Greek Dictionary

We all know about Grexits, but it is probably worth covering all further derivations of the Grex meme.

Grexcell - How good the Greeks are at avoiding tax.

Grextacy - The feeling Greece has when an EU payment arrives.

Grexcitable - The market when it comes to Greek deadlines.

Grexodus - Bob Marlios song about the movement of da Greek people to Germany

Grexistentialism - Greek philosophy characterised by what has been called "the Grexistential attitude", or a sense of disorientation and confusion in the face of an apparently meaningless or absurd world.

Grexposed - EU discovery that Greece never had any money.

Grexploited - What both sides are feeling.

Grextortion - What both sides feel the other is applying.

Grexwife - Merkel

Grextraction - EU attempt to receive a debt repayment.

Grexception - What Greece hope the EU will make when it comes to the rules.

Grexcessive - Greek Debt.

Grexchange - What Greece would like to do with their debt, preferably for a Grexpectation.

Grexpectation - What Greece offers instead of a promise. See Dickens' novel "Eat Grexpectations"

Grexcitement - The short lived Greek hope after the election of Tsipras.

Grexcluded - Greece’s invitation to the EU christmas party.

Grexcreta - What Greek bank shareholders can expect to hit the Grextractor fan

Grexcentric - The behaviour of the Greek Finance Minster

Grexcrutiating - The whole process.

Grexcellent - The weather rather than the outlook.

Grexcuses - Greek explanations.

Grexplanations - Greek esoteric theory that bypasses reality.

Grexcursion - The trip Greece may be making out of the EU.

Grexpulsion  - The German for Grexit.

Grexaltations - German mood after a Grexpulsion.

Grexecution - Greece carrying out a plan, charactised by the infinite time it takes.

Grexparrot - Monty Python's definition of Greece

Grextrapolation - Assumptions as to what other peripheries will to do on a Grexit.

Grexotic - A Greek proposal

Grexclaimation - An EU response to a Greek proposal.

Grexuvia - The remains of the exoskeleton that is left after the EU has sloughed off Greece

Tyrannosaurus Grex - What Greece likes to think it is to the soft underbelly of European cohesion.

"Which leads me on to" - A collection of observations.

Take a share, any share. If it pays a dividend how do you calculate its theoretical price? To be honest I don’t know because it would appear that if there was a right way then a share price wouldn’t move much at all as the efficient market hypothesis, which let me make clear right now, is the biggest load of tosh ever unleashed on the poor economics student, would, in its completely tosh way, dictate that the price is fairly priced.

Which leads me on to asking - Is a price a fair reflection of what it is meant to be? A reverse argument if you like. If we look at a price can we deduce the components that make it up? I ask as one of my greatest bugbears is the way the price of credit default swaps is examined and backward assumptions made that the price reflects the actual probability of default. We had it with Greece and we have it now with Austria. CDS is examined and the cry goes out in media land “There is a x% chance of y defaulting’. This is also tosh. The price is an ‘implied’ probability just as implied volatility in option pricing isn’t the actual volatility, instead being where people think it will be.

The difference between what people think the chances are of something defaulting and what the actual chance is are very different. Think of it this way. There is a horse in a stall quietly munching on its hay waiting for the start of its race. The horse is unknown and as such no one is betting on it and it is pricing at 100/1. Someone sees the price and thinks that's a fair bet on an unknown and bets on it in good size. The price moves to 33/1. This attracts attention and others bet on it and even some of the other jockeys bet on it in case they lose as a hedge (this happens in CDS). The price comes in to 15/1. At which point a rather drunken fellow fancies impressing his drunken friends by placing a massive wager on it and drives the price to evens. Meanwhile the horse is still quietly standing in its stall wondering what all the fuss outside is about. So at which point in all of that did the actual likelihood of the horse winning the race change from 100/1 to 50/50? The horse didn’t get any fitter nor did the competition get nobbled. Nothing has changed with respect to the actual probability of outcome. Yet the market price has. So it is with CDS.

The assumption that is used to counter this argument is that of the wisdom of crowds - "Well if everyone thinks that, then there is a pretty good chance I am wrong". But for many outcomes the wisdom of crowds is no better than random. If you were to ask the whole population to guess the outcome of the next lottery and then bet on the modal forecast you would have no better outcome than betting on any other set of numbers. Yet the belief that mass market behaviour can effect independent outcomes is rife. In a market where the guesser can interact and effect the outcome then yes, market prices and beliefs in them will move hand in hand. But in markets where the outcomes cannot be influenced by the actions in that market then they cannot.

Which leads me on to the #NFPGuesses twitter tag, where we all have a lottery type guess at what the Non Farm Payroll data will be that Friday. All fun and games but under no circumstance should the analysis of all the results be deemed to indicate the correct outcome. Yet they are often cited as such. Short of the participants running off to get jobs or to resign their posts to get the result they are betting on, it really is not linked. Where of course this analysis is useful is determining how the market may react after the announcement, but not what the announcement will be.

Which leads me on to recommend that prices that are estimates are not turned into inputs into further models that are used to create further estimates. If they are then there will be horrible feedback loops where the likes of CDS are used as an input into the probability of default in a model that then sees that default risk rising because CDS prices are higher and so buys.. errr CDS. And on we go.

Which leads me on to Central Banks and Goodhart’s law, whereby CB policy influences market behaviour towards the assets and indicators that are themselves inputs into policy models. Here we are talking inflation expectations as measured through the 5yr/5yr which are driven by bond purchases anticipating CBS loosening because the 5yr/5yr is moving down as much because funds are buying bonds in anticipation of.. etc. More excitingly though, the reverse will apply in an unwind.

Which leads me on to government borrowing. There is simply gaaarillions of it and none of it is really seen as a problem as the interest payments on it are so stupidly low. To the point that Germany get paid. But should prices of bonds start to fall, yields will go up as will the running costs. Most unpleasant. But isn’t there some sort of borrowing cap that is applied to governments for risk reasons? No, as long as the coupon is paid the government can keep borrowing. The fact that the debt can probably never be repaid is rarely taken into consideration.

Which leads me on to mortgages.  Lets talk about the UK to start with. The government has knee-jerk reacted to the last banking crisis by laying down affordability tests for you and me that they themselves would have failed and failed in evermore spectacular style since 1823. If you are to be allowed to buy a house in the UK you have to be able to argue convincingly that you will be able to repay the whole of the debt within a relatively short space of time. That’s pay interest AND capital. A test any government would fail. Yet if I was to have retired (I haven’t) own a house worth £5 million have a pile of cash in the bank of £1m off which I am living then the bank would not be allowed to lend me a bean as I don’t have an income. The value of the underlying asset is ignored as you are not allowed to consider that the debt could be paid off by selling the asset.

Which leads me on to unaffordable housing. Which first begs the question “If it is unaffordable then how come it sells”? Ahh! You mean people who can’t afford it can’t afford it. That’s different. Someone is now making a judgement call as to who should be allowed to afford it. I notice that the government is reintroducing 'right to buy, whereby state tenants can buy their property from the state. Fine, create another first generation of cash winners, but the benefit doesn’t last further than the gentrification of some prime location hell holes. But the right to buy should not be confused with the right to have enough money to buy. It’s a market. I am a firm believer that market interference in the case of property leads to further distortions and that natural market forces should play out, even if, like a nature film, that involves big lions eating cute deer (note that there always seem to be plenty of deer left or the lions would have died out). If areas of London are too expensive for people who want to live there to live there then sorry, that’s life. I would like an Aston Martin DB5 yet I don’t launch a campaign protesting over unaffordable Aston Martins.

‘But that's where the jobs are” - Well they won’t be if no one can afford to live there. The employers will move and that would be the best thing for London, the workers and the rest of the country.

“But my family have always lived here, I was brought up here and I can’t afford to live here and I’m local’ - Well if your parents have lived here all there lives, what’s happened to all the cash they have made on their property? Just wait, as the greatest redistributer of cash between the generations is death.

Which leads me on to bubbles. Does it matter how high the price of something goes? I am inclined to answer "no, as long as no one borrows against its theoretical value". Whether that’s directly to buy it, as in a mortgage, or to use it as collateral to borrow against to spend on something else. If my humble cottage is worth a billion trillion pounds and I continue to live in it and don’t raise debt agaist it, nor spend profligately on other thing in the belief I can sell my cottage (effectively borrowing) then its price is immaterial to me or the rest of the economy. Should someone purchase my cottage from me for a billion trillion pounds and they haven’t borrowed to do so and carry on as I had, unborrowed, then nothing in the world is effected, we have just exchanged positions.

If house prices are moving to infinity why do you want to own a property in the first place? To live in of course! But there are alternatives.

Which leads me neatly back to central banks, theoretical prices and equities. In a world of super low interest rates, let's say zero in many cases, a stock paying a dividend can be priced to infinity and still have a better yield than a zero yield bond. I have often mentioned the lunacies involved in negative yield land but we can now expand the collection of absurdities to the housing market. As with stocks, house prices can go to infinity and, as long as the tenant is paying maintenance costs, the rent can be infinitesimal and the owner is still yielding more than they will be getting on zero yield bonds. Looking at that in reverse it means, dear friends, that rather than paying £10^21 for a shoebox you do the owner a favour and rent it from them for £0.0000001.

In fact, if European yields are negative, the efficient boundary would suggest that a property owner could buy a property and pay you to live there and still outperform German government debt. Now how about that? Being paid to live in your house! Yet you still insist you have to be able to borrow money to buy your own house whatever the price?

Pray, tell me why you are so completely stupid?

Baby I Don't Care

Turn up the music LOUD and sing along with the words below as we tell Yellen just what we really think to the her weasely Fed timing words. 

BABY I DON'T CARE! 

Transvision Vamp 

This embed may not play,  if not open it here and crank it up. 

Waaaaaahhhhh!

Well you can tell me your a dove

And you won’t raise rates in quarter two

But I knows what’s on your mind

You think that growth may cool

And deflation’s due to dollar

Give me ‘bullshit' forever and a day yeah 

But there's just one thing 

You don't have to say

You don't have to say when hikes'll be

You're the chair of FOMC

We"ll just have to wait and see.

Baby it's alright

Cos honey I don't care

Oh baby I don't care

Oh honey I don't care

Oh honey I don't care

Well you can turn expectations down low

Sometimes it's best for stocks that way 

So you can tell me all your stories

But please spare me the plays

Cos you don't have to say your a dove, see?

You don't have to allay rate hike fears

No you don't have to say when the date'll be.

Baby it's alright

Cos honey I don't care

Oh honey I don't care

Oh baby I don't care

Oh honey I don't care

Deep in your eyes

I see it in your dots

I know you'll wait and see

Sometimes it hurts

But you know that some things

Are best left never said

Cos you may never want to raise, see?

Though you have to say you can

You don't have to say when it'll be

Baby it's alright

Cos honey I don't care

Oh when I tell you baby

I don't care

Oh baby please believe me

I don't care

Oh when I tell you baby

I don't care

When your raise will be

I don't care

Oh baby please believe me

Don't you see that I don't care

I don't care

Oh honey I don't care

You know, you know that I don't care

You know, you know

That you don't have to say you’ll hike rates

And you don't have to say you'll cut

You don't have to say when it’ll be

Baby it's alright, oh honey it's alright

Oh baby I don't care

Whale Oil Beef Hooked

Whale oil beef hooked. Look at the price of oil and oil stocks.

Though I have been out of oil for a while I have been watching it with keen interest and a couple of associated stocks. Of interest is the timing of relative highs and lows.

Lets look at the charts below of Tullow, BP and Premier ( the candles) and Brent oil (the black line)

We can see that the lift off from the base in Jan was led by the stocks rather than oil and the turn lower kicked off in the smaller more speculative stocks like Tullow and Premier before oil finally got around to catching up. Even the mighty BP refused to go up after the start of February. 

So what is going on here if oil stocks are meant to follow the oil price? Well could it be that oil actually follows the stocks? If so how? 

I am wondering if we have a speculative interest, or even model interest in the markets that has worked out that the profits to be had influencing lead/lag correlaters is greater than playing in the underlying commodity alone due to influences of liquidity and market capitalisation.

Option 1 - So you are going to sell oil and you know that the amount you are going to sell is going push the market down as you know that once it starts to go everyone will chase it. So instead while oil is steady you instead you start selling oil stocks. the spreads between oil and the stock widen and other players support the stock as it now begins to look out of line, giving you a stronger bid into which to sell. You carry on selling stocks until the spread widens to such a point that others start to buy the stock and sell oil on the spread trade, which finally gets oil going down. At which point you start to sell that oil you were planning to sell. Which reacts as you predicted and accelerates downwards. With it the floor for the stocks goes and they melt below levels that they would normally be at relative to that oil price. At which point you buy your stocks back for a healthy profit. 

Option 2  is that you never have any oil to sell. You follow the strategy above ( including the selling oil part) but after buying your oil stock back you buy your oil back. 

This is not a new tactic and may have been famously employed in the gold markets where gold mining stocks have greater liquidity than the gold market 

Shares surge: Gold prices and the stock of mining...

April 26, 1993

Shares surge: Gold prices and the stock of mining companies soared Monday after money manager George Soros bought a 10 percent share in Newmont Mining, one of the U.S.'s largest gold mining companies. Soros, who heads the Quantum Group of investment funds, purchased the stake from European tycoon Sir James Goldsmith, Newmont officials confirmed. Gold prices have climbed 7 percent since March 10.

Gold surges after the completion of buying a miner? Hmm. Someone buying back their shorts now that their use for holding down prices during negotiations for the stock has run its course perhaps? 

Now of course there could be lot of other reasons for the price of oil and stocks behaving in the way they do but the suspicious cynic in me would be reading the massive bounce in a couple of those stocks today as an indication that oil will also base today ...  for a while at least. 

IT Dementia

I was once considered the IT Geek. I used to be able to write programs in machine code and I always knew which bit of tech was top of the pile, I knew ALL the functions of every latest phone and I had a Windows based smartphone in 2002 that played mp3s when everyone else relied on iPods. I knew every setting in Windows, I could fix the wiring in the house, I even knew what every button on a 1990s VCR remote control did.

But but but…. I am now swamped. My brain just can’t cope with it all and I want to turn into an Apple zombie where the nice men in Apple white coats just make the shiny thing work without me having to trouble my little brain as to how. I have hit the equivalent of IT dementia.

I am currently having to cope seeing my dear old Dad slip into that dark land of dementia, a land from which you know there is no return, only a one way trip down a tunnel of engulfing gloom as the light of the past recedes leaving only a memory of growing darkness. My mother said something very astute about him the other day, but then as a high flying consultant neurophysiologist in her day I should have guessed she would. When I asked how he had gone downhill so much recently she replied, “Well his dementia hasn’t accelerated, it’s just that he has been able to cope without the bits he has lost so far. But having denuded the excess capacity it is now eating into what he needs to function so the effects are much more noticeable". Poor Dad.

But IT is the same. We can fill up so much of our brains with its complexities before they suddenly hit the ‘full’ mark, at which point our brains have a choice. Forget the less important facts and replace them with those of a greater importance ’sort by rating’, or they can just forget the oldest stuff leaving space ’sort by date’, or it can do what my BLOODY MAIL SERVER HAS DONE. Sorry to shout, but I am only just holding enough brain CPU in reserve to type this, so stress levels are a little high as my brain has done exactly what my bloody mail server has done.

"Your mailbox has exceeded its quota, please delete messages from your inbox.” Yes, that’s my brain re IT ability.

I try to delete -

"The IMAP command “UID COPY” (to INBOX.Deleted Messages) failed for the mailbox “INBOX” with server error: You exceeded your mail quota.”

All the more annoyingly someone says that they have forwarded me a mail with how to rationalise my IT knowlege. Which leaves me with a paradox. Just as with my mailbox, my brain is full of IT yet I need to learn more IT in order to relinquish IT. Yet as my brain is at maximum quota of IT so I can’t learn any more in order to get rid of it.

In a large organisation at this point you pick up the phone to the help desk and act the dementia patient as the World of Warcraft playing spotty youths flock around your desk, not so much to fix the problem with one deft keystroke, but more to gawp in barely suppressed mirth and the gibbering IT demented moron who doesn’t know how to archive his mail box. However I don’t have that privilege anymore, working for a boutique operation it is often quicker to google the problem and embark upon a mission into the depths of system setups that rivals Frodo’s travails in the Mines of Moria, as I tiptoe through the darkness trying not to upset the smallest setting that will call the Balrog of irretrievable system failure upon me.

Having said that, it is most likely NOT the quickest solution, as Google swiftly refers one to chat rooms that need logins, or whose remedy involves a 7th dan in wonkishness. The other course of action is to try one of those YouTube entries purporting to solve just your problem. Now, I’m not being racist nor nuffink, not that I call 'identifying a larger than average population of wonks’ racist but is it my imagination or is the national pastime of 17-20year old Canadian young men to sit in their rooms and make incredibly badly communicated videos of themselves offering solutions to basic problems over a time frame of 20 minutes that can mostly be answered with a ‘just flip that switch there’ 0.3 second subliminal mind flash? You guys really are making it impossible for the self-help needing IT dementia sufferers like me from finding that self-help. I give up on you.

So I now turn to the half bottle of Amaretto that was by my side. I know the image is not as hard as an old hack in a Saigon steam-shop, garbed in a once white, sweat soaked vest, pummelling out his diatribe on an old Underwood No. 5 typewriter, swigging from a once-corkstoppered unlabelled bottle of firewater, but hey, allow me some leeway here. It was all I had. "Had" being the word as it appears to have evaporated. So with the last sticky sweet essences of almond evaporating away I turn to my last port of call. It may be late, but when a man is in trouble a man is in trouble.

“Darling, do you know how to make my letters thing on my computer thing work please? I was about to send your mother an invitation to join us for Christmas, a message to your sister offering to pay for her children’s education, an apology to your friends we were at dinner with last week for upsetting them with my dreadful sense of humour and a large donation to that donkey orphanage you so want to help. But it won’t let me as apparently the IMAP command “UID COPY” (to INBOX.Deleted Messages) failed for the mailbox “INBOX” with server error: You exceeded your mail quota, what ever that is”

Backward Engineering.

I have recently read a few good pieces on why Germany needs to do more to iron-out its internal structure problems.  They focus largely on the demographic imbalances caused by an ageing population and a falling birthrate. Whilst they correctly cite various remedies that need to be implemented to stop it following the demographic trajectory of Japan they tend only very briefly to mention the most obvious quick fix answer, the one that Japan has failed to implement for all its cultural and xenophobic reasons and the UK Prime Minister only today is citing as one of the reasons the UK is doing OK -  Immigration.

The Eurozone was constructed by applying a wardrobe of artificial straightjackets designed to hold itself together. But as with most regulation, or even complex financial product pricing, if you contain one variable then stresses will display themselves through another (what is ‘implied volatility' in options calculations other than the remaining free variable once all the others in the Black and Scholes equation have been tethered). It’s like grasping a balloon between your fingers. Squeeze one part and it will pop out somewhere else.

I saw this marvellously demonstrated years ago at a Michael Jackson concert in the Singapore national stadium. We, the expats, sorry I mean 'immigrants',  in the crowd, were not used to having to sit still (as required) throughout an MJ style concert and so clumps of people would spontaneously leap to their feet and start dancing at which point a posse of security guards would rush over and demand they sat down again. It didn’t take long for the crowd to realise that the guards could not cover all bases so when one part of the audience was quelled another would rise on the opposite side of the stadium causing the guards to race over to quell them. This became a game with the crowd actively playing the guards, rising and falling just for the merriment of driving the guards in futile hot heeled persuits across the vast stadium. But basically they could not contain the natural forces that dictated that at a Michael Jackson concert the crowd were going to get to their feet and move.

The straightjacket of the EU is the Euro. Its unionised monetary policy without fiscal union has led to a veritable monetary buffet. Stimulus is provided through a centralised monetary buffet free-for-all from which all countries benefit, yet those who excessively benefit from it never have to pay through tightening domestic fiscal measures. As the feeding continues those with the best credit take more and get fatter and their credit improves further and they take yet more, meanwhile the hungry ones at the back find the table bare and demand it be refilled. The ECB kindly oblige.

Greece is the diner who fills his pockets and when challenged replies 'Who me? I only had the tomato soup”
Spain and Italy hide the piles of smoked salmon under a lettuce leaf so they aren’t spotted heading off with the best bits.
Portugal is under the table feeding on everything that hits the floor and hopping no one will notice it is there.
France is seen as polite and thankful, only taking what the waiter brings over to her. But the waiter is of course French.
Ireland meanwhile can’t believe they are being given free grub when they are actually meant to be dining with the UK.
The UK haven’t got a ticket to the buffet and though their mouth is watering they guess the food is poisoned.
Austria say they are a friend of Germany's and Germany says it's ok for them to have some of theirs.
Holland is trying to explain how the buffet works and is smacking the hands of anyone who leans past them.
Denmark was just walking past and is trying to explain that although it has a food sharing deal could people please stop eating off its plate.
And then there is Germany who protests the cost of the buffet and demands it should stop being refilled but when presented with another tray of low EUR/USD and negative funding foie gras helps itself and does nothing in the way of fiscal exercise to burn it off.

Everyone knows that if you don’t take your share at a free-for-all, someone else will. So Germany is growing fatter than them all. The best credit gives them the lowest borrowing costs and of course people always lend first to those who don't need it. With monetary policy generalised and fiscal policy local, there is a policy bias towards continuing looser monetary policy and relatively tighter fiscal policy. Why eat your own packed lunch when a free one is being provided?

So where do the adjustments occur? If a country will not voluntarily adjust its fiscal policy for the greater good but takes advantage of the generalised monetary policy, the last resort to adjust imbalances is for people to physically move and take jobs in booming areas, thus increasing labour supply and dampening wage pressures. This leads us back to the beginning. Germany needs immigration to counter its own demographics and the rest of Europe needs Germany to take immigrants to dampen economic cross border stresses.

So why hasn’t the whole of Greece upped sticks and headed off to Germany? The rich probably have and are there doing well and not paying taxes back in Greece (exaserbating a different problem that could also do with the unionising of fiscal policy) and the poor haven’t because they aren’t welcomed and don’t speak German.

Germany does exhibit the highest immigration figures in Europe but the fact that demographic failures are discussed at all is a sign that immigration is not doing enough to dampen the stresses. More can be done. But when economies suffer and disparities and national wealth inequalities extend, nationalism and protectionism start to dominate. These are natural barriers to migration. Until a European can head off to another part of Europe without being perceived as a foreigner stealing a job, the ultimate balancing function of migration that the EU has to rely upon (having artificially restricted all other variables) is less likely to work just when it has too.

Whilst the EU was originally formed to prevent wars, the mantle of cultural unity that has recently solidified over the cooling magma of past European conflicts is not yet strong enough to see swathes of non local lingo speaking arrivers taking from the buffet table of those who only have a buffet table due to them taking more from the original buffet table that the arrivers didn’t take as much from in the first place. So to speak.

Which leads me back to a tenet that I have been mumbling under my breath since 1998. -
"It won’t be the Euro that unifies Europe. It will be the English language."

QE QAR QRASH - Driving by committee

I am beginning to feel that the talk of QE did more good than its actual execution. This could fast turn into a QE QAR QRASH. EU QE is like driving an F1 car by committee and no one really knows the course.

QE buying running up the yield curve taking us further into the negative yield twilight zone is just compressing the inevitable spring of unwinds from this abhorrent state.

But in the meantime we have equities going down because of fear of US rate hike fears and bonds going up because of EU QE. It's nuts m'lord.

Still think both should go down ultimately as we have the next deleveraging saga. Only this time it won't be in personal debt but where that debt went - into state hands so soveriegn debt deleveraging. But of course the man in the middle is corporate debt who have been loading up thinking they are as bullet proof as sovereigns, mostly due to the investor market treating them as kings in the hope of currying some Maundy Yield Money.

If that debt is associated with its own currency then it will be FX dampened, but where its tied to a 3rd party currency (EU) all the pain will be in the debt and we will be back where we started in EU.

Be interesting to see who gets the blame. In 2008 it was the naughty lenders who took the social wrap. Next time around I predict it will be the naughty state borrowers who are blamed. Always blame the bigger entity it seems.

Euro issues.

To paraphrase Churchill "Never in the field of EU bond buying has so much been expected to be bought by so few from so many."

The monstrously low EU rates have, to no surprise, triggered a glut of Euro issuances with another swathe hitting the wires.

Berkshire Hathaway
Ghana
Romania
Hosts of Chinese names

The effect on the Euro depends on how the proceeds are then handled. If they are to be used to fund Euro investments and paid off with euro returns then they self hedge . But if, as is the case with Berkshire and the majority of these, they are to be used to repay non EU debt load or to fund non EU investments then FX exposure opens up. Which can be then hedged or left exposed.

If they are fully hedged with FX swaps then currency risk is removed but so is the EU low yield advantage through the forward points. If it is partially hedged with rolling short date FX swaps then there is yield curve exposure and cash flow differentials on on each roll  date due to FX spot moves. If it is left unhedged then low rates are fully utilised at the cost of opening up FX risk. The risks of which are now being seen by emerging market countries who loaded up on USD debt and are now being squeezed by a strong USD and rising US rates.

But of course the EU is different isn’t it? The Euro is going to keep falling and rates are going to stay low forever. Basically the same arguments that were applied to the US two or three years ago. Hmmm.

As these bond issues pick up, the Euro will feel continued pressure in a self fulfilling way. Issue, sell the proceeds for which ever country currency they are needed in, see FX fall and feel justified to have left the FX exposure open. This is basically the ‘low yields mean currency falls’ mechanics from the debt issuance side rather than the ‘lower rates so won’t invest there’ investor side. Yet someone has to be buying these bonds and they will have to buy Euros to do so if they are non EU players. But the demand for EU based investment at stupid low yield is not so much coming from new overseas investors. It’s mostly ‘Have to be in Euro’ investors who are just looking for anything of good credit that is paying more than 0%, which results in portfolios switching along the curves of both duration and credit. Which means that local institutions, banks and pension funds have to buy the negative yield and take the pain or buy these new issues. Basically, I cant see the Euro being supported by a wave of overseas money arriving especially to buy these new Euro issues.

So it would no be a huge surprise to see Euro keep falling encouraging more to issue and keep the cycle going switching from Usd funding to Euro. Right up until all bases are loaded and rates are perceived to be going up again. So the best way of running your Euro bond issue is to run it unFX hedged until the Euro bases and then hedge as rates outlook change or the last issue is done. But that is a game of chicken watching the issuance calendar and being ready to hedge when the last player is in.

With all the Euro issuing going on I do wonder if the calculating minds of the structures and investment bankers have worked out a way to palm the stuff off into the whale shark grazing mouth of the ECB. As the ECB is allowed to buy covered bonds and ABS as part of its program, how much of this nonEU issued Euro debt will end up buried in ABS structures that end up in the ECBs vaults?They may well end up holding non-EU issued Euro debt via a complicated back door.

Meanwhile I also wonder exactly how legged over the ECB is going to get buying their bonds. The world has preloaded and anyone who has worked in a dealing room will know the drill when a CB calls up for a price. Very much like Gordon Brown and his gold sales.  Ok, I know that this is being done through e-platforms, but the moment the name is seen then the response will be the same. The cry goes out ‘ECB is in! Offers vanish and clients are sent messages along the lines of ‘ We are seeing very good demand right now from a good European, I said GOOD European, name’ and spec buying pushes things against them. Then the game of 'guess the amount they have done' kicks off and the guesses then correlated against price action in order to work out a rule of thumb guide to future price action, which will then be anticipated and so work less well going forward.

Unless of course there is a rerun of the apocryphal story from a 1990’s FX trading room.

Sales Guy - “USD/DEM in 10 for a bank please’
Spot trader “10/15”
Sales Guy - “Mine”
[Prices leap about 200points]
Spot trader - “WTF .. Who was that???"
Sales Guy - “Err.. Federal Reserve Bank"
Spot trader - “********* YOU ***ing MORON ******NEXT TIME THE FED IS IN ***** YELL IT OUT!  MINE MINE MINE MINE ’

2 weeks later
Sales Guy- ‘ Hi guys, Fed's in"
Spot Traders “MINE MINE MINE MINE’
[Price barely budges]
Spot trader - ‘Mate are you sure? WTF it’s offered! Who told you they are in?’
Sales Guy - ‘Reception, they just called up to say they are here for our meeting’
Spot trader - “**** *******  *** ******* MORON!! .. YOURS YOURS YOURS YOURS'

Prince on Bonds - Sell 'em like it's 1994

NFP's have damaged US Treasuries to the extent that I think I can resurrect and retune my bond version of Prince's 1999. Sorry Prince.

Sell 'em like it's 1994

Don't worry, I won't hurt you
I only want you to buy my bonds

Was I dreamin' when I bought these
Cuz' they sure ain't goin' my way
After NFP's this mornin'
Coulda sworn it's judgment day
The screens all bloody,
There are yields rising everywhere,
Tryin' to run from bond destruction,
Just gimme a bid that's fair.

Cuz' they say two thousand fourteen bond QE party over,
Oops, through the floor.
So tonight I'm gonna sell 'em like it's 1994.

I was dreamin' when I bought these
Thinking Fed would buy and buy 'em fast.
But QE was just a party. QE parties weren't meant to last
Growth is all around us, my mind says prepare for flight
So if I gotta deal, I'm gonna sell my bonds tonight.

Yeah, they say two thousand fourteen bond QE party over,
Oops, through the floor
So tonight I'm gonna sell 'em like it's 1994

Yeah
Lemme tell ya somethin'
If you didn't come to buy mine.
Don't bother knockin on my door
I got some stocks in my pocket,
And baby they've started to roar
Yeah, everybody's long bonds,
Watch 'em all dive today
But before we'll see that happen,
I'll have sold mine anyway.

Oh, they say two thousand fourteen bond QE party over,
Oops, through the floor,
Were runnin' out the door (tonight I'm gonna)
So tonight we gonna (dump 'em like it's 1994)
We gonna, oww

Say it one more time
Two thousand fourteen bond QE party over,
Oops, through the floor,
Were runnin out the door (tonight I'm gonna)
So tonight we gonna (dump 'em like it's 1994)
We gonna, oww

Alright, it's 1994
You say it, 1994
1994
1994 don't stop, don't stop, say it one more time
Two thousand fourteen bond QE party over,
Oops, through the floor,
Yeah, yeah (tonight Im gonna)
So tonight we gonna (sell 'em like it's 1994)
We gonna, oww

Yeah, 1994 (1994)
Don't you remember well (1994)
When all bonds were a sell  (1994)
Prices fell down the well (1994)
I don't wanna loss,
I'd rather give all my bonds away (1994)
Listen to what I'm tryin to say
Everybody, everybody say sell 'em
C'mon now, no hope from Yellen
That's right, everybody say (sell 'em)
Can't run from the revaluation, no (sell 'em)
Sell 'em, watch these Govies fall (sell 'em)
Tell ya the Fed's a hikin' baby, sell (sell 'em)
Employment's risin' (sell 'em)
Cmon, cmon, you sell (sell 'em)
Everybody, (sell 'em )
Sell 'em down to the ground, sell (sell 'em )
(dwell them )
Come on, take my bonds, baby (sell 'em)
That's right, and buy the Dax (sell 'em )
(sell 'em )
That's right (sell 'em)
Got stocks 'n' shares in my pocket man and Bonds? (sell 'em )
Oh, they've dumped right through the floor (sell 'em)

Mommy, why is everybody selling bonds?
Mommy, why is everybody selling bonds?

Deflation to inflation in one paragraph.

One of the concerns being raised about European QE is that there will not be a enough quality debt left for them to buy or if there is then there won't be enough for the investor to buy. No supply of debt left for the investor to buy?

Well excuse my French but isn't that the whole *^*^** point? To make it so impossible to buy debt that people stop buying debt and buy something else instead? Like 'things that people make' perhaps? At some point someone will realise that there are other things to buy other than negatively yielding IOU's and as soon as they buy those other things the price of those other things will go up and that, voilà, is called inflation. At which point people won't want to buy IOUs that they have to pay to hold as there is now something else going up in value and... Woh! Don't want to miss that and, hey, you don't buy bonds during inflation do you? Oh look, our selling of bonds to spend money on other things is making inflation go up even more. Quick, quick! Buy 'stuff' sell bonds! Whoops, this is moving fast, are the central banks going to act? No sorry, I'm a central bank and I'm waiting to see if prices moved LAST month and then I'll look at next month to make sure. Meanwhile - Wow, prices are higher and woh! Bonds are tanking. Hell, yield differentials are making equity holdings look poor on a yield comparison, I'd better sell them and buy stuff too. Quick make more stuff, people are buying stuff! Hire people to make it. Sorry not enough trained people to make stuff. Ok hire the people that can make stuff. They want more money? Just pay them, Jeez we are missing making stuff fast enough to sell (and tell the kids if they want to earn a buck do a degree in stuff making). Whilst - hang on, I'm a central bank. I'd better raise rates a bit, but oh that's odd equities are down and bonds are down but inflation is up, errr should I be raising rates? Perhaps I'll wait a month, and wow, the government refunding is getting expensive. I'm a corporate and my bond rollovers are expensive too and oh, I'm paying people more to make stuff and funding it at higher costs, woops, look stuff is going up in price still, I could hedge by buying stuff myself whilst trying to make more stuff to sell. Uh oh, we've got a stuff bubble. Oh yeah, that's called really high inflation. Huh? Wasn't it yesterday we had deflation? That's confusing. Oh I don't believe it,we are stuffed the other way now.

...or something like that. Here endeth the rant.

Exhibit A in the case against Real Money Bund positions

Following in from  the last post where I point to real money being the ultimate casualty in bonds -

I just saw and want to raise as (exhibit A) in the case against real money bond logic. (from a Robin Wigglesworth ( FT Hack) @RobinWigg tweet) which he says is from David Tan JPM Asset Management's head of rates. Here he justifies why the fund is investing in negative yield.

To understand buying German bonds on a negative yield, consider our starting point which is The European Central Bank's negative deposit rate at -20 basis points. For a lot of banks owning a five year government bond at -8 bps is preferable to placing the money on deposit with the ECB at -20 bps. (1) Secondly. whilst as an investor you may allegedly be 'paying to own the bond', bear in mind that if yields drop further, you will get a capital gain to offset the negative yield Therefore from a total return perspective the expected return will be positive rather than negative. (2)

For investors including JPMAM we may choose to own negative yielding bonds by shifting out of 2 year bonds at -22 bps into five year bonds at -8 bps because we see no prospect of ECB tightening in the near term, which would make the trade unprofitable (3). Secondly. we see a very low inflation environment for the foreseeable future. (4) In that context it can make sense to shift from shorter dated bonds into longer dated bonds at less negative yields on a relative basis.

In our view the market is getting used to negative yields. About half the German bond market excluding T bills is now in negative territory therefore investors are becoming acclimatized to negative yields (5) The ECB haven't even begun to buy government bonds and that will further reinforce the current environment.(6)

It is important to point out that Germany is actually running a small budget surplus currently so we would expect net negative supply in Germany for the next few years and at least for the entire duration of the ECB GE programme That means demand will continue to outstrip supply, effectively bolstering prices and holding down yields. (7)


Which leaves me even more convinced that real money are going to get hosed and that some of them are just winding the spring of their own demise even tighter. Let's look at the points I have numbered in the text in blue.

1) Adding duration adds leverage for the same face amount and we assume he is talking same face as he is avoiding being in cash. Adding leverage normally leads to a faster death should something unexpected occur. Interesting that he would rather pay negative yield in Germany than get positive in France on this argument. Also interesting that he isn't saying get a more positive yield by going even further up the curve. 30year? I can only assume that he is aware of a duration/risk payoff that far out but isn't mentioning it in the case of the 5yr. It may be cheaper for him to rent a vault and stick a few billion of Euro cash notes in there at 0% plus rental.

2) 'Bear in mind if yields drop further you will be paid'.  So yields fall, though how much further is a squeeze, and you get your coupon paid by capital appreciation OR yields stay the same and you lose on paying to own it OR yields go up and you are screwed on all fronts. Yet he only mentioned the first case. In fact paying to hold something only because you hope its price will go up is a characteristic of the last stage of any bubble.

3) You don't need the ECB to change anything to make the trade unprofitable. The longer bonds whip around independent of ECB and are more of a measure of expected inflation. Indeed if the ECB does nothing whilst inflation (or just expectation of inflation) picks up the 5yr will rip a hole in your face via expectations and thoughts that the ECB could be behind the curve. One of the cop outs of holding bonds is that you can run them to maturity and not make a loss even if mark to market they appear so in the interim. It is opportunity loss but you get your face value and coupon back at least. This is reversed with a negative yield where the longer you hold them the more you pay, which would suggest that come a turn, the requirement to exit will be greater.

4) It's on his expectation of low inflation forever. Even if JPMAM are right, should inflation expectations change from the rest of the market they will still be hosed. But fair enough at least a viewpoint here.

5) Sounds like my rail company who now feel that because I am used to overpaying for a rubbish service I will be happy to go on doing so forever. WRONG. I have never before heard being used to losing money as a reason to want to continue losing money in a grown-up investment argument.

6) Correct, but we all know they will, so do you suppose that this information may already have moved the price? I do. Remember the Gordon Brown Gold Trade?

7) On the massive assumption that the demand side of the equation stays where it is and isn't at all effected by inflation expectations turning from the current mega-deflationary meme, alternative assets become more attractive (he's a bond guy, so probably only knows his universe), Europe de-stresses, or US rates become attractive enough to outweigh the currency risk of holding them instead and finally, someone wakes up and objects to having to pay to give someone else their money.

I rest my case m'lord that your pension fund is under threat.

RU, a pain in my Bund?

This morning I own up to having pains in my Bund. Piles of it, as Bunds are higher.

 Since I have started building a short Bund position I have been gaining confidence as a) it hasn’t broken higher b) Greece issue is waining rather than waxing c) European stocks are driving higher as faith of a return of growth, or at least no imminent collapse in growth, has returned and there are better yields to be had than in negative rates at the short end of the German curve. I was additionally relieved to see Credit Swiss research calling fo 10yr Bund up around the 1.3% yield by year end.

Against this I have been fighting the oft quoted against me views that QE is coming, which I counter by arguing that that bit of info has been in the price since QE was announced b) European growth is not really going up yet c) The ECB is going to crush deflation through policy stand back d) Europe isn't fixed e)Money needs to be held in Europe and before decisions on allocation are made you hold it somewhere safe , like bunds

I then see this morning that the likes of the Japanese civil service fund is cranking up its holdings of foreign bonds from 2% to 15%, and that makes me quake. Not that one fund is doing an allocation, but that if that thought pattern is repeated throughout Japan then there will be a wave of assets allocated by managers who have no qualms about buying stupidly low yield, having had decades of practice of buying their own stupidly low yields.

Meanwhile in other parts of the 'Who would have thought it' alternative universe,  Irish 10yr is now yielding below 1%, which is making me ask what other oddities there are out there to add to German, Swiss and Danish negative yields, Global MSCI equities hitting a world record high and oil being around $50 bucks. Imagine if in 2011 you had put a trade on that paid off if Irish 10yr was at 1%, Oil at $50 and Global stocks at record highs. You would have been carted off to the funny farm before even being allowed to place it. Once again this highlights why what is consensus today can so swiftly change.

And with that I have just talked myself into staying short bunds.

Greece is on simmer having been on hard boil, so market’s ADHD attention can switch to the next worry. Market worries appear to be similar to PEZ sweet dispensers. Remove the top one and the one underneath pops up to be given as much attention as the previous no. 1, even though it was there all the time.

Yellen and the Fed have filled many column inches with her being read as dovish, or not, or maybe or.. and at this point we see Fed watchers examining the ink density of full stops and the weight of the notepaper it was issued on for upcoming clues. I must be one of the few people who think that micro-tuning Fed timing is one of the biggest wastes of time mankind has ever invented, to the point I should wrap the whole exercise in an App called 'Rate US’ the success of which makes Candy Crush look like Friends Reunited.

For me there are bigger issues out there - and the one that frightens the willies out of me (and could in fact be another reason to buy bunds) is Rrrrrraaaaaaashaaaaa.

- The Ukraine ceasefire didn’t hold.
 - Russia has almost stopped pretending they aren’t there.
 -British forces head for Ukraine as David Cameron issues warning to Vladimir Putin Ok, to train Ukrainians but we know where this leads and this headline has to be the most frightening I’ve seen for a while. Interestingly and perhaps reassuringly Russia hasn’t become a UK election issue. but I just hope Cameron doesn’t think it his political Falklands.
- Cameron is also threatening to switch Russia of the SWIFT payment system.  Russia is already building bypasses around that so doubt they are worried.
- Meanwhile Russia is buzzing European airspace and the US are parading troops 300yds from the Russian border in Estonia.

And yet I feel I am alone with my own childhood terrors of Russian conflicts and nuclear wars. Popular US commentary once again appears to be dismissive and a blind faith prevails that economic sanctions will work (well they effectively did with Reagan’s Star Wars all-in poker bluff in the 80’s) or through military power (all Russia’s equipment is old and rubbish). Everything that Russia has done so far backs up my original belief that threatening Putin makes him stronger. But we are back to a problem we see everywhere. Morals come first these days rather than best outcome. I hate to say this but I agree with the UK Green party in that we need to appease a little. Standing up to a bully is all well and good and works well in US teen movies, but in the real world down a darkened alley having fallen out of a night-club sometimes negotiating to give the mugger a couple of notes rather than kicking off world war three and losing the lot is a sensible option. In the mugger analogy there is an ultimate rule of law over it together with enforcement (someone will later go and track them down and hopefully punish them). With Russia there is no overriding super-authority that can prosecute and punish. It would be great of the US had the power to do something without using Europe as a muddy football pitch again for superpower playouts, but their track record of binary 'with me or against me’ foreign policy has left the world looking like a recently kicked red ant nest. Is there some irony that the EU was originally formed to prevent war yet is now so inwardly focused on petty bickering over who owes who what for the buffet of cheap funding, that they could really screw up over the biggest war threat on their doorstep?

If Dijsselbloem is such a crack EU ‘get what we want’ negotiator I suggest he pops off to Moscow for a chat.

This may sway a bit from markets but it does reflect on what makes people make investment decisions. I find there are those that introspect and those that look wider afield. The introspective appear to be gaining foothold in funds as micro-specialists beaver at individual relative value and quants pour over historic performance and cross correlations but neither of them have time to look up at the non-financial inputs that may hit their asset class  (Russia a good example). This leaves the macro decision to be made by the asset allocator and in most cases that buck is passed back to the client who then turns to a consultant who once again looks back over history. Have you ever heard a consultant pass comment on future global political outcomes rather than drown you in spreadsheets of past performance, diversity and risk measures?

Which leads us back to the beginning. My final hope for my Bund short is that these introspective management views that consultants and real money apply these days has built up a risk in bonds that I can bet against. When the dam breaks real money and the poor pension funds who are matching duration of assets to liabilities are going to get hosed by negative real return. "But hey, we are only following the rules and against benchmark we are.." Yaaawn.


Post script -  I raise exhibit 1 in the case against real money bond logic in a following post here . It is the case made by JPM Asset Management for buying Bunds which I counter point by point.

Mr. Varoufakis's homework.

Mr. Varoufakis has until Monday to get his homework in to the EU teachers for marking. As this appears remarkably little time to recalculate all permutations of Greek economics overlaid with political agreement, one can only wonder if it will be done in time (perhaps accompanied by excuses of the dog having eaten it, family funerals, spilled greek coffee on it etc). Having heard that he is in fact going to have it ready by Sunday evening one has to assume it more likely that it is being lightly skimmed over, with answers rich on general ideas but devoid of detail or numbers.

With that in mind I can only pray it doesn't turn out as I am imagining it below -


Homework - To be handed in Monday 23rd Feb to Mr Eurocrates
Please answer all questions fully. Deutchmarks will be deducted for incomplete workings

1. 2+2 = ?

That would depend, but I would commit to 1 with room to negotiate to 59 as Greece is suffering a humanitarian crisis,

2. If you have €100 and take away 40% how much is left?

If it is Greek tax, €100. If it is haircut on Greek bonds at the ECB, €0.

3. If you had 1,000,000 public sector workers and you have to take half of them away, how many will you have left? (Please show how you took half away).

About 1.500,000? I would take half away by employing another 1,000,000.

4. If you owe Wolfy 300bio Euros and he would like them all back 

            a) How many do you have to give him?

Some, maybe.

            b). If you have to pay Wolfy his Euros on Feb 27th 2025 and it is now Feb 27th 2015, how many years do you have in which to pay Wolfy?

60ish

             c) Where would you find the Euros to pay Wolfie?

 €6.47 I found down the sofa and the rest from Wolfie.

5.  Which mathematical term is used for calculating debt repayments?

Hypoteneuse,  which means essentially "length under", and derives from Latin hypotēnūsa, a transliteration of Ancient Greek hypoteínousa (pleurā́ orgrammḗ), the feminine present participle of hypoteínō, a combination of hypó ("under") and teínō ("I stretch" or "length").The word ὑποτείνουσα was used for the hypotenuse of a triangle by Plato in the Timaeus, but we would prefer to use it with respect to how we plan to stretch and lengthen the terms of our loans under a new agreement.

6. If a ratio is expressed by the first variable divided by the second variable, how would you reduce your Debt to GDP ratio?

By taking intention and multiplying it by sincerity.

7. Which theorem best applies to Greek public accounts?

Fermat's Last Theorem - It is not possible for any power to make some of our numbers equal (or something that sounds like that)

8. If you sell all 1000 VIP Government limousines how many do you have?

1000

9. What is the square root of minus 1?

 How much i imagine i am going to repay you.

10. What is the difference between 300bio and 50bio?

If we are talking debt repayments then it's not worth arguing over, 50bio is close enough to 300bio. If we are talking new loans then I’ll take the 300bio please.

11. How do you propose to reduce your debt levels, increase your GDP, guarantee your creditors repayment, maintain a primary surplus and regain a positive current account whilst reducing capital flight to protect your banks?

I think the answer is 'yes' but our teacher didn’t teach us this, probably as they don't know the answer either.  I thought this test was going to be general economics and politics and not all these specifics

12. This is economics and it does involve numbers, so describe a method for solving question 11.

By selling figurines with amusingly large penises.

Varoufakis's Neville Chamberlain moment.

Mr. Varoufakis returns home from his summit meeting 

"I have in my hand a piece of paper signed by Mr. Shaeuble"

A Greek Euro departure but Euro based economy.

If Greece leaves the Euro and adopts a new currency then any devaluation in the currency will need to be matched by a rise in domestic Drachma based wage inflation if Greeks are to be able to maintain the lifestyle they currently have importing the same things they currently do. If local wage inflation is below the FX inflation effect than on a relative basis greeks are being paid less than they were. Which is the same as them remaining in the Euro and experiencing wage deflation in Euro terms and a fall of relative wealth.

Whilst leaving the Euro means regaining domestic monetary policy it is probably safe to assume that Greece won’t be needing to raise rates to control growth and that with Euro rates already on the floor there is no room to lower them. Any rate adjustment is therefore likely to be in order to defend FX related capital flows so there is little reason to leave the Euro to regain monetary control. Whether they stay in or out, Greece still has to adjust its relative pricing. This occurs through inflation in local terms or through deflation in Euro terms. Though identical in outcome the difference is psychologicaly and politically very different. Taking a wage cut dents personal pride (it is an individuals decision whether to take a cut or resign) whereas inflation can be pinned on others. Blaming others for your mistakes is a politicians escape route, or even ladder to glory, and one which Putin is utilising to worrying consequence. It is also the catalyst for nationalistic behaviour that can either be used as a focus for productivity (to fight the evil others) or more likely raise anger and destruction.

Greece really can’t blame anyone else for it’s overspend of the capital flows that have come its way, however it can blame others for reneging on implicit and explicit agreements and not seeing sense (a great post here from M. Pettis on the problems of capital flows in Europe). But an exit from the EU and resulting inflation undermining domestic wealth could easily be blamed on the EU. So for Syriza an exit and its wealth destroying effects would be easier to handle politically as well as leaving it clear of debt having defaulted (let’s assume that heir s no point in leaving if debt load stays the stay). But 70% of the population don’t want to leave the EU, leaving Syriza somewhat painted into a political corner. If it leaves the EU against the wishes of 70% of the population it will be hated. If it stays and has to swallow the German pill it will be hated for not brokering the deal it promised. The EU must know this and though the negotiations are currently EU vs Greece over debt, there is probably a sub-plot to embarrass Syriza to the point that they look fools from all sides and are removed from office. Removing the most rebellious EU government within the EU would do the EU master-plan overlords no end of good towards promoting their form of political unity and defuse rising anti-EU political movements who are all watching Syriza as a test case. For Syriza, perhaps being forced out of the EU and having it seen as not their choice would be their best outcome politically, if not the best outcome for the Greek people. This could explain their current negotiating stance.

But there is a half way option. Greece’s economy is so Euro’ised that any EU departure would most likely see the Euro continued to be referenced by the private sector with  goods and services continuing to be priced in Euros. This bypasses the wild volatility a new currency would inflict on business planning and could easily be facilitated by the population running and transacting through offshore Euro bank accounts, thus bypassing any local bank enforcement of Drachma (you only have to go to the Turkish resort of Bodrum to see this in effect where Euro prices are ubiquitously applied). However new currency paid State employees would be the ones to suffer.

If they do leave of course they will be needing a name for the new currency and a new RIC code to identify it. I suggest the ‘Formally Known as Drachma’, RIC code - FKD

Europe - The tide is coming in. Bunds may submerge.

Today I saw a couple of references to EU equities being a bubble. Which had me asking a few questions

1- Haven't I heard this before, but with reference to the US markets?
2- Wasn’t it only a month or two ago that European equities were seen together with Europe as a whole as the dead men walking of the global markets?
3- Where do we stand with regard to Europe on the classic path to a bubble, specifically on the S curve that depicts most market rallies?
4- How does this attitude shift in equities fit with bonds particularly that in bunds?
5- What happens to Eur/Usd or Eur/Gbp with this?

1- My memory is of course cloudy but at what point did we first hear of an equity bubble in the US with old fashioned valuations of stocks being cited for overboughtness and bubble blowing? I am pretty sure it was when we were around the 1600 SPX level. Since then? well, just look where we are as we approach 2100. At this point I am tempted to revisit a mega long view posted last summer

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.


2- The attitude to Europe is shifting. We have the Greece situation hanging over us and the much longer term concern of Russia, yet the Russian situation and any binary risk of shots being fired between East and West still appears to be outside market concern as Ruble is gently strengthening (Oil bounce helping but that looks as though it's rolling over again) and it would appear that Greece is becoming the last stand for the Euro asset bear. Meanwhile a steady asset flow back into Europe appears to be underway, especially from US, as opinion swings from growth doom to one of accepting that nascent growth potential exists. With longer term allocation happening it is no longer a question of 'if' the tide is coming in but of 'how fast’.

3- I would put us somewhere in the middle of the stock S curve, somewhat at the US's SPX 1600 equivalent, but with very sectoral bias towards smaller stocks as some of the mega stocks have been performing more as bonds recently. The rush of the speculator appears to be joining the underlying tide with even bank stock benefitting. I say ‘even' bank stocks as structurally I still don’t see how they are ever going to be allowed to make serious money by state or social system and for the further reason that their bond holdings may be a source of concern as the growth meme moves on to that sector - see next point.

4- If return to growth is the play, and assets are switching from defensive to growth allocation then one would wonder what there is to support European bonds. The peripheries will benefit from a credit function vs the core but the core would be liable to a multiple whammy. Outflows from core into periphery, outflows from bonds to equities and finally outflows from bonds in general on a mood swing on rate expectations from uber dovish to a more normal. the path of US treasuries recently will not be giving much support from a global bond argument either.

5- Eur/Usd is a pig to play on this as rising US rate expectations are balanced by flows and expectations from the above arguments and this opposition could already be visible in Eur/Usd effectively not going anywhere at the moment despite the ‘stronger USD’ idea being so popular. EUR/GBP may be a different story. GBP has done well on Euro safe haven, comparative growth and yield. Yet it doesn't have the strength of underlying rate expectations that the US has, more as robust growth. A switch in European growth expectations could well see a EUR/GBP reversal rather than EUR/USD. ( and anyway, I'm a Brit. We can never see the value of our currency).


Which leaves the last question. What to do? The obvious point of attention for me remains Bunds. they have stopped going up but haven’t started going down. When they do, it wil be very hard to see where the marginal buyer will be coming from with yields where they are. The caveat of course is binary risk over Russia and someone doing somehing competely stupid over greece, like REALLY stupid as basically stupid has been priced in.

Bunds lover the past year  

Bunds recent action 

Todays news and comment - Bloomberg headline style.

Bloomberg's dissociated headlines are legendary to the point of making me wonder if Bloomberg run an internal competition to come up with the most absurd. My thoughts towards this were triggered by today's '"Greek Stocks Fall on Deal Skepticism as Ruble Advances" headline implying that the two statements either side of the 'as' are causal or linked. After a few fun examples were bandied around on Twitter I thought I'd do a brief post solely in the style of Bloomberg headlines, so here we go -



Today has seen oil prices press higher as Tesco sheds 10,000 jobs and USD/RUB has naturally responded by falling as Greek talks fail to reach swift agreement. But markets are otherwise quiet because catholic Europe is on holiday as it's Washington’s birthday. It’s pretty depressing on the Ukrainian front too with the ceasefire crumbling as Apple and Google together now have a bigger market capitalisation than the whole of the Russian stock market.

Elsewhere Denmark mourns another horror shooting in a cafe as UK’s Ed Balls calls for receipts to be demanded to prevent tax evasion.  It’s all heating up in Libya with Egypt retaliating with air strikes as Kim Kardashian threatens a new reality show. This is worrying as low tide is at 10pm tonight.

I have been staring out of the window and wondering what to do as herds of wildebeest trek the dry savannah of the Serengeti and decided to look at buying bank stocks again as Fifty Shades Of Grey dominates at the box office. The problem I have with bank stocks is though they are a normal growth sector play, they are going to be taxed and fined out of any form of outperformance as cybercriminals steal $1bio from up to 100 banks. But with ECB QE just around the corner they should see continued support as the French trial revives the question of prostitution.

China’s data perked up last night but then it’s hard to trust Chinese data as Ed Miliband is silent over hacking allegations, but the commodity sector is worth looking at as Nutella and Ferrero Rocher boss Michele Ferrero dies. I’ve been looking for a bounce in AUD as Hepatitis A caused by frozen berries highlights concerns about Australia's food and hope that any Chinese positives may help as Italians rescue more than 2000 Mediterranean migrants.

It’s certainly not easy to call these markets as smoking skunk cannabis triples the risk of serious psychotic episodes.


-------
The comments column is open for any recollections of the best real 'Bloomberg Assumed Correlation Headlines'

Macbeth's Oil Bear Witch Project.

A few big names are continuing to call oil lower and cries of $20 are still rife. Now whilst this may indeed occur at some point in the future, their behaviour is beginning to appear Shakespearean with their now infamous lines learnt by rote by all financial commentators.


So here are Macbeth's weird sisters (For the non-Shakesperean the original is here).

WITCH 1.
Thrice the Saudi Oil Min mew's.

WITCH 2.
Thrice and once, the hedge-fund whined.

WITCH 3.
Bear cries:—'tis time! 'tis time!

WITCH 1.
Down and down oil futures go;
In the poison'd longs throw.
Oil from newly fractured stone,
Margins pared back to the bone;
Swelter'd longs caught sleeping got,
Oil thou'st cursed, just sell the lot!

ALL.
Double, double oil in trouble;
Prices burn, and frackers struggle

WITCH 2.
Saudi pumps for Saudi’s sake,
All the rest no profits make;
Rise of new tech on a plug
Fall of Nat, oil sands undug
OPEC talk makes hedges sing,
Sell the call and own the wing,
For a charm of powerful trouble,
Like a hell-broth, oil’s a bubble.

ALL.
Double, double oil in trouble;
Prices burn, and frackers struggle

WITCH 3.
China’s growth a toothless wolf;
Supply still pours out of the Gulf
Russia, squeeze the dangerous shark;
Keep Nigeria in the dark;
Global usage falls, it's true
Solar brings new charge to you.
The Stans’ supply, Qatar's eclipse;
Now the Turk, Tartar oil sips;
Figure now birth-strangled Frack
Their new flow begins to crack
Add thereto the Tiger's slowdown,
For the ingrediants of our caldron.

ALL.
Double, double oil in trouble;
Prices fall, and frackers struggle.

WITCH 2.
Cool it with producer blood,
Our $20 call is firm and good.


---------------------------------------------
However that is not as it is playing out so far, so to continue for now 


But yet the witch, finds potion weak
A new solution she must seek
For oil now trades at annual highs
To bear witch's great surprise

"It's but a squeeze, don't you fret
20 bucks we'll get to yet"
But the crowd think she's a fool
And call her to the ducking stool

More oil, more growth, less deflation and a 'what if'.

The Brent Oil price time machine has taken us back to Dec 14th 2014 and the excuse of ‘its just a short squeeze’ has been eroded by time. The calls for $20 oil, if they are still beng waved around, have been pushed out from 'soon' to 'some time’. If we want a model on how these calls wax and wain we just have to compare them to the Euro breakup calls that go back to 2011. Great if you have an infinite time frame for your free option of rightness but a nightmare to trade and remain solvent against.

One of the regularly touted reasons to be bearish is the levels of reserves in the US, which I can understand impacting WTI, but the move we are currently seeing is being led by Brent which I assume is outside that SPR mandate. The Brent spread to WTI is really impressive now, so are you really sure US reserve data is massively important?

In my last post in a confused state, I said I had exited long oil trades because they had performed massively in a short term and now it was less clear. However the lack of a roll over (just when it looked like it would roll over) and break to new highs has me looking for laggards in the oil sector, to the point of overlaying Brent and oil stock prices to se what is out there. One or two look as though they have some catching up to do - Premier Oil? And yes, for full disclosure I have bought it this morning on the Brent/stock price spread argument.

But as mentioned in this recent post, it would appear that complacency in longer term oil prices has been the backbone to many deflation trades and whilst the ‘just a short squeeze’ argument was holding out then related trades could be excused any doubt. But with the latest spike I would not be surprised if we start to see some contagion into other asset classes. In old 'Macro Man' parlance - The Pink Flamingo Effect. To start with other commodity linked zombies might perk back to life. Rio Tinto has seen a surge as it is starting to distribute some cash but cash rich commodity companies in general are in my sights.

On to the other thing - Europe. There are so many internal variables involved that it really should not be seen as one trade, even if non-Europeans like to see it a such it needs to be played by sector and by country as there are multiple forces to balance. Return of growth, falling rates, politics, individual country solvency and the usual round of long term structural problems vs short term fixes. If we consider the long term structure of Europe as an Egyptian boy and Euro-policy as a sticking plaster then it is probably best to consider Europe as the mummy of Tutankhamen.

But growth is returning and before you argue, lets at last try to agree it is returning more than most had forecasted in November. And oil is up (did I mention that before?). Is this as deflationary as the markets are currently pricing? Probably not but the question is - is it as deflationary as the ECB is adapting for? With my views on the outlook for Bunds already massively anti-consensus the icing on the cake would be that European data starts to pick up not only enough to steer the market away from collapsing yield expectations but even to, dare I even suggest it, be enough to delay the ECBs first tranch of QE.

Now THAT would be a win for ECB policy, German pride, Denmark, Switzerland and the nonsense of negative yields and a loss, on the red hot pokering level, to just about every consensus trade out there.

The Prince of Mayfair.

I was asked if I could do a parody of the Fresh Prince of Bel-Air, but based on Mayfair, Hedge Fund capital of London. So, with absolutely no apology to my friends at Mayfair hedge funds, I give you -

The Prince of Mayfair -

Now, this is a story all about how
My life got flipped-turned upside down
And I'd like to take a minute
Just sit right there
I'll tell you how I became the prince of a fund in Mayfair

In Rainham, Essex born and raised
On the broker desks was where I spent most of my days
Chillin' out maxin' relaxin' all cool
And getting inside info out of school
When a couple of guys who played it too good
Said I couldn’t trade 'inside' in this neighborhood
I got in one little fight and my client got a scare
I said 'can I move to your hedge fund in Mayfair'

I begged and cajoled with him day after day
Paying him back points on trades that went my way
He gave me a chance but he said it’s no ticket.
I put my swagger on and said, ‘yeah I’m gonna kick it'.

First class totty, yo this ain't bad.
Got my own brokers too willing to kiss my ass.
Is this what trading in a Mayfair fund is like?
Hmmmmm this might be alright.

But wait I hear they've process, risk measures, all that.
Is this the type of trading that will suit this cool cat?
I don't think so
I’m sure I’ll bust the VaR
I hope they're prepared for the Prince of Mayfaaar

Well, I called up Jimmy and he gave me the shout
And I bought up all the stock, it was a right real rout
I didn’t get arrested, instead they cheered me then
I thought this is easy, so I did it again.
Got made Partner this year, I’m no longer a lout.

Now wear red skinny trousers and buy champers that's dearer
Drive a lambo plated ‘FUND’ and have powder for the mirror
I thought about Rainham and going back there
But I thought 'Nah, forget it' - ‘Now my home’s Mayfair'

My accent’s changed too, I no longer say ‘mate’
Instead to the cabbie "Good chap, I'm running late"
I look at my kingdom
I am finally there
Sitting on my throne as the Prince of Mayfair.

NFP's are like

NFPs are like a beaujolais nouveau. Over hyped, never as expected and forgotten within a week.

NFPs are like a lottery draw. Pick the winning numbers and they'll still be a reason you don't get payed out.

NFPs are like blackened cod. Discussed and anticipated for days before but turn out disappointing and fishy.

NFPs are unlike lightbulbs. It only takes one economist to change them.

NFPs are like snow in England. Rarely as forecast, cause chaos on arrival, but forgotten by the following day.

NFPs are to Fed forecasting as Punxsutawney Phil is to weather forecasting.

NFPs are like the Super Bowl. A small portion of the global population go nuts over them and the rest wonder why. 

NFPs are like lies. The bigger they are the less folks believe them.

NFPs are like Hershey Chocolate. What they consist of is subject to constant debate, the only agreement being that most of it is artificial.

NFPs are like roadworks. Everything stops miles ahead but once you get to them there's no action and nothing to see.

NFPs are like soviet era shop queues. You join in the wait as there must be something worth waiting for. But there isn't.

NFPs are like... well,.. they come every month and are a bloody mess.

Greece and a Country Leaseback Plan.

The ECB yesterday decided not to accept Greek sovereign debt as collateral and the markets went into flight mode. The fight and flight type, not switching off your phone in the aircraft, though that would have been the best thing to do because as we come in this morning the US timezone wobble has all but dissipated. The 100 point drop in Dax futures and dump in Spoos to 2020 has evaporated and Bunds are back to yesterdays range (phew).

The debate over whether the ECB is within its rights to pull back the favour that they granted to the greek junk bond rated collateral is rife, but the upshot is that it’s the Germans fault and that the game book the EU appear to be playing to is the holy book of Dijsselbloem that was read to Cyprus. And like most holy books it starts off very old testament with lots of smitings and punishings and thou shalt nots. I just wish that the EU would jump to the end of the book where they learn that forgiveness, kindness and understanding is to the benefit of all. If not we can just consider the book as the EU’s “Art of War”.

But back to Greece and some more silly thinking. If Greece were a company, by now it would have had advice from an investment bank, the guys in charge would have set up a new company doing the same, drained all the assets from the original company, including the staff and left the old company as a hollow shell loaded with all the debt and no assets against which it’s creditors can claim.

I assume that all the EU rules are stipulated by country and assume that there is no reference to the size that country is, talking geographically. If there was then coastal erosion, volcanic land creation and rising sea levels would be upsetting all sorts of measures. So if there aren’t then perhaps Greece could do the following. A country lease back.

Greece approaches Spain, as they appear to have similar political outlooks towards the EU, and sells nearly all of its land mass and contents to Spain for a token €1, condensing the existing Helenic state to just one small office, perhaps in the centre of Athens or even on an otherwise uninhabited greek island. This office is now Greece and will now have the all outstanding state debt compressed into one filing cabinet with no assets to repay them and no local liabilities to fund..

The deal with Spain is that this new region of Spain (the old Greece) is leased back to its population for maybe €0.50 a year and granted total autonomy from the rest of Spain, much like the type Catalonia is demanding. The net effect is that instead of the whole Greek population having to emigrate to other EU countries due to local economic cataclysm, causing mass demographic problems, instead, rather than moving the people to the country, you have moved the country to the people. As for debt to GDP ratios for Spain, without the greek debt load it may even benefit them.

This leaves the new Greece debt free, still living it’s own way and still within the EU. It can then try and do a Scotland, and be granted complete independence at a later date and (if you were to believe Alex Salmond) be allowed to remain in the EU thus completing the circle.

In the Psychiatrist's Chair.

I’m getting my head in a twist. I need to write down the thoughts and hopefully someone else can tell me what I should do with them or where they don’t add up. So here are the patient notes. Apologies for their schizophrenic nature but they are just an outpouring. 

Supercycles  -  I have always held in the back of my mind are that asset classes tend to work in 7 year cycles - on that basis as commodities ended in 2008 and so should be due a return. And the reverse for bonds.

Commodities are the dead man of asset classes so fits with the above. 

Growth is returning to the world - JPM global PMI picked up for the first time since last June.

Central bank policy is hugely stimulatory (adds to the above).

Oil is 'tabloid' as a story and is beset by the whims of producers and has enormous slack in the steering wheel due to speculative positions as evidenced by a 20% swing over the last few days. That was NOT due to changes in pulling it out of the ground or rate of burning the stuff. It doesn’t change that much in 3 days. So +20% swings on specs make the thing hard to play. So I’ve got out of my long plays and will watch for a bit. 

Metals are a different story. Bombed out and worth looking at for the next big cycle. Africa has taken a hit on EM USD Funding, collapsing oil, poor metals and adding in West Africa ebola and Boko Haram means that Sub Saharan and Pan African funds have been dogs. Tend to think all the functions above will or have abated. So looking at Africa again? Or what about Peru and Chile?.. hmm

China re the commodity story. Have been long for ages against the Mobius style doom-mongers as I believe that that simple stories are too simple in a command economy. But, policy under the new regime is to take power back from the speculators and so long term slowing of investment performance as local leverage is taken out will mean not such a sure bet. But this doesn’t mean that commodity demand from China will slacken as policy is still for growth.

With the commodity story above and mood on Aus being so poor it should be a buy now/soon (see yesterdays post).

EU - Still overdoomed and growth is more likely than more slowdown. Greece will pass and though there may be political ructions and debt shenanigans the populace will be quietly getting on with the growth side. So still hanging on to long term EU growth positions. 

Deflation story is overplayed. Looking for trades that profit most from a sharp reversal in expectations from this front hence Bund trade idea yesterday. And considering what happens in CTA land when low vol trends break the bund market reversal could be really sharp ( even without the ‘you have to pay to hold them story’). Anti-deflation leads back to commodities. 

US - Can’t see equity performance ripping higher. Moves in USD (both ways) will offset performance for the non-US investor. Rate story there is too hard to play as it self adjusts to changing backgrounds.

Japan - avoid. Abe story run out of steam vs expectations and it's treading water so nothing obvious.

Short term - Some big moves that can lose momentum. Oil, wouldn’t be surprise to see it slip and same for equities. Yet looking for equities down in the next couple of days pollutes the bund view. And though I still see the ultimate bond sell off to be sharp enough to hit equities, that is the big move. Before that happens we will keep the equities/bonds reverse correlation. It's also the end of start of month, in other words month start allocations done and we can settle down. 

January has lived up to normal expectations. As suggested here, Everything is a mess in January and not worth setting your direction for the year by. yesterday oil was back at dec 31st levels, Eur/usd was back to pre ECB range, SPX was back around its 2040-60 range and all you needed was EURCHF to be at 1.2000 and you could have imagined that January was just a bad dream.. 

So what to do? I’m actually short Dax and bunds. Sort of self hedging until both go down. If they correlate but both move widely apart  I’ll chop one leg when news changes. Short FTSE for a correction, but that goes against my longer term commodities up thought. 

I hate it when short term and long term views clash and would welcome any suggestions as to what you prescribe for such conditions.