Friday, 22 September 2017

Cash is oversold.

If I was selling a trade idea I would be now composing lots of arguments as to why I am getting really nervous about the markets. But I can’t. Call it a trader's instinct or some unexplainable subconscious human pattern recognition, but I am nervous about the markets. To the point that I have started shutting down long-term positions, even my long-term favourites in commodities, emerging markets, and dividend yields.

The clues are like flitting shadows in my periphery vision but ones I can more clearly identify are -

Metals - A nicely bubbling speculative play on growth rarely sees metals sell off and copper and iron are really off.

North Korea - news stories work like investments and have their own cycle of overland under response. More attention is paid to the speed of change than the underlying slow grind. The easiest things to miss are the quiet unobtrusive trends which don’t have a 'Wow - look at that 10% move’ bringing them to general attention. North Korea is a slow-burning fuse on a potential powder keg.

Fed - A few years back I stopped getting excited about Fed meetings as the hot air to true impact ratio has always been too high. This latest one has left the market a bit confused apparently with excuses being attached to ‘unexpected’ market responses. I’d rather read this as a confused market that is grasping at straws. An indication that any new feature or price drive can easily pick up a new herding.

EU - Growth is wallpapering over the cracks in the EU allowing Juncker to assume the role of Caesar with his federalist plans. The European markets are buoyant, the spreads of periphery against core are getting to the point where they appear to be discounting convergence with no chance of independent default. All are discounted as well with EU, so how much more good news can there be?

One of the greatest trends of the past years has been the issuance of debt rather than the issuance of equity. To the point of frustration as nearly all the fruity projects I’d like to invest in are, quite rightly, held in-house. Why issue stock when you can issue debt to a closed group without all the aggravation of coping with a slew of irritating nonparticipating shareholders. The only time you ‘ll get a slice of the pie is once the idea has been maxed out for the early investors.

But if there is going to be an end to the underwriting of debt by central banks then the risks change. I think we are at the start of the great reversal here all that debt that has been issued to buy back stock gets reversed.

Do I want to hold bonds? No. Do I want to hold equities? No. Do I want to hold a guaranteed return paying above inflation? Yes. But the number of government renewable energy schemes that guarantee that is reducing fast and it’s unfortunate that the surest way to receive an inflation-busting sure fire yield is through an arbitrage of misplaced government subsidies.

So what do I hold? There is one chart that I have never seen but would love someone to produce. It is effectively the inverse of an index of every investment there is. It would be the price of fiat cash. Not having seen such a chart, but imagining it and imagining the work technical analysts could have with it, I would not be surprised for them all to be saying that cash is in dangerously oversold territory. With the accompanying ‘we haven’t seen cash this cheap since xxxx” commentaries.

Who does hold fiat cash these days? Everything is invested in a scheme. Or a new version of cash which isn’t cash. The fallout from the 2008 meltdown was a complete distrust of banks which has spawned the growth of pseudo banks that have much higher risk than traditional banks but are perceived not to as they are not banks. Cash is not king at the moment, apart from places that have been devastated by natural disasters leaving them without the power needed to make electronic payments. The dependency of the monetary system on power infrastructure is often overlooked.

But I am going into cash. It is very oversold. There are probably clever ways I can play hedges but the best hedge is to exit your position. Or buy one in a garden center.

Saturday, 16 September 2017

Fund report - Polemic Casino Fund

There was a Bloomberg article out 'separating the dos from the don'ts in investing'  that wouldn't have caught my attention other than  Rob Majteles‏ (@treehcapital) tweeted it with the most observational of comments -

"Only real way? Make money, then look back and pretend you actually know why..."

Which is very apt as investment performance is as important an ingredient in feeding fund narratives as any economic data is for market narratives. Losses are excused away to the point of failure. Hugh Hendry really should have read this wonderful piece by Ben Hunt on why we have to adapt our beliefs or die. Profits are always held up as proof of genius. "My Profit, our loss", as @Gerald_Ashley pointed out to me so many years ago I have stolen it as my own.

But the idea that a random walk or luck can be repackaged as proof of future returns had me wondering how a blatant case of luck could be presented in the style of a fund performance report. So here goes.

The  Polemic Casino Fund Manager’s report for the half year ended September 2017

Dear Investor

During the six months to 30 September 2017, the Polemic Casino Fund share class rose by 18.9%. This was more than the 11.0% gain posted by the FTSE All-Share index, and placed the fund in the upper quartile of our 'IA Funds we chose to benchmark against’ peer group. The fund notably outperformed every other fund in the IA Funds 'Not as good as us’ group.

It was an eventful six months in the casino market with seismic events at the blackjack and baccarat tables dominating the news, leading to a significant sector rotation into craps. Roulette and slot machines (particularly our hold of the 3 bars) were the best-performing sectors. More defensive areas of the market, for example mechanical horses and online poker posted negative returns. This market rotation was helpful for relative fund performance as our aggressive stance led us to avoid exposure to bar bills, hostess tips and restaurant meals thus contributing to the fund outperforming benchmark.

Roulette was the largest contributor to our total return over the period. Yields in our algorithmic ‘it’s going to be red’ model saw exceptional yields of 100% in the first roll and though yields saw declines thereafter we saw opportunities for diversification and allocations into our macro driven ’no, this one will be black’ program quickly saw the performance recover. We were unfortunate to have been subject to a 3 standard deviation event occurring at 11.30pm with the ball landing on green zero. This was due to Brexit. Though we continue to see a reoccurrence as a low-risk event, we are looking for the UK government to make their position on Europe clear so that market participants can plan for future spins.

Rapidly rising piles of cash on the lips of the penny falls machines boosted sentiment towards the sector. Competition entered the market with the Close brothers competing at slot 3, however, our selective nudging of the machine made good contributions to performance. Finally, baccarat, new to the portfolio, saw net positive returns after a game-changing acquisition of a seat next to old Mrs. Spriggington-Dawkins. While the scale and scope of the acquisition entail significant execution risk, we believe the risk/reward ratio is favourable as her small dog has run off with her glasses after she dropped them on the floor.

On the negative side, several defensive holdings on the blackjack table posted small losses as investors rotated from one table to another averaging out returns that were insufficient to pay for broker fees, a sensitive area of the market. Midway through the period, the struggling 'hold on fifteens' took their toll on the group and returns fell back. We used this short-term setback to increase our exposure to splitting 9s and saw returns improve.

We started one new holding during the period. Structured as a REIT, we have taken a long-term exposure in the real estate at the bar where staff return glasses. This environmentally recognised fund focuses on the recycling of half-finished drinks into new glasses, returning them to the market under a generic branding. The highly experienced management team has developed an excellent track record as shrewd acquisitors of high-yielding single malts. At current levels, we believe the fund to represent good value and offer a high and secure dividend yield.

Looking ahead, online gaming has significantly expanded capturing a type of market participant that we do not consider as class clients. We have swaggered into the casino on new highs into the next half with confidence that the outperformance of early 2017 is a testament to the superiority of our research, analytics and forecasting of our markets.

There has been a spate of blacks in the far corner tables, leading many investors to enter the new year with optimism. We do not share this enthusiasm. Our long-term concerns, centered on unfavourable demographic trends and high debt levels, jar uncomfortably with some broad market valuation metrics that are flashing red on our screens. So we will stick to red.

As a result, we remain relatively aggressive with our capital capture model picking up dropped chips. We are able to fully participate in what we see as the first stages of an increasingly momentum-driven, highly valued, ICO issuance program, launching our own in February. With a rotation from the tables into crypto issuance, we anticipate limitless upside whilst the stock of morons remains high.

Thank you for your continued support.

Polemic Paine

Regulatory note - MiFID II directive

We are pleased to advise investors that under MiFID II regulations, research costs will be born by the firm excepting one-off payments to Jim, the croupier. His research into when he will issue bent dice has been invaluable to the fund and is quantifiably responsible for 23% of performance in the crap market.

Thursday, 14 September 2017

Surviving the behavioural arms race

I spoke to someone today who was surprised to hear where sterling was trading. They aren’t like us market watching nuts and only glean their news from the television and radio and the television and radio only report sharp down moves in GBP. But GBP is a narrative for all seasons and whether your season is bad weather to support your beliefs or good weather to support your beliefs you will find something in any move to water your roses. So, in line with my Brexit news curfew, I am not going to use the move in GBP to substantiate any narrative. But I am willing to say that GBP has gone up a lot because there are more willing buyers than willing sellers.

And probably because no one can think of any other trade to do, having worn out every other theme over the last 2 years. It also fits with my ‘don’t do what you are told' investment policy because nearly everything you are told to do in your life is for someone else's benefit.

Of course, it’s always framed in such a way as to sound as though it is for your benefit but it rarely is.

- Hi Sir would you like fries with that? Oh how caring, yes please .. that'll be £4.50
- Would you like a job at our bank? Oh yes please .. right sit there for a year on intern peanuts and we may give you a break.
- You know what? You really should get a good education, get good GCSEs, good A Levels, a degree, a job working 14hrs a day to earn money to buy a Victorian terraced house/warehouse shoe box to marry a great professional partner to have kids and pay for their great education so they can do the same and then pay off your mortgage and then save for retirement and then retire and then wonder where your life went and then die - Meanwhile you really should do stuff for me so I don't have to do it.

Somewhere along the line, you have to set your own goals, your own. NO! YOUR OWN! Not what your peer group set for you. Tough isn’t it, in this age of 'social everything' where we are more dependent upon human interaction than we ever have been. In years gone by the envelope of our survival bubble interfaced with nature. Whether it rained or snowed, if the crops grew or withered, if the hunt came in, or ate us, or if we contracted a disease. Everything was focused on battling nature.

Now think how much of your life’s attentions to survival are concerned with nature (‘Oh I worry about global warming’ doesn't count) and how much of your survival is dependent upon people outside your family group. People doing what you need them to. For you to survive.

So human interactions are becoming more critical as the hive we live in expands with more interdependent members. We are no longer independent amoeba, we are cells in a body. A body we need to inhabit to survive. Though I think we may be more like slime molds

So how we interface with others is all the more critical. Behavioural sciences, human biases, understanding our psyche to best tune ourselves and understanding that of others, to tune our responses to them to maximise their responses to us, is fast becoming the cutting edge of marginal return.

An arms race of behavioural understanding results in a vortex of behavioural play and counter play. Those trying to learn how to use and respond to behavioral inputs are already behind the curve as they are learning from and feeding back value to those who are teaching them. A Ponzi scheme if you wish. We don't know

I was at the Nudgestock conference last summer where we were entertained by some of the brightest behavioural experts out there. The audience should have been lapping up the insight but interestingly were still exhibiting there own behavioural biases that prevented them paradoxically from learning about behaviour. One of the speakers was Dominic Cummings. The mastermind behind the Leave campaign of Brexit. What he had to say was fascinatingly brilliant, as his attention to behavioural manipulation in that campaign was what won it.

Now are you still reading this? Or have you associated ‘Dominic Cummings’, ‘manipulation’ ‘leave’ and ‘brilliant’ and formed an opinion that you can’t possibly learn anything more from what I write because you hate the man that manipulated the country into doing something you feel so completely and utterly stupid, classing him as the king of manipulative evil and me, in even being entertained by his talk, must be likewise? Because that is pretty much what the audience did. Instead of enquiring, the audience shut down. Which was the most fascinating live practical demonstration of behavioural biases I have seen from a bunch of folks who were meant to understand and adapt to behavioural biases and gave me hope that there is a huge arbitrage out there in behavioural markets. If the experts can’t spot their own biases then there is gold in them there hills. most likely found selling picks to the behavioural miners. Otherwise known as running courses and conferences.

Unless you understand how people tick, what drives them and what influences them you will never be able to predict their behaviour towards the things that you cherish or need. If you have been in the markets longer than a 12yr old quant analyst, you will know that predicting why and when others will desire to own something is the holy grail to doing it first.

Handbags, stocks, electricity, FX rates, shoes, soap, kids toys.. the lot. Predicting when demand will wax or wain is instrumental to making money out of fashions. Influencing those outcomes by influencing behaviour is power, but as soon as we learn the tricks of manipulation we are able to counter them. Influencer or influencee. It's a behavioural sword fight.

Let our defences down and we are outwitted and they have us, we won’t know it but we will be striving for something that costs us and benefits them. The greatest cost of goals is the unhappiness in not achieving them.

So, as I say to the kids, the shortcut to happiness is to move the goal posts. Part of that is realising that you really don’t have to know everything.

As it is harder to know when to get out of a trade than to get into it, it is harder to know what you don’t have to know than to know what you do.

And, with that, I exit my long sterling position.
Night night

Wednesday, 13 September 2017

Ramblings of a mad man.

My last post mentioned me selling out of Woodford Income fund and going it alone in an attempt to lose money in a more amusing manner than Woodford had. Which primarily involved shorting EURGBP and owning a small Tungsten mining stock called Wolf Minerals. The bad news is that Woodford outperformed me on the losing money stakes, whilst the good news is I can now afford a craft ale and I had some fun.

I can’t string thoughts together tonight so here are the bullet points.

The path of pain is for equities to skyrocket again. Purely for the reason that we have had so much bad news recently and we haven't been able to go down.

I note USDMXN and USDRUB are moving higher. Why these two over other EM? Trump unwind and USDRUB is a refection of many global things.

This could be a precursor to an EM unwind, which doesn’t sit well with my general 'risk motoring' view. Better watch this.

Copper bounced but is down again. Looks like a rollover sign.  Add this to EM concern though both could be USD rally backlash.

USD rally? Look at cable, are you sure?

GBP rally, FTSE underperforms, naturally. But some idiots are going to use either to support their narratives on Brexit, so as a prophylactic…..

I have muted the word ‘Brexit’ from my twitter stream - I highly recommend it. My cortisol levels are already dropping.

“There was anger over .. “ is an overused sure fire emotional radio/tv news headline but is totally vacuous.

Listen to this - Forecasting - how to map the future

And when you are done with that, watch this - This episode explores how the human brain relies on other brains to thrive and survive.

Mifid2 - I am setting up an "artisan organic blockchain research" platform as it will be able to charge 16 times as much for the same product as a basic research platform. Maybe more if I get a graphic designer to put swirly floral patterns on the home page.

Iphone8 - if you want to understand why it will sell more than the Samsung S8 then read this.  Basically, we are hardwired to be predisposed to believe that something more expensive is better. It’s how face creams work, or don't but get bought. And the corollary is this blog.

iPhone8 everything else- you can talk using a turd emoji. It does a lot of things the Samsung S8 does but in a cooler way. And it's got no home button. So that’s you stuffed coming out of the club at 4am. But it does want to have 30,000 points of familiarity with my face. That might work as a chat up line for some but not with me and certainly not from a phone. There has to be some acne cream manufacturer banging on Apple’s door with that feature, surely.

The levels of bad debt at Italian banks is collapsing, not as much because bad debt is getting good as people are buying bad debt from the banks in the hope it will become good debt. Pass the ticking parcel, so to speak.

It may be being used for other purposes though. Crypto currencies Initial Coin Offerings have broken the records set in CDOsquared property heaven of 2006/7 by amortising the future value of fresh air - this example of a guaranteed honestly useless coin is Useless Etherium, which would be priceless if it didn’t have a price, but it raised $90,000. So if you can now issue crypto currency backed by nothing and folks will buy it, just imagine how much you could get by backing it with something, anything .. even Italian bad debt - Standby for the ItalianBadDebtCoin. #IBDC

It maybe too late as FCA goes Loco on ICO - not really but it rhymes. They have announced that ICOs are very risky but aren’t always sure if they are covered by FCA regs but watch out if they are. And just don’t put your hand too far into the meat grinder if they are not. That's helpful, isn't it?

Have you seen how much energy bitcoin is consuming?
Please take a look in

The same amount as the country of Jordan just to process existing transactions. 175kWh for each transaction apparently. This is the equivalent to an inverse perpetual motion machine - you pour in limitless energy and get nothing out. Some rule of the conservation of something is being broken here and if it isn’t then the planet is. Bitcoin is not green.

And we have to add Etherum and the rest to that too.

Jamie Dimon says Bitcoin is a scam - a very bright man is that Mr Dimon. OK, he may have been wrong about some things in the past but if we refuse to listen to anyone who once got something wrong we’d only be listening to 1yr olds.

To try to immerse myself in bitcoin I tried to follow some bitcoin twitter. Imagine a primary school playground at break where the kids have found a copy of "Janet and John go charting”, some spacesuits, cardboard and crayons.

Yeah, I know - here comes the abuse. But I've openly come out as a Bitcoinophobe so you can’t oppress me because if you think that I am wrong then it means you think you are superior to me and so anything you say would be bullying. Or some such PC force field barrier.

I’ve spent too much energy on Bitcoin too. It just sucks it out of you.

Other stuff -

They are going ahead with the Stonehenge A303 tunnel. Yeehaaa!! It's avoiding the monument and though some are saying its disturbing ancient land, nearly all land is ancient. As for desecrating it, I’m sure those trees and that grass aren't 5000yrs old. Anyway, did you know that Stonehenge was moved from near Milton Keynes by the Romans to make way for Watling Street but they kept it quiet? Strange but untrue.

The protests at disturbing this monument seemed at odds with other recent calls to pull monuments down. When does a statue which is subject to being pulled down in protest against the erectors morals, transcend into an ancient monument where age makes it immune to threat. Just saying that, say, say, like, I could prove that Stonehenge was built by child murdering proto-nazis would there be a call to pull it down? No? So how is the time/moral boundary determined?

Now I ‘ve gone too far off on a tangent.

I'll end


Monday, 11 September 2017

Doom Buster

Doom Buster 

Kim Jong-Un and Irma,
Brexit and Trump,
Global debt monster,
To give us a thump

Russia, Iran,
Post-Turkish Coup
Household debt, China debt,
Coming for you

Greek budget wrangles
OPEC in tangles
Crypto new-fangles
Attack from all angles.

Yet Yen down and gold down
Bonds down and VIX down
Basis and swap down
No price risk in this town.

Stocks up and oil up
Sterling and tech up
Carry up and buck up
Buckle up for risk up

Bad news eroded
Bear market corroded
Sprung loaded and goaded
The market exploded