it either involves dictatorial oppression [insert lists of global leaders responsible for genocides etc] or the invocation of messiahs and religious leaders. Or a bit of both. I know there are some out there only too happy to place Trump in either of those camps but for me he is one man with some ideas and those ideas will only ever reach effectiveness if he has the support of the structure around him to implement them. That means that a lot of people have to also think his ideas are good ideas and that the side effects of their implementation will be worth enduring.
But my key problem with this whole idea that Trump is going to reflate the world, drive growth and asset prices is that if the answer were so simple why hasn’t anyone tried it before? Nothing is that simple.
So with nothing being simple and the pendulum of expectation now so totally and utterly swung to the reflation trade the risks are what? That it either doesn’t happen at all due to the self-regulating way that policies that have to pass through bodies of committee rubber stamping get squashed, amended or dampened, or that it does happen and the law of unforeseen consequences opens a new set of Pandora’s woes.
This all boils down to a single thought. The markets will chase this consensus reflation trade when the New Year begins, especially if we haven’t seen a fall before then, only for the positions to reverse on 20th of Jan. Why the 20th? Because that's when it normally happens and this year it ties in with Trump's inauguration speech. I’m not saying this is a bubble in the true price sense but I can smell all the behavioural ingredients in the pot.
The first thought is more of a reminder of just how far prices move on expectation of change rather than actual change. This might sound obvious but when you see just how far they move before anything concrete ever emerges to back those moves up, you have to realise how far they can come back down again should the thing not happen. I have often mentioned the slack in the steering wheel when it comes to oil prices but the leeway between expected, i.e. speculative, and actual outcome is now being demonstrated in just about every other asset class.
If I were to carry this point further it would morph from ‘point’ to a treatise on the anatomy of bubbles and that is pretty boring so I’ll stop, especially as I am not saying that the current moves have led to bubble status in anything really. So instead I‘ll revert back to the what has changed vs the what is expected to change.
Oil prices. This year we have seen oil trade a 100% range of its low. It got down to mid-twenties and then shot up to the high 50s, so the range has been pretty much 100% of its lows Now let’s put this in perspective by considering what has actually happened to the state of global supply and demand. The tweaks have been marginal and the whole range and been predicated to expectations of future supply and demand. So, guess work. When we can have such huge swings in price just on speculative tea leaf reading without yet having had any real change in supply and demand I really do wonder as to the value of debating the odd $5 move here or there. It is noise. Moreover, I wonder whether it is worth debating any of oil price moves when they can be swung on a whim.
The same is now happening in equities. An interesting comparative to oil is Deutsche Bank stock that last January was suffering exactly the same price punishment as oil and, likewise is nearly 100% higher than where it bottomed. But what has changed? Nothing really, just the expectation that all the dreadful things that were expected to happen haven’t happened. And now we look at the global stock markets, and indeed the global markets everywhere, where the past month's massive moves can be traced back to one factor. Donald Trump.
Equities, commodities, bonds, you name it, all of the huge recent moves can be traced back to the assumed actions of one man. Wow. Wow. Wow. Thinking how the belief in one man can change worlds is scary because it either involves dictatorial oppression [insert lists of global leaders responsible for genocides etc] or the invocation of messiahs and religious leaders. Or a bit of both. I know there are some out there only too happy to place Trump in either of those camps but for me he is one man with some ideas and those ideas will only ever reach effectiveness if he has the support of the structure around him to implement them. That means that a lot of people have to also think his ideas are good ideas and that the side effects of their implementation will be worth enduring.
But my key problem with this whole idea that Trump is going to reflate the world, drive growth and asset prices is that if the answer were so simple why hasn’t anyone tried it before? Nothing is that simple.
So with nothing being simple and the pendulum of expectation now so totally and utterly swung to the reflation trade the risks are what? That it either doesn’t happen at all due to the self-regulating way that policies that have to pass through bodies of committee rubber stamping get squashed, amended or dampened, or that it does happen and the law of unforeseen consequences opens a new set of Pandora’s woes.
This all boils down to a single thought. The markets will chase this consensus reflation trade when the New Year begins, especially if we haven’t seen a fall before then, only for the positions to reverse on 20th of Jan. Why the 20th? Because that's when it normally happens and this year it ties in with Trump's inauguration speech. I’m not saying this is a bubble in the true price sense but I can smell all the behavioural ingredients in the pot.
Friday, 9 December 2016
2016 - The score card.
As it's December and before I think about next year, let's score last year's test sheet. I did publish some thoughts on 2016 back in Dec 2015 which can be found here, or we can just go to the marked up, in bold, version below.
---------------------
2016 - I've been looking at trade recommendations from some houses and the complexity of some of them e.g. GS’s ‘Stay long a basket of 48 non-commodity exporters and short a basket of 50 EM banks stocks’ has me thinking that no one really has any confidence in anything at the moment. AS PROVEN. The idea that a year that has left many confounded ends with an outlook that is also bathed in confoundedness is not really to be unexpected. As a general rule, forecasts are normally an extrapolation of current mood. As they are this year
If I was to be completely true to my faith, now would be the time to go for some big calls that sit outside confused tweaks of yield curves or spreads of things that are pretty much reliant on good fortune than real cleverness. I don't want to be fooled by complexity. It may look clever, it may sound clever, it may even be funny, but it can still lose you money as fast as betting that Trump would be out of the running by now. Or even president-elect by now.
But I don’t have any brave calls other than thinking that 2016 may see the following
-People will think that the Fed will hike faster than currently discounted, discount that, and then the Fed end up trailing market expectation again. I think we can score that as a HIT.
-The UK and GBP will take a hit as the rest of the world wake up to the fact that the ‘leave EU’ vote is going to be a very close run thing. BIG FAT HIT. I would love the UK to join NAFTA instead. Well, many laughed when I wrote that but it’s become a ‘thing’
If Turkey can be considered part of Europe then why not UK part of the North American continent. And a valid ref to the absurdities of Turkey/Europe relationship which has been killed by the EU’s handling of the coup.
-Europe will continue to politically melt like a lump of fat on a hot plate - From the bottom. HIT. Populism is rising ( Italy, France, Austria etc) at the base of societies whilst the top try to wish it away. The only hope is that economies grow fast enough to defuse nationalistic unrest. HIT And so far it has, a recovering economy funded by ECB morphine has so far mellowed the nationalistic risings so that they remain below violent unrest. Greece will become an issue again in June. MISS but I do think there was a large incentive to keep Greece on track through the Brexit referendum.
-China will be just fine but relations with the west will continue to cool politically. HIT, The Chinese economy still hasn't succumbed to the woes perpetually peddled since the Aug 2015 devaluation. Relations with the US have just taken a battering with Trump, on top of the South China Sea developments.
-Something will happen in the oil markets to see prices rise, HIT a $20 target was pretty widespread this time a year ago, the breath holding contest between marginal producers is going to see drownings. HMM.. Some but really not that many. Or someone forcibly goes in to turn the taps off in Saudi. Was never really likely at this point
-ECB will continue to trade Oil. ( i.e. energy and commodity price inputs will be the main sway to EU inflation and ECB will follow the swinging watch chain, hypnotised) YOU CAN MARK THIS ONE. Inflation has picked up towards target AS oil has risen ( Bloomberg style headline implication there) but am too honest to say 'because' though it has been an input . I am beginning to wonder what the ECB is actually following these days and am worried that they are still too busy protecting balance sheets to notice that they really ought to be reining in QE on a purely economic basis.
-Iran becomes more of a friend to the west MEH, it depends upon who you talk to. The EU are still keen but Trump's threats to tear up the nuke deals could put as back into the dark ages here, though I don't think it is likely. putting further pressure on Saudi Arabia. Well, Boris Johnson started that yesterday, in a Don Quixote manner, but it's hardly policy.
-Saudi Arabia will come under someone’s cosh in general. Too many points of interest coincide at Saudi Arabia. I want to roll this one over to next year
- The West reduce sanctions against Moscow. I don’t know what will be the catalyst, but something will thaw relations. MISS (so far) I'll let this call roll over to next year to see if TrumPutin is a bromance or a cage fight.
- Equities will have a shake down at the beginning of the year HIT and there will be the usual 'EM is going to collapse' call (seems a regular feature of Januaries) HIT but then you scoop them up with both hands. Probably on the 19th Jan. HIT, BULLSEYE, BINGO, though I was 6 hours too early on the call, but I challenge any investment bank to have called a dump and the day it would turn in a yearly forecast.
- Banks will continue to morph into old fashioned post offices as they are squeezed between regulation and Fintech. HIT - RBS has become, as predicted a while back, the British Leyland of banking, only allowed to provide post office banking services. The intelligent output of Universities is now going to where it always should have gone, science, engineering and creativity. HIT
- Inflation will be back. HIT, and back with a fury in future expectations. It's sometimes hard to remember just how ingrained the markets were with deflation only a year ago. Great for deflating debt but only as long as real rates stay negative while inflation rises otherwise the cost of servicing debt could wipe out borrowers before their debt levels denude through inflation. But judging by the ECB, BoJ and suggested Trump fiscal policy, the cash portals are still wide open.
--------------------
So all in all, on top of mid-year calls for a Brexit win, a Trump win and market bounces thereafter, it has been a pretty good year all round at Polemic Capital LLC.
I did also include some sillier things that would have LIKED to see happen in 2016, so let's have a look at those too.
---------------
- Amazon is found to be run by creatures that otherwise occupy the 'Tripods' in 'War of the Worlds' as I gather the way they treat humans is similar. NOPE, in fact I like Amazon now. Christmas won't be possible without them.
- SKY TV go bust. NOPE not yet, though many I know have spent 2016 trying to leave them.
- The road works on the M3 will be finished, or at least finished before the world is engulfed by the sun as part of its natural evolution towards a red giant. FAT CHANCE, tumbleweed still blows down the cordoned off sections.
- People will fix your computer rather than telling you how to do it. Yes oh Yes, I found a shop that takes in your laptop and fixes it without charging an Apple based price nor referring you to a 3hr long Youtube clip of a Canadian telling you how to do it yourself.
- Trump and Putin meet in a cagefight - on the basis that two men enter and hopefully neither leave. Still could happen see bromance/cage fight outcomes mentioned above
- Politicians are fined for every proven untruth they tell. Check your stats folks... DREAM ON, Trump would have a bigger debt than the Fed balance sheet
- Banks will work with retail so that all transactions automatically attach an invoice to your online bank statement which is automatically downloaded into accounting systems. Not yet, though apps are improving.
- A large blank swathe of Syria is secured by international forces and new cities rebuilt to rehouse all the fleeing refugees. Better to rehouse on their own land than in foreign countries. Far too sensible, never happened.
- A new ‘thing’ is invited that becomes the must have essential item for the whole world, kick starting economies (large TVs, phones and cars have run their course) STILL WAITING, though self-drive cars are where the money is being thrown.
- Battery energy density break through. Not yet. Musks's gigaplant producing Li-Ion batteries is probably safe for another year though Na-Ion may be next.
- Someone invents a new class of antibiotic. Unfortunately not
- Scotland gains independence whether they like it or not. Unfortunately not
- Peak Political Correctness occurs when my offence at your offence causes stalemate in the Ombudspersons judgepersonst. Well in a way Brexit and Trump wins probably did mark the peak of political correctness.
- People reading from 2000yr old books stop trying to change my life. MISS They still try, but have now been joined by people I just generally don't agree with. And there a lot more of them.
-----------------------
No surprises there really.
Wednesday, 7 December 2016
A guide to making annual financial market forecasts.
I have posted this before but repost this slightly updated version as it is exceedingly pertinent considering what is happening in the markets after many institutions and departments have already published their top trades and financial calls for the next year. I would like to know how many have already been stopped out of their next yeartrades before next year has even begun. So here is a somewhat cynical guide to the whole process with some top tips for practitioners.
WHY
First, there is absolutely no point in embarking upon this process because only an idiot would put on a trade on Jan 1st and not look at it again until 31st Dec, with no positional adjustment during it. If everyone did this then the financial internet, press and even markets or exchanges would not have to exist between Jan 2nd and Dec 1st. Perhaps that's a good idea.
This process is much more like a yacht show where forecasting agencies can show off their shiny products of intricate design and process, wrap them with a glitz of gravitas to sell you a dream that you can sail off into next year aboard. If it doesn’t hit any rocks and sink then they hope you will be back to buy a bigger one next year.
HOW
The usual first rule of forecasting is never to put a price and time frame in the same forecast. For example ‘Oil will be over $100’ gives you an infinite time run within which to be right and 'Oil will be lower than here in the next year’ gives you a very high probability of being right unless you have unfortunately hit the absolute low at the time of prediction.
With this in mind, make sure your predictions are not for where prices will be at the end of next year, just somewhere during next year. This leaves you with a year of optionality to either get out or take profit, GS style.
Only publish your exit trades way after the event. For example, you called oil down, oil went down until Jan20th then up for the rest of the year - You cut the winning trade on Jan 20th. Of course you did.
WHEN
If you have to publish before the end of the year then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for next year in March, or even later. The first few months of the year nearly always go the wrong way (as 2014, '15, '16 and '18 have shown) and you will have three extra months of information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternative sources of advice.
If you can, make the predictions for longer than just next year. Make them 5 year rather than one year forecasts and you get an extra four years of optionality with regard to the above methods but it also has two other advantages. First, you give off a greater air of authority having a five-year view rather than a one year view. Second and more importantly, after five years everyone will have forgotten your predictions except you, so if they are wrong it doesn’t matter. If you are right, you can wave them around in success and write a best-selling book and set up a large hedge fund doomed to lose all its assets.
WHAT
Of course what people actually care about is probabilities of outcomes and though I have often suggested that forecasters publish their own probability curves of price outcomes they still seem to stick with razor sharp defined price targets that, by definition, they are bound to miss. So best to put your 1 standard deviation range around a call. No one will mind and may prefer it. Either way, it won’t matter but does give you a wider chance of success.
Write exactly the opposite of the GS forecasts. If framed under the conditions of the first point you will still have opportunity to get out at a profit at some point and if you can show a profit against GS your views will be spread wide and far and you will appear on Financial TV, more because most people enjoy seeing GS look like a mug than your views being spectacularly right. If last year is anything to go by then you will have outperformed them by March.
Finally, even though the regular market faces of doom-mongering are beginning to be treated like quaint village idiots, remember to have an absurd couple of low-delta calamity calls in there. They can be camouflaged in sensible calls and will only get noticed if they are right.
WHO
Pick eight prices you are going to call, they can be as varied as you like, calling long or short for each. Then set up 256 new blog, Twitter, Seeking Alpha or some such identities. Using all the available permutations (2^8= 256) one of them is going to nail it exactly. This is who you now are. Wave this one around, write that book and set up that hedge fund. There are plenty of people out there still being dragged out for comment because they happened to have the lucky dice come up their way in 2000 or 2008. It could be you next year.
WAFFLE
All forecasts are now couched in as many pages of disclaimer as there are forecast. Make sure that each of your calls has 16 pages of arguments and appendices behind it. Come to the great reckoning there is bound to be something in this small print that can be held up as a caveat. E.g. 'though we call for US 10 year yields to go to 6% in 2017, should the Fed not raise to 5%, GDP not hit 10% and unemployment not fall to zero, we may see this trade underperform". Better still create your own benchmark and reference against it. "We see the suggested portfolio outperforming the Polemic risk-adjusted emerging developed market average weighted corporate bond fx hedged equity benchmark by 30 basis points on a chronological biased heuristic". Complete nonsense, of course, but a get out of jail free card when the time comes.
However, don't forget the 'unforeseen events' claus, such as Brexit or Trump which, though unforeseen by you, were foreseen by the majority of the population, proven by the fact they voted for it.
REPEAT
If all of the above is too complicated then just repeat the trade ideas that you put out last year, or if you are feeling very adventurous just extrapolate the last month's moves. It seems to be what most people do
WHY
First, there is absolutely no point in embarking upon this process because only an idiot would put on a trade on Jan 1st and not look at it again until 31st Dec, with no positional adjustment during it. If everyone did this then the financial internet, press and even markets or exchanges would not have to exist between Jan 2nd and Dec 1st. Perhaps that's a good idea.
This process is much more like a yacht show where forecasting agencies can show off their shiny products of intricate design and process, wrap them with a glitz of gravitas to sell you a dream that you can sail off into next year aboard. If it doesn’t hit any rocks and sink then they hope you will be back to buy a bigger one next year.
HOW
The usual first rule of forecasting is never to put a price and time frame in the same forecast. For example ‘Oil will be over $100’ gives you an infinite time run within which to be right and 'Oil will be lower than here in the next year’ gives you a very high probability of being right unless you have unfortunately hit the absolute low at the time of prediction.
With this in mind, make sure your predictions are not for where prices will be at the end of next year, just somewhere during next year. This leaves you with a year of optionality to either get out or take profit, GS style.
Only publish your exit trades way after the event. For example, you called oil down, oil went down until Jan20th then up for the rest of the year - You cut the winning trade on Jan 20th. Of course you did.
WHEN
If you have to publish before the end of the year then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for next year in March, or even later. The first few months of the year nearly always go the wrong way (as 2014, '15, '16 and '18 have shown) and you will have three extra months of information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternative sources of advice.
If you can, make the predictions for longer than just next year. Make them 5 year rather than one year forecasts and you get an extra four years of optionality with regard to the above methods but it also has two other advantages. First, you give off a greater air of authority having a five-year view rather than a one year view. Second and more importantly, after five years everyone will have forgotten your predictions except you, so if they are wrong it doesn’t matter. If you are right, you can wave them around in success and write a best-selling book and set up a large hedge fund doomed to lose all its assets.
WHAT
Of course what people actually care about is probabilities of outcomes and though I have often suggested that forecasters publish their own probability curves of price outcomes they still seem to stick with razor sharp defined price targets that, by definition, they are bound to miss. So best to put your 1 standard deviation range around a call. No one will mind and may prefer it. Either way, it won’t matter but does give you a wider chance of success.
Write exactly the opposite of the GS forecasts. If framed under the conditions of the first point you will still have opportunity to get out at a profit at some point and if you can show a profit against GS your views will be spread wide and far and you will appear on Financial TV, more because most people enjoy seeing GS look like a mug than your views being spectacularly right. If last year is anything to go by then you will have outperformed them by March.
Finally, even though the regular market faces of doom-mongering are beginning to be treated like quaint village idiots, remember to have an absurd couple of low-delta calamity calls in there. They can be camouflaged in sensible calls and will only get noticed if they are right.
WHO
Pick eight prices you are going to call, they can be as varied as you like, calling long or short for each. Then set up 256 new blog, Twitter, Seeking Alpha or some such identities. Using all the available permutations (2^8= 256) one of them is going to nail it exactly. This is who you now are. Wave this one around, write that book and set up that hedge fund. There are plenty of people out there still being dragged out for comment because they happened to have the lucky dice come up their way in 2000 or 2008. It could be you next year.
WAFFLE
All forecasts are now couched in as many pages of disclaimer as there are forecast. Make sure that each of your calls has 16 pages of arguments and appendices behind it. Come to the great reckoning there is bound to be something in this small print that can be held up as a caveat. E.g. 'though we call for US 10 year yields to go to 6% in 2017, should the Fed not raise to 5%, GDP not hit 10% and unemployment not fall to zero, we may see this trade underperform". Better still create your own benchmark and reference against it. "We see the suggested portfolio outperforming the Polemic risk-adjusted emerging developed market average weighted corporate bond fx hedged equity benchmark by 30 basis points on a chronological biased heuristic". Complete nonsense, of course, but a get out of jail free card when the time comes.
However, don't forget the 'unforeseen events' claus, such as Brexit or Trump which, though unforeseen by you, were foreseen by the majority of the population, proven by the fact they voted for it.
REPEAT
If all of the above is too complicated then just repeat the trade ideas that you put out last year, or if you are feeling very adventurous just extrapolate the last month's moves. It seems to be what most people do
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