The world of finance and investing has, for me, been pretty much on hold as I have been so mistrusting of the pace of the equity rally that I haven’t been overly long, yet also aware that mood can drive things way beyond where I think reality lies taking out any stops I may have on shorts.
So it’s been a do nothing month, apart from watching my long owned March 17 put expiries signal the top in the markets. Oh well.
Oil has been on my radar as I have been generally long of the filthy gloop for the past 18 months. What I have found most interesting is the way the price has been behaving with respect to reported positions. Monster longs in oil building even as US inventories built did look odd and a look at the forward curve sharply moving into backwardation pointed to odd things afoot when backwardation normally implies short term supply restriction - which didn’t tally with the inventory figures - unless the inventory was actually captive speculative hoarding.
But the recent falls, which should have been so obvious given the size of speculative longs, were interesting because they took so long to appear. Normally when one sees huge positional extremes either a binary event occurs to justify them or they unwind pretty quickly. This one didn’t. Which has me wondering why and looking for other examples.
This ties back into what has been happening in stocks and is reflected in my apathy to play. Under the rules that I have modeled my trading life upon, this stretch in equities with positions growing to levels not seen since [insert a previous date here] and cash levels in funds falling, a pull back would have been seen by now.
So why hasn’t it been? If I say a binary event has to occur to justify new massive positions then I can label that as ‘Trumponomics’, let's hold that thought for a moment. If I am looking for positional self-corrections to occur then the short term moves should have corrected by now. Is there a new factor? Here I have been wondering if we are seeing a new form of herd behaviour driving prices further out of line from past norms.
I have a feeling that models and passive funds push deviations further from means. Corrective forces are overshadowed by their dumb money and here I provocatively include 'Artificial Intelligence' in dumb money. AI might appear to be awfully clever and is a wonderful new marketing tool - a ramped up version of ‘our model says’ which was the first substantiation to pull money away from those decried ghastly human operators with their unpredictable emotional responses. Well, I’ll have a little side bet that the move to put all the eggs in the AI basket will end up with omelettes. The move to AI will create a new special herding in an AI manner which has not yet been discovered and will not be noticed until it is too late. ’Tis ever the way.
Training machines to behave like humans will most probably amplify the heuristics they are exposed to at inception. The catalogue of behavioural biases we note within ourselves will have to be weeded out by the coders and, I am sorry to say, coders are not the most savant of emotional beings.
But back to that binary Trump function - So, it looks as though Trump is not getting his way at last. It’s only taken two months to work out that Trumpworld is much like ‘Westworld'. A false reality run by robots with the objective of fulfilling punters’ dreams… for a price... finally sending them home poorer to the cold reality from whence they came.
The unwind of the Trump dream in equity land COULD be huge. But there is a twist, as there always is in Westworld plots. What if the equity market didn’t actually go up because of Trump policy? What if it was only a trigger, a narrative trigger, to what was actually a huge final exhalation from the bear meme that has effectively been running since 2008. Now before you vehemently protest that there can’t have been a bear meme throughout the huge equity rally from the 2009 lows, I will argue that this rally has been the most fought rally ever. The dominance of narrative that ultimately stocks will fall again has been constant, passing from bad news peg to disaster post. It only relented at the turn of this year when the mood changed dramatically as the final shorts were taken out and bear towels were thrown in.
On top of this, I have to throw the filter of central bank policy where there is a continued oversupply of money as the central banks are terrified of reversing the stimulus. The Fed because well, they are still Yellenised and afraid of their own shadow; the ECB because of the need to support peripheral debt; the BoE because of their Brexit fears; the BoJ because policy is only just pulling the economy out of a 20 year nosedive; China because they reverse engineer the stats to suit themselves anyway; everyone else? Well, to be honest, the rest don’t count as they are mostly indebted to ECB, Fed or China policy by one route or another and all that changing their own interest rates really changes is their domestic FX rate.
So this doesn’t make plotting our position on the financial maps any easier.
I still see a correction to Trump occurring (we have started), but the level to which markets will fall has been reset but a fundamental jump in really long term attitude. All of this is further clouded by the growing influence of the non-humans. Which leaves me even more inclined to stand clear and leave it to the machines to fight out while I pursue a new career in something creative.
AI is amazing, it just isn’t as amazing as we think it is yet. You can be smart but it doesn’t stop you being pushed over by an idiot.
http://www.bbc.co.uk/news/technology-39397211 Uber suspends self-drive.
Now finally the important bit -
It's been a while since I did anything decent, especially with regards to raising money for worthy causes, but I have been drawn into the story of a friend who I have promised to help with fundraising for a great cause 'Young Minds'. They are a leading charity trying to help the ever increasing number of our young who are suffering mental problems, often unspotted.
I am setting off with them on a coastal walk, but it's immaterial what I am doing as my request is the same whether I do nothing or cycle to the moon - Please, if you have ever enjoyed this income free blog or the odd tweet, a lovely way to thank me would be to help them.
https://www.justgiving.com/fundraising/Polemic-Paine
There is more of the story at that link.
With thanks
Pol
4 comments:
"Say nothing but say it well" was the wisdom of the elders.
You truly do have a gift for putting things into perspective.
Nice one POL
Very good piece - if it has not corrected yet, have to start asking the question is there some kind of "Noo paradime" - quite often what the driver is/was emerges later with all kinds of erroneous explanations/narratives from the talking heads/analysts along the way - the assumption that someone knows or they would not be buying might be erroneous - maybe they are just dumb and getting lucky coz everyone else is buying dumbly. Also flat as don't see the R:R I will deal on.
One of your best posts, Westworld reference is priceless/spot on.
Yes I agree with you. Time to sit this whole thing out and take a look from the stands.
Who knows what the rules are in play here.
Also, I agree that apart from the big central banks you mentioned, everybody else is indebted to them one way or another and when they play around with their own interest rates it just changes their fx cross rates. Too true.
Good article. Following.
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