A Reply to Lucy Kellaway's FT article on FX Traders.

Lucy Kellaway published an article in the FT today covering the attitudes of FX traders based on the style and content of the chat room exhibits cited in the latest fix fixing investigations. There were references to her own experiences in the markets 30 years ago and the boorish testosterone behaviour then and how it applies to FX today. The article is here.

http://www.ft.com/cms/s/0/511ad09e-6be2-11e4-b939-00144feabdc0.html


I have left a comment as I feel that many broad brush assumptions are being inexpertly applied to FX at the moment. Here it is -

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Whilst I agree that the conduct shown by the miscreants is appalling and their testosterone exhibitions further undermine the poor reputation of anything 'City' I would like to make a few points.

The laddish behaviour of the '80s was endemic across society at that time and I feel that though your own experience of it was within FX, that doesn't mean it was limited to FX. This also applies to the present day. FX has had the regulatory microscope focus down to individual chat screens with every written letter now being exposed in public light. The lack of evidence of such behaviour in other areas of the City does not mean it does not exist. It just hasn't been looked for, but it's there. And of course it exists outside City activities as much as it does within. I am sure an estate agent, footballer, car mechanic (so many I'll stop there) can tell a tale or two. If every profession had their every communication examined then there would be similar horrors emerging from the earth at a rate reminiscent of Zombies Dawn of the Dead. 75 solicitors were struck off in 2012 (last figures I saw) without much comment.

I do excuse these poor souls the spelling inaccuracies you mock. They were never hired for their written communication skills beyond quoting numbers and they were writing for each other, not a public audience and certainly not at a journalistic level. If a message is understood then the time spent correcting it is superfluous, especially considering the time pressures most of them work under.

The cockney rhyming slang you quote is also not so much an indication of FX boys keeping a dying language alive but more the application of market abbreviation that first originated in the days when cockney rhyming was more a fashion. Just as the term 'Cable' isn't an indication of the continuation of language forms used when the first transatlantic cable was laid, but more a 2 syllable abbreviation of the unwieldy 24 syllable 'British pound sterling against the United States dollar using sterling as the base currency' Every profession has its nicknames and colloquialisms. FX is the same.

I suppose the saddest thing about all of this is how once again some stupidly outrageous behaviour by some has brought disrepute on the all. FX has changed hugely since you experienced it in the '80s, Lucy.
I just wish this small sample size of cretins hadn't given you the chance to use assumption based on extrapolation to imply that the behaviours that treated you so badly all those years ago are still endemic today.

Wicked Game

A warning. This post is a personal recount of music infection. It is not a financial post and has very little message other than to infect you with a wonderful song,


Last night I drove 250 miles from the West Country to my home in the south east of England. It was a wet and stormy evening with the journey made all the worse by the collapse of the infamous M25. The journey turned into a road trip in its own right, an epic of Quixotic episodes and out of body experiences as I passed unhindered on cunningly selected B-road bridges over Hieronymus Bosch motorway scenes that I would otherwise have endured, but as usual I found fortitude and vigour with BBC Radio 4. First I was amused with the News Quiz, then shocked by The Archers, then confused with 'Front Row' (seriously I am sure they make up most of the arty things they talk about as a laugh) and then riled to fury by 'Question Time' and the politicians on it who once again reinforced my belief that no one should be allowed into public office unless they have spent at least 10 years working in a real job.

So I switched to Radio 1, normally reserved for the teenage kids. At 10pm Pete Tong kicked off with his dance mixes at which point the large can of Red Bull I had consumed 30 mins earlier (as a prophylactic against pulsing whiteline and rain lashed screen-wiper induced hypnosis) kicked in. The rest of the journey home was a heart thumping beat induced rave of euphoric emotions whilst trying to keep within a reasonably acceptable percentage above the speed limit. And before you ask - No, it was just Red Bull and it didn't give me wings (but I won't be suing because I am not a moron unlike this moron)

So this morning when I got in the car Radio 1 booted up just when I was expecting sensible Radio 4 news.  I was just about to switch over when I heard this, which changed my day. Chris Isaak's 'Wicked Game' has always been an all time favourite song but here it was in an awesome  chillout/house female vocal version.



And that was it. It's been in my head all day. On returning I Googled to find out who/what/where had produced it only to find a selection of covers by females that I then felt compelled to sample. And the hands down winner was this, which was a joy to find as it was by another top fave band London Grammar, who I have been following for longer than should be expected due to their Nottingham University origins.  Hannah Ried's range of vocals is so impressive and this must be the most emotionally expressive version I have ever heard.



Having heard that and been blown away, I moved on to Pink's version. Which I endured for about a minute thinking that the guitar drop-tone fades were the record deck playing up.



And then Lana del Ray's overly trying whispered version where the production was poor compensation for a  poor attempt. That didn't last long.



But I was soon rescued by Heather Nova with a homely 'on the ranch' fireside purer version



After a most bizarre Gregorian chant/ house beat mix version which I only include for bizarre amusement -



I was back into the ethereal with celtic version with Karliene (Don't understand why the galleon in the picture has a modern Rib with outboard on the back though)




So I have a day full of Wicked Games and I hope that this odyssey through a song that has stuck in my brain hasn't meant that you are now equally poisoned. But if you are, then let's at least make the last version the one that sticks. The best one, so here again is Hannah Reid and London Grammar's heart melter.

Strange Correlations

Everyone likes a good correlation and whilst perusing a favourite site, 'spurious correlations' , I came across two topical ones. One involving oil imports and one involving non-commercial space launches (in regard to the most amazing Rosetta probe achievements).

But I have spotted one or two of my own recently. Sorry I haven't got  charts for them but through intuition, if not maths, I am pretty sure they are highly correlating. So do with them what you will.  - 

The price of oil and the distance between the Rosetta probe and comet 67P. (The Rosseta probe/comet distance leading oil prices by a about a week).

The number of poppies around the Tower of London and rainfall levels in the South West of England.

Global leaders in star trek outfits and the level of global tensions.

Number of times a politician says "Let me make this very clear” with how unclear what they are about to say is.

The number of tanks that are entering the Ukraine from Russia with the amount of tanks that Russia says are not.

The amount of action the Japanese take to stimulate their economy and the amount the Europeans don’t.

The height of leaves above the ground in autumn and the price of oil.

The popularity of bankers and  the pulse rate of Paul Newman.

The size of the Bank of Japan’s balance sheet and the distance from earth of Voyager 1.

The expansion of the universe and how long it takes to speak to a human at an EE phone company call centre.

The propensity for a driver to wear a hat whilst driving and the number of cars stuck behind that driver.

The percentage of bears who populate blog commentary forums and the percentage of bears that shit in a forest.

The price of rail fares in the UK and the rate of deflation in everything else.

The luck of Mark Carney in leaving the Bank of Canada for the BoE and the economic outlook of UK less that of Canada.

The celebrityness of celebrities on 'Help I’m a celebrity get me out of here’ and the number of ebola cases in the US.

Unemployment levels in Spain and the interest rate you pay on a credit card.

The number of times you have to say hello to your wife when answering the phone when busy in order to have said hello nicely enough and the complexity of the task you were busy doing when the phone rang.

Comments on the FCA Report on FX Wrongdoing

The FCA has announced its report on FX market misdoings and its associated punishments for wrongdoers.

The most important part, in my eyes, was the bit referring to 'triggering clients' stop losses'. This transgresses the original Fix fixing and opens up the biggest can of worms imaginable as to general FX practice. I would also suggest to the FCA that the wrongdoing doesn't stop at the banks' doors with many 'clients'  applying dubious practices. Many of them FCA regulated in one form or another.

I have written about how Regulation has killed the FX star before but here I would like to go through this report and make a few observations. Original in small italics, comments in normal text.

 The Financial Conduct Authority (FCA) has imposed fines totalling £1,114,918,000 ($1.7 billion) on five banks for failing to control business practices in their G10 spot foreign exchange (FX) trading operations: Citibank N.A. £225,575,000 ($358 million), HSBC Bank Plc £216,363,000 ($343 million), JPMorgan Chase Bank N.A. £222,166,000 ($352 million), The Royal Bank of Scotland Plc £217,000,000 ($344 million) and UBS AG £233,814,000 ($371 million) (‘the Banks’).


Why only five? As we will see the report goes on to identify generalised market malpractice.

The G10 spot FX market is a systemically important financial market. At the heart of today’s action is our finding that the failings at these Banks undermine confidence in the UK financial system and put its integrity at risk.

As much as the commodity, equity, bond, credit and all the other markets that haven't had this level of investigation aimed at them.

In relation to Barclays Bank Plc, we will progress our investigation into that firm which will cover its G10 spot FX trading business and also wider FX business areas.

Looks like the worst is saved 'til last. There's gonna be a lynchin'.

In addition to taking enforcement action against and investigating the six firms where we found the worst misconduct, we are launching an industry-wide remediation programme to ensure firms address the root causes of these failings and drive up standards across the market. We will require senior management at firms to take responsibility for delivering the necessary changes and attest that this work has been completed.

So others were up to it too but have escaped with a 'patch it up don't do it again'. The mention of root causes rightly implies that something isn't right with the way that institutions have had to do FX in order to survive.

This complements our ongoing supervisory work and the wider reforms to the fixed income, commodity and currency markets which are the subject of the UK Fair and Effective Markets Review.

Ah, FX isn't alone. In that case stand by for fines in other markets that will dwarf  these FX fines. Commodities, watch out.

Between 1 January 2008 and 15 October 2013, ineffective controls at the Banks allowed G10 spot FX traders to put their Banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The Banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.

Bank's putting their interests above that of the client? Name one large company that doesn't. Companies are there to make money, not to be a social service. Fully agree that breaches of the other points should be punished.

These failings allowed traders at those Banks to behave unacceptably. They shared information about clients’ activities which they had been trusted to keep confidential and attempted to manipulate G10 spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.

Yes. Caught bang to rights - Guilty

Today’s fines are the largest ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA), and this is the first time the FCA has pursued a settlement with a group of banks in this way. We have worked closely with other regulators in the UK, Europe and the US: today the Swiss regulator, FINMA, has disgorged CHF 134 million ($138 million) from UBS AG; and, in the US, the Commodity Futures Trading Commission (‘the CFTC’) has imposed a total financial penalty of over $1.4 billion on the Banks.

This paragraph smacks of 'haven't we done well, look at the large fine, we are heroes, don't say we aren't doing a good job in trying to shut the gate, even if the horse has bolted and been frolicking in the paddock in front of our eyes for years.

Since Libor general improvements have been made across the financial services industry, and some remedial action was taken by the Banks fined today. However, despite our well-publicised action in relation to Libor and the systemic importance of the G10 spot FX market, the Banks failed to take adequate action to address the underlying root causes of the failings in that business.

Once again the root causes. Perhaps they should examine what the FX market is and realise that bad market practices have evolved because it is an unregulated collection of market stalls rather than an exchange that does not charge commission (though at this rate it may have to).

Martin Wheatley, chief executive of the FCA, said:

“The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system. Today’s record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.

Not game the system to boost profits or imperil the wider UK financial system? The whole UK financial system and all its institutions are built on gaming the system and regulations.

But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor. This is essential to restoring the public’s trust in financial services and London maintaining its position as a strong and competitive financial centre.”

 "London maintaining its position as a strong and competitive financial centre". Unfortunately one of the reasons most  these transgressions arose was due to the fiercely competitive element of London that you wish to preserve. Any future regulatory action must make sure that doing business in the future is not so onerous that companies head off to the Far East or lesser regulated market. The only answer is GLOBAL regulation.

Tracey McDermott, the FCA’s director of enforcement and financial crime, said:

“Firms could have been in no doubt, especially after Libor, that failing to take steps to tackle the consequences of a free for all culture on their trading floors was unacceptable. This is not about having armies of compliance staff ticking boxes. It is about firms understanding, and managing, the risks their conduct might pose to markets. Where problems are identified we expect firms to deal with those quickly, decisively and effectively and to make sure they apply the lessons across their business.  If they fail to do so they will continue to face significant regulatory and reputational costs.”

"This is not about having armies of compliance staff ticking boxes" That is exactly what it's about.

Clive Adamson, the FCA’s director of supervision, said:

“The supervisory measures that we are announcing today will help make sure that real cultural change is delivered across the industry, and that senior management take responsibility for ensuring that the highest standards of integrity operate across all of their trading businesses.”

Help, but in no way guarantee.

The FX Market 

The FX market is one of the largest and most liquid markets in the world with a daily average turnover of $5.3 trillion, 40% of which takes place in London. The spot FX market is a wholesale financial market and spot FX benchmarks (also known as “fixes”) are used to establish the relative value of two currencies.  Fixes are used by a wide range of financial and non-financial companies, for example to help value assets or manage currency risk.

Fixes are not used to establish the relative value of two currencies. That is done by the dynamic market. A fix is an inaccurate out of date attempt at a snapshot of roughly where prices have been and  though it's applied to some trades, it is not actually a tradable price. Anyone who uses them as a way of  booking real trades needs to understand this. Unfortunately due to its application as a benchmarks in many funds, clients have more concern about deviation from the benchmark rather than the actual level of the price. This has naturally opened up behavioural imbalances.

'Turnover of $5.3 trillion, 40% of which takes place in London' The FCA should ask themselves why they had no clue until now about the basics of this market, or were they negligent in turning a blind eye?

The FCA’s investigation focused on the G10 currencies, which are the most widely-used and systemically important, and on the 4pm WM Reuters and 1:15pm European Central Bank fixes.

The FCA’s findings

Today’s action shows that we will not tolerate conduct that undermines the integrity of this crucial market or the wider UK financial system.

Once again, 'we are big and in charge'

We expect firms to identify, assess and manage appropriately the risks that their business poses to the markets in which they operate and to preserve market integrity, whether or not those markets are regulated. Although there are no specific rules governing the unregulated spot FX market, the importance of managing risks associated with spot FX business through effective systems and controls is widely recognised in industry codes.

As it remains an unregulated market translates to "Do your best, and if at some point we decide it wasn't good enough we'll fine you"

We found that between 1 January 2008 and 15 October 2013 the Banks did not exercise adequate and effective control over their G10 spot FX trading businesses. For example policies were high level and firm-wide in nature, there was insufficient training and guidance on how these policies applied to this business, oversight of G10 spot FX traders’ conduct was insufficient, and monitoring was not designed to identify the behaviours found in our investigation.

Yes, it is cultural and goes to the top.

The right values and culture were not sufficiently embedded in the Banks’ G10 spot FX businesses which resulted in those businesses acting in the Banks’ own interests without proper regard for the interests of their clients, other market participants or the wider UK financial system.


Traders at different Banks formed tight knit groups in which information was shared about client activity, including using code names to identify clients without naming them. These groups were described as, for example, “the players”, “the 3 musketeers”, “1 team, 1 dream”, “a co-operative” and “the A-team”.

Morons, in a Darwinian as well as regulatory way they deserve what has happened to them. One would hope that those indicted include management for lax controls as well as those directly involved

Traders shared the information obtained through these groups to help them work out their trading strategies. They then attempted to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements). This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate it had bought that currency for in the market. If successful, the bank would profit.

Ok, this is where it gets interesting. 'and trigger client "stop loss" orders'. This moves away from the original Fix fixing realm and enters a whole new universe of possibility. If triggering client stop losses is punishable then every financial market should be quaking in its boots, with some of them having to put out profit warnings as revenue will collapse (Looking at you early monday Far East markets). From now on clients can expect dreadful slippage in any stop losses they put out there once they are triggered.
This topic is worth a post in its own right.

Firms can legitimately manage risk associated with client orders by trading in the market and may make a profit or loss as a result. It is completely unacceptable, however, for firms to engage in attempts at manipulation for their own benefit and to the potential detriment of certain clients and other market participants. Our Final Notices include examples where each Bank’s trading made a significant profit.

This makes no sense. Can they or can't they trade against client orders? Where is the boundary between the first and second statement? Unfortunately 'manipulation' could be seen to occur with any proprietary trade as every trade effects price. There is no clear guidance as to how a 'profit' is separate from 'own benefit'. If the boundary is 'significant profit' as suggested in the last sentence then it implies that the issue is 'how much it is acceptable to profit from a client order' rather than if it is allowed at all.

In setting the fine for each Bank we have considered, amongst other things: the Bank’s relevant revenue, the seriousness of the breach, each Bank’s disciplinary record and response to the wider issues around Libor, the degree of co-operation shown by each Bank, and knowledge and/or involvement of certain of those responsible for managing this part of the Bank’s business.

We have also increased the penalty to reflect specifically the seriousness of the risks posed to a systemically important market and the failure across the industry to learn the necessary lessons about tackling these risks, given the similar failings which arose in the context of Libor.

The Banks agreed to settle at an early stage and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount the total fine would have amounted to £1,592,740,000 ($2.5 billion): Citibank N.A. £322,250,000 ($511 million), HSBC Bank Plc £309,090,000 ($490 million), JPMorgan Chase Bank N.A. £317,380,000 ($503 million), The Royal Bank of Scotland Plc £310,000,000 ($492 million) and UBS AG £334,020,000 ($530 million).

Our investigation lasted 13 months, involved over 70 enforcement staff and unprecedented cooperation with domestic and international regulators. We welcome the Serious Fraud Office’s criminal investigation into individuals.

the FCA are justifying the level of fines and trying to highlight that it was diligent. Though the fines are nothing compared to what the US would have nailed a European bank for, it's not a bad sum for 70 staff for a years work but  nothing like the amounts that the banks have made through this sort of practice over the lifetime of the London FX markets.

Tackling the root causes

It is clear from our findings that there has been widespread poor practice in the spot FX market. The FCA has sought to take swift enforcement action against the worst offenders, and has today announced it will carry out an industry-wide supervisory remediation programme for firms to drive up standards across the market.

Sounds a bit like a company selling the strength of its future order book. 'The FCA has orders for the next decade and will be expanding'.

The FCA is already conducting broader reviews of how effectively firms reduce the risk of traders manipulating benchmarks and ensure confidential information is not abused, and will also look at how firms manage conflicts of interest. We will use our findings to inform the remediation programme as appropriate.

Good, about time.

The remediation programme will require firms to review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of a sufficiently high standard to effectively manage the risks faced by the business. The work at each firm will depend on a number of factors, for example, the size of the firm and its market share and impact, the remedial work already undertaken, and the role the firm plays in the market.

Back to - "This is not about having armies of compliance staff ticking boxes" That is exactly what it is about.

In some cases, the reviews will extend beyond G10 spot FX, and we will require firms to explore any read across into FX Emerging Markets, FX Sales, derivatives and structured products referencing FX rates and precious metals.

Here we go, open the flood gates. May I suggest that, if the FCA wish to apply the same criteria they have used in this case to other areas, they take a look at market behaviour around option expiries, binary option triggers and extend it to the futures trading in all major markets beyond FX. Limitless possibilities.

And also PLEASE include the 'client' side. I am sure that the bad practice doesn't stop at the doors of the banks.

Senior management will be asked to attest that action has been taken and that firms’ systems and controls are adequate to manage these risks. This will ensure that there is clear accountability and senior management focus on the specific issues at each firm where the FCA expects to see change.

Removing even more incentive to ever being a senior manager in a bank. The smart ones, if they haven't already will have packed their bags for less onerous responsibilities leaving the mediocre and average to carry the can.

The FCA has played a key role in developing internationally agreed regulatory standards on benchmarks including work by the International Organisation of Securities Regulators (IOSCO) and Financial Stability Board.  We are actively engaged in developing EU regulation on benchmarks and co-chair the UK Fair and Effective Markets Review which is considering wider reforms to the fixed income, commodity and currency markets.

The FCA equivalent of 'Just call Saul'?

An Ornithologist's Guide to the Sudden Market Silence.

Something very strange happened yesterday that was quite out of character for the markets -

NOTHING MUCH.

But the silence that really would have caught my ear, had it not been silent, was not so much the price action but that of the commentary streams. Was it my imagination or have all the doomsayin', top pickin’, crash wishin', cabin buildin’, gold buyin', gun totin’ Bearsieeeeess  fallen silent for a little longer than the prerequisite two minutes at 11am 11/11 for Remembrance? And come to that, their bullish antagonists too?

Recent market pauses in price cacophony have been compensated for by a dramatic increase in the volume of rhetoric from those arguing as to whether things go up or down from here. So the comparative lull is somewhat calming. Or is it? Perhaps it's as calming as that silence in the countryside before your only companion in these woods miles from anywhere remarks how strange it is that there is no bird noise. At all. At which point the staccato minor chords of the film score are completely unnecessary in their warning of impending horror, as one's own sympathetic nervous system has already started to gear one up for pant filling flight.

But rather than sprint off screaming back to the car only to trip over some creepers and fall into an old buried church to face a clan of possessed Satan worshipers (i.e. check out the Zero Hedge website), instead we should turn ornithologist and find out why the birds are indeed so quiet. Let us see -

Ahhh!!  A Norwegian Blue - Not much explanation needed as Ornithology 1.0.1 teaches that any unconscious Norwegian blue is just shagged out after a long squawk. It would appear that this specimen has been screeching for tops for so long it has collapsed exhausted.

Cuckoo - Grown fat being fed in its adopted home of financial TV shows with its gaping mouth calling doom looking for reward. Having kicked all the opposition out by bullying and harassment, it now finds itself all alone because even the guardian parents are fed up with this thug who doesn’t make sense and don’t want to feed it any more. So the Cuckoo’s nest is silent.

Fat Turkey - Thanksgiving is just a week away and rather than waste breath on recounting old arguments perhaps its easier to say nothing until Black Friday provides more to vocalise over. If it lives that long.

Chicken - Confidence lost in all self-belief. The rules just haven’t worked in this market so until it can work out a set of new functioning rules it’s probably best to retreat under a bush and sit this one out.

Dodo - As dead as itself. Hunted to death by the Stoploss bird with its fearsome scream ’Sorripalurout’. There is only so much getting it wrong before the stop losses will finally kill you.

Pink Famingo - Ah the famous Pink Flamingo. The silence from the Pink Flamingo is due to its very nature. It has wandered far from this market off to find different ones to disrupt, leaving silence behind it.

And for those birds that sing on high and call for mates to join them in the sunny skies? Why is there silence from them?

The Sky Lark - Its high pitch repetitious trill, normally uninterrupted on sunny days has vanished. Why? This bird has suddenly grown a fear of heights having ascended so fast and would rather, just maybe, not take so much risk and take it easy pecking seeds on the ground quietly if thats ok by you.

The Hawk - His normal prey, who he likes to think he can rip to shreds having caught them on the wing in a weak argument, are now silent, so with nothing to betray their position he has moved off to his perch hoping for easier prey at a later date.

The Albatross - Flying behind the market on up breezes this bird is considered good luck, but kill one and you are doomed. But not as doomed as the Albatross. And this albatross has seen a sailor fiddling with a cross bow of internal market stresses that could well take it down. So it too has made like a cloud.


So far from being a portent of doom the silence of the twitterings is easily explained. Or, to sum it up, a bird in the hand is worth two in the bush. It’s coming up to year end. Bank a profit, cut a loss and shut up. 2016 will be here all too soon and the screaming in the aviary wilL once again BE driving us nuts.

How do you know when the bottom is in for commodities?

Basically we never do until we are far enough above the base to recognise it as one, but the cynic in me is starting to see some signs that we are close to a pause if not a bounce -

ANZ sharply reduces its 2015 target for iron ore from $101/tonne to $78 after prices move down from $101 to $76 in the last 6 months.

Citi sharply reduce theirs further to $65 in a leap-frogging motion. On the comparison between the two banks I do wonder how much influence  'not wanting to upset your local client base' has on published price forecasts. And anyway, if  their forecasting has such swing errors should we be bothering with them in the first place?

China is cited as bearish and not buying inventory (so when demand does kick in they will have no buffer and will have to buy fast).

BDIY ( Baltic Dry Shipping Index), the chart that only seems to be wheeled out in disasters, puts on a quiet 65% rally in the last three weeks without anyone mentioning it leaving it 100% up from July.

Tullow Oil stock starts going up again despite oil not bouncing.

Folks sell the whole of their High Yield portfolios because of the impact the energy sector has had on them, without caring that they are throwing babies out with the bathwater.

UK newspapers speculate about sub £1/litre fuel.

'We Buy Gold' shops sell up (courtesy of @BasonAsset twitter)

Thieves stop stealing copper wire and start replacing the lead on the church roofs. Ok not there yet, but at least the number of phone and train failures in the UK due to copper theft has dropped dramatically.

Winter comes to Europe.

---

One last call before I go, and it's a bubble call related to corn. Not to corn itself but to a derivative - It is pretty clear that there is a bubble in popcorn making when there are more popcorn making startup companies run by ex-private schoolboys than farmers growing it and producing it in more flavours than there are zinging hipster tempting retro marketing slogans framed in pastel colours on the packaging. In the UK the market is estimated to be worth £55m a year so by my my rough calculations that's only enough to support 12 Tarquins and three red trousers.

When popcorn pops, don't say I didn't warn you. Where's the regulator?

This Week in Pictures

Fed 

 BOJ 

Unanimous ECB 

Oil

US Stock Market 

EU on UK membership

Democratic Midterms 

Financial beliefs are like a -

Someone very kindly posted this on a twitter feed about religion

Religion is like a penis
It's fine to have one.
It's fine to be proud of it.
But please don't whip it out in public and start waving it around.
And PLEASE don't try to thrust it on our children!

Now whilst not exactly new as a statement, indeed it has been used by friends in the most polite of manners when encountering evangelists from any religion at their doorstep, it had me thinking. Niether about religion of penises as it happened. But about markets.

If we think about this statement in terms of market beliefs rather than diety beliefs it does sort of sum up what I feel is a growing antithesis to having other people's market views rammed down your throat.

The similarities to market beliefs and religion are multiple. Let’s start with why people even bother to read other peoples opinions. It’s normally because they are lost and looking for substantiation of embryonic beliefs of their own that need a more solid structure for them to grow upon. Much as coral spawn prefers the support of an old wreck rather than growing alone on a sandy seabed. The provision of a structure on which to grow and hang one’s own beliefs upon gives a sense of structure and symbiotic social support to shelter within when facing the uncertainties of the world.

But what happens when some of the tenets of the religion you are hanging on to for your own psychological support are seen to be eroding when viewed in a dawning light of reality? This week we saw the catholic church, in fact the Pope himself, decreed that evolution and the Big Bang did occur,  but after a quick repackaging under the legal terms of the religious contract it can still be seen to fit with the existence of God as the creator. It’s just that he did it a bit earlier than they first thought.

The back fitting of theory to fact sounds somewhat reminiscent of talking to an economist, market strategist or in particular a Elliot Wave technical analyst. Any new evidence that might at first be seen to contradict the original premise is shoe-horned to fit. Even if the resultant product looks like Pavarotti in a mankini. Yes, the theory may well be just about holding together but the bulgy bits around the edges leave those that came to worship the most beautiful of thought wondering if there is only so much botox, filler and liposuction that can be applied before the theory looks more like a, well, something unpleasant and not worthy of taking home to your mother.

So this is where we get back to what has been occurring in financial markets. The last six year have seen the crystallisation of two great religions. Those that expect the end of the financial world as we know it (put into this bucket the end of fiat moniests, stock market plungers, goldbugs and anyone who reads Zero Hedge and thinks it’s a balanced view on the world) and those that think that the great game will grind on and that new market highs in unexpected areas will occur again and that actually mankind has a habit of making sure that mean reversion plays out as this is actually the path to the least loss for mankind on the greater scale. Basically the churches of the black swan and the white swan.

When a religion becomes suspect it is natural for those that follows it to look for a new home into which to park their belief. As it was in 2007/8 when the church of the white swan was toppled by a few uncomfortable truths that had new followers queuing at the doors of the church of the black swan. Since then the church of the black swan has held sway during the Euro-crises and the catalogue of major newsworthy events that are normally communion wafers at their altar. Except something didn’t quite fit as the tails failed to occur and everything started to mean revert. Which meant that some of the black swan followers started to drift back to that of white swan again.

The two churches have had there odd rumble throughout 2014 with an EM crises, Putin, ISIS, QE ending and European growth flatlining etc, but it wasn’t until this October when old rivalries broke out into serious street rioting. Massive market schisms had the high priests from both camps back out and preaching from their soap boxes. The battle was fierce with financial markets taking one of the greatest short term pastings they have had in years. Only to recover.

Which leaves the followers of both cults back where they were when they first looked for a financial religion on to which to cling. Lost and confused. As the purpose of a religion is to remove the feelings of lostness and confusedness this is not the best return on a few years of heavy investment of belief. In fact it could be comparable to investing in many macro funds this year where they have sold a great story and can prove a great track record but at the end of the day they have yielded zero. A result that leaves the investor wondering if either side adds any real value with their opinions and perhaps it’s more valuable to work out your own (investment) morals from first principles rather than reading or listening to anyone else. Once again that can apply to deity or market beliefs.

The current noise of opinion may well see a backlash in a new belief in the self, a belief unexpressed, other than to be acted upon and I have a sneaking suspicion that readership numbers of financial blogs and bank research may be starting to substantiate that theory. The catch is, if you have read this far and believe any of what I have just written, then you have just proved me wrong.

Eight Topical Questions

There are now nine questions to this paper (there were eight but the BoJ has just inserted another). You have 10 minutes to complete the questions without resource to Twitter, Google or calculators. You can turn over your question papers.... Now.


If you were Chair of the Federal Reserve would you -

a) Give clear guidance to future policy
b) Give clear guidance that was couched in terms of ifs and maybes to make it unclear.
c) Just make sure that real interest rates were always negative.
d) Retire as soon as possible and go on the lecture circuit having seen how much your predecessors make.
e) Have bought gold with your QE instead of bonds and watched ZeroHedger goldbugs explode in a logic loop as to whether QE was a good idea or not.
f) Pick up the phone to Europe and tell them it’s their turn to do something.

If you were President of the ECB would you -

a) Do everything possible to stimulate the Euro economy without doing actual QE.
b) Do QE and ignore Darth Weidmann and the Bundeathstar’s protestations.
c) Go back to Italy, or your job at Goldman as apparently the politics are similar.
d) Take the BBC News path - get interviewed, tell a sob story (no matter how cretinous), blame everyone else and sell a moralistic argument to try to garner sympathy as to why tax payers should bale you out as at the end of the day it's the governments fault.
e) Pick up the phone to Japan and ask them to throw again, apologising that you know it’s your turn but you are having a bit of a problem in the old German department.

If you were the Governor of the BoJ would you

a) Bide your time
b) Expand your monetary base further to keep favorable momentum in price expectations and continue QQE until you have stable 2% inflation
c) Realise that your only inflation is coming through JPY depreciation and, though the wrong type of inflation, hit the JPY crash dive button.
d) Put down the phone to Janet, calmly tell your deputy that you would like him to bring you every bond in the world and then walk silently towards the cabinet containing the family ceremonial sword.
e) Put down the phone to Mario and buy back all the newly minted Jpy for Euros, then go and pack for the 'holiday of a lifetime' you have just won for a luxury-all-expenses-paid-stay-as-long-as-you-like trip to Brussels.

If you thought someone in a town three miles away had Ebola would you -

a) Be exceedingly unlucky to catch it considering how difficult it is to transmit without contact with bodily fluids.
b) Put yourself in quarantine, apart from the odd bike ride.
c) Launch a petition to save your dog.
d) Buy shares in a Hazmat suit manufacturer and then ring Fox News to tell them it’s more contagious than flu and that the whole of the USA is going to get wiped out unless they buy Hazmat suits… and then take profit.

If you have just returned from a three week holiday on a deserted island would you -

a) Glance at your screens and decide nothing had been going on in US stocks and look forward to taking profit on the lazy long later in the year.
b) Laugh at your amusing broker when he rings to tell you you were stopped out 7% lower.
c) Pull up a chart of ‘what happened whilst I was on my holiday’ and, ashen faced, cancel Christmas.
d) All of the above.
e) Book another holiday and reallocate the huge profits from your leveraged position on a 14% move that you may or may not have had anything to do with starting, whilst stroking the long-haired white cat on your lap.

If you were an oil trader would you -

a) Be just fine as it’s nice to see some volatility at last.
b) Be launching a guerrilla advertising campaign to promote 12 litre SUVs.
c) Be long Saudi oil co’s vs. short the Scottish Independence Party budget plans.
d) Be stunned that just as the investment bank you work for has fired everyone else on the desk as commodities are dead leaving you alone to turn the lights out, it all boots off again and it’s apparently your fault that all the lines aren’t getting answered.

If you were a market strategist would you -

a) Make hum-drum consensus calls because it is easier not to get eaten if you are part of the shoal.
b) Make calls by looking at recent moves, getting a 15 meter ruler, extrapolating the line and placing your target at the end of it.
c) Not give a damn as to whether you are right or wrong as you don’t have to actually run any positions.
d) Use a Twitter feed as your primary source of ideas.
e) Do an MBA to go with your PhD in economics and your term at the IMF, in the hope that it will improve your forecasting ability from the 50/50 it seems to be resiliently stuck at.
f) Have left years ago to run your own fund being one of the few that is fairly consistently right.

If you were a ruler of a large super-power would you -

a) Say one thing and do one thing
b) Say one thing and do another.
c) Invoke sanctions upon those with an aggressive stance you wish to change.
d) Relish sanctions being invoked upon you as it helps your cause to rally nationalism and stimulate local production to replace imported goods all the while being able to blame imperialist bullies.
e) Assume that your influence over third parties towards threatening states would hold firm as they owe an allegiance to you.
f) Enjoy watching your neighbours squirm as winter gets cold as you have your hand on the gas taps.

If you were on the International Space Station waiting for supplies would you -

a) Invoke contigency plan epsilon theta from your ‘Advanced Space Stationing' training manual and carry on as usual.
b) Wonder why they are letting off fireworks early this year on the eastern US seaboard.
c) Cheer as you can have a month off doing sudoku puzzles in your bunk as the next experiment they were sending up has just vaporised.
d) Turn ashen as you notice you are down to your last roll of toilet paper.

A Plumber's Guide to the Blockage in ECB Liquidity Transmission.

There has been a lot of talk over the past two week’s about European banks, their balance sheets, ECB corporate bond purchases and the general provision of liquidity to the economy by the ECB and how and if it is actually reaching the intended beneficiaries.

I have followed the liquidity analogy to come up with a water pipework diagram of how I picture this. I know this is far too simplified but here we go -

After the various financial crises (global and European banking), the first destination for central bank liquidity has been to refill the balance sheets of the banks so that once again replete they can start to pump money further down the pipe towards the rest of the economy. The debate still rages as to whether the European banks' balance sheets are in a fully functioning state yet to pass on the liquidity as has been testament by the debate over the European Stress tests, but let's assume they are and the liquidity flows on.

Once released from the balance sheets the liquidity is passed out of the banks on to corporates and to the general populace but not after seeing a proportion syphoned off as bank margins to support more onerous credit and regulatory costs and of course as, hopefully, profit.

One of the concerns has been that banks have been absorbing the added liquidity to such an extent that they have haven't been effectively passing it on and this is why any new ECB program to purchase corporate bonds directly will bypass any restrictions to flow from the banks instead benefiting corporates directly.

So now corporates are getting liquidity injections from two directions. But there is still no benefit to the economy unless they utilise that liquidity in a way that will lead to growth. There is plenty of evidence, though I am too lazy to find and quote any here, that cheap corporate funding has done little to drive corporate investment with cash instead piling up or being used for share buybacks or M+A (which is usually designed to decrease investment rather than increase it). It is at this point that the blockage in the transmission process is occurring.

So here's the catch. If corporates spend on increases in Capex, R+D or other forms real investment, we would see that flow through to jobs, wages and ultimately spending and growth. However in a world of low growth a corporate is hugely unwilling to leverage up if there is no apparent demand. Chicken and egg indeed.

Whilst we hear concerns about unblocking the banks' transmission process (acknowledging the point that the demand side is weak, we are looking at supply side here), I have heard very little about regulatory change that would encourage corporates to spend productively rather than save, other than via monetary policy. Perhaps it is time for the overactive regulators of Europe to turn their beady eyes to those corporates who have been benefitting from cheap liquidity but haven't been passing it on.

Perhaps any ECB corporate bond buying program should be limited to companies that have agreed to some form of spending program as those with the best credit ratings, who will be able to most easily access ECB liquidity, are those in the best shape to pass it on.

The Demise of Dickus Arrogancis

Macro Hedge Fund performance has been a notable casualty this year with much of it being blamed on the way that markets aren’t following the usual play books in response to tried and tested headlines and information. Middle east blows up? Oil tanks. US Economy picks up and taper is on the way? USTs soar. The list of ‘that shouldn’t have happened’ trades is pretty long but if you are a savvy macro investor you either saw the changes coming or you adapted to new rules pretty fast. So the poor performance is due to either macro being packed with mechanists who recite the mantras of the past and don’t adapt, or something else is happening.

I have met a lot of hedge fund portfolio managers over my years and in my eyes they can be pretty much be broken down into the following

Hugely brilliant who know they are brilliant
Hugely brilliant who think they are average
Hugely average who think they are brilliant
Hugely average who know they are average
Hugely poor who think they are brilliant
Hugely poor who think they are average
Ones who were let go last year.

The hugely brilliant who know they are brilliant I will always doff my cap to and enjoy any pearl they drop before swine such as I, but I will run a mile before becoming the butt of their joke.

The hugely brilliant who think they are average are a delight and I would sit at their feet all day as the boy would at the feet of the great philosopher.

The hugely average who think they are brilliant I will accept for their ability to be average and maintain a job in a world that is ruthless. However I will always grimace at their peacocking and wince at their airs and wonder with deep suspicion as to what it is that makes them think they are brilliant.

The hugely average who know they are average I always have respect for, for it is they that remain courteous inquiring and eager to engage on a level playing field.

The hugely poor who think they are brilliant I am quite happy to kick down the career stairs if I can and there is never a staircase far away in that business.

The hugely poor who think they are average I will give charitably to, but I will know that they are, in reality, not long for this world.

Now let’s cut to the chase. There are portfolio managers whom I have met who couldn’t argue their way out of a paper bag and yet have managed to peacock and maintain well paid jobs in otherwise ruthless institutions. It is they that I have always assumed were the luckiest traders alive,  or had photos on the boss, or had other ways of making sure that their position was secure. Mostly they could be characterised as a number two, in both metaphorical terms and in market menagerie terms (see here). Otherwise known as Dickus Arrogancis.

Dickus Arrogancis, I soon realised had a particular skill in making money. The amount of business he would allocate to his brokers was rarely based on deep thought or probing economic analysis, but more on market contour analysis. Well, that is what he may well have termed it, but to the Joes on the street it was information. Of course not INSIDE information, just information inside . The whisper that Mr Big was ahead of him on the bid, the nod that buying now might be a good idea rather than in five minutes time. The suggestion that perhaps if there was to be an interest in the fix then it may just be left hand side.

Which of course sounds preposterous as that sort of behaviour would have been sniffed out with the investigations into fix fixing when every trader communication was examined for any sort of leak. But in my opinion, the number of bank clients investigated for use of information that may have been at least a bit borderline has remained remarkably low. Remarkably. If one was a cynic, which of course I am, I could suggest that it is easier for a bank to fire its own quietly than drag a huge customer into it, lose them and face potentially huge lawsuits from said customer. Not that this ever happened of course, but hey-ho, what do I know.

But the information game has changed and though I am sure the shoe-phone has adapted to survive, the risk reward has changed drastically and even if past misdemeanours (that never of course happened) went undetected, the jungles that are home to Dickus Arrogancis are no longer handing him a bounty of fruit and perhaps he is now an endangered species. Perhaps also some of the downturn in some macro fund performances is not solely due to the macro rules being different this time. The regulatory ones are too.

If so, goodbye and good riddance, Dickus.

Economist Cover Alert

We have just been treated to an indicator that out trumps any such voodoo as Hindenberg Events (Heisenberg Events are different and involve Breaking Bad), Golden crosses, moving averages or Fibonacci levels. This is the Ace of Spades in the pack of indicators. The mighty Economist Cover Alert.

The lull in the market battle that occurred around the 50% retracement level for US equities was brief and though it looked last night as though the fibonacci sellers were going to have their way with a rollover that was shaping up to dump again, it's now looking as though it was an ambush and the move back through this week's highs has followed through with a final bayonet charge that might carry all the way through to 2000 on SPX. I pity any poor soul who has just returned from a nice 10 day half-term break in the Maldives or such distant delight to be informed that they were stopped out 7% lower.

Of course that's just the US. The European markets have been languishing behind and that's why this Economist Cover alert is all the more interesting. Their full Europe story is here but though they paint a picture based on recent history,  it is hard to see sentiment turn much more bearish on Europe without a real fracture in structure rather than just bond vigilante attacks. Today's European data (released after the Economist piece) was a pleasant surprise and falling on such abject pessimism may be enough to turn some marginal sellers into buyers.

Please don't think I'm a raging Euro bull. I am just of the belief that with sentiment placed where it is, a lift in RoW sentiment out of last week's disaster zone, the US breaking higher, a bit of better Euro data and an Economist Cover Alert, it's worth buying the 'worst of the worst' and they are anything that contain the words 'Growth' and 'Europe' in the same title.

Battle Lines

It is now a week into the great 2014 financial asset price war with an uneasy truce having broken out after the first bloody squirmish between bull and and bear. Here are the battle lines -

Blood and gore. The mopping up,
Morphine the injured.
Euthanase the undead.
Carts of corpses slow retreat.

Regroup the regiments,
Reload the arms,
Rally with cries from leaders,
Taunt the enemy across the divide.

But hope for calm.
The dead cat's bounced
The supports defended.
Yet still there is no victor.

Fibonacci points mark muster.
General’s missives swirl by mail and meeting
Buy there, sell here, prepare.
If X hits Y, take Z.

The fog of war descends.
Leaves the world outside
With only rumour and supposition
Reported to the desperate

All know battle will be re-served
Cold with despondency
Hot with euphoria
Melted in a stock of fatigue.

The priests preach
To the disillusioned,
Rallying the righteous
Around their gods.

As the bibles of the past recite
“And as it was in '87, '00, '08 the great book says"
The tenets of technicality preach,
"And then in the fifth wave, after the 4th and the A,B,C, do we not descend to hell?”

The fires are lit, the horses shod,
The muskets rammed, the cannon fused.
And yet the calm of data see’s
The battle mists waft aimlessly

The lines are drawn.
Scarlet jackets, defiled.
The blues,
Their own fresh scarlet wounds possess.

But here they stand,
Their future faced,
Knowing each other’s victory
Reflects in enemy eye.

A strip of furrowed mire
All they are from glory.
The command they wait
To join the battle anew.

A Glossary of This Week's Market Headlines.

Here is a basic glossary to help decode some of the terminology used by the popular press this week in the aftermath of some price movements in global financial markets.


Liquidity - The ability to exit out of your position without the price moving so much you can’t exit out of the rest of your position.

Lack of liquidity - Losing money because everyone else is doing what you would like to.

Volatility - Something that most people have forgotten the meaning and value of.

Growth concerns - A backward fitting correlation between the momentum of GDP and price action.

Correction - A move counter to your belief.

Turn - A move finally going in the direction of your belief.

Stop losses - A reason employed by sell-side advisors to explain any sharp market movements.

Euro-crisis - A term used to explain otherwise unexplainable moves in European assets.

Positional adjustment - Hedge fund losses.

BIS reports on market instability - A story for the press to misrepresent as a reason to sell stocks when in fact it is related to potential bond market selling on a long term time basis which is all the more irrelevant as the bond market is still short.

Deflation concerns - A misinterpretation of commodity price falls as bad news when in fact they are good news for most western nations.

The need for more regulation - The belief in the non-existence of unforeseen consequences when the consequences are asked to be foreseen by individuals who have little comprehension of the whole picture.

Technical support - A hope for those long.

Break of support - A hope for those short.

Moving average - A number derived from history that some hope many will hope predict the future.

Largest move since (insert date) - An observation that fills column lines but has no predictive powers.

CDS price rallies - A natural move in the sister market to bonds that has no bearing on the actual chance of default.

Italy yields skyrocketing - A media description of small moves in Italian bonds to levels that three years ago would have been considered as Nirvana.

10% - A nice round number that can be used to insight fear or imply value.

Leverage - A disaster waiting to happen

Balance Sheet - Where most leverage is hidden.

Greek concerns - Stop losses in over-leveraged carry trades.

Overbought/oversold - It’s surely got to go down/up now

Expected Fed policy response - Hoping that the train isn’t more than 10 minutes late.

Expected ECB policy response - Realising that the train isn’t going to stop at your station.

Expected German policy response - Realising that the train never left Berlin.

The Four Italians Sketch

Spain and Italy spreads are trading wider but not as wide as they were on Thursday morning when the media were running with apocalyptic headlines along the theme of ‘Italian 10y yields tear higher to 2.71%’. These caused my screen to need a wipedown from the coffee expelled at the thought. A thought that can best be described by the Monty Python 'Four Yorkshiremen' Sketch,



Which really needs to be rewritten as four Italian bond traders:

FIRST ITALIAN:
Si, very tradable, that, very tradable bit of convertible.

SECOND ITALIAN:
Nothing like a good dose of liquidity , eh, Marco?

THIRD ITALIAN:
You're right there, Riccardo

FOURTH ITALIAN:
Who'd have thought three year ago we'd all be sittin' here trading 10yr on a 2% handle, eh?

FIRST ITALIAN:
In them days we was glad to get a price on a BTP

SECOND ITALIAN:
An off the run BTP

FOURTH ITALIAN:
Without a broker

THIRD ITALIAN:
Or a bid

FIRST ITALIAN:
In an offered market

FOURTH ITALIAN:
Oh, we never had a market. We used to have to pay a broker 25bp just to take our line and then trust their price.

SECOND ITALIAN:
The best we could manage was to call a local bank and threaten to close them if they didn’t buy 'em.

THIRD ITALIAN:
But you know, we were happy in those days, though we didn't trade USTs.

FIRST ITALIAN:
Because we didn't trade USTs. My old Papa used to say to me, “liquidity doesn't buy you happiness, son".

FOURTH ITALIAN:
Si, 'e was right.

FIRST ITALIAN:
Si, 'e was.

FOURTH ITALIAN:
I was happier then when no one cared. We used to trade in this bank with great big holes in its balance sheet.

SECOND ITALIAN:
Bank?! You were lucky to trade in a bank! We used to trade out of one boiler room, all twenty-six of us, no screens, 'alf the floor were drunk, and we were all 'uddled together in one corner for fear of regulator finding us.

THIRD ITALIAN:
Eh, you were lucky to have a boiler room! We used to have to trade our own accounts giving 50% to rent the desk space.

FIRST ITALIAN:
Oh, we used to dream of trading our own accounts! Would ha' been an investment bank to us. We used to trade for the central bank in an old water tank on a rubbish tip. We got woke up every morning by having a load of rotting credit dumped over us

FOURTH ITALIAN:
Well, when I say ‘bank' it was only a one man treasury department of a quasi-state credit-fraud scheme hidden behind a holding company but it were a bank to us.

SECOND ITALIAN:
We were fired from our quasi-state credit fraud scheme we 'ad to go and sell to the Chinese.

THIRD ITALIAN:
You were lucky to have the Chinese! There were a hundred and fifty of us working on getting away just a fraction of the 1yr Issue to some fool in a real money account in Scotland.

FIRST ITALIAN:
1 year?

THIRD ITALIAN:
Si

FIRST ITALIAN:
You were lucky. We traded the 3yr on the Italian corporate issuance desk. We used to have to get up at six in the morning, print the paper, make up bullshit, go to work on our dumbest investors, fourteen hours a day, week-in week-out, for 10cents a week, and when we didn’t get any out our boss would thrash us wi' his belt.

SECOND ITALIAN:
Luxury. We used to have to get in the boiler room at six o'clock in the morning, mismark our books, get given in-house balance sheet stuff as Greece went tits up, work twenty hour day, for 2c a month and get told by the sales desk the client needed mid... if we were lucky!

THIRD ITALIAN:
Well, of course, we had it tough. We used to 'ave to get onto issuance desk at twelve o'clock at night and lick investors' arses with tongue. We had no screens, or brokers, worked twenty-four hours a day, got told to fix EURIBOR, and when we got home some German would say something about fiscal discipline.

FOURTH ITALIAN:
Right. I had to get rid of 100 yards of new issuance five minutes after ECB said no help needed and 10yr went through 7%, I had the Finance Minister calling to tell me if I failed I’d be lucky if it was only a horse's head in my bed, I had the US investment banks taking down my trousers and surgically implanting their oversized positions, the CDS desk would be stuffing me, I got no sleep, the tax man took my Ferrari, the ex-Prime Minister took my wife and at the end of the day the Bundesbank would kill us with some stupid statement and dance about on our graves singing Hallelujah.

FIRST ITALIAN:
And you try telling the young of today that 2.71% 10 yr is nothing to worry about ..... they won't believe you.

ALL:
They won't!

A Market Post-mortem and View of the Afterlife.

This is the least 'fundamentals driven' correction we have seen for a while. Are people really expecting a double dip in the US? If not then the talk of 'concerns over growth' are hard to swallow. If we look at real yields they haven't fallen much until recently, unlike prior episodes of growth concerns where there was a more realistic probability of sharp slowdown.

So where did it all start? Perhaps oil is the culprit. Oil & gas are the largest sector in High Yield, (~13%) so the sell off below marginal production costs really put pressure on HY and led to the gap higher in HY spreads. Equities then followed HY. If you are someone who only looks at numbers it may well appear as a growth scare driven sell off as energy and materials are cyclical sectors and t'was they that took the biggest hit. But the other side of the equation is that whilst everyone panics over the energy sector, the rest of the economy benefits as lower oil prices lead to higher real incomes. Manufacturers must be rubbing their hands in glee whilst farmers, if they were to ever express any sort of happiness, would be dancing for joy (let's not forget that farming these days is pretty much a way of turning oil into food via fertilisers, farm machinery and transport). Perhaps the bond market saw this side and didn't really price in much of a slowdown until stocks started tanking.

Another factor is that when global yields moved higher in September, the pension funds that do automatic rebalancing programs may have sold stocks to buy bonds and the real money guys may have ended up selling to short term specs. This rebalancing could have been the reason that yields have been leading price action in stocks by about a month for the past 12 months. As yields have obviously retraced, so maybe that rebalance has been unwound.

We must also note that 30yr US treasury yields are now BELOW when Bernanke uttered the word "taper" and 10yr treasury yields are now less than 10bps above the dividend yield of the S&P. The value proposition for stocks over bonds has been the highest since early 2013. There is no recession risk in the US (stop laughing in the cheap seats) and even though Europe will have a roughly flat / marginally negative real GDP print it’s all priced in now. Europe has barely grown in the last few quarters, so it's not as though there are a lot of excesses that need correcting.

Oil - I strongly believe that oil prices won't stay here for that long. There is some infighting within OPEC regarding ISIS perhaps and oil prices have become a tool both there and in the anti-Russia game. The fact that spec longs in oil futures were also at all time highs going into this surely had a large impact too. With the chatter that $80 is the marginal cost of production for a lot of the shale producers supply should also be slowing soon, although it may take a few months for it to be felt. But my underlying feeling is that a 15% fall in two weeks is in no way substantiated by a change in the fundamental supply and demand of the huge and complex oil market. It was (and is) positional speculative and hedge forced position adjustments and as such is just as likely to move back higher again. Fill your tanks.

Europe - Disaster contagion was in full swing as correlation trades swept through the books and peripheral markets saw spreads to core scream higher again. Once again this can be explained by liquidation of stretched positions. Core/periphery spreads have been a talking point for the past couple of months so were due a creation anyway but coming in the midst of an equity rout the mood appeared to fast morph into one of Euro-panic with dealers reaching for their 2011 Euro-panic gameplay handbooks. Greece stocks down 10% at one point in the day was worse than at any point during their own crisis. But this is not 2011 again and despite Germany sticking to her selfish ways, I doubt the bond vigilantes are going to have much success further than taking the excess out of the recent compressions. Europe may be suffering a growth and deflation problem (actually bond positive) but the chances of default for the likes of Spain and Italy have not dramatically increased over the last week and they are still ultimately enveloped by OMT. This is not 2011 though the bond vigilantes may try to make it look like it.

So, despite all the recent shenanigans, you can probably guess that I'm still bullish risk. The macro backdrop has not changed, but what has changed is positioning. People may just have been over exposed and the price action today is suggestive of that with all the popular trades getting killed - short bonds, long dollar, long stocks, european periphery spreads etc and it was clear that their was real panic in the treasury market today with people capitulating with the net short position that specs have been running for the past 9 months getting unwound.

Where does this lead us? The master plan, after the ‘Bear Signals’ post at the end of September, had been to wait for a typical Sept/Oct sell off/panic to play through psychologically with the probable buy date to be somewhere around the end of October. However after today’s retracement, things look as though they are lining up for a low in risk assets perhaps as soon as next week or perhaps later in the week due to option expiration. I surmise that plenty of short dated options were bought expiring in October when this move began adding to those already bought to hedge against the risk of market volatility due to the end of QE. I would also surmise that most long-term real money will hold onto their long exposure (Larry Fink also saying they have seen no large institutional selling) and just roll the protection out. So the expiry of the October options on Friday may allow volatility to fall as dealers gamma exposure will probably drop measurably. This fall in volatility could itself become a bullish event as it leads further buyers in. Let’s not also forget the point made earlier where the relationship between yields and stocks (whereby yields have been leading by about 1 month) also suggest a low this week.

Finally, there's the time component. It seems that a 'proper' correction needs a minimum amount of time to sufficiently change attitudes, and historically, it's been roughly 4 weeks. This is the 4th week.

And finally finally, I am wondering how much of yesterday's carnage, especially in the less liquid products, can be attributed to new banking regulation. There has long been concern that the regulatory removal of bank proprietary trading positions also removes a buffer of liquidity should things start to collapse. Perhaps that was our first sighting of such an effect.

Fed surprises market with no surprises! (and other musings).

October the 27th is traditionally a good time to buy back September/ October sell offs but the market's volte-face in the light of the Fed minutes has me thinking that the fun and games may be over for now. Which is sort of a shame as we have so many ducks in a row as far as a self-feeding cross market sell off is concerned.

Where I think I have been wrong is just how wrong footed the market has been in their expectation of CB interest rate policy despite my belief that they were some way off course. The post minutes price action has to be the key witness in my case against the wasted man-hours invested in predicting yield curves in the previous post here.

Once again it is absolutely staggering how far a market can oscillate from conviction within the envelope of ‘not sure’. The moves in the curve seen yesterday are causing news headlines along the lines of ‘not this much since the last time’ to pop up in abundance. And did the Fed say that much? Apart from Bloomberg deciding to apply their red line of importance over news headlines in a seemingly arbitrary manner, there was little of great surprise other than what they were saying made sense. The surprise was more that the market was surprised that a major Central Bank is adaptive to circumstance and doesn’t plunge immediately ahead with what the market thinks it ought. Surely watching the European situation has taught us that.

So the response in the market appears to be more of a mean reversion as the oscillators of expectation once again snap back from stretched against the damped line of CB action.

European Growth. German data this week has been a scheisse show and though regional holiday patterns of German car companies can be partly blamed, it is undoubtably the best news that Europe has had for a while. Best as there is nothing better for European unity than Germany suffering great misfortune (well, up to a point and that point normally involving Krupps’ fortune). The FIGS (France takes Portugals place) must be looking up translations for Shadenfreude as they smirk into their wine glasses.

I can hardly see Schaeuble and Weidmann calming their calls against ‘alternative methods’ but their voices may well be muffled by the masters of German industry and with the Fed now openly quoting their concerns about global (read European) growth, Dr Aghi will now have plenty of prompters in the audience at his next performance mouthing his lines to him. So please, JFDI.

UK Lib Dem conference - At what point does the popularity of party become so small that even the role of kingmaker no longer applies? Listening to the UK Lib Dem's conference and you may be fooled into thinking that they will be in a position of power post 2015 and able to enact any of the promises that they are now making. For the record, if I get into power at the next election I will make it compulsory for vehicles travelling at less than the speed limit with more than five vehicles queued up behind to pull over and let them pass. There, as much chance of that as Nick Clegg being PM and I’m not even standing.

Oil - 20% down from July highs (19% in WTI and 24% in Brent) which apart form leaving my fracking stocks, like the gas they seek, three kilometres beneath the surface also means that all the drilling support and tech stocks are getting shellacked. Unfortunately that includes my ‘Graphene is the future’ stocks as graphene is also used to lubricate oil extraction. But there is good news. The energy tax on industry has been lifted by 20%. Manufacturing industry will of course be looking to retain this as additional margin and indeed it may give a fillip to earnings, but the world will cry doom as the deflationary impact hits the CPIs. But this is GOOD deflation and I for one am very grateful for it. Unlike all oil producing countries which of course include the Middle East, Russia and….. Scotland. I haven’t seen any conspiracy theories out there yet saying that collapsing oil prices are a huge manipulation to defeat the enemies of the West but we can’t be far off.

Volatility is back but the lesson of 2014 has been to fade every break out leaving me with the evil thought that the cruelest blow to the markets from here to year end would be a collapse in volatility. The uber popular USD bull story has seen some serious retracement, especially in the usdjpy and the usdjpy/nikkei spread where nikkei in usd terms has take a bath.

Japan appears to be in a bit of a quandary. A key pillar of driving Abenomics has been the inflationary impact of a weaker jpy and the relative spur to buy stuff now rather than later. But if the weakening currency is now of concern we are at risk of Abe issuing JPY and the BOJ buying them all back in exchange for USDs which effectively sees Japan doing US QE !

Perhaps instead ( and here is a cunning plan) they could issue JPY and then buy them against Euros, in effect doing Draghi’s QE job for him to the delight of everyone apart from Shaeuble and Weidmann who would have no control over it. Just a thought.