The Bear Signals are Aligning.

A very quick look at concerns that are building rapidly.

Background :-

Europe - Who is in charge?
Russia vs RoW - Slow escalation.
UK - Fracturing political structure.
Middle East - Deja Vu
Hong Kong - Riots with many remembering/frightened of a Tianenmen Square
DM Economies - Rolling over.

Price action :-

High Yield prices yukky.
Small stocks leading the main indices lower.
UK London house prices off.
UK stock shocks increasing (Tesco, Balfour Beatty) - Leveraged expectations being caught out.
Usual EM stress points breaking (watching Turkey).
DM and EM both moving lower (haven’t seen that in a while).
Corporate bond market liquidity a real worry.
IPO launches rapidly going negative.
Commodity prices still falling.
NZD melt down - separate issue but pretty sure John Key knows the background carry concerns so is just helping the NZD on its natural way
European markets opening down despite late NY rally

This is beginning to smell like a typical all round September/October risk dump. So this permagoldbear even thinks he'll buy gold and JPY - and that's saying something!

More Golf Balls

The Ryder Cup is back and once again has me wondering what golf is all about. Don’t get me wrong, I have been a member of a golf club myself and have wandered the fairways only to come off the other end with regular feelings of despondency only rarely spiked with ones of satisfaction. But that satisfaction is itself questioned as my achievement has hardly been through the achievement of a goal I have set myself, but the achievement of a goal set by others - those that set the rules in the first place. Golf is like a drug, it messes you up, wastes hours, turns your brain to mush but now again teases you with enough of a high to want to have a another go at it.

At the risk (no, i mean intention) of upsetting the purist it is time that the rules of the Royal and Ancient are dramatically updated to produce a sport which is not only more fun to play but also to watch as it is currently only one level up from watching snooker in black and white.

There appears to be some irony in what golf clubs have become. Despite their throwbacks to grand upper-class institutions, with their interior design strongly nodding towards Victorian hunting lodges (even if they are located in 1980s brick supermarket style buildings) and with their inane rules that challenge those of the most peculiar of English public schools, most of the cars in the carparks around here are taxis. The drivers are not delivering, they are playing.

With the number of players still falling (one of our local ones has closed down and returned to arable land) it is probably time to bust down the doors of the establishment and introduce our own new order and to do so I will present them in the format of my own dream golf club -

-----------

Welcome to 'Polemic Dales'. Golfing as it should be. 

Dress code. No garb allowed bearing diamonds, checks or the words Teitlist or Ping. In fact no golf related words allowed at all. Any other garb allowed.

The Rules -

Rule 1 - No w@nkers.
Rule 2 - Only 7 rules.
Rule 3 - Bad shots to be greeted with howls of derision from fellow players rather than smug suggestions for improvement or sympathetic hissed intakes of breath.
Rule 4 - No out of bounds.
Rule 5 - Overtaking allowed, overtaken party to keep clear and it is up to them if they wish to take cover or not.
Rule 6 - Use of trackable balls (lent out free at reception) compulsory.
Rule 7 - Any type of club allowed, even ones you have invented (including snooker cues for the greens).

New game play variants -

Foot golf - We’ve been beaten to it already see here.
Speed golf - It's not the number of shots that count but the time you can complete all holes in. Can be expanded to take in cycle-golf.
Limited shot golf - You only have as many shots as the par for the course. Your brass plaque is pinned in the ground at the furthest point reached and is only moved on once you improve upon it.
Only par golf - You can move on to the next hole if you parred the previous one, otherwise it's back to the beginning after a 20 minute time out in the bar.  We would suggest each course has at least ten first holes. The 18th hole will have a rarely used champagne bar off the green.
Cross country pub to pub golf - Having tried this I can only say that it is brilliant.
Throwing golf - Not a master of the club? You can throw the ball or gently bowl it on the greens.
Mortar golf - Golf ball diameter small mortars are used to propel the balls. It is up to players to set the trajectory and chose the size of the mortar charge.
Drone ball - For the young tech-savvy, UAVs (without camera aid) are used to fly and drop the ball. The operator can only stand at the point of ball pick up and use line of site.

The Committee -

The following will be excluded. Middle ranking accounts managers with a penchant for petty rules. Retired company directors. Anyone who drives a Lexus or  Jaguar, or who's last holiday was a cruise.

Club House -

No tartan to be visible, no green in the carpets, no wood cladding, no dress code. Women not only allowed but compulsory. Michelin restaurant attached onsite at one end, BBQ grill the other. Large night club attached with top DJs in the evening (these places are miles from anywhere built up so no noise complaint problems). Maitre’d who is really good at his job, knows all members and introduces them to each other so they get to know each other. Staff to be polite and helpful and not tell stories about their time in the war/driving coaches/playing golf/running a bed and breakfast. Free shuttle bus to take members home to avoid drink-driving problem.

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Of course the club would welcome any other fun suggestions. If your response to the above is one of disgust and a  "Sorry sir, but it's tradition" - Well so was slavery, but we managed to change that with the times.

The iPhone6 Songs

The Apple woes don't seem to be letting up. I was just walking past an Apple store and I'm sure I heard this coming from the iPhone6 Stand.

(Apologies to Simple Minds for obliterating one of their best ever songs)




The iPhone6 Song -


Hey, hey, hey, hey
Ooh, oh

Won't you come and buy me?
I’m alone in the store you know it baby
I’ll sell you my dreams
Though I’m becoming a mess inside and out

Though IOS8 may turn your screen dark
Think of the upgrades we're working on
But slow change may pull us apart
When the light goes out in your heart, baby

Don't you forget about me
Don't, don't, don't, don't
Don't you forget about me

Don’t pick Samsung above me.
Look my way, please love me
But trust keeps falling, trust keeps falling
Down, down, down

Will you recognize me?
Call my name or walk on by
My stock keeps falling, stock keeps falling
Down, down, down, down

Hey, hey, hey, hey
Ooh, oh

Don't you try to pretend
I’m not the best, I'll win in the end
I'll try to stay flat and connect to your networks
Vanity and security.

Don't you forget about me
I’m stealing your data, you know it baby
Repair stores going to take me apart
Put my screen back together at last, baby

Don't you forget about me
Don't, don't, don't, don't
Don't you forget about me

As you walk on by
Will you call my name?
As you walk on by
Will you call my name?
When you walk away

Or will you walk away?
Will you walk on by?
Come on, call my name
Will you call my name?

iPhone, blah blah blah blah.
When you walk on by
And forget my name


--------------------

And to follow that, with gratitude to commenter 'C', The Outsiders and American Breed, I have lifted this from below -

Bend me, shape me.



You are all the mobile I need
And baby you know it
(Know it, know it, know it)
You can make this beggar a king
A clown or a poet
(Poet, poet, poet)
I'll give you all that I own
You got me standing in line
Out in the cold
Pay me some mind

Bend me, shape me
Anyway you want me
Long as you milk me
It's all right

Bend me, shape me
Anyway you want me
You got the power to turn off the light

Everybody tells me I'm wrong
To want you so badly
(Badly, badly, badly)
But there's a force driving me on
I follow it gladly
(Gladly, gladly, gladly)
So let them laugh I don't care
'Cause I got nothing to hide
All that I want is you by my side

Bend me, shape me
Anyway you want me
Long as you milk me
It's all right

Bend me, shape me
Anyway you want me
You got the power
To turn off the light

Yeah, bend me, shape me
Anyway you want me
Long as you milk me
It's all right

Bend me, shape me
Anyway you want me
You got the power
To turn off the light

Noise over Substance

Is it possible to over-analyse a market? What is the benefit of dissecting every nuance of every flutter? I ask because the number of man-hours consumed in watching, interpreting and (let’s be honest) guessing what the shape of the forward yield curves in the major economies of this world are going to be is staggeringly, STAGGERINGLY large. And to what use?

The Fed signalled over a year ago that the taps were going to be slowly turned off when it came to QE and since that point the extrapolationistas have been waving their rulers or, in the case of yield curve analysts, their bendy rulers and prognosticating in ways that at first appear to be ones of remarkable accuracy, but soon resemble spurious accuracy and finally become absurd inaccuracy.

The same process is reflected in the trades that are discussed, spurred on by the apparent unwritten rule in finance that the more complex your trade structure the cleverer you must be. A whiff of a word from an official source and rather than buying or selling a basic it’s a complex leg structure of buying barbells, butterflies, condors, seagulls and any other flying creature that you can use to show your prowess at trade structuring in order to climb up the Candy Crush like levels of peer recognition to reach the accolade of 7th dan, black belt yield curve guru.

The level of gravitas with which complex curve structures are discussed, all argued and tweaked to the nth level of basis point precision, is in most cases farcical as the next word from an official normally creates a blast of noise so great, the gossamer tuned trade is atomised. At which point the original complexity and analysis can be seen to have been as worthwhile as old men in a bar discussing their betting 4way-forecasters on the times the first goals are going to be scored in the 2022 World Cup quarterfinals.

A nice platform on which to display fancy analytical plumage but less useful than a dead duck (you can eat a dead duck).


----
Post script -
I have just read Mark Dow's post 'Of Trends, Yields and Metals' which is a great read and sort of argues the same, but by stressing the importance of the large trend rather than my argument against the value of spurious accuracy in the micro.

8th Oct - update
The actions of the markets today in response to the Fed minutes is surely the strongest evidence to support the above postulation.

15th Oct - update
I call on today as the key witness in the case against the man-hours wasted in over analysing the Fed. Today's carnage in rates markets have been the biggest and most painful in years. And the Fed didn't say a word. Today wasn't just noise, it was exploding ear drums.

Unconventional Methods

Lots has been spoken about the possibility of the ECB using 'unconventional methods'. It would be a delight to see some really unconventional methods deployed, so to help out here are some suggestions.

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Replace Draghi with Alex Salmond at the ECB meeting Questions and Answers. Who needs detail when you have conviction? 

Set up an ECB youtube channel explaining how to spend Euros in shops, modelled on daytime TV shopping channels.

Introduce thumbscrews and the iron maiden as regulatory punishments for those who don’t lend. 

Create a subterranean secret society of ECB gnomes who tunnel under banks and fill their vaults with Euro notes whilst leaving their balance sheets untouched

Create an Ice Bucket Challenge equivalent where all vendors of goods and services are challenged to film themselves increasing their prices and then give €10 to the 'Bide-a-wee Home for Old Central Bankers’. They then have to nominate others. 

Build a time-freeze ray and fire it at Germany and while they are frozen go wild with money printing and inflation creation meanwhile running around Germany changing all the clocks back to 1923 and leaving wheelbarrows in every bank. Then turn the ray off. 

Announce that a large Meteorite is going to destroy the world and that Europeans only have 21 day in which to spend their money so they had better get on with it. 

Appoint Abe as head of ECB and wait quite a long time. 

Rebrand the ECB as the iECB, People will mistake the 'i=ineffectual' for a famous brand and believe everything they say. 

Rebrand all european goods iPhone6xxxxxx  e.g. the Citroen iPhone6DX hatchback. Judging by last week's i-mania sales should soar. 

Make Bund prices 50% of the CPI sample basket. 

Make Robert Mugabe head of the ECB calling upon his success in creating Zimbabwean hyperinflation. 

Call in Native Americans to do an inflation dance. 

Reorganise Europe. Sell off France, privatise Spain and Italy, nationalise Germany, buy Switzerland, put Greece on six months performance watch, promote Poland, retire off Luxembourg  and make Belgium redundant. 

Buy the company that owns the Oxford English Dictionary and redefine deflation as inflation and recession as growth. 

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Hope that helps!

This Week in Pictures

Scotland

FOMC

European Economy and the TLTRO 

Notes from the Greek Islands.

Today is our first day home from spending a delightful two weeks sailing ourselves around the Greek Islands. Sailing is imbued with many charms so I have embarked upon some home improvements to continue our enjoyment of them all year round.

I’ve left the tap running in the bathroom above my bedroom to provide that leaky hatch style Chinese water torture through the night, I’ve replaced the mattresses with yoga mats and placed them in a Sauna, I’ve set up nautical wind chimes in my and my neighbours' gardens consisting of 200 ft aluminium poles and ‘just not tight enough’ ropes attached, I’ve screwed random, not quite visible, blocks of toe-stubbing wood and metal to the floor throughout the house and I’ve taken a dolls-house toilet and fixed it into the shower cubicle, together with a bin of used toilet paper. I’ve placed a bucket of rancid yoghurty water in the fridge and thrown all the fridge contents into it, I've fixed a random time switch to the freezer power socket, I’ve unified the function of my washing basket and my wardrobe, I’ve tied every electrical wire we own into a huge gordian knot, I’ve relaid the drains using one inch diameter hose passing through a plastic matchbox on the way to our ornamental fishpond, I’ve put a wasp nest in the dining room and finally I’ve just managed to drag the car onto the roof. There, it’s just like being onboard again!

A few years ago I wrote "Notes from some small islands” whilst sailing around the Cyclades in the Aegean and most of the theme was based upon a general feeling of shock that a country that at the time was in abject financial crisis still carried on as if it wasn’t. But three years on and two trips later to the less bleak and more wooded islands of Homer’s Ionian Sea it is probably time to rebalance the view and add to the notes.

The first impression is that Greece is resigned to its lot and is just getting on with it. As a shop keeper told me "The Greek people are not poor my friend, just Greece”. Which at first had me thinking that the old game of tax avoidance hadn’t been fully addressed, but there were enough signs elsewhere that things had improved with regard to State collection of their kilo of flesh. Credit card machines are now widespread in shops and Tavernas. A mixed blessing as the convenience of presenting a piece of plastic is countered by the inconvenience of a large bill two weeks later in the midst of the post holiday blues. But for the restauranteur he has an audit trail for the taxman to follow and now that they are all being chased, there is less reason not to accept cards. One of the kids tried to haggle a trinket down on price and was greeted with a repost of the time “No way I can lower, I now have to pay 20% tax on that!” Though the cynic in me would suggest that blaming the taxman for high prices is an easy play in the game of haggling.

The level of tourism was noticeably higher than recent years, superyachts were brimming the bays of Fiskardo and Vathy and ferries were disgorging foreign day-trippers from large resorts yet the locals said the voices of foreigners belied the fact that few Greek nationals were contributing, as there is a noticeable slide in local tourists.

I am glad to report that Greek Economics is alive and well. Coffee priced at €3 for the smallest of cups in the shabbiest of cafe’s is still Alpine. Yet for the same price around the corner you can get two Gyros of beautifully roasted pork, salad and tzatziki in a homemade pitta for €1.50 each. (Gyros soon became our base unit of pricing and we suggest the Euro is pegged to it). If Greece wants to get back on a decent footing it only has to come over to the UK and peddle those Gyros beauties in place of the usual giant spam kebab-maggots on a stick we get here.

It still strikes me as odd that a small town can have so many restaurants all lined up next to each other selling exactly the same things. Walking along a quay reminded me of that old Goldfish Joke “Nice castle…Nice castle… Nice Castle”. Only in this case insert either ‘Taverna’ or 'expensive fish’. To be honest it baffles me how Brits can rave about a small grilled farmed sea bass costing 20 Gyros when the fish at home is so much better. I have to report that on the positive side a few Italian restaurants are sneaking in and when found were pounced upon as there is only so much Feta a man can take.

There are of course still glaring oddities about the infrastructure. If they spent as much money and initiative on the plumbing system as they have on the remote infra-red, hand approaching detection, lid opening and closing technology they have applied to the bins that still have to be used for used toilet paper, then the bins themselves would be mercifully redundant. It is strange too that whilst suffering the plumbing pleasures and the R2D2 bins in the most remote island locations, one can be getting high speed wifi that puts the UK services to shame.

Despite the odd minor exception, I felt that the old charms of Greece are returning. It may have been that Greece has dropped off the financial radar for so long that my impressions have mellowed but perhaps the crisis, having dashed the hubris and greed that was tainting the Greek experience, has moved through the stages of grief from denial, anger, bargaining and depression and reached the point of acceptance. As with the weather, the angry heat of summer has given way to a cooler relaxed evening.

Things are changing for the better and the irony of spotting a German street hawker was much enjoyed.

Thank you Greece, I will be back soon.

FX Employee Survey - How's life in the trenches?

I thought it time to give my old profession a chance to air how they feel about the state of the jobs market in sell-side FX these days. We have all had to fill in work related satisfaction surveys but we all also knew that they were not as anonymous as they promised (how else would HR know to send you an email reminding you that you haven't filled it in). This IS completely anonymous, no log-ins etc. which actually makes it less reliable as anyone could fill it in. But I trust folks to be honest.


I have set this up so everyone can see the collated results/answers as they come in, so the benefit of doing it will be to see those results. Please pass on to anyone in the industry so we can get a representative feel of what the mood is like.



The analysis of the responses IS HERE

Innocent Aid - Secured.

If I were Putin I‘d drive a huge convoy of aid trucks around the country gathering, like the Pied Piper, moral support along the way. The longer they parade, the higher the status they gain as humanitarian and morally good. They would be packed with bona fide aid materials, devoid of any military equipment (as this is truly aid) and the nations of the world would be allowed to fully inspect them to rubber stamp the validity of this humanitarian action.

Then I’d drive them into Ukraine to provide succour for the suffering innocents. However to protect this saintly mission security support would naturally have to be provided (as we can all see, this is a very violent environment) to protect not only the aid trucks but also those receiving it. Perhaps a tank or two, or three per truck. Well, you can never be too safe.

An Aid truck and its logistical support

I then split up the convoy deploying individual trucks of aid, together with their own protective force, to wherever fighting is most intense as obviously that is where aid is most needed. Once there, the truck’s escort of security will do its best to restore peace so that aid can be distributed. Obligingly the rebel side would desist from action leaving the only potential aggressor as Ukrainian forces who now have the choice of desisting or carrying on the aggression only to be countered by the Aid trucks security assistance. If the Ukrainian forces desist then naturally it would make sense for the aid trucks to push on to extend their aid services to others, Any aggression against the aid truck being swiftly dealt with by its protective swarm of T-90 battle tanks and air cover. Of course any resulting casualties on the Ukrainian side would need further aid thus justifying a further push west.

If the aid trucks were to stumble in their purpose then they would swiftly be reinforced by the Airborn Special Nun Service meting out their own form of moral rectitude.

Who could possibly morally deny this humanitarian aid to those who deserve it?

The Day the Earth Stood Still

I saw the remake of ‘The Day the Earth Stood Still’ on TV over the weekend. I don’t know why, but it was just on and I got hooked working out if Mr Keanu Alien Reeves was going to punish the human population for messing up the planet by wiping them out or let them off because a single mum and her twatish kid had shown him that humanity is not all bad.

Unfortunately he let the human race off with a second chance by effectively confiscating their mobile phones, or rather making all electrical things fail. A trick I have tried myself to the extent of putting the family router in the boot of the car and driving to work with it in an attempt to leave the holidaying and fighting kids looking for non-internet activities to entertain themselves whilst I was at work far enough away not to hear their protests. Unfortunately their mother could and I had to do the cowardly thing of pleading that I had indeed removed it temporarily and couldn’t remember where it was and perhaps the kids could play ‘seek the router’ for the rest of the day and no, there was no way I would have maliciously driven off with it leaving my dearest in the lurch with the howling horrors.

So the relevance of this to markets? Little apart from the way that Keanu Alien was planning the demise of the world by unleashing a plague of micro-insectbot things that consumed everything in their path in very tiny increments but very fast. A bit like sand blasting. Which is, in my jaundiced eyes, pretty much what we have with the markets. Lots and lots of bad things that are overloading the immune system and causing us to go to bed with some ibuprofen, hide under the duvet and hope we feel better some day rather than being devoured and recycled by some horrible plague of bad news.

It"s all very 1970s -

Ebola - It all came rushing back when the dreaded word Ebola hit the screens this year. I am old enough to remember it when it first appeared when I was a child in 1976, watching the news and hearing about this incurable dreadful unstoppable disease. Though my mother, as a very sensible doctor, assured me that its very lethality was its weakness, it gave me nightmares for weeks. Yet Ebola did eventually creep back into its darkest african cave and I though that was that. But here it is again and this time it’s getting out. I hate to say this, but my only recent experience of epidemics has been playing the ‘Plague’ game on my phone. Which all seemed great fun at the time but I predict its sales have crashed over the last month as it is now in the least possible taste. But I am hoping, probably at complacent levels, that the latest bout of Ebola burns itself out again.

Middle East- The Middle East and oil shock of the 1970s was a fundamental game changer to the nature of energy supplies and a jolt that showed that country's economies could not be considered nice little experiments for the incumbent political party to inflict upon their guinea pig populations. Globalisation was real and had to be considered. - FRANCE! FRANCE! FRANCE! CAN YOU HEAR ME FRANCE? This is your problem NOW!

But war in the Middle East is back again. It never seems to die but this time it is unpredictable and uncontrollable because, just like those microbots in the film, it is a swarm of killers only programmed to do one thing. Kill anyone who isn’t them. Unfortunately they don’t have a Keirnu Alien to switch them off.

The Gaza situation is not only dividing the Middle East it is dividing Western nations. As the multi-ethnicity of the world's nations has expanded there is no longer that national feeling of them and us, Okokok American readers aside, where of course 'them and us' is at the bedrock of rallying calls at every level of life, sportsfield, corporate identity, investment bank slavery and finally foreign policy. But European nations are seeing local protests as their populations divide along internal lines that simply wouldn’t have been there a hundred years ago. The dangers of the Middle East are apparent now on city streets across Europe and it leaves governments in a quandary as to how to handle it with them ending up having their decisions pilloried by a good chunk of the population whatever they do. Western governments are doing their best not to get dragged on to a side and if they do, they have to be sure that the enemy they chose is definitely the enemy in most peoples eyes and that the supported side is not as bad.

Hypocrisy is evident everywhere as the the triggers for support come only when humanitarian thresholds are breached - when things get so bad something has to be done. Gaza is a case in point, the fleeing Christians in Iraq another. This sort of thing has been going on at a smaller scale for years but it is now judged too bad to be allowed to continue. But to hear Obama say “The US can’t stand idly by when there is this level of human suffering' does lead one to ask what happened or rather didn't happen, with Rwanda, Darfur and the original Syrian refugee camps which incubated the militant hordes we now see streaming into Iraq.

We could look at the this binary response by governments to vicious uprisings a bit like binary options. Nothing .. nothing .. nothing .. nothing Kaboom, the trigger being its own public’s horrors at what they see (Rwanda by the way wasn’t that visible, it was only when journalists went in afterwards that the true horror was seen. Pre-mobile phone camera apps plus poverty I suppose). But the binary function is a game that all the problem factions play to. Niggle away, spread the network, infiltrate, manipulate and do horrendous things on a big enough scale to take power but small enough not to trigger a reaction.

However the latest horrors in the Middle East appear to be trying something new. Being so absolutely barbaric that they cannot be ignored and appear to actively want the morals in the west to be so shocked that the west is sucked in, at which point, i assume, they hope that those nations getting involved are split internally about what to do.

US policy so far on every level has appeared to be ‘let them fight amongst themselves’ and whilst they have stopped short of fomenting war, there has been very little action in the way of progressing peace. Either in the Middle East or with the waking Bear.

Let me ask one last question before we lead the Middle East. What is the difference between Tony Blair as Middle East envoy and a banker? A banker loses their job and hands back their pay and is never allowed to work in that field again when they leave the place in ruins.

The Cold War - another one of the1970’s nightmares. It is strange to think that there is a whole generation who have no recollection of it and haven’t had the nightmares that I did involving mushroom clouds on the horizon, lost parents and all the other horrors of childhood terror.

To be honest I’m a bit annoyed at myself. After raising flags in this very space as to my concerns over Russian policy and how it wasn’t going to stop at Crimea, I let myself get reassured by (surprisingly mostly American) friends that the Russian economy was in a mess and there was no way Russia could afford a spat with the West as they need the energy revenues. As it is this spat is more like a slow insertion of hot steel than a slap in the face followed by a swift make-up. Who is Russia’s new energy friend? Why of course the Chinese, never fussy about the morals or methods of the supply of their raw ingredients/materials (see Africa). China meanwhile is taking the opportunity to test their boundaries in the South China Sea.

It's all very 1970s out there and all we need to complete the picture is a hefty dose of inflation and a few pares of flared trousers. Perhaps if we follow this into the 80s the next thing we would see is a rise of a radical right (Thatcher and Reagan) as a reaction to ineffectual social and international policy. Errrr.. hang on.

So where are we? It’s the 1970s, we have a swarm of microbots devouring the middle east and we have a swarm of bad news taking over the markets. None of it is big enough to have triggered a full scale rout, but each little nibble undermines the asset next to it and we see a self feeding sell off in risk.

Yet here is where I digress from all the points above.

The junk bond market may be looking as shaky as anything and Bund yields may be doing a Baumgarten (the jumping out of a ballon in space man) and equities may be overpriced and the Middle East may be blowing up and the Cold War may be returning and religious based riots may erupt on the streets of Europe and Portuguese bankers may continue to lie through their teeth and UK house prices may be going to crash and the US may be about to raise rates and Ebola may be going epidemic. But, but, but I think we've had the panic. That's it for now and..

I'm still long equities.

Russian Sanctions - Part II

Putin laments his last Big Mac and discusses the future production of the BigPutin.

So the EU have unleashed the big sanction guns and though they are treading a fine line between moral rectitude and punching themselves in the face, it is a big step forward from the UK's Nick Clegg wanting them removed as hosts of a future football competition. I have long held the opinion that 'one should only worry about things one can change', but with Nick Clegg that can be extended to 'only worry about people who can change things'. So he can be ignored.

Sanctions normally spawn a rash of media stories of unrighteous suffering that some may incur but in general we could be pretty safe in assuming that sanctions could get pretty sneaky and there are bound to be some major unforeseen consequences. Here are some suggestions or predictions of future silly actions and their consequences.


Russia bans the import of artisan goods from London’s Borough Market causing prices to fall from 'eye watering' to 'expensive'.

Russia and France ban Russian superyachts from Monaco both thinking wrongly that the other will suffer most - Monaco goes downmarket and looks to Magaluf for guidance.

London Borough of Chelsea bans Russian hookers - Lots of wives are surprised to see their husbands home early from work.

Brussels follows its solar panel tariff idea and places a minimum charge on Russian hookers of $5000 - The clientele of Porto Banus moves even more upmarket in wealth but even more downmarket in taste.

Russia bans Russians from working on Investment Bank Emerging Market desks - Mass confusion erupts trying to work out what has gone on in their books causing more regulatory fines to the glee of western governments.

The French sue US banks who have Russian quants working for them (most of them) for $10bio each - Well there has to be some retribution somewhere.

US closes all McDonalds in Russia but dangles Big Macs teasingly from US embassy windows - The world sees the introduction of the world's largest yet most inefficient and unwieldy burger - The BigPutin

Russia bans export of all website software created in Russia under white-labeling to rip-off UK design agencies - 404 errors appear on most advertising agency websites and there is a scramble for 'html for dummies' books.

VW remotely reprogram all Russian sold Audi and VW sat-navs to display an erect middle finger - Lots of Russians misinterpret this as a signal to drive straight on and accidentally drive into Ukraine causing the West to believe an invasion is taking place.

Russia sells all Russian owned UK property simultaneously - Half of the UK population cheer, the other half cry.

Russia market Chernobyl (in Ukraine and so not sanctioned) as a Centre Parcs alternative, at 1% of the price, to low IQ gullible Brits causing all British watchdog bodies, holiday regulators and personal litigation firms to blow up due to huge apoplectic overload.

The UK's Vince Cable bans all companies ending in -ski crippling the winter sport industry.

Courchavel in the French Alps declares independence from the EU and instantly becomes the world's richest nation.

US ban Sikorsky helicopters forgetting an important point.

UK bans supplying Moscow arms - The Moscow Arms pub in London runs out supplies and has to close.

Yellen Yell to Sell

As we teeter in the Bradley Sideorgraph market turn period, Yellen's yell to sell has been joined by an upswing in Russia/ Ukraine hostilities, together with further US sanctions against Russian companies, Portuguese banks and the usual concerns of overvaluation that Yellen has only added voice to.

Yet Yellen's comments were particularly aimed at the tech and biotech sector, warning that P/E levels around 100 are risky. Too right they are, but raising interest rates by a percent or two is going to have minimal impact on these stocks as the reasons folks buy them at stratospheric P/Es are based upon hope about the future and dreams of rapid profits. If it was about interest rates these sort of stocks wouldn't have even got through IPO.

To that extent Yellen's concerns are generic and are not under the control of the Fed. Raising interest rates doesn't stop people buying lottery tickets.

One comparison that is being made is that between Yellen's latest comment and Greenspan's "irrational exuberance" speech of Dec '96.

The first thing to note is it took another three years of irrational stock exuberance before it all came tumbling down in March 2000. But it was different then wasn't it? Greenspan cut interest rates in the intervening period rather than raising them. As my old friend Macro Man points out, we now have a young generation of traders who have never experienced rising interest rates and what it does to market's so they will be in for a shock.

But that new generation has also be conditioned by tail risk. Like young lads sent to the front, they are all shell shocked and nervous as hell having been led into battle and taught by, tail risk glory hunters who made their killing in the Global Financial Crapout and subsequent Euro campaigns. They are programmed to look for tail risk. The condition they are not programmed for is irrational exuberance.

Though BAML have issued their Fund manager survey ( see a great run through here on GlobalMacroTrading) I guess what we need is data on how leveraged markets are in long equity positions vs 1999 (any help appreciated). It's leverage that kills and I don't believe anyone is mortgaging their house to buy stocks just yet, more likely the reverse - they are selling their stocks to buy a house.

Beware the 16th of July.

It's that time of year again where my most mythological of turn dates appears. The 16th of July.

As I have written before under the TMM banner, Beware the Humphry Hawkish of July . But this 16th of July is even more special as a turn date for we can add some hockum pockum astrology to the equation.

For today is the biggest turn day of the year so far for the Bradley Siderograph and interestingly the next biggy is 20th Nov which rings a bell as another regular event turn week. Let's Thanks Giving for that.




Not much to go on, but combine that to a full moon and a positive response to the Humphrey 'Hawkish' testimony and we may be about to see a change of mood. Now the big question is a change in mood from what? The distribution of opinion is very much bi-modal rather than normally distributed at present, as indicated by the lack of response to questions on equity direction that yield 'hang around here for a while'.

This writer is too keenly aware that the last 2 months have seen a definite trend higher that these sort of change dates should normally reverse.  But there is conflict as he is also still happily thinking that the next move is higher and would be delighted if todays 16th July is the start of a massive move in that direction. Especially as we have just had another failed test lower.

So still playing the 'onwards and upwards' into a rarified atmosphere of equity valuation nose bleed and bear bleed territory. All the better for an ultimate Baumgartning from. But not yet.

I get the feeling that being an equity bull carries the same social caché as saying you vote UKIP.

Three Thursday Rants

Rant 1

UK BoE re housing - Though those concerned about UK house prices cite various reasons as to why current prices are terrible it is leverage that is always the ultimate killer of personal wealth so the capping of mortgage borrowing salary ratios makes absolute sense. But once done, there is still a cry that prices are still too high. If we assume that for those that want to buy or upsize this is the case then for those that wish to downsize it is the reverse. So why the bias? Probably because we have many more trying to upsize a bit bigger but we have fewer downsizing a lot (I'll wager the downsize ratio is always a lot more than the upsize) or liquidating completely on death. Which means that though the total housing market is a zero-sum game, the majority would like small incremental gains at the cost of the minority who would like to see big ones. The simplest solution to all of this is to build more houses where people don't want them. People only want them in already expensive areas (funny that) so best to change the demographic.

Which leads on to the most wanted area - London. However there are some simple solutions to iron out the huge regional disparity seen in London verses the rest of the country.
First let market forces do their work. The cost of living via housing should ultimately push up labour prices to the point that companies relocate to cheaper parts of the country.
Second, stop spending on London infrastructure (which is being done to make things easier for those living there) as it's a vicious circle and only attracts more in. Perhaps implement the reverse to make it less appealing to live in London. The debate over another London runway is a case in point. Don't bother, but expand Manchester instead.

Rant 2

The process of bank castration continues and Barclays, having thought it had already lost most of its testicular function, has found itself back in the rubber band shop over its dark pools. The principle is that these internal markets didn't own up to the fact that there were some sharks under the surface. The holiday brochure instead selling them as exotic tropical beaches. If this goes through then really every travel agent promoting Australian beach holidays should be done also. Once again its the principle of huge face value markets maybe being bent that upsets more than the actual real cost to end users. As we have seen with FX fixing and gold market fixing we only hear from those that may have suffered but not from those that benefitted from a price not being where it perhaps should have been by a zillionth of a percent. We don't know whether the dark pool service was still of net benefit to the client base relative to costs of going through the main exchanges with their associated costs, even after some scumbags where taking a fraction of it. It's basically resting on misselling even if there was no real cost. Either way go long of 'USbankfines'r'us Inc.' as their revenue continues to exceed expectations.

Rant 3

As we are looking at misselling let's tie that together with the current spate of rubbish UK sports performances (Cricket, Football, Rugby to name a few). In the past when these failures occur there is a cry that more must be done to boost the nation's sporting prowess with academies being set up at huge cost, coaching programs funded at every level and a massive drive to increase the intake to each sport. But why? Especially as there is such an outcry against inequality in pay and reward in every other field of life. Sport has to be the worst offender with zero hour contracts for 95+% of the participants. If we assume that there is normally only one winner in any sport then surely it is more efficient to have as few participants in any sport to maximise average earning throughout? The winner and a couple of runners up take nearly everything and the rest are a waste of any investment and of their own time surely? Setting up sport academies to train thousands of young into a sport for there only to be one winner like setting up super-academies to train people in how to fill in lottery tickets to become lottery professionals.

However, if it is the drive and competition that we admire so much then perhaps this could be harnessed more purposefully. Competing to just compete for personal gain should be classed as personal with associated costs born personally. Unlike a company which drives competition to drive ingenuity and production, rewarding the whole strata of employees from the overall income, hot housing thousands of kids in a sport with the hope of maybe winning is an inefficient use of resources and will end up with all but a handful of them as depressed jobless losers whose best hope of earning a living is coaching others selling on the same Ponzi style dream.

Oh hang on.. That's investment banking isn't it?

Finally tying together homes, banking and sport - If animals are so prescient in forecasting World Cup events then surely financial trading houses would be zoos in the real sense rather than the metaphorical.

I Can't Get No Satisfaction - (Bear remix)

Any excuse to play Devo,

Here we have the bear market's "I can't get no..." after yet another bad bit of news (US GDP) joins the long list of others this year in failing to kick the market significantly lower

For Bulls and Bears - Hyperbolic then Hyperhorrid.

And so it is with English football - all but out but not even granted a clean death, instead being offered a 4% chance of surviving. I thought that sort of torture was banned in the Middle Ages. Don't we get a special conciliation penalty shoot out to go out on, just for tradition's sake? So far everything is running to schedule was we teeter at stage 11 of the 20 stages of a World Cup market. Oh well, not to worry, next up is Wimbledon where English players will be far more successful at getting the ball in the net.

I am always half hoping that football should one day receive the wrath and ire that has been reserved for the generic breed called bankers, though I am still unsure as to whom a 'banker' is as most of the folks I know in banks are far from being bankers (cockney rhyming slang excluded). I am sure that the world would have exploded in flash of moral rectitude if banking were regulated by the likes of FIFA and conversely would be delighted if footballer pay was under the same regulation re deferred and capped performance remuneration as bankers.

So on to markets - Also running much on schedule with the psychology of recent events having indeed taken the path of most pain with equities re-approaching recent highs which, judging by the squealing on most commentaries is not consensus. But here is another big spanner of unforeseen consequence of regulatory straight-jacketing - With those inside the industry allowed to comment less and less, if at all, about opinions the commentary world is becoming even more biased to those outside it where 'steady as she goes' does not constitute a headline, a tweet or FB rant. We are left with even more noise at the tails and less sensible fat middle on the normal curve.

For the sake of transparency and not being under the regulatory thumb any more perhaps I should throw in a two pennyworth that combines the boring and a tail.

So here's the view - Equities will keep grinding up boringly, but once past a tipping point, say 2150 on SPX, they will go spectacularly stratospheric in a hyperbolic spike as every Joe piles in on leverage (Zero Hedge rebrands as 'Infinite Hedge'). This happens just at the time that inflation starts to hit which also then careens higher leaving the Fed on the hop, who after trailing the curve for too long will hike dramatically stuffing global markets (includiing EM ) that by then will be fully geared for chasing micro-yield at the expense of risk. The resulting dump then triggers all the uber calamity theories with respect to the values of money, as the walls of state debt fail to withstand this final tsunami crashing into them. Meanwhile, the world will have been further weening itself off the Usd as the only currency in town and political global enforcement of US financial policy will have annoyed enough other countries to make them think twice before wanting to bail out the mothership again. throw in a few uprisings along the way and it's all change in the world.

Is that view enough to alienate me from everyone? The bears and the bulls?

Less Shock of the New.

Shock is wearing thin and markets are putting in some sort of recovery. Shitty stocks have put in the biggest moves judging by my SSI (shitty stocks index derived from the shitty stocks in my portfolio) which points to the day-trader community (for no one else would own these shitty stocks) having pressed the OMG button on their day-trader platforms. And it does seem to be a general 'sell shitty stocks' move as they seem independent of sector eg. shitty UK gas stocks down just when one might have thought that an OMG energy shock via Iraq and exploding Ukrainian gas pipes should have pushed them higher.

So reading between the lines, we have had the knee jerk market move on Iraq and we enter phase two where OMG is tempered with a bit of 'well actually' and the derivative of primary news, namely 'ah but', starts creeping out of the mouths of those who want to sound more intelligent that the OMGers. Hence the market balances.

From the technical side and here I cut through the plethora of homeopathic indicators to some more basic ones, we have had a shake down from 'overbought' and are now just back to 'now what' which is normally indicated by a proliferation of fibonacci levels being quoted in desperation.

In general the level of 'not done this since the last time' type of comments is still high and it is still fun to note that the pre crisis 2007 highs are still being used prolifically as a benchmark for all current performance with no respect to the fact that 2007 levels were stupid to start with on many levels. Highs or lows are always an easy anchor to chain one's own biases to, even if said high or low was, by it's very nature, an aberration.

If we measure the path of most pain as the one that derives the most 'You have got to be joking' and hence 'WTF' comments, I would happily put my money on another rally in stocks resulting in a lot of torn out bear hair on the floor.

Talking of being dulled to shocks, it's pretty clear that the extremists in the Middle East think western forces are not to be feared after the last 10 years exposure to them to the point that short of all out invasion they really don't care. Perhaps it's time to play tag wrestling with respect to Middle East intervention sending in Team China. That should cause an 'Ooo Err missus' from the likes of ISIS.

As for FOMC, It will probably go BoE and revert to mean. In other words no shocks other than a shock that you misinterpreted the last FOMC.

Onwards and upwards..

ISIS Attacks Short Volatility Positions

Low volatility has been the talking point of the markets over the past couple of months as volatility compression has destroyed bank trading revenues, cut macro hedge funds off at the knees and given every bear a reason to trot out charts of how historically low vol leads to higher vol and how that implies price dumps. Which sort of fits, like a badly planned Scalextric track levered together at the last joint, but like trading RSI's as a technical signal, the underlying can keep moving a LONG way against you with only micro moves in the assumed correlation.

This year has seen many a potential macro event pop up with the potential to shake markets down to their roots but like many a Hurricane season of recent years, dire warnings of impending doom have seen each event fizzle out with only moderate breezes rippling the fronds of the market palms.

But here we go again. This time it's the Islamic State in Iraq and Syria (ISIS) attacking the short volatility positions major swathes of Iraq and threatening markets future progress towards Baghdad.  One wonders, having already asked where they get all their weapons from, if these sorts of groups partly fund themselves by front running market moves they know they will create. Manipulation - Go on Mr. Regulator, request a copy of all their communications.

I can hardly add any analysis of forecasting the likely outcome of all this as my own knowledge is only being fed by the same sources as everyone else, but I am more interested in how this will effect market psychology.

We have those that have been desperately fighting the low vol grind and have been short probably taking no action but increasing communictaions whipping up the disaster scenario. We have those that have been squeezed out of shorts reluctantly and are now probably jumping back short not wanting to miss the biggy, we have the twitchy longs who are probably getting flatter, we have the lazy longs who are hoping that this will pan out like all the other shock events of the year (namely only to mean revert 2 weeks later).

The one overriding feeling I have is that this shock has a couple of key elements to it that are more likely to give it legs than others.

- It has come from left field. Not many were expecting a drive south into Iraq from a hither little known group called ISIS. Unexpected is a huge prerequisite for shock effect.

- It ties together all the greatest of Western fears - Islamic extremism, Oil, potential need to throw your own young men into a foreign war and finally a 'whats the point' admission of impotence that you've done all this before and it was to no avail.

On those features this is a psychological biggy. But the psychology doesn't mean that the outcome will be any worse than it would without it. Just as the dread factor of sitting exams rarely has an outcome on the result.

So where do I sit in all this? Scratching my head wondering if this is the biggy, but I have been so preprogrammed by 'that wasn't meant to happen' events in markets over the past 12 months that the first thought is to sit this down move out but buy the dip when news panic is at max volume.

Time to wheel out the armchair generals. David Petraeus must be rubbing his hands together thinking of upcoming consultation and speaking fees.

Two-Speed Regulatory World

The City has always made its buck by arbitraging the regulatory environment. Tax laws keep tax advisors busy, accounting laws keep accountants busy, regulations keep regulators busy and all of it keeps investment banks busy. If rules and regulations are seen as the dams preventing efficient equilibriums in water levels then investment banks are the turbines in those dams taking energy out of the system as they find ways to profit in constructing complex ways to bypass the rules and regulations. However the current and upcoming regulatory overload would appear to be testing even the most creative of institution to find ways around the dam. Flow is drying up and with it the power that it generates. Layoffs are abounding in the City especially in Fixed Income and the currency markets as profits dwindle and banks continue along their path towards 'Post Office' status.

From the outside this would seem like a positive development as it could be said that all the money these institutions are taking out of the system is a tax on the rest of the world. An increase in the application of IQ towards 'proper' jobs rather than nuancing the finest fraction of a basis point from a mythical price makes perfect sense (even for the biggest pricks) but there is a core function that these markets provide for the world on which all the excess froth formed.

As posted recently here, the FX markets are under the regulatory cosh and a concern is that if garrotted to within an inch of their life then the regulatory hurdles become a serious cost and barrier to entry, reducing competition as the few main players become similar to oligopolic utility companies providing the end user with services priced far away from efficiency (energy prices falling, but UK utility bills staying high). Even the user starts to suffer - well someone has to pay for all the changes and restrictions somewhere along the line.

There is a lot in the news at the moment about how BNPParibas' $10bio fine is already testing relationships between friendly states and has brought into question how enforceable or even correct it is for one country's rules and morals to be enforced upon an other (Frank Dodd being another prime example). There may be a case of hypocrisy here where countries refuse to have foreign ways of life imposed upon them, surfacing through nationalistic expectation of immigrants to leave their rules of behaviour behind when they come in, but at the same time imposing their own rules of behaviour on other countries.

It is worth asking if a global homogeny of regulation has to assume a global homogeny in beliefs, values, ethics and historical upbringings as at the moment the world is still very diverse. Shock at the way the cultural differences interface is probably most visible with Western interactions in Afghanistan, Iraq and a plethora of other 'hearts and minds' conquering failures. They are just different and enforcement of foreign ideals in the short term doesn't work. If it is to work it more likely takes generational change coming from cultural morphing probably via social melding internet services. Note to Europe - The English language will probably be the uniforming force in Europe rather than the Euro or any EU Parliament imposed edict.

With a world full of cultural differences, just as with regulation, there are attractions to effectively arbitraging these differences. We have seen companies moving offshore to minimise tax burdens, ship owners register under far off flags to reduce regulatory loads, clothing manufacturers move production to deathtrap sweat shops to reduce labour costs and even FIFA declaring itself super-regional and above the law with respect to corruption, so it may be worth considering how far the regulatory market can squeeze an industry before the market feels enough is enough and packs its bags to set up shop in a new less ethically bound but much more profitable world. How far can you push a market before the path of efficiency is to move to the dark side and stick two fingers up at the world it is leaving behind?

Where would they go? There are plenty of grey states around the world that could develop their own competitive financial markets but let's have some fun and think about what would ideally be needed. You want an unregulated, cheap, empty and undeveloped country that can effectively be bought and start again in. A green field site. Somewhere to build a new financial hub in the European time zone, unsaddled by monstrous debt (US, UK, EU) and irrevocable old laws (Dubai), yours for the moulding. I have had in the back of my mind for many years that a country like Eritrea with a low population, large size and pretty empty, should put itself up for sale to a large consortium of the mega-rich, private and corporate, and build a low tax, regulation free Utopia. The Country motto being 'Caveat Emptor' with the only rule being, in Mad Max style, "Bust a deal, face the wheel".

It would immediately place responsibility solely on the purchaser to do their own due diligence with no crying to rating agencies, regulators, government or personal claim lawyers if they mess-up. The low-cost airline of the financial world. No frills and you know that price is low at the cost of service and guarantees. You want guarantees? Sure you can have them but it will cost you. No doubt a secondary insurance market would naturally evolve (Like CDS's) to cater for those that didn't want to bother with their own due diligence and this would become a reference point for implied risk ( as set by the market) rather than the theoretical risk that rating agencies uselessly peddle. You want regulation? Sure we can offer you a regulated version but it will cost you. It's available but not compulsory and that is the key.

But there is always a concern - Upset the old world enough and they will first impose sanctions and then physically close you down (invasion). Sanctions are only effective, like a siege, if they cut off enough sustenance to cause serious damage. If the new grey world state is big enough and self-supporting enough then sanctions may well not be effective. As for security against invasion? Well, next-door in Somalia are a bunch of easy to rent guys who for the last 20 years have been running rings around all-comers. Job Done..

But on a less tangental level is it not possible to introduce a halfway house of regulation where an institution can offer two versions of a trade - the regulated or the not regulated? It already happens in the electronics stores where you are offered an extra three year warranty at a cost. We know what most people say to that.

20 Stages of a World Cup Market

It's that time again for the World Cup to influence markets so despite various opinions on the effect of markets here is a basic guide to how it will most likely go.


1- The host country doesn't get its act together and everyone sells host nation assets as it comes under the global and hedge fund spotlight who notice what a pig's ear they are making of it.

2- Arrangements for client conferences in host country proliferate hitting the absurd with respect to subject titles such as 'Latvian telecom market and how it is influenced by Brazilian logging conference 2014, Rio'

3- The host country pulls it off at the last minute and speculators buy local assets as reports start coming in from early arriving reporters about how great the hotels they have been put in are and how clean and organised their deliberately sanitised prearranged surroundings are.

4- Volatility is meanwhile sold in all major global markets as there is an assumption that markets will go quiet as all turn to their TVs. Except for US local assets as no one expects the US to understand what's going on with respect to soccer, apart from the Hispanics who tend not to live in Connecticut.

5- Huge traffic increase in Bloomberg IB soccer related chat as this is not covered by FCA / SEC regulatory information transmission codes.

6- Despite the above, a few dealers are suspended for offering bets on the World Cup outcomes (bets are not permitted).

7- Banks spend fortunes on establishing whether office sweepstakes are covered under regulatory guidelines re. insider trading, prop positions or speculation and ultimately decide to ban them.

8- Kick off - Markets are indeed quiet as the world turns to the opening matches. City bars with TVs do a roaring trade and are able to double prices from 'ridiculous' to 'downright offensive'.

9- Armchair football generals pop up in otherwise clueless sell side desks passing on informational irrelevances (involving Goalkeeper's grandmothers) in order to impress clients with their comprehensive knowledge.

10- Research desks get into the mood and provide any 'amusing' correlations they can find between any market and any soccer fact but it is Goldman who outshine with a 300 page research note on it.

11- England are out. David Cameron announces a national day of mourning and the press demand the canonisation all the members of the 1966 winning squad. Cameron acts accordingly. Ed Miliband demands an enquiry and the resignation of the whole of the Government front bench whilst Clegg promises free football coaching at all primary schools.

12- London pubs see a drop off of trade. Clients start sending regrets that they are now busy and can't attend the quarter final canapes and beer evenings in second tier banks' boardrooms arranged and accepted on the assumption that England would be playing.

13- The UK population checks its collective ancestry to see if it can claim allegiance to any surviving country in the competition and then does so.

14- UK Office for National Statistics report this vast increase in claims of overseas origin which reignites UKIP's fervour and causes mass confusion over immigration policy.

15- France is out. French politicians blame the UK.

16- Germany are the last remaining European team in the competition which divides European support along the lines of bail-out status of country of origin.

17- UK have gone back to supporting rugby, cycling, rowing and sailing (cricket having also disappointed) after declaring the whole World Cup corrupt as proven by the Qatari bid for 2022 so London markets are trading normally.

18- Prices in volatility starts to tick up as expectations of a return to a normal market return.

19- A country wins and after that country's economy takes a beer and restaurant based short term economic boost things return to normal.

20- Markets flatline and once again disappoint those long volatility positions and the next excuse for lack of activity is desperately sought.

Regulation Killed the Forex Star.

As video killed the radio star, regulation appears to be killing the FX star. The sight of a baying FX phone jockey bullying and cajoling, buying and selling, ripping and clipping started to fade years ago as communication shifted from phone to screen and pricing shifted from voice broker to e-platform. But the regulator may be putting the final boot in as new regulatory pressures arising from actual, political and reactionary needs does for FX what the window tax did for large houses. Namely start off with an honourable intention but end up creating dark institutions not fit for purpose.

The latest onslaught has gone mainstream, with front pages beginning to cover the issue loving to suggest that a market with over a trillion a day in volume is corrupt, but how can this regulation be made to work fairly in a market that is global and does not run on an exchange? Regulation has already taken its toll on the ability of sell side to offer a client what they have always demanded, namely advice and best execution.

Advice has already been hit by restrictions on what a sell side participant is allowed to say. For the research department, advice that is extreme of view is frowned upon and opinion is being watered down to a mushy mean wrapped in disclaimers and codicils that make them near worthless. If a client has a trade recommended to them and it turns out that the institution is positioned the other way in a different department, then cries of foul appear even if the salesperson recommending it had no clue of the distant position.  If a trader is to suggest that a currency may go up and he is long of it for whatever reason, the trader is now obliged to advise that client should his position change, which being a fast a fluid market can be so unmanageable the trader just won't bother engaging with clients to begin with. An individual on a desk when asked "what do you think?" now has limited upside in expressing an opinion should it by some unfortunate and unexpected link be later attached to something going on elsewhere in his institution he had no knowledge of and he be held for disclosing sensitive information. 

Researchers themselves can no longer give a client an opinion, such as an informal view on EUR/USD over a dinner, if that opinion hasn't previously been expressed in a formal public advice. Advisory may well have to split away completely into a subscription service and indeed has in many cases which has really tested the value of the service in the first place.

Best execution - What exactly is that? Hitting the best market bids at the instance of execution? Or is to encompass market timing and advice on short term direction?  Spoofing a market higher before hitting bids with the intention to actually sell a large tranche was de rigour in the past with much of the motivation being to supply the client with a better price than they would have recieved by "selling clumsily" and just hitting every bid in the market and seeing the price melt only to bounce once bids had time to return.  

This raises an interesting point as to how execution is to be governed in future. If every market trade has to be reported against a client execution then the incentive to finesse an order drops and the client ends up getting a poor but well reported fill rather than 'best execution' in the broader picture. 

With transparency of pricing and a regulatory requirement to provide 'best price' we are immediately at odds with the role of a spot trader whose raison d'etre is to make money, which can be done in a couple of ways.

- Take proprietary positions in the market
- Buy or sell to cover client trades at a better rate than the client receives.

The second statement will already be raising the hackles of both regulator and the 'little man' but in a broader light this is no different from any other business where price of product sold has to be more than purchase price plus costs. As FX stands at the moment a counterpart makes its own price (like any high street shop) and it is up to the client to trade on it or not, which is justifiable. But when it comes to exercising client orders confusion can creep in where the client will expect to be filled when a price trades one tick through his level. So if the bank has executed the trade on this basis and not made any money on the trade (bear in mind the key point that FX is not a commission based business, unlike equities)  the value has to come from somewhere else. This somewhere else has always been generally classified as 'information'. Which begs the question of how this information can be of value.

A clear and public example of this informational value has surfaced through the WMR fix investigations which are showing, allegedly, that banks have colluded in their trading based upon information they have about client orders. Thus this must be market manipulation. Market manipulation is the heinous charge that governs all outrage from Libor fixings right through sport betting scams to goldbugs who are convinced that the world is conspiring to suppress the value of their anti-fiat money doomsday hordes.

So when is trading market manipulation?  In the broadest sense any trade in a market is manipulation as it will have a direct impact on the next subsequent price available. In the regulatory sense manipulation is acting in the market to effect subsequent price for personal gain at the detriment of others (but then any trade's subsequent gain must be at the detriment of others or where did the profit come from?). The well publicised FX Fix fixing is a hard example of collusion and price manipulation which can easily be mended by changing the absurdity of trying to trade upon a hypothetical price. Views on that previously expressed at TMM -

The debate revolves around the WMR fix, which is a strange animal. It isn't
a real exchange rate you can trade on in a centralised exchange, it's one
which is drawn up by a private body and released after its calculation from
published dealable prices over the course of a preceding time frame. Many
asset managers and funds have their portfolios benchmarked against this
number and hence would like to see their execution done as close as possible
to it so as not to have annoying accounting disturbances in their
portfolios. As always, the greatest problem with benchmarks is that people
tend to get more worked up over variance from benchmarks rather than the
actual level of the benchmark itself. This then opens up behavioural risks
in the system due to the divergence of accounting from reality. Oh my word,
haven't we seen that before. As we regularly say - "Benchmarks are Bollocks"

But the expression of market manipulation could be reduced fractal style to include the translation of the 'value of information', mentioned above, with a single small client order into monetary value. If a trader can no longer position his book conditional upon the orders he sees in it because in regulatory eyes it could be seen to be interfering with the best interests of the orders themselves then the original value of information is removed. Which would therefore lead on to asking why the bank would offer such services at all if they couldn't take any value, monetary or otherwise, from the trade.

The answer partly comes from an assumption that bid offer spread can be captured and this is where machines have overtaken men. An institution's e-platforms will execute orders at lightening speed matching buys and sells and taking a hair's breadth of margin from it. But if we think about what these machines are doing, all be it in fast computery way, it is exactly what a trader would do (many and maybe most trading algorithms have been derived from human behaviour). They analyse the orders they have, probe prices with micro amounts and use that information to set the prices they are dealing at and decide their own positions. Is there a difference in ethic? Should the algorithms and their programmers escape the potential jail sentences their human trader counterparts are subjected to?

Perhaps not, because this is where the pincer movement against High Frequency trading comes in. Enough has been said and written about that without having to dwell any further, but if the push is to dehumanise trading on one hand due to errant human ways then we had better watch out that the computers the trading is devolved to haven't also been removed through separate legislation. We have the anti High Frequency groups crying for more human intervention and those that don't trust human trader nature calling for more computerisation. 

So why is this the case with FX and not with every other traded commodity? In many ways it is and the evidence for manipulation in the FX market is minuscule compared to some of the price swing evidence seen in other markets around closes or option fixes, but the key difference is that FX is not traded on an exchange. It is a sum of a myriad of market stalls. Is this different to the bond market? Not in that respect but the bond market has an advantage - it is nowhere near as reliant on credit lines as FX is.

The requirement for credit lines to be established in order to deal with a counterpart not only limits the availability of choice (though the network of prime brokerage agreements that can be established by big players makes their access broad enough to catch most names) but it also affects the transparency of pricing.

Forward pricing already has to take into consideration credit functions as any forward deal carries settlement risk (chance of default at settlement date) against delivery as well as market risk (cost of unwind of the trade if the counterpart collapses before contract date). The chance of default will have to be priced into the forward price and this will be subject to individual credit assessments which will vary across institutions. Without an exchange to standardise and collateralise credit assessment, forward pricing is always going to vary across institutions making it very hard to pin down what the correct reference market price is for a trade.  Where CDS and other tradable credit hedging products are available it is easier to agree credit pricing but for the man on the street it's impossible.

The problem of transparency also occurs in the spot market where a price may be visible on electronic platforms yet untradable as the credit rating of the entity showing the price is so appalling no one has credit lines to deal with the institution showing the price. But the reference agencies won't know that.

Now let's get on to the next can of worms with respect to market manipulation. Options. Hedging of options is calculated mathematically but there is a huge amount of human intervention (otherwise why would a good options trader be a good options trader) and the most intervention occurs close to strikes at maturity or in the case of binary options close to barriers whenever they are close. You don't have to dig deep to hear market chatter of "barriers at xxx" influencing behaviour. If the bloodhound of public and political retribution is on to the WMR it surely won't miss the scent of binary options. Indeed the press are just picking up on it. So far the FT but it wont be long before mainstream lap up the large face values involved and infer that the public is being ripped off to the tune of billions. But
the banks are not alone in the way they defend or attack barriers. Many clients themselves will act with equal aggression leaving this a less clear 'them and us' bank vs rest of world argument with a strong risk that the 'scandal' would engulf 'nice' institutions rather than the already tainted banks and hedge funds.

So let us assume that the regulator and politician get their way in trying to regulate towards a fair and even market. Free from manipulation by computer or human, providing tight pricing in a non volatile way, how are they actually going to do this short of setting up a global exchange?  I really don't know but I am pretty sure that along the way to building their ideal machine they are going to break the current one to such an extent that the provision of both pricing and service to the world's FX clients takes a much greater turn for the worse. Very much like the way a rail company increases prices to pay for improvements whilst reducing services to implement them.

I am very keen to see how this pans out but in the mean time - "We apologise for the late running of your trade and general poor pricing, this is due to suspension of the dealer and regulators on the line"

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Late addition - Having been asked since writing this how I think the regulator would like to see the market operate I can only point to what I wrote nine months ago somewhat tongue in cheek (but now becoming frighteningly more real) Regulator's Perfect Market Hypothesis. ! 

Bristol pound - If you are currency you need FX regulation.

Could I ask that the regulator doesn't forget during this new crack down on currency market manipulation to include the local gift voucher market known as the Bristol Pound that insists upon calling itself a currency?

 It is promised to be pegged to Sterling at 1:1 but there is a 3% FX charge, local shops may offer discounts if paid in it - trading at a rate other than parity to GBP when its pegged to GBP is pure market manipulation, it has a running cost that has never been disclosed ( though I would guess it is close to 1GBP cost per 1BP in issue), has its success measured solely against circulation numbers (in which case a more successful alternative may be Herpes) rather than any measure of increased Bristolian business with any benefits being assumed and unproven.

Alternatively Bristol Pound could give up its claims to being a true currency and instead have itself listed under  "alternative medicines"  as it is homeopathic money at best.

The BP  is still probably running to this schedule The 19 stages of the Bristol pound

Young's Modulus of Macro Managers

The new job has somewhat distracted me from writing for the past couple of weeks and, to that matter, trading too. Which all in all is probably a fairly good thing. The down side is that those pesky puts I bought for a Ukrainian pop have done what most bought options tend to do - expire worthless only for the next day's move to be in the direction you were looking for. C'est la vie d'options

I am beginning to wonder if 2014 could be rebranded the zero-sum year where nearly every move that has occurred due to positions being entered based on future macro expectations has eventually unwound back to where it came from. If the original move was positional and the unwind was positional (taking us back to the starting point) it does make you  wonder if there is any real non-spectultive business going on, or if it is naturally netting to zero. If so then perhaps we are at a proper equilibrium and the noise is a veneer of speculative positions waiting to reverse. After Zombie banks perhaps we have Zombie Markets and perhaps we should all go and join this wonderful event in a couple of week' time. No, It's not a macro manager's parade but it looks similar.

So the tension in the markets is palpable as general ideas and trades are not generally playing out made all the worse by a healthy dose of 'Meh' where what would have been market moving news events are, due to the anaesthetic of past performance of panic trades, yielding performance of zip. This is putting stress upon macro funds where returns continue to be dismal and I can only imagine that the pressures  might start creating behaviourally bias. Macro managers are feeling the stress of lack of performance and the strain of cost bleed and justifying their existance to their investors and CIOs so we could ask, referring back to schoolboy physics, "What is your Young's modulus?"

It would be wonderful to see an E measure appear as a behavioural input into a consultant's measure of a fund manager's investment process.

And on to lighter things - Did you hear the one about the banker, the consultants and the German client? The story is one of lines of responsibility being blurred by a bill for strippers which, though of course is an important issue it, will be probably be scaring the bejessuz out of many an institution if there is a chance that past client entertainment in gentlemen's establishments will deem subsequent deals Ultra Vires!

The backdating of current ethics to cover past histories rolls on.