tag:blogger.com,1999:blog-75856351498834709442024-03-13T03:09:01.931+00:00Polemic's PainsPolemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.comBlogger319125tag:blogger.com,1999:blog-7585635149883470944.post-23751179746976043442020-04-01T02:01:00.003+01:002020-04-02T09:37:05.081+01:00Biases in feedback lead to CBAI am fast adopting a bunker mentality. I know that listening to the opinions of others builds a sample set on which to base one's own opinions but the behavioural biases of social platforms make it all too much like hard work. <br />
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The only way my opinions can benefit me is through the actions I take based upon them. Yet in expressing them I am suffering from what follows. Demands to justify them or to defend them against evidence to the contrary. It is particularly interesting how people do expect an answer in response to their demands. Where did this expectation that anyone ever needs to respond to a demand come from? It's probably as a spin-off of the journalistic use of the term ‘demand’. We demand answers! Well, I’m not going to give them to you so whatcha going to do about it, do some more demanding? I have no incentive to invest time in persuading others that my views are correct. I will ultimately be judged by the future, not by those challenging me.<br />
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Looking at this through a bias filter, anyone who disagrees with an opinion will cite the views of others to support their case, affecting an arms race of ’someone more famous/respected/right agrees with what I say' citations. People appear to have stopped thinking for themselves, instead needing to select one of the thousands of academic papers on any subject to do their thinking for them. Academic papers are two a penny. There is always one that will support any view making their employment in discussion less and less effective yet they are used to attack either the evidence supporting the opinion or the opinion itself.<br />
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Yet anyone who agrees with the opinion will tend to stay quiet. I assume because there is a belief that an opinion doesn't need support if the author is already on board with it. So we have a bias. Lots of negativity versus little support. If I were to respond to the critics by adapting my actions to represent the balance of response I would ALWAYS have to change my mind as the ‘disagree’ pile of evidence always outweighs the ‘agree’. This is reminiscent of the famous Monty Hall problem where it's always best to change your choice. I assume that if I announced I'd followed popular feedback and reversed my position, the bias of feedback would swing to the other side supporting my original view. I could, at that point, step back leaving a barroom brawl between all participants as I sneak out of the saloon.<br />
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Or is all this disagreement supplied to me for altruistic reasons? Do people realy care whether I am right or not, just for my benefit? Naaahhhhh. <br />
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They care about whether THEY are right or not. If they have based decisions and actions on views that oppose those expressed and those expressed are right then they are wrong, resulting in a loss that includes the loss of the security of a narrative framework that they have hung their decisions upon. Rebuilding a broken narrative framework takes time, thought and effort and an admission of failure, which comes with its own psychological problems. Hence there is a preference to avoid this cost until its absolute necessity, which usually occurs as a phase change rather than a smooth transition. We hang on to beliefs because humans like certainty and hate uncertainty. We go through our lives craving certainty as certainty removes risk, to the point of preferring to believe in the models we employ to run our lives well past their sell-by dates. There is also pride. But being able to admit when you are wrong is essential to succeed in life and certainly if you are trading in the markets. If we never adapted our models for, say, crossing the road as cars evolved from 5mph to 60mph, we would be splats in the road. <br />
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Yet there is value in the volume of criticism of my financial market opinions. It's related to the fact that financial prices reflect the aggregate of the expectations of all participants (note it's expectations that drive prices, not the maths or data of the ‘now’). Prices change due to changes in those expectations. If I am deluged in criticism then I can take that as a good sign that no matter how logical their argument, the next move will be a reversal of expectation and a reversal in price.<br />
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This is particularly important in these times of virus as I believe the most important input into determining price direction is the watching of others, rather than studying deep reasoned analysis. Why? Because the complexity and detail of current analysis are camouflaging the error function of the primary input, which in these times is usually a big fat assumption, let's even call that a guess. The errors around this primary assumption are so huge they make further analysis worthless. Effectively polishing a turd with detail.<br />
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This type of analysis is over-relied upon. Normally as a crutch to support priors. It was only two years go when the last decimal point of forecasts of UK GDP out to 2030 was being quoted as gospel to support or decry Brexit, yet here we are deep in an ‘unforeseen’ that has made all of them worthless. <br />
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So what is it that drives the criticism. The desire to be perceived as right? Why? Does being right or the respect of others pay the bills? Not unless you are selling snake oil. I don't care about making an idiot of myself - no one pays me for my views, I have never had an offer of employment based on my publicly expressed opinions, nor am I a journalist needing a profile nor a following to ensure my continued employment.<br />
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It doesn't matter if anyone thinks I'm a moron, but as far as publishing financial market trades goes, I’m switching from 'transmit' to 'receive'.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com7tag:blogger.com,1999:blog-7585635149883470944.post-61332708677104733742018-05-30T00:47:00.002+01:002018-05-30T19:32:56.021+01:00BTP time bombs. My last post was on Turkey and oil. Oil, only briefly to say it was turning and Turkey in a great long verbose way to say it was turning.<br />
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Last week every eye was upon the Turkish lira. But market attention is drawn not by absolute badness but by relative baldness, so the complete explosion in Italian politics over the last five days has drawn the macro tourists away from Turkey, leaving it free to pick itself up, dust itself down and become one of the world's best performing assets this week, knocking the socks off even the USA. Oil has also continued its downwards track leaving the long Turkey short oil trade looking like a podium winner. But there is no one even watching the champagne spraying ceremony because they have all dashed off to Italy.<br />
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Italy is really big stuff compared to the shakedown of a Turkish market that has already been seriously shaken down. If you think Turkey is a source of contagion in EM, you just have to watch what Italy can do to the DMs.<br />
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Italy is where risk and reward have been forced together between the huge clamps of ECB policy. Applying billions of Euros of force to the BTP market the ECB has managed to hold things for long enough to convince the market that Italian risk was not far off German risk and that Italian yields could be lower than US yields. And the money poured in on the implicit promise that the ECB would always be there and the explicit promise that they ‘would do whatever it takes'. Which is all fine as long as Italy doesn't decide to tear up its agreement with Europe and hence the ECB.<br />
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Unlike Turkey, Italy has a LOT of money parked in its debt markets. First, because it has a lot of debt and second because it pays more than the rest of core European. Finally, it will only lose you money if it defaults.<br />
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Losing money in bonds is a game of peek-a-boo. If you don't look at it won’t have cost you anything because any bond with a positive yield will, on full repayment at maturity, have made you money on an absolute basis. However, on a relative basis, things can be very different. Bond markets are about chasing the best yield and that implies relativity. Bond performances are barely ever measured against absolute return, instead choosing to be measured against a benchmark. So relative performance is absolutely key for measuring success. As soon as we have the relative performance we have to keep a track on how things are going and though we know we will get our money back in the end, if the value of bonds fall relative to the benchmark we are 'losing money’.<br />
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One obvious way not to be losing money, if we know we’ll always make in the end, is not to look at the price of the bond whilst holding it. 'No looky' no lossy'. Or no mark to market. This is what the ECB does with its holdings and that applies to the current 250bio it has on its books through QE. If it has no intention of selling them before maturity then there is theoretically no reason to mark them to market.<br />
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Funds are a different kettle of fish as investors constantly want to know what the worth of their assets are for value and for risk management sakes and that involves measuring them against current market prices. Kaboom.<br />
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Italy has always been a dirty little secret in real money portfolios. The long-term traditional real money accounts have huge amounts of higher (well, it was) grade Italian debt on their books under the title of European bonds. Desperation for yield and performance has forced many to wade into the 'Draghi guaranteed' higher yielder. There was little chance of being criticised by senior management for being long Italy, as to doubt Draghi was to doubt the existence of the Euro and therefore the existence of your own large European financial institution. If you know the event that blows up your fund also blows up the whole company then there is no relative disadvantage to holding them, if it blows up you lose your job either way.<br />
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When Europe started to recover and the Eurozone lift-off story started propagating 18 months ago, the chance of Italian default through local credit pressures was seen to fade and the demand from private hands to buy the previously considered toxic NPLs and sub-grade debt that was polluting Italian banks’ balance sheets was huge. The banks eagerly offloaded swathes of it and were starting to be classed as clean again. So banks were bought again too.<br />
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The purchasing of Italian based debt by private hands has been huge. Real money, hedge funds and SWFs own it and swathes of it have been built into all sorts of illiquid high-yielding structured products. The Italian banks are still holding enough of it together with government debt, to have some serious problems. Everyone is up to their necks in it.<br />
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The question is who has the longest mark-to-market interval. If you don’t have to look at the relative value then you might be able to ride this out as long as there is no default or restructuring into NuevoLira. But trying to keep a lid on exposures is going to become harder as time goes on. We are going to see fissures open up in places we probably haven’t yet imagined. Try picturing financial Europe as a Hawaii Big Island lava map. Even Herr Oettinger may find the soles of his feet warming up through German institutions' Italian debt holdings.<br />
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BTPs erupt in Portfolios</div>
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So in summary. I am a fader of peak 'tabloid' noise. Tabloid noise is indeed at a fever pitch. But in the case of Italy, we are not quite there yet. Mrs Watanabe has not yet sung and, though trying their best not to make any noise, those with Italian debt embedded in ‘safe' funds are going to be crying for their mamas before we see this over. Of course, that is unless Mr Draghi and the Eurocrats bow to quiet pressure to ‘just sort it out’.<br />
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I had wondered whether Italy might issue 250 billion of a 1000yr zero coupon BTP. They could exchange this with the ECB for all the shorter-dated stuff they hold and as ECB isn't mark-to-market, they would have effectively written off Italy’s debt. Just an idea.<br />
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Finally, its time to resurrect a post from 2014 which is once again very apt. Though my interpretation this time is that there is a lot more to worry about.<br />
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Monty Python's Four Italians sketch<br />
<a href="https://polemics-pains.blogspot.com/2014/10/the-four-italians-sketch.html">https://polemics-pains.blogspot.com/2014/10/the-four-italians-sketch.html</a>Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com0tag:blogger.com,1999:blog-7585635149883470944.post-92046106676696334802018-05-25T10:41:00.002+01:002018-05-25T17:08:05.561+01:00Tabloid Turkey. My Tabloid-o-meter shot into the red this week on two matters - Oil and Turkey. I have had very successful runs in both over the last two years but with the amount of noise surrounding them, I have reversed my positions as both are likely to correct. However, I am going to leave oil for now and concentrate on the Turkish noise.<br />
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Watching the crowds form around the Turkish sell-off is like watching a fight break out in the school playground.<br />
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Two kids start shoving each other, a crowd gathers, others see the crowd and ask what’s going on, more join as the playground’s attention starts to get sucked in by the gravity of the situation. They are told by those who didn't know what was going on what is going on, but Chinese whispers are propagating the further out the crowd is from the epicentre. Teachers are called and kids start Facebooking the action. The media notice and a reporter arrives, then the TV crews (let’s stay this is a Beverly Hills school) and suddenly a 'school-fight expert' is on the screens. To fill time and tighten the tension he even suggests that the fight might spread to neighbouring schools as gang culture is rife. Watching this on TV, parents pull their kids out from all the local school. Why? they don’t really need the reason, just the fact that their darlings have the smallest chance of being hurt is enough. Meanwhile, an enterprising guy opens a book on the fight, offering odds. People who have no clue about the antagonists are betting on the outcome. Seeing there is money to be made, big online betting sites get involved. Adverts appear extolling how much money can be made betting on the fight and an old man with ‘The End is Nigh' on a placard is spotted wailing outside the school. He's interviewed on TV as an expert on the upcoming global destruction. Finally ‘Phyghtchain' is ICO’d. The crypto coin backed by the physics of fight. Ten minutes after it launches someone in the centre of the scrum notices that the two scrapping kids have vanished, having been called home for their tea.<br />
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Well, that’s what it feels like, and pretty much encapsulates the anatomy of the past few EM crises. If you had faded the noise you would have made a lot of money.<br />
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Turkey has been firmly at the centre of my geopolitical radar for years, but the failed coup and the onset of the Putinisation of Erdogan had me shorting Turkey faster than a butcher on Boxing Day (26th Dec, for my non-UK readers).<br />
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The concerns being that Turkey was going to be a massive problem in the overlap of every sector of global politics. Add this to the price of coffee in Bodrum cafes and it looked like an obvious short. Yes, I do use a bit of coffee PPP as an indicator for when a country moves from EM to DM, usually through UM (Upstart Market, where they think they can charge alpine prices for emerging levels of service) and Turkey went UM very quickly in the early naughties.<br />
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The problem with starting the ball rolling on shorting Turkey was the yield. Yield is like a hill in the road. To get over it you need enough momentum in underlying price to overcome the drag of yield gravity. if you are paying 10+% of your returns away hoping for a move that is greater than that to pay you off, in a world where if you manage to make 5% as a fund money manager you are a hero, you need a really strong belief that you are going to get a big move your way. And this is where momentum comes in. If you travel fast enough up that hill of price then you will make it successfully to the other side in profit. While things grind along slowly it may not be worth the risk.<br />
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Until the day comes when something triggers the tipping point and the yield is no longer enough to pay for the risk in price moves. This is what happened with Erdogan's policy announcement that high interest rates were bad and weren’t going to be used to defend the currency. Boom. Momentum meant that prices were moving far faster than the yield could compensate for. Who cares about 16% p/a interest costs when you are getting 5% moves in a day? As momentum explodes the relative return of carry is diminished.<br />
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Those long of the carry trade were underwater and the risk-reward was seriously changed. Japanese yield hunters were finally triggered out of their positions (normally the last out) and the resulting sharp moves were what sucked in media attention and anyone thinking there was a buck to be made. Why has everyone piled in? Well… Well, a good question to ask is why are you selling TRY now rather than selling it a year ago at much better levels? The answers I hear back are that ‘this time is different’. Deficits, Balance of Payments, screwed up policy, political isolation and a rising US dollar and global rates.<br />
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So which bits of that are new?<br />
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Deficits and BoP are cited every time there is an EM sell-off, but we know from experience that investors are tarts enough to be bought off by high yield once things stabilise.<br />
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The screwed up policy and political isolation - these are based on Erdogan and I concur it is a long-term mess, but the balance of monetary policy position has shifted with the 300bp rate hike on Wednesday. The political situation is a very good reason to be concerned in the long-term but it isn't anything new to us.<br />
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Rising US rate and a strong dollar - This generic EM wasp spray is brought out every time there is an EM crisis. As seen in 2014 and 2016 it never ends up killing EM. It is also important when reading articles on the amount of dollar debt out there, to consider who owns it. EM dependency on US-based lending is waning. If EM issue USD debt and buy USD debt then as rates rise, yes, the borrowers suffer but the lenders gain. Often it is the same countries or companies who are both long and short - most of it is intra-China. So whilst I agree that higher US rates and a stronger dollar don't help matters it certainly isn't responsible for the chaos.<br />
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QE unwind? Money was cheap and it was easy to park it in high yield. But the reduction in liquidity is reflected in rates and a move in rates is yield differential and though US rates may be 2% higher than last time, Turkish rates are higher still. It’s a great back-fit story but it isn't the trigger or the ‘now’.<br />
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So, as with an old wedding cake being recycled for the first christening, we have the old baked reasons to sell Turkey re-iced with some new ones.<br />
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Turkey is still a tinderbox and Erdogan’s positioning in the world will have to be resolved before we can see any long-term improvement but I do not see this event as THE blow-up. EM blow ups are more like dud fireworks. They explode in your face when you go back to wonder why they hadn’t gone off. Early 2014 may be a good case in point to follow. We had maximum noise before Turkey ended up as the best performing EM of the year.<br />
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I do not see Turkey acting as a catalyst for a contagious event. It is an easy sensationalist game to play and Ambrose Evans Pritchard is <a href="https://www.telegraph.co.uk/business/2018/05/24/iif-fears-dollar-spike-will-set-emerging-market-contagion/">at it already, quoting the head of the IIFF </a> but the world is now smart enough not to clump all ‘EM’ into the one fund-box it used to.<br />
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With noise at such levels and every macro tourist flocking to Turkey, I have turned my shorts into Turkish longs looking for momentum to fade and the weight of the carry costs tied to the ankles of TRY shorts to drag them, spluttering, underwater.<br />
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<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com3tag:blogger.com,1999:blog-7585635149883470944.post-60728887008441586522018-04-25T15:10:00.001+01:002018-04-25T21:07:35.702+01:00Is the EU protectionist?In response to the Tony Barber piece in the FT "<a href="https://www.ft.com/content/e761a1ca-47af-11e8-8ee8-cae73aab7ccb">The EU is no protectionist racket</a>"<br />
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- The EU’s FTAs are quite narrow and include Rules Of Origin constraints on manufactured goods.<br />
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- These are primarily goods trade deals which suit France and Germany but would not suit the UK. They also seek to impose EU product standards (more on this later).<br />
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- Public procurement is an area of French and German strength. It is why public procurement is one of the very few services that has been included in recent trade deals the EU have signed. However public procurement falls under State-Owned Enterprises (SOEs) or is classified as national security concerns. So though on the face of it it looks like the EU isn’t being protectionist via the trade agreement when it comes to actually awarding the contracts practice, these concessions are never awarded to foreigners. They impose local regulatory standards or clauses to make sure this is the case. The inclusion of the public procurement clause is a concession that will never result in anything for the counterpart. <br />
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- The US is not an innocent party, but it does have a legitimate argument that China, Korea and Germany have taken unfair advantage on trade by following mercantilist policies that restrict domestic market access via regulatory measures. The US is seeking to use its leverage to adjust this relationship.<br />
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- The US has already stated it would like to have a trade deal with the UK. There would be cheaper food in the UK as a result. the argument over such things as chlorinated chicken can be defused by clearly labelling produce and letting the consumer choose (c.f. free range eggs). <br />
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- Of course, the UK should depart from EU regulatory alignment where it is in the national interest. That is the point of taking back control. A significant trade deal that opens up markets in services and food is eminently in our better interests.<br />
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- The Irish border issue is not legally solvable. A fudge is required and will be found. The UK will not police it even if the EU wants to. The EU is being overly legalistic on this front, and technology will ultimately provide the solution. Lawyers have too static a view of a dynamic world, especially in this respect. The tendency for Eurocrats to regulate for the now, or the past, rather than the future is also why the EU is not going to end up with thousands of City bankers. Banking functions, including trading, are going to be dominated by AI and we should expect to see the supra-national FANG model become the norm in banking. The computer may sit where the regulator tells it to sit but those programming it won’t. <br />
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- They are protectionist by insisting other standards that might not conform to Rules of Origin requirements (in themselves protectionist). Erecting blanket trade barriers with the UK, even with products that do match their standards, because the UK won't enforce all of their standards domestically is pretty close to the definition of punishment beatings and protectionism.<br />
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- Setting EU standards is a form and force of protectionism that tries to export the cost of European social models on the non-EU supplier countries. It requires these countries to completely change the way they produce goods etc and instantly puts them at a disadvantage with French/German firms. This is why Dyson moved his production to Malaysia: they stitched the rules up to the UK's disadvantage. As a result, he pays the EU external tariff to export Dysons to the UK. <br />
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- The most liberal of FTAs is the Australia /New Zealand agreement, which involves Mutual Recognition Agreements. These accept that both countries' regulators are competent enough to be accepted by the other without the need for harmonisation. Harmony in this sense, though sounding peaceful, is the forced infliction upon other countries by the EU of the EU’s way of doing things (do it the way we want you to do it, not the way you do it) to their protectionist advantage. If you don't submit to being 'harmonised' with EU standards then you cannot have market access. A more sensible view would be that developed countries, by and large, have high enough product standards and service regulation that they should have Mutual Recognition Agreements instead of harmonisation. <br />
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-THIS IS NOT ABOUT TARIFFS, it's about Non-Tariff Barriers - which the EU excels at imposing. It's a French national pastime - remember the <a href="https://www.nytimes.com/1983/01/14/business/the-latest-battle-of-poitiers.html">Battle of Poitiers with VHS recorders coming in from Japan</a>? Why do they want to stop the UK from keeping the City? Because they want the business. True free-traders would allow it to continue with regulatory cooperation and Mutual Recognition. The BoE/FCA/PRA are amongst the best financial regulators in the world from a financial stability standpoint. The ECB et al, in appealing to financial stability risks as a reason for on-shoring, are applying the same logic as warning that building a bridge across the Thames will decimate the boat building business. It's protectionist.<br />
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- If the EU have always been such a liberal free trade loving union then why has it taken them decades to come up with these FTAs? Could it be that they feel threatened by the UK leaving? The UK had been pushing for such agreements years ago to no avail. If they had progressed with these earlier it may have defused some of the arguments for Brexit. <br />
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- Finally, let’s not forget that the EU’s very existence is based on a bilateral protectionist agreement to protect French agriculture and German steel and coal. <br />
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<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com3tag:blogger.com,1999:blog-7585635149883470944.post-7047956341807389702018-02-22T21:34:00.003+00:002018-02-23T10:25:02.370+00:00Behavioural gamma and fractal attractions - I blame the Russians. <br />
I am fast wondering if someone has perfected the ultimate 'hunt and destroy’ algo trading weapon. The development of programs that can sniff out other’s stop levels and micturate all over them before running off maniacally laughing with their positions has been around for years, but the precision with which market moves have sliced and diced the flesh from many a portfolio this month has me wondering if the Russians have developed the killer algo of all killers.<br />
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I don’t really wonder if it’s the Russians, I more expect someone else to wonder if it's the Russians because if anything that involves a computer and cannot be easily explained, or rather can be easily explained by ‘yeah ok, I was dumb not to see that coming’ but we don’t want to say that - it's blamed on the Russians. I use it all the time now. My wife popped out of the room during ‘Call the Midwife’ on Sunday night and when she returned the TV was tuned to ‘Dragons Den’. I told her it must have been the Russians as I didn't know where the remote was. She couldn’t find it either to turn the channel back, thus proving my point. We also found that the Russians had turned the thermostat down in our house from 24C to 20C, which I can cope with but the Russians, as my dear wife pointed out, have also cut the power to all the wires and chargers by my bed, emptied the fridge of high-fat foods and hidden my favourite clothes. Damn cunning, these Ruskies.<br />
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Markets have turned ‘difficult trading’ into a form of waterboarding. I don’t need to talk you through the details of various asset swings over the last few weeks but if you have a position and your stop loss is in the range zero to infinity, there is a good chance you have been stopped out. Unless you are an investor, in which case you have waved your hand in a marginally dismissive way whilst tilting your head slightly back to peer down your nose and languidly intone, “No my dear chap, I'm an investor, not a speculator, my investments are to provide me with long-term returns”. Which actually translates to - “ I haven’t got a clue what is going on with the markets as I had a chap come round to the house who sold me this marvellous long-term investment fund, no I don't know what the fees are actually, that I don’t have to look at as he assures me that it will pay me handsomely when I retire. Mr Woodford’s something or other”.<br />
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I was taken out today. Out of gold longs, stock shorts, and lunch. Only one was pleasurable. Mourning the loss of my gold position, I bought a new one as I applied my trading maxim - 'the best time to enter a position is just after you have been stopped out of it’. Sad, but unfortunately true recently.<br />
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If you had your screens off for the last 36hrs you could well ask "what Fed minutes?"<br />
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This sort of thing hurts when you are suffering from 'fractal attraction’ and 'behavioural gamma'. When you don’t know what is going on you have some choices.<br />
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1- Carry on, pretending you do know what is going on - you may get lucky<br />
2- Walk away - Clever, clever, clever.<br />
3- Get angry that you don't know what is going on and make it a mission to know what is going on in an ever more dangerous search down the old mine of broken dreams - Danger danger danger Will Robinson.<br />
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Or perhaps Lassie - “What's that Lassie? You saw Polemic trying to dissect every price move down to a 3minute chart looking for patterns in order to look for breakouts that would define the next big move? And you think he needs rescuing? Nah.. he’ll already be dead"<br />
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The 'fractal attraction' is the drilling in on tighter and tighter time frame charts in the search for a pattern. Each zoom showing pretty much the same pattern, or lack of one, as the previous. Fractal-like. The 'behavioural gamma' is the chasing of any move that looks as though it is setting the next direction, as you really don't want to miss out, only for you to be caught out on a reversal and have to chase it the other way. Behavioural gamma increases dramatically when there isn’t a fitting narrative. It isn’t options gamma, as it is linked to behaviour not a mathemantically derived hedging demand, but I suppose you could imply a link between behavioural gamma and options gamma stemming from the same source of uncertainty.<br />
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One could even go so far as to cogitate if one drives the other or that the total sum of behavioural and options gamma is constant. But my mind is wandering too far.<br />
<br />
I guess the point of this ramble is to say. Don't get sucked in. When you don't know what’s going on, walk away, as curiosity may well be terminal feline flu.<br />
<br />
Just blame the Russians.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com8tag:blogger.com,1999:blog-7585635149883470944.post-27775068999250031252018-02-21T23:49:00.000+00:002018-02-22T00:18:40.657+00:00GRReat - the Global Risk Repricing<br />
<br />
First a recap -<br />
<br />
<b>10 days ago -</b><br />
<br />
<i>My best case is that no narrative can be ignored and all have their strengths. But instead of them each being a separate diagnosis of different potential diseases they are all symptoms of a single greater one. They are all building into a great big superstorm of grief encapsulated in a super-narrative</i><br />
<i><br />
</i> <i>Inflation, corrections, a spike in volatility (really an increased cost of insurance), problems in leverage, US bonds, problems in risk parity, China sell-offs, Junk bonds sell off, aren’t all separate but are all part of the same single story - the new super-narrative of ‘The great global risk repricing'</i><br />
<i><br />
</i> <i>A sudden spasm of awakening to true risks may now be underway. For years we have been saying that credit is too cheap and that junk bonds are way too expensive and that leverage has been practically free. I hate to hark back to QE, as we know that it has spawned a rash of ridiculous pricing, but this, folks, could be the big one with regards to waking up and smelling the coffee. Free money does not mean any risk.</i><br />
<i><br />
</i> <i>This reassessment of risk perceptions can also include US Treasuries. If there is a chance that they are no longer the ultimate safe haven then the schism would have dire consequences for the stability of current investment theory. No, I am not saying that US Treasuries aren’t safe as houses, I am saying that all you have to have is people questioning them for problems to kick off as soon as Monday.</i><br />
<i><br />
</i> <i>And that is why waiting for bonds to go up to know if this is over is all the more important, If they don’t then it is really bad news.</i><br />
<i><br />
</i> <i>Currencies have worn this move fairly well. Yes, they have moved with the classics like AUDJPY doing the risk off thing, but considering the size of the equity moves they are hanging on in there. Most notably, the popular position of short USD hasn't really seen much of an unwind but it should be considered as part of the short UST trade. This is not about rate differentials anymore, as we have seen the divergence of rate differentials vs FX widen for the past few months, but about underlying trust in the US to manage its affairs. It's part of the risk adjustment as the US and USD have moved a notch right along the scale between Switzerland and Zimbabwe.</i><br />
<i><br />
</i> <i>So what do we do? the trader in me wanted to buy on Friday, so I did, but the pragmatist thinks this is far from over.</i><br />
<br />
<br />
<b>And then 7 days ago -</b> Shorting the CPI and being stopped out.<b> </b><br />
<br />
<i>I have to say that today was a hero to zero day for me in equity land. I played the CPI figure perfectly as stocks decided that the inflation story really. really is a concern. Until it isn't. And that ‘until it isn’t’ occurred about 15 seconds after maximum 'it is a really, really big concern'. That was when perfection vanished in a puff of humility and the ‘natural bounce up off the lows' spent the rest of the day grinding higher up to new highs.</i><br />
<i><br />
</i> <i>I am not too shy to own up to the stock shorts costing me money. I hate grinds, they are worse than sharp moves mostly because sharp moves engulf your emotions in one hit, whilst grinds tie you naked to a chair and beat your bits with a knotted rope until you are finally put out of your misery by the pistol to the head of a stop loss.</i><br />
<br />
<i>But I JUST KNOW that US stocks will now tank. But if I don't understand why equities are going up then I must get out. Understand? That where your narrative fits whatever it is you want it to fit, but unless someone takes a 3ft pipe bending machine to the current narrative of ‘it’s inflayshun innit’ to make it fit with today’s moves then I am afraid this narrative is broken</i><br />
<i><br />
</i> <i>We are getting through narratives faster than plates in a Greek restaurant.</i><br />
<br />
<b>Since then.</b><br />
<br />
I licked my wounds until Monday when I started shorting things again. I couldn’t bear to think about missing the big dump. Why Monday?<br />
<br />
Momentum was fading and we had just had a new narrative on the block - Double deficit. The double-deficit was the next big thing. But double deficits are like herpes to many countries. Many have them but are mostly unnoticed. They are a pain and you don't want to give them to anyone but the worst they normally do is sting and everyone points, rings bells and shouts ‘unclean!’. But when something else comes along they fade away into the background to reside in the ganglion of government statistics. A double deficit? How quaint.<br />
<br />
We can have double deficits narrative and we can have inflation narrative and we can combine them in a theory of the US crowding out, but to combine them requires something to happen - risk assets have to reprice lower and the overall discount rate applied to US assets has to go up to compensate for future USD depreciation. Meanwhile, a bit of risk premium creeps into apparently risk free assets.<br />
<br />
Now the inflation narrative is only supportive of stocks and commodities and emerging markets if it’s cost-push inflation. In this scenario, short end rates rally a touch as Fed lags as it is cost driven. But if the inflation is demand-pull inflation we have a different position as the Fed will tighten faster, real yields will go up, bear flattening the curve and stocks will fall as the market starts to worry about a potential recession from a potential Fed over tightening.<br />
<br />
So we have both inflation and double deficit - stocks down<br />
Cost-push inflation - stocks up<br />
Demand-pull inflation - stocks down<br />
<br />
Two out of three are down for stocks.<br />
<br />
Today the Fed showed their hand and stocks fell.<br />
<br />
<b>And now?</b><br />
<br />
I am hoping that the narrative will now find some clarity, but I am still very aware that this narrative is US-centric, yet major panicky moves are always contagious. So I am constantly watching everything else.<br />
<br />
Europe - It’s a bit sad we have had the Brexit vote in the UK, not because of the result but because of the shading, it has put on the reporting of Europe. In the salons of London, it is considered terribly bad form to point to concerns in Europe because having declared an avid will to remain in the EU casting criticism on anything European is seen as handing sharp object s to the leavers.<br />
<br />
The AfD is rising in popularity in Germany (I read something that they are now the 2nd most popular party). Italian elections are on the way and have all the hallmarks of doing a Brexit/Trump in providing a ’shocking' result as the concerns of the basic voter are dismissed as socially incorrect and troubles shuffled under the official carpet. Greece has just failed to get its latest round of bailout money, Ok, they will but it is a reminder that the new glass tower of the European economy is built upon the limestone caverns of past debt mismanagement and a sinkhole could open up at any moment.<br />
<br />
Back in 2016, I think it was for my ‘thoughts for 2017', I suggested that Europe problems could be obscured as long as economic growth kept everyone happy. This is what we have seen. The concept of default risk has evaporated and even Italian banks have been able to offload what was previously considered as toxic waste under a new wrapper of 'high yield' to private hands. Let's also not forget what Portuguese government debt is yielding. Less than US treasuries the last time I looked - now there IS a changed narrative.<br />
<br />
But I can’t forget what is out there and how every thread of favourably reassessed credit risk leads to the door of the ECB.<br />
<br />
The concentration of credit risk that has flown into the ECB is stupendous. Of course, it isn’t default risk because the ECB can QE until its heart content. But how content will that heart continue to be when Draghi is replaced by Darth Weidmann, commander of the Bundeathstar. I saw comments that the SPD approved of his appointment. That’s not a story. The story would be if Syriza approved of his appointment. He is a very clever man to move onto that throne under the cover of a benign economy, but even today the PMIs of Europe began to disappoint.<br />
<br />
We tend to look at whatever is the current issue with respect to the world rather than in balance with the rest of the world. When the EU has a crisis, it’s just an EU problem and the US is just fine. When Britain has a Brexit wobble then it's Britain's wobble and the EU is just fine. Rarely are the comparative strengths and weaknesses observed and considered. One part of the equation is anchored whilst the other is considered the variable.<br />
<br />
But maybe it isn’t. We think this a US-centric issue in the markets but we must watch out and be impartial in our judgments. Though we have global growth masking other problems, once the problems arise, global growth can collapse.<br />
<br />
I am still playing the macro short on risk but am desperate for low-risk yield. I just think that all risk is priced too low as we enter the Great 'Global Risk Repricing’ which I hereby copyright as the GRR. Grrrrrrr indeed.<br />
<br />
When it occurs the central banks are going to have a knife edge to walk between loosening, to counter the restrictive function of higher risk premia and tightening, to counter the inflationary effects we are already seeing. As they say with great comedy. "the secret is in the t t t timing",<br />
<br />
If they get it right, they won't have to do anything as tightening of risk premier does their job for them. GRReat.<br />
<br />
But the risk rolls on.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com5tag:blogger.com,1999:blog-7585635149883470944.post-3044007111652219222018-02-14T19:28:00.002+00:002018-02-14T19:41:07.979+00:00The diary of a messed up market day. <br />
<br />
Well. Well Well. Or ‘three holes in the ground”, as my uncle used to say. That was a day.<br />
<br />
The last two weeks have so far seen<br />
<br />
Meltdown Monday<br />
Turnaround Tuesday<br />
We'll be OK Wednesday<br />
Thumped Thursday<br />
Found a base Friday<br />
Make up your mind Monday<br />
Trying Hard Tuesday<br />
<br />
and today?<br />
WTF Wednesday<br />
<br />
I have to say that today was a hero to zero day for me in equity land. I played the CPI figure perfectly as stocks decided that the inflation story really. really is a concern. Until it isn't. And that ‘until it isn’t’ occurred about 15 seconds after maximum 'it is a really, really big concern'. That was when perfection vanished in a puff of humility and the ‘natural bounce up off the lows' spent the rest of the day grinding higher up to new highs.<br />
<br />
I am not too shy to own up to the stock shorts costing me money. I hate grinds, they are worse than sharp moves mostly because sharp moves engulf your emotions in one hit, whilst grinds tie you naked to a chair and beat your bits with a knotted rope until you are finally put out of your misery by the pistol to the head of a stop loss.<br />
<br />
I think I might have been watching too much McMafia. Actually, that James Bond and Le Chiffre reference stemmed from a picture I saw of Macron in a Bloomberg article this morning and it just struck me how much Macron looked like Le Chiffre from Bond’s latest Casino Royale.<br />
<br />
<br />
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<br />
<br />
<br />
<br />
But I JUST KNOW that US stocks will now tank. But if I don't understand why equities are going up then I must get out. Understand? That where your narrative fits whatever it is you want it to fit, but unless someone takes a 3ft pipe bending machine to the current narrative of ‘it’s inflayshun innit’ to make it fit with today’s moves then I am afraid this narrative is broken<br />
<br />
We are getting through narratives faster than plates at a Greek restaurant.<br />
<br />
I fell for that inflation one I really did. I even thought about what would do well in an inflationary world and thought.. hmm stocks could do well in an inflationary world because they hold tangible assets that are inflating so the value of them must go up against a deflating USD. Unless they own large amounts of debt and the cost of funding that goes up faster than the inflating asset values. I then thought this is getting complicated as I'll need to know the debt levels of the companies and if they are fixed or floating against which benchmarks and which currencies and where their manufacturing vs sales is and and ... and then I stopped. It was all too much.<br />
<br />
I'd wandered into this because my favourite dodgy high beta oil stocks that went to cash like everything else on the 12th Jan, might be worth buying again as I think we might be near the end of the oil dump. Have you noticed how correlated it is to SPX price moves?<br />
<br />
But the problem with my dodgy oil stocks is that they have large loads of debt and funding that, relative to where rates were a month ago, would mean that oil will have to be a lot higher than its last recent peak. So I haven't bought them. I just bought oil instead. It’s always worth remembering that if you think something is going to go up or down, instead of getting clever with correlated stuff, just buy or sell the thing you think will go up or down. For example, with oil, don’t mess around with NOK/JPY FX thinking you are being clever, just buy oil.<br />
<br />
The only consolation was a ‘that doesn't look right' enlarging of my long gold positions in the low 1320s and I did buy gold mining stocks, including some very dodgy ones. I even bought an ETF of gold miners (an ETF? In this environment? Are you mad?). It would be great if someone could inform all the goldbug loons of yesteryear, who took their evangelistic crusade to crypto-land, to come back because their one true Messiah is risen again. I never thought I'd miss them but we should point out that burying your gold coins in the backyard of your log cabin leaves your assets a little more accessible than down a phone wire that those pesky government agents, who you are sure you saw spying on you in the woods, could cut.<br />
<br />
So that's been my day. I have ended it by kicking myself for not standing true to my initial beliefs that led me to eject all my positions in mid-January ahead of Martin Luther Turn Day. as defined in my <a href="https://polemics-pains.blogspot.co.uk/2018/02/the-changing-narratives-of-market-dump.html">post 4 days ago. </a><br />
<br />
<blockquote class="tr_bq">
<br />
1- Markets take off in January en masse in the direction set by all those ‘2018 trades of the year’. This sets consensus.<br />
2- The week after Martin Luther King day, or Martin Luther Turn Day as I prefer to call it, together with the first expires, can often trigger a turnaround.<br />
3- The start of February sees a peak crisis in something - EM, Bank Balance sheets, whatever.<br />
4- This causes first round damage in the assets associated with the assumed crisis.<br />
5- This causes losses which need countering by selling other assets that are in profit<br />
6- This sees a cascade unwind in anything that is leveraged and heavily positioned.<br />
7- Narratives chase price moves but are usually later proven to be incorrect.<br />
8- These February washouts of the consensus trades of the year slowly settle down and reverse, leaving March as the time to really put on your trades of the year.</blockquote>
<br />
<br />
Good luck out there, I've had as much adrenaline as I can take for a fortnight. It made the skiing holiday look tame.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com2tag:blogger.com,1999:blog-7585635149883470944.post-75757915180342208702018-02-10T19:41:00.002+00:002018-02-11T13:46:43.799+00:00What happens next? The great global risk repricing.Following swiftly on from the last post's <a href="https://polemics-pains.blogspot.co.uk/2018/02/the-changing-narratives-of-market-dump.html">synopsis of the changing narratives of last week</a>, in the famous words of a UK TV sports quiz show, it's time for "What happen's next"? When a clip is shown and the contestants have to guess the, normally unlikely, outcome.<br />
<br />
The clip shows US equities falling over, bashing heir head and looking dead only to spasm as we freeze the frame. So .. what happens next?<br />
<br />
Friday felt like fear but the rally into the close makes this all the harder to call as both camps have ammunition.<br />
<br />
<b>For the bounce -</b><br />
<br />
Nothing has really changed, the US economy is doing well, indeed it’s very success is what has triggered this fall.<br />
<br />
Company earnings are booming and are not going to fall. In fact dividend yield on stocks has just gone up 10% due to the price drop. Thank you.<br />
<br />
We needed a healthy correction. That was it. The weak holders are now out and will no doubt be sucked in slowly as prices rise again pushing them up further. Effectively we have more marginal buyers wanting to get back on the bus now they have been thrown off.<br />
<br />
It isn't that bad, we are only back to last Noveber prices.<br />
<br />
Why should overseas investors in overseas stocks be concerned about domestic US inflation? European investors in European stocks, where the ECB is still slow to drain liquidity, should see more reason to buy.<br />
<br />
The size of that fall and the way it worked over the last two days saw the market move from 'unconcerned' to 'doubtful' to 'fear', only to see everything rebound into the close on Friday. We are done.<br />
<br />
It was indeed just a volatility blow out, the ripples are settling.<br />
<br />
It was a typical February positional wash out across all asset classes, hanging on an excuse of the labour data that tripped some ridiculous leverage in silly products. Over positioning of the year favorites has been rationalised and we can get on with it all again.<br />
<br />
<br />
<b>And for the trouble ahead -</b><br />
<br />
It ain’t over until the fat cow squeals. the fat cow being the sacred cow position of short US treasuries.<br />
<br />
If USTreasuies because what I saw as fear on Friday isn’t anywhere near fear yet and we are still in a complacent mode. this complacency can be reflected in headlines I saw on Friday saying we had ‘entered a corrective phase’ #. Entered a corrective phase? we entered a corrective phase two weeks ago! The sign should say; “Thank you for visiting corrective phase, only 2 days to meltdown, drive safely!"<br />
<br />
Volatility lingers - from my <a href="https://polemics-pains.blogspot.co.uk/2018/02/the-changing-narratives-of-market-dump.html">last post</a> on the last two week's action<br />
<br />
<blockquote class="tr_bq">
One of the consequences of measures of volatility moving is that it affects how much leverage you can have in your portfolio. The lower the volatility in an asset the lower the assumption of risk in holding it. Value at Risk, or VaR models, dominate bank, traditional fund and, most importantly, algorithmic funds. When the number you use as a volatility input increase you have to reduce your holdings even if you still consider your base argument for holding them valid. It depends on the time frame of allocations, these can be instant in high-frequency models, to monthly for old-fashioned real money to really slow with retail. Value and volatility shocks linger in the darkest crevasses of portfolio management for ages. It's like oil on beaches after tanker spills.</blockquote>
<br />
<br />
That US Stocks are only back to where they were in November, meaning that losses for many are only lost profits not losses versus original investment, can be read as suggesting that many are still long. I know this is nitpicking for mark to market, especially with a year-end real in between, but for retail it’s a psychological 'get out of jail' card. You can bet that every IFA out here is telling their clients not to worry. Probably because they haven’t yet worked out the reason to sell. This is a tell that there are many trapped longs out there praying for buyers to come back in.<br />
<br />
But who? Real money funds have not liquidated on this and are probably as caught as retail. yet they have been sitting off record loads of cash so what are they going to spend to buy with. the wall of retail certainty will have dried up too. Of course, we will have the ‘just a dip’ buyers return but that doesn't mean it’s over. As we saw last Tuesday, buying dips and seeing a run-up doesn't mean you are right.<br />
<br />
If this really is a US inflation story then why indeed are global stocks melting? The case for buying says that if this is US Centric that we need not fear in rest of the world. But the corollary is that as everyone else assets are dumping then this is not US-centric and the narrative is wrong.<br />
<br />
The inflation story may just be the next narrative that will be questioned and thrown away as greater fear of unknown emerges.<br />
<br />
This has become a global risk sell-off for equities and has started to become a general risk sell-off, but rather than looking at my usual ‘February, favourite trade squeeze’ what if this is something else?<br />
<br />
<b>What I am suggesting -</b><br />
<br />
My best case is that no narrative can be ignored and all have their strengths. But instead of them each being a separate diagnosis of different potential diseases they are all symptoms of a single greater one. They are all building into a great big superstorm of grief encapsulated in a super-narrative<br />
<br />
Inflation, corrections, aspike in volatility (really an increased cost of insurance), problems in leverage, US bonds, problems in risk parity, China sell-offs, Junk bonds sell off, aren’t all separate but are all part of the same single story - the new super-narrative of ‘The great global risk repricing'<br />
<br />
A sudden spasm of awakening to true risks may now be underway. For years we have been saying that credit is too cheap and that junk bonds are way too expensive and that leverage has been practically free. I hate to hark back to QE, as we know that it has spawned a rash of ridiculous pricing, but this, folks, could be the big one with regards to waking up and smelling the coffee. Free money does not mean any risk.<br />
<br />
This reassessment of risk perceptions can also include US Treasuries. If there is a chance that they are no longer the ultimate safe haven then the schism would have dire consequences for the stability of current investment theory. No, I am not saying that US Treasuries aren’t safe as houses, I am saying that all you have to have is people questioning them for problems to kick off as soon as Monday.<br />
<br />
And that is why waiting for bonds to go up to know if this is over is all the more important, If they don’t then it is really bad news.<br />
<br />
Currencies have worn this move fairly well. Yes, they have moved with the classics like AUDJPY doing the risk off thing, but considering the size of the equity moves they are hanging on in there. Most notably, the popular position of short USD hasn't really seen much of an unwind but it should be consdiered as part of the short UST trade. This is not about rate differentials anymore, as we have seen the divergence of rate difererentials vs FX widen for the pat few months, but about underlying trust in the US to manage its affairs. It's part of the risk adjustment as the US and US has moved a notch right along the scale between Switzerland and Zimbabwe.<br />
<br />
So what do we do? the trader in me wanted to buy on Friday, so i did, but the pragmatist thinks this is far from over.<br />
<br />
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I will run my long with a trailing stop ready for part 2 as so far that may have only been part 1.i and 1.ii.<br />
<br />
I can't help but think that gold is looking exceedingly attractive.<br />
<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com5tag:blogger.com,1999:blog-7585635149883470944.post-52177280233633556822018-02-10T15:21:00.001+00:002018-02-13T12:06:27.845+00:00The changing narratives of a market dump. <br />
It’s February and I have been using Twitter more than the blog as, in effect, most of my thoughts are pretty simple and don’t need expounding but it is probably worth pulling everything together for the record and to evaluate the 'what happens next'<br />
<br />
As regular readers know I have a regular concern about the way markets start new years, which can effectively be summarised<br />
<br />
1- Markets take off in January en masse in the direction set by all those ‘2018 trades of the year’. This sets consensus.<br />
2- The week after Martin Luther King day, or Martin Luther Turn Day as I prefer to call it, together with the first expires, can often trigger a turnaround.<br />
3- The start of February sees a peak crisis in something - EM, Bank Balance sheets, whatever.<br />
4- This causes first round damage in the assets associated with the assumed crisis.<br />
5- This causes losses which need countering by selling other assets that are in profit<br />
6- This sees a cascade unwind in anything that is leveraged and heavily positioned.<br />
7- Narratives chase price moves but are usually later proven to be incorrect.<br />
8- These February washouts of the consensus trades of the year slowly settle down and reverse, leaving March as the time to really put on your trades of the year.<br />
<br />
With this in mind, I approached the third week of January with huge caution, switching holdings to cash, but Martin Luther Turn Day came and annoyingly it didn’t produce the falls, which was FOMO painful. However, month-end was looming and it wasn’t hard to calculate that, with bonds having fallen and equities have risen so much, rebalancing of assets in funds was going to see some very large selling of equities and buying of bonds.<br />
<br />
The large size of equity selling occurred in the days running up to the end of the month but there didn’t appear to be the bond buying. However, the narrative of ‘just month end’ still accommodated the equity move leaving those long excused from their positions.<br />
<br />
But the 'end of month’ narrative had an expiry date - the end of the month - and though this had passed we saw no bounce in stocks and the amplitude of intraday swings in equity prices was picking up (normally a turn signal).<br />
<br />
Friday morning had me scratching my head as to why traded volatility wasn’t rising<br />
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We didn’t have to wait long. The US data showed a growth in wages. This flickered like a force 4 tremor on the seismometers along the San Andreas fault of inflation concerns. Bonds sold off again and stocks fell heavily, with inflation concerns triggering ‘just stop losses’ as the inflation story had been a back-burner narrative for a while. However, we know that ‘just stop losses’ is on a par with quoting Fibonacci levels in the league of ignorance of real reason.<br />
<br />
With both bonds and equities lower, attention turned to the 'risk parity' sector with it now being blamed for the stop loss action. Risk parity funds switch between bonds and equities as historically when one falls the other rises, hence keeping risk levels constant, but now we had bonds and equities falling sharply. So, it was assumed, it must have been them. Even volatility was polite enough to move with VIX a whole point and a half up from 13.5 to 15.<br />
<br />
Now a quick brief here to anyone reading this who is scratching their heads over what this volatility product thing is. Experts, please jump this.<br />
<br />
<blockquote class="tr_bq">
Volatility is a mathematical measure of how fast and far a price moves. It is a historic measure as you need to know how far and fast something has moved to work out how far and fast it has moved.</blockquote>
<blockquote class="tr_bq">
But volatility is also the key ingredient to pricing an insurance policy. If you know how far and fast something has moved in the past you make ASSUMPTIONS as to how far and fast it will move in the future. This assumed future volatility, though psychologically referenced through price anchoring to past volatility is basically an informed guess.<br />
The maths used to calculate insurance policies or options as we like to call them in finance, the Black-Scholes model, can pin down every variable (Exercise price, forward prices, interest rates, discount rates, time, etc) but there is always an unknown variable (otherwise we are saying the future is certain) and this unknown variable all boils down to one number called 'implied volatility’. And this is what is traded in options markets. </blockquote>
<blockquote class="tr_bq">
The word ‘implied' should be the clue to the danger here because as this is the only effective unknown the equation, should the price of the option change, even though basic demand (say a corporate wants to hedge a large overseas future payment) then the implied volatility changes too. This does not mean that actual price volatility of the underlying asset will change even though the implied volatility has. Nor does it mean that, as volatility is so closely linked to implied probability in the equations, that any actual probabilities have changed. </blockquote>
<blockquote class="tr_bq">
Basically, it may IMPLY that probabilities have changed but it doesn't mean they actually have. It is worth comparing this to CDS pricing where the same calculations are made as it too is an insurance product, where many confuse CDS prices with the actual probability of default.</blockquote>
<blockquote class="tr_bq">
So with this in mind we look at the next derivative of implied volatility - which we have already decided is a derivative of the maths of guessing where prices will be in the future - the VIX. This is an index of lots of specific implied volatilities from lots of different assets in different time frames. If you think it is simple then just look here to correct that view. Yet this index is bet upon in its pure form through a futures market and as soon as something can be bet upon as a future it is assumed to be clean and pure. As this future can be bought and sold and held in a portfolio the dangerous next step is to consider it as an asset rather than the complex hypothetical maths derivate of the future unknown that it actually is.</blockquote>
<blockquote class="tr_bq">
As this comfort grows funds are structured to hold these futures in ETFs and ETNs. and if the movement in these ends seems pretty small they are geared up by leverage to multiple factors in specialist ETFs. Finally, a product is offered a product that goes up when implied the VIX goes down - the XIV (as in VIX reversed, not the French king Louis XIV, though they both suffered excruciatingly painful deaths). </blockquote>
<blockquote class="tr_bq">
As stock prices had been rising strongly for a year demand for hedges against them falling had dropped. And so implied volatility fell too. (I won't get on to the asymmetric behaviour of volatility but it is worth bearing in mind that historic volatility can be as high on strong up moves as it can be on down, but the way people associate implied volatility is that it goes up on price falls). </blockquote>
<blockquote class="tr_bq">
This created a trend which was observed as an trend in a true asset and was sold as such. As soon as past performance can be cited as a reason to buy then a dangerous feedback loop evolves (see Bitcoin). Money poured into the trend with very little idea of what was actually being bought, indeed funds themselves started to sell volatility to increase there own performance having missed out on the stock moves. </blockquote>
<blockquote class="tr_bq">
We even saw people study these products with technical analysis like an asset, adding trend lines, oversold/overbought lines and Fibonacci levels (see above) to it. The distance they had stretched from the reality of what drove these things had reached parsec levels. But it had already established itself as a legitimate hedging tool and had become embedded in countless financial products and bank and fund positions. </blockquote>
<br />
So what happened?<br />
<br />
Monday saw the dormant VIX crack as leveraged trades in toxic products cascaded down the tree of hedges into ‘have to sell stocks’ which just pushed up volatility making it all worse.Volatility skyrocketed, both implied and actual. I am not going to quote a number it hit because different time frames have different values and I could just pick, as the press does, the most impressive. They were already performing statistical crimes by reporting that volatility had gone up 100% when it had gone up from 14% to 28% (that's up 14%).<br />
<br />
Even with this massive 10% move in stocks the narrative of explanation was still not concerned that this was anything to worry about in the longer term. It had moved from 'just month end', through 'just stops on wage data' to 'just an explosion in mad dog leveraged lunatic esoteric products'.<br />
<br />
Which is somewhat ironic as on this basis it would be clear that the crash had been caused by everything that posts 2008 enforced regulations and been put in place to rid us of - ridiculous leverage in products that are toxic, bought by punters who have no clue and sold by spivs who point at past performance to sell them. It was textbook.<br />
<br />
Tuesday saw the ‘volocaust’ settle down as volatility products were now the assumed culprit and this wasn’t a reason to sell global risk. But even though VIX, which was by now as keenly watched for direction as stocks themselves (another example of the tail wagging the dog). A rally in stocks was assumed to be great news that everything was settling down and the 'volocaust' was passing, but massive moves up in the underlying asset can be as representative of chaos in a volatility market as much as down, as delta hedges in the underlying get more desperate. A rapid up move did not mean volatility was falling even if implied volatility was.<br />
<br />
Global assets were now wobbling. If this was indeed just an esoteric product wobble then why on Tuesday night / Wednesday morning did Chinese and Japanese stocks put in such a battering? Moves like that in China, without anything else to look at, would normally of themselves because for a mini global rout (2015) but these were being studiously ignored.<br />
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<br />
Wednesday saw rallies, which made my China theory look iffy and reinforced the 'it's just vol' story - until the close, which was dreadful. Stocks were being dumped again.<br />
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One of the consequences of measures of volatility moving is that it affects how much leverage you can have in your portfolio. The lower the volatility in an asset the lower the assumption of risk in holding it. Value at Risk, or VaR models, dominate bank, traditional fund and, most importantly, algorithmic funds. When the number you use as a volatility input increase you have to reduce your holdings even if you still consider your base argument for holding them valid. It depends on the time frame of allocations, these can be instant in high-frequency models, to monthly for old-fashioned real money to really slow with retail. Value and volatility shocks linger in the darkest crevasses of portfolio management for ages. It's like oil on beaches after tanker spills.<br />
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Thursday saw another leg downwards as things were now starting to look global. China was still steadily falling, FTSE was now down 10% off the highs, the DAX was in serious trouble (the darling of the ‘euro-uber-alles' trade) and it was all starting to look as though we had a big mismatch between action and explanation. When that occurs things get really messy. Not understanding why something unpleasant is happening is the gasoline on the fire of fear.<br />
<br />
Friday was interesting. What appeared to be fear emerged properly with even the 'just a healthy correction’ crowd looking a bit like the Monty Python Black Knight, yet the markets bounced into the close. There was no new news. Price is news (PIN).<br />
<br />
----------------<br />
<br />
Stepping back from all of the micro of the week, we could fit all of the above into the classic layout of the original 8 steps of a February wash out. It starts as a US concern, has accelerated and is now hitting global risk appetite with apparently dissociated assets in far off places being sold.<br />
<br />
‘Inflation' may now be sprawled in colour on the billboard outside the cinema but inside the show is a classic black and white blow out of consensus trades.<br />
<br />
The big what 'happens next? ' I'll ponder over in the next post <a href="https://polemics-pains.blogspot.co.uk/2018/02/what-happens-next-new-risk-paradigm.html">"What happens next? The great global risk repricing." (Now posted here)</a> but I am far from sure that this is over.<br />
<br />
But before I go I’m going to be a bit unkind. But it does need to be said. There a lot of people out there who pride themselves on analysing the minutia of finance, looking for clues as to the next nuance of price moves or the odd basis point arb between trades, or clever sector switches, or curve trades. So it is with an evil gloat I see their detailed embroidery get burnt up in the house fire caused by the gallon of gasoline left in the oven that they failed to spot. At the end of the financial day, you are judged on PnL not PhD<br />
<br />
<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com1tag:blogger.com,1999:blog-7585635149883470944.post-52692844922424874992017-09-22T00:24:00.000+01:002017-09-22T00:47:04.336+01:00Cash 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.<br />
<br />
The clues are like flitting shadows in my periphery vision but ones I can more clearly identify are -<br />
<br />
Metals - A nicely bubbling speculative play on growth rarely sees metals sell off and copper and iron are really off.<br />
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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.<br />
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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.<br />
<br />
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?<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com14tag:blogger.com,1999:blog-7585635149883470944.post-61281599196810285732017-09-16T14:15:00.000+01:002017-09-17T22:55:41.568+01:00Fund report - Polemic Casino Fund There was a Bloomberg article out <a href="https://www.bloomberg.com/view/articles/2017-09-15/separating-the-dos-from-the-don-ts-of-investing">'separating the dos from the don'ts in investing' </a> that wouldn't have caught my attention other than Rob Majteles (@treehcapital) tweeted it with the most observational of comments -<br />
<br />
<i>"Only real way? Make money, then look back and pretend you actually know why..."</i><br />
<br />
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 <a href="http://epsilontheory.com/notes-from-the-field/always-go-to-the-funeral/">wonderful piece by Ben Hunt</a> 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.<br />
<br />
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.<br />
----------------------<br />
<br />
The Polemic Casino Fund Manager’s report for the half year ended September 2017<br />
<br />
Dear Investor<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
Thank you for your continued support.<br />
<br />
Polemic Paine<br />
<br />
<i>Regulatory note - MiFID II directive</i><br />
<i><br /></i> <i>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.</i>Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com3tag:blogger.com,1999:blog-7585635149883470944.post-4160770172218941752017-09-14T23:57:00.000+01:002017-09-15T09:07:57.916+01:00Surviving the behavioural arms race <br />
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.<br />
<br />
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.<br />
<br />
Of course, it’s always framed in such a way as to sound as though it is for your benefit but it rarely is.<br />
<br />
- Hi Sir would you like fries with that? Oh how caring, yes please .. that'll be £4.50<br />
- 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.<br />
- 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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<br />
<br />
<iframe allowfullscreen="" frameborder="0" height="315" src="https://www.youtube.com/embed/bkVhLJLG7ug" width="560"></iframe><br />
<br />
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.<br />
<br />
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<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
And, with that, I exit my long sterling position.<br />
Night nightPolemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com6tag:blogger.com,1999:blog-7585635149883470944.post-71529631683327348422017-09-13T00:49:00.001+01:002017-09-13T09:54:16.518+01:00Ramblings of a mad man. <br />
My <a href="https://polemics-pains.blogspot.co.uk/2017/09/what-i-did-in-my-summer-holidays.html">last post</a> 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.<br />
<br />
I can’t string thoughts together tonight so here are the bullet points.<br />
<br />
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.<br />
<br />
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.<br />
<br />
This could be a precursor to an EM unwind, which doesn’t sit well with my general 'risk motoring' view. Better watch this.<br />
<br />
Copper bounced but is down again. Looks like a rollover sign. Add this to EM concern though both could be USD rally backlash.<br />
<br />
USD rally? Look at cable, are you sure?<br />
<br />
GBP rally, FTSE underperforms, naturally. But some idiots are going to use either to support their narratives on Brexit, so as a prophylactic…..<br />
<br />
I have muted the word ‘Brexit’ from my twitter stream - I highly recommend it. My cortisol levels are already dropping.<br />
<br />
“There was anger over .. “ is an overused sure fire emotional radio/tv news headline but is totally vacuous.<br />
<div>
<br /></div>
Listen to this - Forecasting - how to map the future <a href="http://www.bbc.co.uk/programmes/b092r72l">http://www.bbc.co.uk/programmes/b092r72l</a><br />
<br />
And when you are done with that, watch this - <a href="http://www.bbc.co.uk/programmes/b070ss9x">http://www.bbc.co.uk/programmes/b070ss9x</a> This episode explores how the human brain relies on other brains to thrive and survive.<br />
<br />
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.<br />
<br />
Iphone8 - if you want to understand why it will sell more than the Samsung S8 then <span id="goog_989957521"></span><span id="goog_989957522"></span><a href="https://www.nature.com/articles/s41598-017-08080-0">read this</a>. 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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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 <a href="https://uetoken.com/">Useless Etherium</a>, 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<br />
<br />
It maybe too late as <a href="https://www.fca.org.uk/news/statements/initial-coin-offerings">FCA goes Loco on ICO</a> - 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?<br />
<br />
Have you seen how much energy bitcoin is consuming?<br />
Please take a look in <a href="https://digiconomist.net/bitcoin-energy-consumption">https://digiconomist.net/bitcoin-energy-consumption</a><br />
<br />
<br />
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<br />
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.<br />
<br />
And we have to add Etherum and the rest to that too.<br />
<br />
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<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
I’ve spent too much energy on Bitcoin too. It just sucks it out of you.<br />
<br />
Other stuff -<br />
<br />
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.<br />
<br />
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?<br />
<br />
Now I ‘ve gone too far off on a tangent.<br />
<br />
I'll end<br />
<br />
THE ENDPolemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com10tag:blogger.com,1999:blog-7585635149883470944.post-11845270469601373262017-09-11T19:14:00.001+01:002017-09-12T06:38:46.067+01:00Doom Buster<u>Doom Buster </u><br />
<br />
Kim Jong-Un and Irma,<br />
Brexit and Trump,<br />
Global debt monster,<br />
To give us a thump<br />
<br />
Russia, Iran,<br />
Post-Turkish Coup<br />
Household debt, China debt,<br />
Coming for you<br />
<br />
Greek budget wrangles<br />
OPEC in tangles<br />
Crypto new-fangles<br />
Attack from all angles.<br />
<br />
Yet Yen down and gold down<br />
Bonds down and VIX down<br />
Basis and swap down<br />
No price risk in this town.<br />
<br />
Stocks up and oil up<br />
Sterling and tech up<br />
Carry up and buck up<br />
Buckle up for risk up<br />
<br />
Bad news eroded<br />
Bear market corroded<br />
Sprung loaded and goaded<br />
The market exploded<br />
<br />
-------<br />
PolemicPolemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com2tag:blogger.com,1999:blog-7585635149883470944.post-64771480574492213922017-07-16T15:41:00.002+01:002017-08-08T12:39:24.413+01:00Bitcoin - Pick a number, any number. <br />
I’m going to write about Bitcoin. Not because I like it, or hate it, just because I rank it as one of the maddest delusions of a market that I have ever known.<br />
<br />
A market which is a case study of -<br />
<br />
Correlation vs causality<br />
Wealth redistribution.<br />
Randomised social mobility acceleration<br />
Disconnected arguments<br />
The technical analysis of noise.<br />
Cyber crime indices<br />
<br />
Bitcoin is the blockchain equivalent of Trevithick's 1802 Coalbrookdale steam locomotive<br />
<br />
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As Trevithick's machine was the first iteration of a steam technology that was to change the world so Bitcoin is the first iteration of a technology of coding that will change the way many data management functions are performed. It is also an anonymised payment system.<br />
<br />
As a payment system, its value can be calculated in the same way you calculate that of a credit card company - the value of the sum of charges made for the transactions by the company, less the costs to run it. I don’t believe Bitcoin charge transaction fees so on that basis it is zero and I don’t believe they have any IP ownership of the blockchain idea, so zero value there too. As a stock price is effectively a discounted function of future cash flow and Bitcoin has no cash flow, the value of Bitcoin Inc is zero.<br />
<br />
Some say that Bitcoin is a currency. Is it? What drives currency price differentials?<br />
<br />
Trade balances - Does Bitcoin represent a trade bloc and so move on trade flows? No<br />
<br />
Interest Rate Differentials - Does Bitcoin have an interest rate benefit? At zero interest rate, it has a negative carry against any +ve yielding currency - Mostly no (unless you are Swiss).<br />
<br />
Foreign Direct Investment - Does Bitcoin see demand due to FDI into a domestic economy? No.<br />
<br />
Reserve Asset - Is Bitcoin a global reserve currency displaying all the criteria needed to be seen as such? No.<br />
<br />
Inflation - Does Bitcoin move due to relative supply against competitive monetary systems. - Yes, but with the contraction of global QE this is not moving in Bitcoin's favour. An additional consideration is the uncertainty of the evolution of other competing pseudo currencies or the competitive function of gold or any other non-monetary commodity. Why buy Bitcoin when you can hedge your future demand for an underlying essential directly rather than using an intermediary?<br />
<br />
Even if we assume Bitcoin is a currency, on the basis that it can be used for transactions, using the parallel to FX markets the transactional function of Bitcoin is identical to a very very short duration FX swap, where both parties agree on a fixing spot rate on which to base other charges, such as interest differentials. As it is on a micro time scale with no transactional charges, those costs are pretty near zero and the fixing rate is immaterial. It doesn’t matter whether the GBP amount you need to buy something priced in USD is 1 Bitcoin or 0.0001. You also expect the recipient to really be pricing in USD with a BTC conversion occurring at their end - just doing the reverse action as soon as possible. If anyone is mad enough to price their goods at fixed Bitcoin prices then they deserve to see no business or go bust as folk arbitrage the FX rates.<br />
<br />
If a retailer does decide to hold its BTC receivables as BTC then they are taking a massive FX risk. Which is why I read <a href="http://uk.businessinsider.com/bitcoin-price-up-overstock-ceo-says-firms-should-accept-it-2017-7">this from an Overstock ($OSTK) exec</a> saying they keep 50% of their BTC received as BTC somewhat of a concern if they see themselves as a retailer rather than an FX punter. So should I be short or VERY short of their stock?<br />
<br />
Having decided that Bitcoin technology has no unique value to Bitcoin itself, as it can be replicated by others (indeed the proliferation of crypto-currencies is a testament to this) and decided that for transactions one only needs to rent it for a fraction of a second, then why would one want to hold and store it?<br />
<br />
It is said that Bitcoin is a store of value that will only go up as there is a limited supply and the rules of issue are immutable.<br />
<br />
Even before the current issue of a bifurcation of the Bitcoin platform is considered, the primary condition for storing value is that the value of your store does not change relative to what you value. Most of us value the security of food, shelter and warmth, all of which have to be purchased in local currency. The value of Bitcoin relative to these things is currently oscillating at +/-30% a month. That is one heck of a risk that leaves even investing in CDOs a preferable store of value.<br />
<br />
Yet despite all of my cynicism towards the price of Bitcoin, the price has indeed gone up. When the price of something moves in the direction that the narrator predicted it is used as a form of substantiation of their initial arguments. The ‘see I was right’ view is dangerous for the old reason that correlation does not imply causation. Bitcoin prices can effectively soar on the ‘greater fool’ theory rather than any of the tulip like arguments of long term value holding water.<br />
<br />
In some cases, the huge volatility risk is a price worth paying for anonymity. Cybercrime ransom holders, money launderers and capital restriction bypassers may well be happy to run the risk but if these are the sole beneficiaries then you can be pretty sure that society will clamp down on the tool tat facilitates their crimes.<br />
<br />
I mentioned in my last post on wine and trade selection that complexity is used to imply expertise and I seen this demonstrated in the complexity of technical analysis that is applied to crypto-currency trading. I agree that technical analysis is a fine tool to apply for market timing and can be used to detect changing behavioral trends but its over-precise application to a market which is impossible to apply a fundamental value to strikes me as futile.<br />
<br />
I'll apply a BTC example I saw last night<br />
<br />
Technical analyst - Price is approaching huge support at $2000!<br />
Price - Cleanly passes through 2000 and keeps grinding lower.<br />
Tech Analyst - Price has broken huge support at $2000! Next support at $1800<br />
Reality - $2000 was never a massive support apart from in the eye of someone with a pencil and ruler and $1800 is just as likely not to be either.<br />
<br />
So what does this tell us? Apart from adding to the belief that Bitcoin price is as irrelevant and unpredictable as a random walk, it tells us that a lot of people are applying a lot of effort in the wrong direction, trying to make free money from a gambling machine.<br />
<br />
Does this serve a function to society? In one respect it does - It redistributes money. In effect, it is a steroid to social mobility. As 'social mobility' has become a term that solely reflects wealth Bitcoin is a wonderful way to take from one person and give to another. Poor people get rich and rich people get poor though rich people can get richer and poor people poorer. It is a lottery ticket with the benefit of an average yield of 0%, which is better than the -50% of most lottery tickets and winning the lottery is the fastest way up the income tree, even if many winners wouldn't be classed as moving one jot in the true meaning of ‘social class’.<br />
<br />
In summary, I remain of the belief that Bitcoin has provided the world with a wonderful starting point from which humanity will benefit, but anyone buying a Bitcoin for long term investment purposes will end up as rich as a man who ordered 200 of Trevithick's 1802 Coalbrookdale steam locomotives expecting them to dominate the railway age for the next hundred years.<br />
<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com12tag:blogger.com,1999:blog-7585635149883470944.post-23322027467765670532017-07-14T08:59:00.001+01:002017-07-14T09:14:27.703+01:00Donnie and the Great Glass SeparatorDonnie and the great glass separator<br />
<br />
<br />
As Trump is now pushing for his Mexican Wall <a href="http://www.vanityfair.com/news/2017/07/trump-transparent-border-wall-falling-drugs-mexico">to be transparent</a>, let's have a guess at future news headlines.<br />
<br />
<br />
-- Pilkington stock resembles Bitcoin during a cybercrime outbreak..<br />
<br />
-- Window cleaners paid 250k a year as national window cleaner shortage bites.<br />
<br />
-- Wall Street offices remain the most opaque since 2007 due to window cleaner shortage.<br />
<br />
-- Microsoft stock trebles as algos misinterpret news of massive new demand for windows<br />
<br />
-- Plastic surgeons move to new Mexico cashing in on the surge in facial injuries due to walking into unseen barriers.<br />
<br />
-- Convexity within structure causes unforeseen losses. - Wildfires ignite due to sunlight focusing at bends in the wall.<br />
<br />
-- Drug prices in US collapse on increased supply as drug dealers can now see and catch the incoming contraband.<br />
<br />
-- Mexicans break the world record for mass mooning.<br />
<br />
-- Curtain sales soar as design flaws in original plan ameliorated.<br />
<br />
-- Trump warned not to throw stones as old English adage upheld by a court in Albuquerque.<br />
<br />
-- Algorithmic trading companies use wall as massive fiber optic data feed.<br />
<br />
-- Vogue declares glass this year's thing.<br />
<br />
-- Opthalmologists argue wall should be corrective.<br />
<br />
-- 'Rain-x' hording blamed for 2% rise in US retail sales.<br />
<br />
-- CNN mock Fox News story that wall to be double glazed to keep Texas cool.<br />
<br />
-- Seaworld petition for double glazing to have 30ft separation with a water-filled interior to create first Atlantic to Pacific dolphin race track.<br />
<br />
-- Dolphins trained and fitted with anti-drug dealer missiles.<br />
<br />
-- Wall to be semi-mirrored so Mexicans can't look in, but US can look out.<br />
<br />
-- Peep-show business establishes 300 miles of booths.<br />
<br />
-- Rayban sponsor wall.<br />
<br />
-- Anti-discrimination groups march under the banner "The glass is always cleaner on the other side"<br />
<br />
-- Glass ceilings ruled legal on glass wall president precedent.<br />
<br />
-- China build new Great Wall, invisible from space.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com0tag:blogger.com,1999:blog-7585635149883470944.post-85642502504346616622017-07-11T22:08:00.001+01:002017-07-15T10:38:02.948+01:00Vinicultural Analysis. For the past few months I have been pretty inactive in the markets, instead parking money in dull old dividend paying stocks as I couldn’t see much else to get excited about.<br />
<br />
Since then we have seen various scares pop up and disappear but, like perennial weeds in the garden of information, they sprout and either die or get pulled out. The continuing debate over who put the RU in TRUMP, the noise around how Brexit will or won't happen, the odd resurrection of how China is doomed or Australian property is about to go bust. The regular resurrection of "look at global debt it’s all going to blow up", the odd explosion of crypto-currency excitement based on the fact that the price has moved (normally due to someone using it to blackmail the world's computer users) or we have the perennial oil will dump/rally because xyz. But the markets have been steady. Of course, if you fractalise a chart you can always paint a picture of sharp moves but look at longer charts of much at all and nothing is really that exciting. Even USDMXN is back to where it was a year ago, acting as a class example of how short term trading on really long term ideas nearly always ends in disappointment.<br />
<br />
So hence I have been sitting it out, picking up dividends.<br />
<br />
There have been the odd opportunistic punts, normally fading fast moves, but I have even closed out my long time favorite of long USDTRY. Turkey is still a major focus for me as it sits at the intersection of so many regional power plays, but with the Justice March now over, media attention will wane and the country reverts to the back burner.<br />
<br />
But today I sold US stock indices.<br />
<br />
Why? Well, here I have a choice. I can list some complex arguments including charts, spreadsheets, numbers, political insight, positioning information and all sorts of things but is there any point? Explaining why you have put on trades is much like explaining why you like a wine. You only do so if you want others to try it or buy it.<br />
<br />
To communicate in the world of wine, a new language has to be learned. One of the terroirs, climates and similes to every possible taste that isn’t wine flavoured - you never hear a wine critic saying a wine tastes of grapes, it's always blackberries, honey, tannins and herbal notes. This language is then used to describe to others, who also understand the language, whether they also should or should not drink it. But if you have no intention of telling anyone else wabout a wine, nor any interest in wines other people like, then you have no need to learn the language. I know which wines I like and I have them on a mental list in order of preference, but I do not need to know that a wine is oaky, citrusy, rich, light, tannic or blackberries with a finish of old dish mops to know, when I drink it, whether I like it or not.<br />
<br />
In the world of finance the language of communication is slightly more important as, unlike wine, it really doesn't matter whether I like what I taste, but whether everyone around me likes what I have tasted too, preferably after I have tasted it so that they go out and buy it making what is in my cellar all the more valuable.<br />
<br />
So the reams written on financial markets have the purpose of explaining why people like things in the hope that others will follow the trade or pay to read the critics' views, or just as importantly, to explain errors of judgment. Where a stock is purchased but turns out to be corked, the communication runs along the lines of why, ast the trade idea came from a great house, grown on a terroir of MBA PhDs, lauded by the greatest trade sommeliers in the world, it really was a great idea but just bad luck that it was pure vinegar to the P+L palate.<br />
<br />
The routes to drinking a wine that you like are similar to those to initiating a trade.<br />
<br />
1) You buy a plot of suitable land, plant vines, harvest the grapes a few years later, learn how to make wine, make wine and then drink it.<br />
<br />
This route is the same as doing your own research. It is hugely time-consuming and you have to be an expert at every point of the process to ensure that errors don't compound resulting with a Balsamic.You run the risks that in the time it has taken your tastes have changed or you have gone bust investing in the infrastructure. This is the losing trade that really should have worked because you have 10 years of records and proof of process, yet you can only offer the excuse that it was really awful as being due to 'unforeseen eventualities'.<br />
<br />
2) You follow the critics.<br />
<br />
You read the Sunday newspaper supplements and try the recommended wines in the food and drink sections. After a bit, you get to know which critics throw up a higher number of wines you like and so tend to follow their recommendations more than any other. This is the cult of the media guru, the hedge fund god, the big name. But in following them you are always paying more than you should. The critics are already positioned, or their bosses are, and even if you sprint straight from the newsagent to the off-licence you’ll find you've been beaten to it and the shelves are stripped bare.<br />
<br />
3) You know a man who knows a man.<br />
<br />
I used to know a man the wine industry who specialised in finding the small vineyards next to the big famous ones. Their wines were nearly as good but at a fraction of the price as they weren’t geared for large-scale production or distribution. In finance, the chatter of those perceived to be closer to the big decision makers is deemed more valuable than that of others. Whispers start that a great trade is coming and only the cognoscenti know. And, if you listen to the right people, you may catch a whiff of it too. Twitter is the Tinder of financial gossip matchmaking.<br />
<br />
4) You try lots of wines and settle on the ones you like.<br />
<br />
You have instinctively grown to know what works for you, though you really can’t explain why you like them to anyone else. Nor want to. You rarely hear of these wine drinkers as they serve wine as a secondary consideration to the main event of the food or a party. They know what they like but won’t ram its wonderfulness down your throat. These are the old traders who just seem to have a gut feeling for markets and rarely say more than "it’s bid" (I like it) or "it’s offered" (I don’t like it).<br />
<br />
5) Use a combination of 2, 3 and 4.<br />
<br />
This is how things tend to work both in wine and financial markets. Opinions bend according to fashions, fashions are set by style leaders (gurus) and the masses follow. Gurus wax and wane but mostly wax until there are so many of them their value is diluted. Yet to be part of the in-crowd you have to be able to talk the language. To sound more of an authority than the next complexity is exploited. The finer the detail the more assumed the expertise is.But often the finer the detail the less influence it has on outcome and the less it matters.<br />
<br />
Apart from methods 1 and 4, one has to learn the language of financial market communications. Either to show one's own prowess, to be followed or paid, or to understand what others are saying, whether it is true or not. Every now and again a critic can trip up, like the CNN lady <a href="http://dailycaller.com/2017/07/10/cnn-analyst-has-apparently-never-heard-of-stagflation/">who claimed this week</a> that Stagflation is a new made up would be the equivalent of a wine critic excusing herself, saying that she just thought that Sauvignon was a typo of Sauterne.<br />
<br />
I have sold US stocks. The price can go up or down. 50/50. That is all you really need to know. Why I think they will go down is only important if I want you to also sell US stocks or for you to think I'm really knowledgeable and to be listened to in future.<br />
<br />
I really don’t need you to do either.<br />
<br />
I just know that I like it.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com5tag:blogger.com,1999:blog-7585635149883470944.post-68301809467435778262017-05-24T22:51:00.000+01:002017-07-12T23:37:50.154+01:00Chihuahua disruption. <br />
I met a great young doctor tonight, he 'scoped my throat because I thought I was going to die. My hypochondria, as it turned out, had merely toyed with 'fish bone graze + general sore throat' and arrived at 'red herring'. Well, actually that was his joke. My joke, after he had mentioned the soaring value of his Bitcoin position, was to paraphrase and throw back at him the old vegan joke.<br />
<br />
A- How do you know when someone is long of Bitcoin.<br />
Q- Because they always f’ing tell you..<br />
<br />
He is long Bitcoin and believes that the price of bitcoin will revolutionise the world. I asked if he knew a surgeon called Mr. Ponzi. He didn’t. The price of Bitcoin can be anywhere you want as the value of a chequebook is not the value of the number written on it.<br />
<br />
So I'm launching a new index to go with the other <a href="https://www.bloomberg.com/news/articles/2017-05-12/there-are-now-more-indexes-than-stocks">indices out there.</a> To the DPI ( Dinner Party Index) and TDI (Taxi Driver Index) I add the DrI - the Dr. Index. (A Baltic DrI perhaps? Maybe, but not after Brexit). The DrI is flashing red on Bitcoin. Mind you, if you are a young doctor and wish to go long of crime then buying bitcoin is probably safer than following Dr. Crippin’s investment advice. Or perhaps my new friend is counting on the NHS becoming a Bitcoin-based service, where you use virtual money to pay for virtual care. Nononono .. a cheap pun, NHS care is unbelievably brilliant when you get it.<br />
<br />
But the young are great believers in new disruptive technology and scorn the types of company I had just visited on my way to having a probe put up my nose. I had visited our local Audi dealership to pick a car up from servicing. I usually take my cars to Ken. He is brilliant and for a one man business in an old barn, it's amazing the amount of tech kit he has to cope with all the makes he deals with. Ken charges me £40/hour. Audi, with their one brand kit, charge me somewhat more than £150/hour.<br />
<br />
So why did I go to Audi? Because they have devised a new form of restrictive practice. The service logbook is now online with only Audi or Audi recognised (read ‘paying Audi’) entities allowed access to make entries. So to get my electronic service stamp I paid the entry price for a service and experienced the equivalent of the Salvation Army headquarters in the City of London. The similarity? Hugely expensive expanses of chrome and glass sitting on prime real estate, funded by money that shouldn’t be going to purchasing and running glitzy premises, instead, being used to give charity to the poor or to provide spannering services at prices somewhat lower than legal fees.<br />
<br />
But Ken hasn't lost out completely, I had an email from Audi near the end of their process. They had a worker go around the car with a video camera and then emailed me the resulting film together with an electronic Audi version of Amazon - an electronic shopping list of all the things they recommended I have done, ready to be clicked and authorised. The design of the site was clever in the way it replicated the easy, one-click "Jeez did I really mean to buy that” sites. They even had a picture of my car in the middle for that ‘look at your poor car, all alone in the garage, if it were a kitten you’d spend anything to make it better now wouldn’t you?’ pressure. I didn’t get much further than the £84 for new wiper blades and £60 for a bottle of brake fluid to be added because, if my car were a kitten, it would have a £100 self-insurance stop-loss on its head when it came to its longevity. Instead I 'cut n pasted' the list to Ken and had it booked in with him for the extras.<br />
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So what is going on here? Ken is the friendly man I trust, he gets the job done efficiently and he is a quarter of the price - yet he is not disrupting Audi. Far from it. Audi has created barriers to entry that in the financial world would be considered monopolistic and in Silicon Valley, would have seen Microsoft have to unbundle its web browsers even faster. I have to deal with Audi because of protectionism and I loathe them for it, even if they did give me a biscuit with my coffee as I waited the quarter of an hour to be seen by a service rep.<br />
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Disruption? I'm beginning to think that the branding fad of disruption is at the same point internet stocks were in 1999. Yes, it (new paradigm) sounds great but the soundbite is so far ahead of the reality you need the Hubble space telescope to see it. Facebook, Amazon, Netflix and Google are not an example of how successful disruption is but, instead, what a failure it is. Who is now able to disrupt any of them? The plethora of primary coloured adverts (with lots of circles, circles are so inclusive) for disruptive new ideas thought out in a land of ideals are not so much world changing, but more like chihuahuas yapping at the heels of the behemoths. One might get lucky and land a turd on Mr. Behomoth's shoe but most are likely to get kickstarted with a swift back heel into the long grass yelping or get picked up but then quietly taken around the back of the woodshed. Some even take themselves around the back of the woodshed, such as the dreadful Lily drone that I stumped up for 2 years ago only for them to go under with my money.<br />
<br />
Another reason I was thinking about the old steady investments versus the new was because of some wise words a friend of mine, relatively new to investing, had said to me. It was probably the first thing he had heard and it had stuck- "never underestimate the investment power of dividend-paying defensive stocks" - which conjured up Kipling's ‘If’ lines<br />
<br />
<i>If you can keep your head when all about you</i><br />
<i>Are losing theirs ..</i><br />
<br />
Now at that point I always thought the next half line should be ‘…. then go short hats’, but here it's a comment on the old stalwarts. The type of company such as Unilever, who make so many essential day-to-day products they will just keep trucking along paying the dividends. Diversified product ranges all under one competition swamping conglomerate.<br />
<br />
The topic of the Unilevers of the world was raised again in my conscious today by Dave Trott’s <a href="http://www.campaignlive.co.uk/article/view-dave-trott-not-everything-fmcg/1401896">article in Campaign</a>. He observes that the FMCGs ( Fast moving consumer goods) that Unilever excels at selling are not actually subject to the same form of brand loyalty as expensive consumer durables. If people buy a £5 product and don't like it, they can buy a different one next time and won’t give a thought to the £5 opportunity cost. Brand loyalty is greater the higher up the price point.<br />
<br />
So how does the disrupter get high enough up the food chain to establish itself as a brand to be followed rather than a brand to be ditched? It needs to fight all the other newcomers. Tadpole land, where carnivorous tadpoles consume each other in their fight to make it to frog. The more seething the mire, the more energy is expended getting out of it and the less energy there is to take on the beasts that have already emerged ahead. In this respect, it is in the big companies interests to maintain the idea of the disrupter. Sell the dream of potential riches, much as the Investment Bank boss sells the dream to minions that if they work hard they could one day have his job, but all the time benefit from their infighting to protect his own position. Very Napoleonic in management style.<br />
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With markets being so quiet, as far as major trends go (get back in your e-box, bitcoin), we are left with streams of news and articles that are much like the chihuahuas of embryonic disrupters. Stories about what may, could or possibly happen if 4 levels of circumstantiality occur. The sands of news are being combed for tidbits of investment opportunity. But, as with most treasure hunting, the bulk of the bleeps from the metal detector yield nothing more than ring pulls which, though they once released a fizz, are now dulled with age. Which is why I am looking at this Steady Eddie, non-attention grabbing boring yielding non-tech behemoths to park my money in whilst I go and pursue more worthwhile interests for a bit.<br />
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The idea I am trying to propagate is that disruption is almost fake news. The big boys quietly stride on and are erecting further barriers to defend their positions whilst the new overexcitable disrupters yap and clamour causing the misdirection that is the foremost requirement of theatrical magic.<br />
<br />
.... and watch for it in politics too.Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com1tag:blogger.com,1999:blog-7585635149883470944.post-53765240139216778802017-04-12T21:44:00.000+01:002017-04-14T18:02:22.328+01:00Orpington Markets At last, I am starting to form some thoughts and the result of them is pushing me towards sounding like Zero Hedge<br />
<br />
There are dark clouds out there but day to day life carries on. One thing that previous crises has taught me is that the world is mostly made up of people who don't care. Their lives are too fraught with their own day to day concerns to change their set ways because of things happening a long way away in both space and time. 'Space' as in 'now but just not here' and 'time' as in 'it did 'happen here once, but a long time ago'. Like a fight in a street, crowds can see it happening but will walk on by minding their own business unless or until the fight turns on them. You may know things are going to be pretty shitty in the future but what do you do? Panic now and run away? Or bow to peer pressure and stay at the party drowning your fears, even if it does mean you have the biggest hangover the following day.<br />
<br />
Or it's like falling asleep on the train after that party. You were surrounded on a packed train when you got on but you blink and find yourself alone in an empty carriage being shunted into a siding for the night. How the heck did you miss your stop, only to be left as the last one onboard with a night of cold darkness ahead of you? <i>*For the record, throughout my life of commuting and some pretty big nights out, I have never missed my stop home.</i><br />
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In many ways, the markets are that train home. And we are currently at Orpington. For those of you who live in Orpington please disembark this post here, if you haven’t already at Chiselhurst. Orpington is an irregular stop on our fast line that normally evokes a low groan from non-Orpingtonians when the train stops there as, instead of whistling in and out of London, a stop at Orpington guarantees the train becomes rammed with London suburban commuters. As one old cove remarked many years ago, on opening one eye as the train drew to a halt in Orpington, “Ah, Apache country” and immediately took cover behind an FT.<br />
<br />
Why are the markets at Orpington? Because when I look out from this packed train I see Apache country. I feel as though I am watching a movie through the window rather than an immediate reality I am actually involved in. I see visions of potential war, I see visions of EU upset. It’s beyond visions of a 1950’s Cowboy flick, it’s more an animated Dante’s inferno. But I'm behind the glass and it's warm in this train and there are lots of people around me who are also on the train and they don’t seem worried, so I’ll just stay here shall I? This is the problem with buying indices blindly. You are behind a glass wall in a carriage of self-reference and whilst you may see worries outside, as long as your peer group are with you then that reality appears far, far away.<br />
<br />
But is the train about to empty after I return to my doze as my fellow travelers decide enough is enough and the future looks too bleak? It’s a game of chicken. No one wants to get off while it's warm and comfy but when they start there will be a rush for the doors as suddenly a phase change of opinion self-catalyses. A seed crystal in a supersaturated solution of bearishness.<br />
<br />
So what do I see outside the window?<br />
<br />
Russia vs West on the Syrian football pitch. I’m sorry West but your team is looking like Dad’s Army with Captain Donald Mainwaring in charge with Sergeant Boris<strike> John</strike>Wilson organising things.<br />
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North Korea - they have informed the 200 foreign journalists currently there to prepare for something big on Thursday. As it’s the day of the Sun in North Korea that day I just pray that they aren’t going to make another one.<br />
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Europe - or more particularly, France. So we have a rising possibility of the final two candidates in the last vote being not Le Pen and Macron but Le Pen and Melenchon. Now as regular readers know my money has been on Fillon for a while but with the perceived rise of those previously thought not bothering to turn out now bothering to turn out and preferring Melenchon things have changed, there is suddenly the potential of having the far right and far left candidate agreeing on one thing -The EU/Euro has to change or they will take France out of it.<br />
<br />
Yet my Fillon bet is not dead yet. The prospect of having two extremes both with anti-EU intentions could mean a resurgence in votes for my runner Fillon. Why Fillon and not Macron?<br />
<br />
Well, Macron’s chances have just been blown out of the water. By what? I can proudly announce that the foolproof 'Economists Letter' indicator has just predicted the demise of Macron.<br />
<br />
I last pointed to this trusty indicator a week before the US elections <a href="https://polemics-pains.blogspot.co.uk/2016/11/the-economists-letter-indicator.html">(here) </a>when a panel of eminent economists endorsed Clinton. This was on the tail of the Economists Letter supporting the Brexit remain campaign. Well, they've done it again in France - <a href="http://www.europe1.fr/politique/quarante-economistes-soutiennent-emmanuel-macron-3292631">see here </a>- now my French isn’t great but reading that I think they are supporting a tasty new economic croissant that they hope Macron will bake for them.<br />
<br />
So that is Macron out of the running, leaving the 'fallen at the first fence' Fillon, up and running again with a clear shot, backed by the moderates. Okedokey, tongue in cheek there, but this signal has been so stupefyingly accurate one has to take note.<br />
<br />
However you want to spin this, the chances of France causing a wobble in global markets has increased rather than decreased. If France ends up with the far right or left winner then not only do OATs (French bonds) get toasted and rolled and all the other porridge puns, but Italy is going to be in a right royal mess unless it eats humble Greek pie and bows to every demand Germany makes.<br />
<br />
So what do I buy or sell in this maelstrom? I may be late to the Party but I have sold some OATs. Selling pure Euro is not that simple. Yes, it's a wobble for the area but if France leaves the Euro does that make the Euro less or more valuable? It's a bit more German and a bit less French than it was. Which COULD be read as a stronger thing. My view of the ultimate fate of the Euro is that it will never die, instead people will gently abandon it until it becomes, like the holy grail in the Indiana Jones film, a dusty relic in a Brussels catacomb guarded by a representative of the ancient order of the Knights Euro for the ages to come. The rest of the world will move on to new shiny things. Where I will play Euro though is short against GBP. Long term GBP shorts may be suddenly squeezed by, believe it or not, the chance of the UK becoming a relatively safe haven. Now there's a thought.<br />
<br />
So being uneasy on Euro, though it is an easy knee jerk bet, I am selling some BTPs again and buying low delta puts in things that shouldn’t be affected but will, no doubt, catch a cold from it all. Especially if I revert back to my Dante’s vision out of my train window, I am looking at SPX puts 2 and 3 months and buying gold.<br />
<br />
After many years of decrying the goldbugs, I am buying it. And in true gold bug style, I am going to buy physical, not some ETF stashed in a warehouse a million miles away, and not tell anyone where I am stashing it. Though if I left it in my local station platform vending machine I think it would be pretty safe from ever being found.<br />
<br />
So back to the market train. I am at Orpington and I am shuffling for the doors. I want to get off whilst it's Apache country before I get to Dante's Inferno or find myself in the marshaling yards at Folkestone, where a few old colleagues have spent a cold and miserable night comparing Folkestone to Dante's Inferno.<br />
<br />
<br />
-----<br />
<i>Final footnote - A huge thank you to those who have sponsored me to help YoungMinds. I walked 42 miles over 3 days, not big for you fit young things, but a Saharan crossing for me. Should you be able to make a late contribution to try to get me to my target I have left the page open at <a href="https://www.justgiving.com/fundraising/Polemic-Paine">https://www.justgiving.com/fundraising/Polemic-Paine</a></i><br />
<i>A contribution from an Orpington reader would make my day. though is now very unlikely. </i>Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com4tag:blogger.com,1999:blog-7585635149883470944.post-82798477112872066272017-03-27T18:27:00.002+01:002017-03-31T07:33:44.570+01:00Watching from the stands trying to work out the rules. It's been a while since I posted, for the simple reason that I haven’t had anything to say.<br />
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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.<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
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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.<br />
<br />
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.<br />
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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.<br />
<br />
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.<br />
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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.<br />
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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.<br />
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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.<br />
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So this doesn’t make plotting our position on the financial maps any easier.<br />
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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.<br />
<br />
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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3OXgD35DBS1PShoK1OV6pJ9SQbSapgfncVexb42rcYoNi6uAxKf_9Dp58DxFKprT1-PlBBzXi9x3moWLAEeQQIbKexEG0mshxFgexjOVEtdSa1L-mWHDWkQprgKrtIIVKymIFpURtHyQ9/s1600/Screen+Shot+2017-03-27+at+18.09.13.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="178" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3OXgD35DBS1PShoK1OV6pJ9SQbSapgfncVexb42rcYoNi6uAxKf_9Dp58DxFKprT1-PlBBzXi9x3moWLAEeQQIbKexEG0mshxFgexjOVEtdSa1L-mWHDWkQprgKrtIIVKymIFpURtHyQ9/s320/Screen+Shot+2017-03-27+at+18.09.13.jpg" width="320" /></a></div>
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<a href="http://www.bbc.co.uk/news/technology-39397211">http://www.bbc.co.uk/news/technology-39397211</a> Uber suspends self-drive.<br />
<br />
Now finally the important bit -<br />
<br />
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.<br />
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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.<br />
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<a href="https://www.justgiving.com/fundraising/Polemic-Paine">https://www.justgiving.com/fundraising/Polemic-Paine</a><br />
<br />
There is more of the story at that link.<br />
<br />
With thanks<br />
Pol<br />
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<br />
<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com4tag:blogger.com,1999:blog-7585635149883470944.post-68486233567311471092017-02-22T16:55:00.002+00:002018-04-20T10:54:43.858+01:00Together in our individuality.<br />
I spend more of my time with creative types these days. There is something about them that makes them all identifiable as creatives. In trying to express their individuality they all look the same.<br />
<br />
It is true for much of their output too. Though their work may be wearing cheeky coloured socks, the uniform is the same.<br />
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If this is the result of thinking outside of the box then perhaps returning inside the box would be more outside it. Their world more a <a href="https://en.wikipedia.org/wiki/Klein_bottle">Klein bottle </a>than the free universe they perceive it to be.<br />
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It’s tribal clothing. Tribal clothing is spawned from the need to at once be both different (from other tribes) and yet the same (as the tribe).<br />
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<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1oxfXRHe_8JVmp0EDqBeec3U0E6rviNqPylcrHVskrR11m-NkvxYfNN_LxC30X9YVXlkrCoSuQ7oMiVXl9mpK781F0agqE_Uete6SihYy6Z6HNwzTHW_Io7lBHE0pc5UdwiJestfzF4EM/s1600/Screen+Shot+2017-02-22+at+16.12.34.png" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="294" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1oxfXRHe_8JVmp0EDqBeec3U0E6rviNqPylcrHVskrR11m-NkvxYfNN_LxC30X9YVXlkrCoSuQ7oMiVXl9mpK781F0agqE_Uete6SihYy6Z6HNwzTHW_Io7lBHE0pc5UdwiJestfzF4EM/s320/Screen+Shot+2017-02-22+at+16.12.34.png" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Mr McKechnie dressed for the part. </td></tr>
</tbody></table>
Architects - black round neck jumpers and Saabs, but these days it's Audi TTs. Apple adopted the architect garb for its masters as architecture is perceived to be where art meets science, the image that Apple has successfully adopted. I'm not sure if that is true but in today’s back fitting narrative world I’ll create it as a retrotruth.<br />
<br />
Retrotruth is a term I predict will appear as the next derivative of the alternative facts. Once alt-facts have been established they can be back engineered, by the application of <a href="https://en.wikipedia.org/wiki/Determinism">Determinism</a>, to derive truths in the past that would otherwise never have been.<br />
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I was thinking about going on to talk about financial market specifics but creatives are briefed to give clear messages to influence the behaviour of the recipient. To this point, the messages have to be short and to the point. No distractions. This is why adverts tend to rely on images rather than copy. It is rare to see a full page advert that is predominantly text.<br />
<br />
But there is a stronger driver in the desire to keep the message brief. Extra content not only clouds the message but can be the source of disagreement that alienates the reader. A single part of a published work can undermine the faith that the reader has in the whole.<br />
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The greater the number of ideas in a piece the more likely the reader will be alienated and the less likely they are to carry the message on. Heads or tails, where a 'tails' switches off the audience. A stream of flips is more likely to have a tail in it than a single flip. Stick to single flips.<br />
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The shorter the message the more likely it is to be broadcast by others, so the sound bite is born and Twitter booms.<br />
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Though an individual is built from many ideas and beliefs, sending ideas out one by one reduces the chance that the ideas pollute each other. The ideas are processed by the recipient in parallel rather than in series.<br />
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An author can produce two tweets. A tweet and an anti-tweet. Together they should combine to cancel each other out, just as <a href="https://en.wikipedia.org/wiki/Virtual_particle">virtual particles</a> do in the world of physics. But separate them and they can live their own lives in their own tweetospheres, gaining the author followers from both universes.<br />
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From a primordial information soup of disparate amino acid statements, we build our own creatures of reality. Genes from different pools reassembled by us for our own bespoke purpose. Yet many of the genes are faulty, the basic news is corrupt or fake as there is no one to screen them. Building our vision of reality from these twisted facts we run the risk of creating Frankensteins of reality.<br />
<br />
So it now lies to us to learn and question the very building blocks of our knowledge. If nothing else, the modern information revolution and the corruption of facts is driving us to learn more about the world in order to understand it. We can no longer rely on others.<br />
<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com0tag:blogger.com,1999:blog-7585635149883470944.post-72530014134583237852017-02-14T17:59:00.004+00:002017-02-14T23:16:24.171+00:00Quincunx policy making. Quincunx markets. It's been a while since I last posted as I have been waiting for the realisation that Trump was not going to be a shoehorn to economic prosperity to dawn, as his extremes either shock the rest of the world into moving away from buying US assets or his changes collapse in a cloud of impracticality. Neither of which has happened.<br />
<br />
My simplistic de-Trumping plan has turned from a binary game of all on / all off into a multi-dimensional game of chess. Hard Trump and Soft Trump, to borrow a Brexit phrase, are forms of Trumpism that are swarm like and ever changing. The strength of policy swings on a Tweet. With foreign policy we have seen back peddling from 'hard' as the one China policy appears to have been acknowledged, Japan declared ‘best friend’ and Canada told that Trump is only planning ‘tweaks’ to NAFTA.<br />
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Yet the rhetoric against the likes of Basel III remains as strongly worded as ever and the deregulation of US banks could cause some of the greatest strains between the US and EU. Since the 2008 crisis regulations have been seen as much a moral crusade as one of practicality. Dodd-Frank and Volker, though nice ideas, were never fit for purpose and the laws of unforeseen consequences have produced all sorts of schisms, whether it is liquidity holes in corporate bond markets or just ridiculous generalised reporting conditions on markets that were not exchange based. So getting rid of these, or at least watering them down, would be a sensible compromise between practicality and moral protection. At least that’s the line I am willing to excuse the panel of top bankers currently advising Trump with.<br />
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Basel III is a bigger issue. If McHenry’s letter to Yellen is properly representative of new policy then it hits the EU head on. The EU has been proudly touting its new banking regulations which should identify weak banks (yes, done in style) and be part of the path towards a unified European financial system, whilst also allow the politicians to wave a huge moral flag in triumph. But what happens if the US banks are suddenly told they don't have to play by the same rules? They instantly have a competitive advantage unless the EU backtracks and loosens Basel III in response - Highly unlikely fot them to do such a massive U-Turn just because Trump has pushed them into a corner - or they immediately remove the US’s European banking licenses if they don't comply.<br />
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This is al the more interesting coming in the wake of Brexit where apparently the US banks are threatening to up-sticks for continental Europe, well let’s be honest, it’s a threat as none of them really want to go. France may well be offering sanctuary to US scientists and the world's bankers, but if it were really that great they would have gone there already.<br />
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There is a small version of the State of Liberty on the banks of the Seine in Paris and I was wondering if they should attach a plaque to it similar to the famous one in one in New York -<br />
<blockquote class="tr_bq">
<i>Give me your scientists, your bankers, your huddled masses yearning to breathe free, the wretched liberals of your teeming shore. Send these, the visa-less, Trump-tossed to me, I lift my high tax rates besides the red tape. </i></blockquote>
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But if the US banks aren’t going to be playing to Basel rules there may not be that tide of bankers. Indeed, the UK would be looking pretty as an intermediary between the two. It would also support another idea I was nursing, the introduction of an offshore Euro market in line with the original Eurodollar market. If London launched such a beast the EU would not be able to control it yet it would provide a method for EU unregulated institutions to fund and lend Euros just as the Eurodollar market did for Russian held dollars when it was established. The great thing about the City is that it has thrived on bypassing regulations, or rather, creating the most efficient systems to mitigate their impacts. It's what it thrives upon.<br />
<br />
But back to the markets, I am lost. I see risk piling up everywhere except in the markets, which are driving on upwards. I don’t need to list the European stresses but I think this sums up the EU's position pretty well.<br />
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<iframe allowfullscreen="" frameborder="0" height="360" src="https://www.youtube.com/embed/x84GKqcpY4E?ecver=2" style="height: 100%; left: 0; position: absolute; width: 100%;" width="480"></iframe></div>
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There are so many possible outcomes to current uncertainties I am looking at the markets as a quincunx- not a Harry Potter creature but another name for the 'bean machine' devised by Sir Francis Galton.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimGSEVDnjvOk5TFvwa7hyphenhyphenk-NIp3so1MPe_gqL5JuLIHygah6gTG8pqoNEZxGuhCh3J-BXoHXXCBXqDoq6B5qqp_7U6DFtSjtlMgiJYq_egqePTddTuCYNvEHCOAbjqjMARHybR3cOhVwzU/s1600/galton_box.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimGSEVDnjvOk5TFvwa7hyphenhyphenk-NIp3so1MPe_gqL5JuLIHygah6gTG8pqoNEZxGuhCh3J-BXoHXXCBXqDoq6B5qqp_7U6DFtSjtlMgiJYq_egqePTddTuCYNvEHCOAbjqjMARHybR3cOhVwzU/s320/galton_box.png" width="181" /></a></div>
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The box itself could even be used as a metaphor for Trump's policies. An Executive Order, or even just a tweet, is dropped in the top and it rattles down through so may deflecting processes that, though you think you have an idea where it is heading, the policy's final resting place may be some way off where it started.<br />
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Add in the rest of global politics and you end up with so many variables, or pins in the box, that the sum of paths may well mean that there are not any fat tails, but the standard deviation of the resulting distribution is a lot wider than volatility pricing is currently suggesting.<br />
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I am buying volatility now rather than direction. I was, or so far have been, wrong on that.<br />
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<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com4tag:blogger.com,1999:blog-7585635149883470944.post-56404666677292250602017-02-07T15:04:00.005+00:002017-02-07T22:09:36.471+00:00Markets move as man skis in Austria. I'm on holiday in a ski resort in the Austrian alps. This means I have no time to read any in-depth market commentary, instead, I am glancing at twitter and headlines that are depressingly dominated by the old 'x happened as y happened' implied correlations. <br />
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So here are my own equally honest, but equally unuseful, ones describing today - <br />
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**European futures fall pre-market as tourist heard mumbling "Oh God, do I have to get up now?"**<br />
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**European equities rally on the open as porridge and coffee consumption rises.**<br />
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**US futures mirror European gains as ski boots tighten.**<br />
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**Oil falls as blazing sunshine lights up mountain tops.**<br />
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**USD/JPY rallies as snow conditions judged near perfect.** <br />
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**Turkish Lira weakens as hot chocolate and brandy sales rise.** <br />
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**Copper falls as multiple tight parallel turns impress.** <br />
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**Rio Tinto rallies as Woah, sorry mate, are you OK?** <br />
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**Gold falls as I think I’ve pulled something.** <br />
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**VIX loses ground as it's decided to have an early lunch.** <br />
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**Greek borrowing costs rise as wine, beer and pizza sales spike.** <br />
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**Austrian inflation much higher than expected as bill arrives.** <br />
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**US futures extend rallies as debate over where to go next continues.** <br />
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**USD/RUB higher as UK/Russian relations thaw on chairlift.** <br />
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**Italian stocks steady as disagreements break out as to whether you said take the red run after the pylon or turn right down the black back to the valley.** <br />
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**USD/MXN extends gains as he must be here soon, he can’t have got lost can he?** <br />
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**US treasuries slip as I do.** <br />
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**Zinc up as laughter breaks out.** <br />
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**Chicken consumption falls as thighs ache.** <br />
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**Bitcoin goes up as skiers go down.** <br />
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**Schaeuble says "We don't want to punish the British for Brexit” as British order Jagermeister and tequila yet state 'No, seriously, I'm not drinking that whatever it is’.**<br />
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**BTPs recover as ski boots discovered to be perfect dance shoes.**<br />
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**Mindspace falls in extended hours.**<br />
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**Markets close heavy as it can’t be 10pm already, can it?**<br />
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**Sterling rallies as loss of wallet is expected to restrict overseas spending**<br />
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Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com2tag:blogger.com,1999:blog-7585635149883470944.post-64486734870130169402017-01-22T19:36:00.005+00:002017-01-23T05:36:42.858+00:00A wall of no worry <br />
The 20th of Jan has been an important date for me for the past 3 years, well before the election of Trump was even a glimmer of parody in comedians' eyes, it has been a turning point for markets. This year it has been even more special. The plan has been that any trend developing over December would accelerate into the start of the year only to reverse about now. As the trend has been Trump, then the 20th would be seen as either a confirmation of the trend or a tear in the fabric of space/time Trumpinuum.<br />
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So what is it to be? I missed the live speech due to other commitments, instead relying on my trusty market-o-meter of news, which involves looking at where the markets are and working out what the news was. So first sighting of prices gave me the impression that I hadn’t missed much. Wall Street up a bit, Usd/Jpy flatish, bonds unexcited and everything a bit disappointingly dull. So, I assumed that speech fitted in with exactly what the market was expecting.<br />
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I have always believed that Trump’s plan was to get into power by taking the mickey out of the stalwarts of truth, honour, discretion and humility, getting the revs of the shock and awe machine up to 8000rpm, before taking office and dropping into 6th gear for a much more sedate and considered journey at a calm 1500rpm down the next 4 years.<br />
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But then I watched the speech and my narrative was hit by a shockwave. Here was the same Trump speaking as though he had just started out on the campaign trail. The repetitious rants about making America great again, the rampant protectionism, the rhetoric without substance and even the paradoxical statements such as “When you open your heart to patriotism, there is no room for prejudice” had me aghast. This was not a Presidential speech. It was one from a man who is confrontational (criticising all around him), stubborn, self-opinionated and lacking any 'how' to add to the ‘what’<br />
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How did this fit with the lack of action the markets? The obvious answer is that I was wrong in expecting the markets to expect a statesmanlike speech instead it being exactly what the markets were expecting. Which now has me wondering if the markets or I have the first premise wrong. Mine being that Trumponomics rested upon a steady Trump hand taking the tiller and guiding a changing ship in a different direction, whilst the markets believing that Trumponomics is coming whatever, whether it is as aboard a shiny new hi-tech vessel or a disintegrating hulk of a fireship. But, the way I see it, there is less chance of Trump succeeding in an agenda that will result in outcomes that the last month's market actions are forecasting.<br />
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Then came the protests - I have a very pragmatic view on protest marches. They only work if you have a 'plan B' and are a stepping stone to something else. Having neither and you end up much like the Occupy Wall Street event, an excess of self-expression and street theatre. Though I have read that OWS was a success because - <i><a href="https://placesjournal.org/article/occupying-wall-street-places-and-spaces-of-political-action/">"For many participants and observers, though, its more compelling achievement was to embody a minimally hierarchical communitarian polity that combined consensual direct democracy with a high degree of individual autonomy, and also a voluntary sharing economy with the market logics and state service provision that dominate everyday urban life”</a> </i>Err what? Obviously very clever stuff but, meanwhile, JPMorgan is doing just fine thank you.<br />
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So, lots of people protesting against Trump is great as long as it achieves their objective of getting rid of Trump or changing his behaviour. Having heard his speech and the attitude it reflects, I cannot see him changing his behaviour until his policies have proved so disastrous in their own right he blames others for their failures and effects changes under the flag of 'Saviour from other’s failures'. Which is actually how he got to where he is. If Trump is a protest against liberal elites then the protests are protests against protests. It's a shame that (to paraphrase an old saying) two protests don't make a right.<br />
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As for protest marches against Trump in other countries, they are going to have even less influence over Trump (read 'none') though are probably effective cathartic outpourings of mass grief at his victory, much as the Anti-Brexit marches were and likewise will have as little impact on financial markets - unless it turns towards civil war, which is so very unlikely.<br />
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The other main Trump news of the weekend was the ‘so how many were there’ debate. Unlike a ‘guess how many sweets are in the jar’ school fete competition that sees you winning the sweets, there seems to be little point in entering the competition. What is the upside? It really doesn’t matter how many people were at his inauguration as it won't change the outcome of him remaining President for four years. If it did then you might as well scrap elections and have voters turn up in Washington and stand on one side of the river for one candidate and the opposite side for the other, to chose the winner.<br />
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The point of the issue is just how much of an issue it has become and how it is being handled by either side. The key observation is that Trump is valuing image over substance again. He is willing to take on the Press over anything that doesn't portray him in a favourable light. He is <a href="http://www.independent.co.uk/news/world/americas/donald-trump-interior-department-twitter-retweets-ordered-shut-down-a7538951.html.">even accused</a> of halting the National Parks Service twitter feed in response to them tweeting ‘HowManyWereThereGate”. But as is possible in today's news games there is, of course, a chance there was another good reason for that action. A chance.<br />
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Boiling the last two days down, I have seen an increase, not a decrease, in the similarities between the way Trump is managing his new estate to a couple of other famous leaders around the world and though it is very early days and far too early to draw any conclusions, I am starting to compile a list of potential similarities that I am keeping an eye on<br />
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Running on a nationalist agenda.<br />
Blaming overseas influences for the country's woes.<br />
Blaming your own press for misreporting the truth.<br />
Controlling social media output.<br />
Manipulation of truth.<br />
Showing more conciliatory tones towards Russia.<br />
The belief that forces within your own secret service are working against you leading to you awrranging an organisational Putsch.<br />
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Ok, it’s not a very long list, but its a start. Of course, if he finds himself without enough power to execute his will then he could take the Turkish route and <a href="http://www.independent.co.uk/news/world/middle-east/turkey-parliament-vote-president-recep-tayyip-erdogan-more-executive-powers-a7529046.html">award himself some more</a><br />
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<i>"Power corrupts, executive power executes" Polemic Paine 2017</i><br />
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Now whilst my quizzical concerns could easily be debunked, IF I were to do what news wires do with implied causality, (eg. My cat had green eyes. You have green eyes. My cat got run over. Woh, you'd better avoid roads or wear blue contact lenses) I could suggest the USD is going to go the way of the Turkish lira, but then I guess the US doesn't have a current account deficit that needs funding from foreign direct investment, a huge budget deficit and nor is it strapped with vast amounts of debt. (chortle).<br />
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But seriously, the theme is that Trump is good for the dollar, primarily because dollars will be repatriated home in a patriotic manner (happened with Turkish lira for a couple of weeks until exhausted and those who had, were soon 30% worse off) and that growth will outpace interest rates which will outpace inflation. And there you have the nub of it. Growth, inflation and interest rates. the balance between the three is critical. It is in any economy but in the new Trump world, it is critical because though there are some strong opinions as to which way they go (apparently all upwards) it will be the relationship between them all that is crucial and the margin for error in predicting the differential derivative is huge.<br />
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The expectation for economic wonderfulness has been rampant, you only have to look at sentiment charts since Trump was elected to realise that it’s all on hope rather than reality, because reality has not changed fast enough to justify these spikes in sentiment. Small businesses appear to be those who have invested most in the Trump dream.<br />
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<span style="font-size: x-small;">Charts shamelessly nicked from my friends at <a href="http://macro-man.blogspot.co.uk/2017/01/quantamental.html">Macro Man </a></span></div>
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CEO confidence</div>
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Uni of Michigan Consumer Sentiment </div>
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Small business optimism</div>
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So there we have it. Trump's speech has not given me a feeling of calm control. His reaction towards the Press and CIA appears to be as confrontational as ever and this falls upon a country with very high expectations. The markets on Friday took the speech in their stride but plenty of them were looking at each other for solace, with the final pit-prop of belief being the sentiment readings creating a "wall of no worry".<br />
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I am still struggling to see how Trump can square handing power to the people whilst stifling the Press and delivering non-crony capitalism whilst imposing greater controls on the free market. If I am not a complete outlier in my interpretations, there should be a lot more doubt today than there was last week and with it a reversal in the sentiment of the Trump trade and, with that, a fall in equities and the dollar.<br />
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The carnage may start right here.<br />
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<br />Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com30tag:blogger.com,1999:blog-7585635149883470944.post-64069651965427440062017-01-17T22:45:00.000+00:002017-01-18T10:17:16.195+00:00The end of the land of the free. <br />
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Mrs May has been top of the headlines as The Economist cover once again proved a negative indicator.<br />
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The weekend saw leaks of her statement with screams of terror from the usual sources as they sherry picked (like 'cherry picked' but in otherwise genteel front parlours) the headlines pointing towards a harder Brexit. With this came the knee-jerk narrative to sell GBP because that's what the simple programming that is currently being applied demands. This made two assumptions. First that May really is going to sacrifice all ties and the second that the result of a hard Brexit means that GBP should be yet weaker (weaker than the 15%-20% it has already fallen). GBP fell to 1.19something on Asia open only to recover and then languish around 1.2040ish for the rest of the day. This morning's commentary was that she has leaked her speech to prevent a market meltdown. But today saw GBP rally 3% to levels higher than where it was on Friday. What a complete and utter waste of time listening to the garbage on the wires. The only headline worth its salt would be<br />
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**GBP RALLIES THE MOST SINCE THE LAST TIME EVERYONE SAID IT WOULD FALL**<br />
but you just don’t see that,<br />
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I have come to the simple conclusion that the reason that the commentary is so wrong is because very, very few of those commenting actually trade the thing. The reason prices move is because people buy or sell in differing ratios upsetting the equilibrium of the assumed fair price. The reasons that people trade is hugely complex. The drivers behind the individual trading decisions can vary massively. Commentators can not accurately define why GBP is lower or higher unless they have actually spoken to a person who has traded it. Here I am not talking about an FX salesperson who has transacted a trade for someone else, nor even a spot FX trader (who manages flow but rarely knows the ‘why’) but the fund manager, central bank, sovereign wealth fund manager, hedge fund or real money PM, or collection of electrons in an algorithm who actually decided to swing the bat. And funnily enough, practically none of them will ever a) want to tell you b) want the fact that they have traded be known in the first place.<br />
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<span style="background-color: #f5f8fa; color: #292f33; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; white-space: pre-wrap;">As my friend JG said </span></div>
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<span style="background-color: #f5f8fa; color: #292f33; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; white-space: pre-wrap;">"Herewith, the slime trail ident of a clueless commentariat, machines and dickheads".</span></div>
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False news, bullshit, selective reporting to fit agendas and so on. It’s a theme throughout politics, markets, social media and, currently, life in general. Why is it so? Because we are awash with free stuff. Said to be free, but not free. The quality of free stuff is currently so low that I am predicting a backlash against ‘free’*. The easiest form of marketing includes the words ‘new' and ‘free, but 'free' has moved on from 'free’ apps just stealing all your personal data to data that is completely fallacious. Which leads me to believe that the days of ‘free' are near an end. It has started already with many once free publications going subscription and many good bloggers either trying to charge, throwing in the towel or moving to a broader platform that provides an income (e.g. <a href="https://macro-man.blogspot.co.uk/2016/12/another-farewell-of-sorts.html">the excellent Macro Man</a>).<br />
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Information has a hierarchy of value. Untruth, Opinion, Truth. As with any commodity, the value of which will be defined by supply and demand. As scarcity drives up prices so it will be that the price consumers are willing to pay for truth will increase. I am now willing to pay for verified news that comes with a guarantee rather than a disclaimer.<br />
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Ok rant over, back to financial markets.<br />
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My mythical turn date is effectively upon us. The first option expiries of the year combined with Trump's inauguration speech. As expiries are tomorrow, I have taken the liberty of front running the Trump speech by putting on a selection of trend reversal positions. Mostly through options as volatility has been crushed. FX, apart from obstinate dabbles in GBP, I have left alone as the dollar has already turned (I do love the EUR/USD 1.1000 magnet, it’s such a parity-party pooper). In equity indices, the FTSE has been in my bag for a few days now but I have added Dax puts, spread over the next 4 months, to back my views that although Europe has growth, growth is actually going to be a problem with regards to arguments over ECB policy. And for a narrative twist, I am going to invoke my first rule of narrative "Change the subject before they notice you are wrong”. So if I am looking for a turn in markets against the recent narrative then, rather than deny the narrative, the subject will change. Wrong on the market responses to Brexit news? Wrong on market responses to Trump? Then change the subject and Europe is there ready as it's been out of the limelight since Italy didn’t last blow up.<br />
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Emerging markets is where I really should be playing as they have been doing so well, but I am loath to. I'm more willing to wear a downdraft there. My bête noire of TRY is still proving that political upheaval and fundamental realignment of the political seismic plates swamps charts, oversoldness and historical value measures. The only EM counter-trend trade I have put on is long Mexico ETFs.<br />
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Oil is a toughie here. A downdraft in risk should see oil lower too. Add that to the well noted positional excesses and I should really be getting out. But I am still hanging on in there with dodgy oil stocks. I know there a hundred reasons to sell it but I’m going to hang on for $65. Commodities, in general, are frothy but I am looking at them returning to favour as part of the super-cycle.<br />
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I only have one comment on the World Economic Forum - The World Economic Forum is now like the Glastonbury festival, where those who go, go to be seen to be going; the headline acts are past their prime; their old songs are nostalgic but their new ones are solely self-indulgent; but, more importantly, it isn’t the performers who set the trends these days - it’s the crowd.<br />
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<i>* </i><i>I include this post as an example of free stuff which is opinion rather than truth and has little value or cannot be verified as true. Read the disclaimer! </i>Polemichttp://www.blogger.com/profile/05985506596290073453noreply@blogger.com15