The Widowmaker.

The trend towards rotating from shiney codey things to old fashioned lumpy things started a couple of weeks ago but Apple’s results are a kick in the nuts reminder that this is a real trend. To be honest I am not at all surprised to see Apple suffer as basically, dear Apple, we’ve already got one. If it wasn’t for Apple’s genius miserliness in restricting drive memory sizes in mobile devices and the maximum RAM in the computers, I doubt anyone would be upgrading at all. But Apple have a huge cash pile and hopefully will move on to making something we all need again (how about a new antibiotic iBiotic?). Whilst huge amounts of wealth are tied up in Apple stock, I don't think that Apple products need to be taken as THE bellwether for demand for everything else and Apple are hardly likely to cut their dividend with that pile of cash in the background.  So don’t panic unless you have a Unicorn farm, where USE, Unicorn Spongiform Encephalitis, has finally been diagnosed in the herd. But for the rest of your stocks it should be business as usual.  Even after the Apple ‘Shocker’ Spoos are currently still languishing around the 2090 level. 

Before I finish on Apple, two observations - 

Japan saw the greatest growth in sales. Abenomics at work.

If the UK left the EU and joined Apple each household would be £6,000 better off. Well if the UK treasury think dividing GDP change by households is a valid equation, when household income has never, ever, ever been GDP, then why can’t I divide the Apple cash pile by number of households. It's equally as irrelevant. 

Whilst Apple has crumbled 8%, oil has made new highs for the year with Brent pushing through $46. The metals sector, well any of those with a futures market, have been putting in spike tops, accompanied by huge Chinese speculative flows.

Iron and copper most noticeably, being followed by rips and drops in the likes Rio Tinto stock. It looked blow out and normally I would be saying it is over for them, but with what I see as a grand rotation back into cyclicals away from tech I think there is another rally to come. 

Whilst in commodity land, Aussie CPI took a sharp move lower but with the currency having rallied 10% over the last quarter it isn’t too much of a surprise. It is more local than global, but does put pressure on the RBA to cut, which will be a detractor for the yield hungry Japanese but not a game changer. Japanese yields are low and Australia still has one of the most attractive AAA rated yields around.

Which takes us to Japan, where I have done something that is anathema to any old lag macro trader. It is the widow-maker of all trades, it is the fatal schoolboy error of  hedge fund PMs. It is the graveyard voodoo scene in James bond ‘Live and Let Die’. It’s shorting JGBs. The plan is that the BoJ  go nuclear on the short end and the back end  steepens. They need to stop buying trillions of their own debt, which just locks their money new debt restricting transmission, and instead move into stocks and ‘stuff’. In fact I would suggest that in the mad alter-universe of Japanese economics, Japan needs to do something that would be fatal for any other country, certainly a deficit country, and that is to shake confidence in its own debt. It needs people to worry about the security or volatility in the long end and start selling. Weaker currency and steeper curves ensue. Mad? Maybe and I doubt they will every explicitly say as such but the Japanese saver needs defibrillating out of their torpor, and made even some ECT shock for their behavioural saving problem. 

Savings are an odd thing. They have basically two purposes. they are an insurance policy against unplanned cash flow interruptions (e.g. losing your job) and they are also a method of buying free time, whether that is retirement, holidays, or just working less hard. But the value of savings is dependent upon inflation. If we imagine that everyone decides to retire at once and cash in their savings to pay for it there will be no one left to supply the services that those savings are expected to supply. The cost of services rockets and the value of the savings collapses in real terms. In the end those with the lowest savings will end up being forced to supply the services to those with greater savings. So the value of savings is not absolute, it is relative.  Much as the old joke of the two fellows encountering a lion and one doing running shoes, You don't have to outrun the lion, you have to outrun your peers. With this being the case, we end up with an arms race of saving that is futile and that futility is further exacerbated by the demographics of old age. 

Enough waffling, back to the short term - So like an alcoholic at an AA meeting, "My name is Polemic and I am short JGBs". I am also long of upside 107.50 115.00 June USD/JPY risk reversals. 

For score keeping sakes, I was quickly washed out of short oil and GBP/USD. The mockery of the Leave campaign seems to be working but we are entering hubris levels for the Remain campaign. As we saw with the General election of 2015 - it ain’t over yet. 

Polemic's trading aphorisms

As there appears to be no regulatory body of trading aphorisms, who would test, affirm and endorse each with a trade body stamp and certificate (£19.99 for members), I will throw in my own, garnered from recent experience. 

Polemic's Trading Aphorisms

- Never short the Dax when you think it's blinding obvious to short the Dax.

- The best time to enter a position is just after you have been stopped out of it.

- Correlations work really well until you put the trade on.

- Buy low, stopped lower. 

- Selling new highs is like buses. You wait ages for one, but as soon as you step aboard another one comes along.

- Adding to winners gets your stops done faster. 

- If it begins with a J it will have your arm off. 

- Academics aren’t rich because they missed the trade whilst writing about the last one. 

- The FTSE responds to many things, just not the things you know. 

- There is always an algo ahead of you, get over it. 

- A forgotten order is always a losing order. 

- Dealing from a train on a tunnel ridden route makes Russian Roulette look lame.

- "China to blow up one day" will remain a meme longer than you can remain short. 

- You will never be the first to trade the news, so fade it and hope.

- If there is absolutely no chance of your stop being done on the Sunday night open, it will be. 

- It's less embarrassing to say you were up watching porn than the Chinese open.

- If someone mentions Fibonacci, there's no data out.

- "Italian banks to blow up Italy one day" will remain a meme longer than you can remain short. 

- Most short term positions end up in long term books.  

- Whatever you tell your mum, you are gambling.

- If Gundlach is talking your book, take it back to the library. 

Sending oil down and politics up.

Oil. It’s a speculative market we know and the price can whip around without much more than a wiff of news at times, and at times can whip around contrary to what news would have you expect it to do. Sunday night’s post-Doha drop, reverse and clean break higher were, after the event, blamed on Kuwait oil workers strike, a weak dollar and many other things, where many other things = anything that can be levered in to fit with the price move.

But the fact is that a lot of speculative positions have been switched. As JPMorgan said
"Ahead of last weekend’s Doha oil producers meeting, data from ICE and the CFTC show that money managers added more than 47,500 contracts and 20,800 contracts of net F&O length in ICE Brent crude oil and NYMEX WTI crude oil, respectively, for the week ending April 12. In Brent, money managers added nearly 30,000 additional longs while cutting their short position by more than 17,700 contracts as well. This brought managed money net length to more than 402,800 contracts as of last Tuesday, the longest level on record by more than 39,000 contracts".

Record net longs at this point in the cycle? Ok, I can understand that oil may go up in the long run but futures positions rarely hang on the way through a move without the odd washout. Record longs normally mark tops. Now I'm not saying that this record long won’t be beaten by the record long getting even record longer but as it is and post the Doha 'no agreement' and after exceedingly big spikes since Monday morning, I am looking for oil to move lower again. And coming from this oil bull that’s tough to say.

But it also fits with a view on the USD. Things have gone far enough. The pendulum of Fed expectation is at its zenith on the dove side and I am convinced that any subplot from the authorities towards the USD is stabilisation rather than outright weakness.  Reiterating a view from before, GBP is worthy of a sell into the Brexit vote. Selling GBP/USD encapsulates both views.

Selling Sterling and oil is a trade of my distant past. It’s the old Saudi money trade. Next I’ll be selling Gold as well as they all tended to move together.

Anyway enough of markets, let’s have some fun. Time for some political questions as we know algorithmic trading models don't do politics and so won't be able to beat us to the answers

If you were a Greek politician would you -

- Be wondering how you were going to get through the summer.
- Out on your company 3 engined 900hp speedboat offering lifts from Turkey to anyone who could pay as you would get paid by the EU to take them back again.
- Leaning on the EU to provide more or you would kick up trouble just before the UK votes on Brexit
- Ask all your diaspora in North London to vote for Brexit hoping that it would shake the EU up enough to be nice to you.
- Have a proper job by now.

If you were a UK politician would you -

- Send yourself on a fact finding mission to a Caribbean tax haven for 6 months until things settle down.
- Not treat all voters as children because by definition anyone allowed to vote is over 18
- Treat all voters as children as they obviously all are (as beautifully expressed in the Daily Mash)
- Find yourself suffering from the same matrix reporting nightmares that most investment bank staff now find themselves in, as you battle to satisfy party bosses, Brexit beliefs and constituents, though they all may be different.

If you were a French politician would you be

- Fighting as hard as possible to be Macron’s best friend, especially as he sounds like an Avengers character.
- On time to a meeting to disprove the theory that you never are.
- On your lunch break and 3rd bottle of wine.
- On Holiday
- On Expenses
- All of the above at the same time.

If you were a US politician would you

- Be wondering how to be more right wing and outrageous than Trump without sounding like a scene from Monty Python’s 'Life of Brian'.
- Be wondering how to be more old than Clinton or Sanders.
- Be wondering how the heck anyone who is moderate in anything stands a chance.
- Be wondering if you would be better off in the Roman Senate than the US one as it was probably less politically nerve-wracking.

If you were a Russian politician would you

- Say “Yes sir Mr Putin. Ho ho that is also a very funny joke my comrade leadershipness”.
- Not do anything else if you fancy your chances of outliving a mayfly.

If you were a Brazilian politician would you be

- Reading up on Che Guevara and Castro’s methods of seizing power from a corrupt regime.
- In what’s left of the rainforest measuring up some new grazing fields for the family estate.
- Selling oil at these levels as a hedge against all that Petrobras stock the company you don’t own in Panama has.
- On the way to Japan offering a country merger.

If you were an Icelandic politician would you

- Be on your way.
- Be on your way to Panama.
- Be on your weight watchers program.
- Bjorn Again. Well an ex-PM might make a living as an Abba tribute band member if he grew a beard and his hair and wore silver bell-bottoms. Let’s be honest, he can’t be any more embarrassed.

If you were a Euro-politican would you

- Give up your pension rights as they are much more generous than those of most of the people you represent, though you wouldn’t know that as you haven’t met any of them.
- Give a talk hinting at future policy for €10,000 to a hedge fund gathering without telling anyone.
- Give peace a chance.
- Give a damn what anyone else thought if they weren’t French or German.

If you were an Australian politician would you be

- Looking forward to an imminent election as an opportunity to reaffirm Malcolm Turnbull as the best leader you have had for years.
- Looking forward to petty infighting of such a local nature, to the outside world you appear like a 1980’s teenager, complete with old suit and too-short tie.
- Looking forward to blaming someone else.
- Looking forward to another election in a year's time anyway as that's pretty much the historic frequency of them .

If you were a Turkish politician would you

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Doha Mwaha

The oil talks in Doha have resulted in no agreement. The response in markets is expectant of a collapse in oil prices, some mentioning $30 again, and a fall in all things 'risk’ on Monday morning.

First let's look at who seems to be tripping a Doha deal up. Depending upon your allegiances it is either Iran for not turning up, or the Saudis for their intransigence to go with a deal that all other parties were willing to run with. Though Iran is refusing to play until they hit pre-sanction production levels, which is understandable, the Saudis appear to be doing little to endear themselves to anyone in particular at the moment. I can almost hear the 'Mwhahaha' from them as they left the meeting. On top of Doha, at the end of last week we heard that the Saudis are threatening to sell their US assets should the US pass a law making other countries legally culpable for terrorism acts against US persons. This doesn’t imply any linkages between Saudi and 9.11 but does mean that it may be prudent to move assets that may get frozen IF any legal cases were to start. But let’s not get too excited about the possibility because in the big scheme $750bio of assets is really not that much (really) and even if they did sell USTs a resulting fall in USD would be pretty handy in these days of competitive FX devaluation and any resulting steepening of the US yield curve would be seen as a move towards stability from the levels of damaging flatness currently out there.

The terrible earthquake news in Japan is more likely to be responsible for JPY strength this morning. Japan tends to bring money home from overseas investment when it has to rebuild. But add this to AUD falls and there will no doubt be models seeing amplified AUDJPY falls as further indication of a risk off environment. I am out of my long Nikkei and short JPY positions until things settle down again.

There’s one other nagging issue that really doesn’t appear to be fully discounted in the markets yet - The Brexit vote. So far the markets in GBP and UK stocks have been relatively subdued. Despite EUR/GBP rallying 10% the markets are not in a mood of panic or scare. I am looking for this to change in the next few weeks as the tightness in the polls becomes more apparent. I do wonder why the markets haven’t started drastically covering UK risk and am asking myself if this is partially to do with how markets are traded these days. Basically, algorithms are pretty dreadful at trading political risk as it isn’t associated with numbers and momentum. Ok, you an plug in a referendum score but there is no way you can quantify how decision makers will act on the outcome. So with most algorithms looking backwards at price and time they have little way of foreseeing this, especially as they haven’t even got a history of ‘leaving the EU’ to back test against. Only when prices start to move through human action will they pick up the running and accelerate things. I don’t think it will be long and I'm planning to short the FTSE 250 and sell GBP/USD again (EURGBP not being the best place to play it as EUR is also likely to suffer on a Brexit).

And of course the Greece negotiations where the IMF is insisting on evenmore draconian budget adjustments. As said before, the PR on these talks is being kept sweet but I am waiting for the lid to blow off the sewer soon.

Now the market response. It is very early on in Asian trading hours but AUS is getting hit and anything commodity is taking a whack. This is leading to expectations of all global risk getting hit on Monday morning - proper Monday morning, not just the New Zealand stopfest hours, renowned for their surgical ability to remove profit from positions. But

- If no deal in Doha is expected to lead to dramatic global financial market falls then that would imply that the recent rises in all risk assets were on Doha hopes. I don’t think so.

- A continued oversupply of oil does not mean that demand or supply of other commodities ensues, so selling AUS$ on this function alone appears premature.

So a fall in oil could be catalyst enough to trigger a correction lower in markets that many have been looking for based upon a myriad of other reasons. Those harbouring a belief that the recent rallies have been nuts may well sell into price falls triggered by Doha looking for the background bear case to now play out. This I can understand. So the tricky balance is untangling Doha (which I don’t see as that big a deal for global risk on its own) from what may have been due to happen anyway.

Brent is down 6% on the futures in early Asia but is still above $40 so not that bad. Sharp moves downwards will be seen as shock (even if in the along run it isn’t) and so DM equities are down but in no panics so I am looking for risk markets to respond by first using the Doha narrative and then wheeling out the usual reasons to be bearish that haven’t changed over the weekend. I am waiting for the moment to buy again as I still don’t see the next leg down as anything more than corrective for US and EM, though UK and Europe are entering a greater uncertainty.

However, imagine the horror if global markets actually end up closing higher on Monday.

The world in hifi

Monetary policy

Politics

Markets

Trading rooms

As this is hifi, the signal and noise.

And the original -

'That shouldn't happen' - The most dangerous type of move.

There is theory and then there is price. At the end of the day those of us who trade in the markets have our performance judged against price, not intellectual peer group review. No matter how bad you see Japan, Europe, global monetary policy, commodities, China et al, nor how well your intellectual case is argued, if you are running short positions because of them in the main indices then the scoreboard isn’t looking too pretty.

Whilst SPX had been oscillating around 2050 my attention had been drawn to more exciting things, namely Japan. My last post was looking for a turn in Nikkei and JPY and we have been amply rewarded with Nikkei now 7% higher on last weeks lows and USD/JPY slowly grinding back up through 109. But the lack of commentary associated with the rises has me feeling that we have a setup much like the lows in SPX in February that saw the moves higher start with accompanied reasoning of 'just stops’ which then became ‘this shouldnt be happening' to finally end with a 'this is mad, it'll happen one day' grumpy squaring or pushing of losses from the short term book to the long term book. Until we see the weight of opinion move from 105 USDJPY expectations and associated Nikkei dumps, we still have plenty of room for pain on the up side. Meanwhile this is the worst type of reversal for bears, one that just happened without intervention or big news to pin it on, leaving the theory unchanged but the price hurting. Theory 0 - Price 1

But this has become a really potent move higher in everything 'risk' .

Oil flew over the past few days but is now stabilising ahead of oil supply talks.
European banking worries are up 7% with European Bank index SPX7 up over 5% with Deutsche Bank shares up 7%.
FTSE - has finally broken up through 6230 breaching the 100pt range its been in for the past month
Copper - Screamed higher yesterday and is still running.
US stocks are just under the start of month highs
Credit and EM? Just fine thank you.

The European bank scenario has been drawing much attention recently and the debt load of Italy in particular. Europe is a slow burn disaster I agree, but the game is, as ever, timing and regional disruption. Debt and its distribution around the zone is of course the problem but as long as ECB throw everything they can at the problem, ie keep lending to the regional subprime, then we can't yet see that implosion. Economic ‘OKness' will mean that bears could get ground out of the position. It's very much like carry creep where we have that saw tooth price action of creep and dump. European banks may be in a mess but the likes of Dax is approaching recent highs again. I’d rather play a Eurocrisis by waiting for it to happen rather than trying to catch a top and be beholden to disaster happening now rather than next year.

So yes, Europe has pile of problems right now and holding Euro is pretty risky. General stopping of positions along with the fall in USD in general may well, in my mind, be coming to at least a temporary end. I would be happily selling EUR, especially against USD which has seen a position squeeze and with the next phase of the Fed expectation oscillator swinginging towards 'higher' again after Yellen has convinced everyone that she is willing to be behind the curve. Selling Eur/Usd here, waiting for the 1.1000 magnet to do its work again, is the plan.

I know that Italy is the junk du jour but we must keep an eye on Greek seasonality and the farcical act on stage as the EU try to keep the PR positive as we head into a UK brexit referendum. If I were the Greeks I'd be pushing the limit with demands as Greek trouble, or Italian come to that, before the Brexit vote could really swing the vote.

I note that the IMF are now out warning of Brexit being a major threat to the global economy and this is being used as further reason to vote to stay. But if Brexit really is that great a threat, isn't that incentive enough for the rest of the World to renew trade agreements along the lines of existing EU ones as fast as possible to defuse that threat. On one hand the EU us threatening that trade agreements won't be renewed as UK shouldn't get special treatment but then say its UKs fault if they exit and the lack of trade agreements messes with global economic security and destabilises the EU. I have had it pointed out to me that there hasn’t been a case of a trade agreement ever being swiftly agreed and EU bureaucracy is the slowest on the planet, but one thing we do know is that when it comes to the wire and the life of the EU is on the line, then they can act. We have seen it with Greece and numerous country debt problems, but only when the existence of the EU is at stake. So if a Brexit really is a death scenario for the EU and the economic world, it wouldn’t be beyond the wit of the powers in charge to whip out the photocopiers are replicate existing trade agreements as they stand through EU membership. This is more a game of chicken.

The snap higher yesterday in everything occurred at a time of day we have often seen things take off namely 3.30pm London (10.30am New York). Back in March there were a few such cases which drove right through the day leaving me wondering which model type accounts are triggering this as there when these 3.30 lift offs occurs, no macro or data reasoning to pin it on. Another nasty ‘that shouldn’t happen’ in the macro player’s hand book.

The skill is to to be able to trade against your core long term view and not be clouded by a dogmatic long term view, even if it does turn out to be reality. In the end we will all be dead but that doesn’t mean we buy coffins and dutifully lie inside them waiting for the day to arrive. There is fun to be had in the meantime.

No Japanese Surrender.

It might not have escaped your notice that the Japanese Yen is screaming higher.  Which may be odd as it's usually a counter-carry currency that goes up in times of stress as the money comes home. Is there carry stress out there? EM has been performing, credit has rallied so on the face of it there isn’t a reason to unwind your carry trades other than they are sinking underwater due to the move in the Yen itself. This is a circular reinforcement argument which for money management rules is just as valid as a decrease in yield differentials. Capital losses versus interest losses. Carry trades are inevitable sawtooth in nature as they creep upwards looking for interest differential and collapse on self reinforcing capital preservation trade unwinds. Hence the inevitable skew in the risk reversal option pricing. On the carry trade argument the move in Yen looks like a carry capitulation.

The major driver to everything Yen is the great BoJ Abenomics experiment. Here Abenomics are the CERN of monetary policy experimentation. It is the biggest and boldest experiment into discovering how the monetary universe really works. Observations on the path of the yen would currently suggest that there is a need for monetary dark matter to explain the difference between theory and observed reality.

On a pure printing of money basis, a Yen's value is a function of the number of Yen in circulation versus the total net worth of all assets denominated in Yen. Econ 1.0.1 says the more Yen in circulation against fixed valued assets, the lower the yen is valued against those assets. Abenomics is focused around Yen creation to cause it to devalue. So why is the Yen screaming higher especially against the USD where the opposite is more likely to be occurring? It really depends on what you do with your printed money. Parking it back into your own hoarding systems just doesn’t work. It needs to get out there into the Economy. One way would be to lend to US banks or invest directly in offshore assets, other overseas bonds, and park them in a form of Sovereign Wealth Fund. The Japanese Post Holdings has always been a quasi-state institution that even after partly IPO'd, it must have enough State interest to still be able to cover foreign asset ownership.



Of course if they wanted to bypass all the pretence they should just print Yen, sell it for Euros and buy German car companies. Nothing like reversing your currency, countering deflation and acquiring your competition all effectively for free. It may sound nuts but if someone is seriously willing to take your newly minted money, which is just a movement of electrons in the world of electronic banking, and exchange them for huge tangible assets then I would bite their hand off.

Whilst the Yen has been strengthening and Nikkei correspondingly falling,  questions are being asked as to whether monetary policy has reached the end of the road. Though I may agree that the policy embarked upon in Japan will not work when to comes to generating growth, it will, if enough is thrown at it, cause inflation, even if inflation doesn’t lead to growth. We just need the dam in the transfer system to breach as currently it’s as though the toilet has been flushed but the U-bend is blocked.

Will Abe give up on his policy? Will the Japanese, to whom ‘face’ historically and culturally has been something that has always had to be saved, be willing to accept that they have been wrong? Instead of surrender I would expect them to go bezerk (in the true meaning of the word) and go madly into attack. Considering this and the path of the Yen so far together with their world leading experimentation into monetary policy I would strongly suspect that they will go all in and aggressively buy equities. Abe's Alamo.

For this reason I am buying Nikkei, JPY hedged, as it will benefit directly and via a retrace in the Yen caused by a shock and awe action. Considering the the potential move down before up again on timing I am looking at options too.

Now to touch upon contiguous market dynamics. The Yen's fall has now picked up market attention and while correlation with 'rest of the world' stocks has been low recently, when we hit acceleration mode it adds to the general mood of concern.  Everything ‘risk' today looked awful. Copper fell to bits having breached the support we've been using for a while (yes I got stopped out of longs there).

Oil fell, the single European bellwether of DB stock fell and we ended up with SPX plumbing the lows.  But, interestingly holding that 2032 area that has been support/resistance congestion for a while. Why interesting? Because the markets felt as though they were going to accelerate to the downside and didn’t.

The UK’s FTSE has been outperforming other markets on a % index basis despite the commodity sell off, but much of this can be explained by GBP's fall (which is being blamed on fears over the EU referendum) and the GBP valuation of UK listed non-UK dependent businesses. The GBP fall is meanwhile making the UK even more competitive and relieving any disinflationary pressures. So here’s the irony -

What Abenomics has failed to do in Japan over years, the UK has managed to achieve in only weeks by suggesting it may leave Europe.

EU - Image is Everything.

The narrative on China strikes me as being much like that on Europe in 2012. The call for failure is constant and noisy yet the outcome starts to erode the instant death narrative. Warnings from the OECD that China could cause the next economic crash, though quoted in an alarmist way, did qualify it with 'if there is a hard landing'. This second derivative assumptive is all too pervasive in financial reasoning. Quote the high percentage relationship between first derivative and second and it implies a high percentage probability outcome of the first derivative, which of course is nonsense, but a clever trick for marketing. A form of selective Baysian implication.

But I digress. Asia is fine and, as mentioned yesterday has pretty much ignored the spat of market worry in the west. further following on from yesterdays comments, Commodities have not only stopped falling but put in the bounces suggested. Oil had a lift form the API drawdown figures which is the first sign of a real change in physical supply /demand rather than speculation over future OPEC agreement and Copper is doing its best to hold in at the support. US stocks held the 2030-35 area that is technically key and have bounced, Emerging markets are doing well ( as expected if the G20 plan is to stabilise the USD). FTSE has followed both commodities, EM and US bounces and I am happily back long of risk assets thinking that the iron pyrites 'fools crash' pf yesterday has played out the wall of worry factor returns and drives things higher again. Though I have gone tactically long of DAX there is a real fly in the ointment of a generalised asset bounce. Europe.

Battleship Europe is having a bit of a timing problem with its banking engines, sending an unpleasant judder through the whole of the ship. The other slight concern onboard is that the cooling system on the Greek warheads is struggling to keep up with the radiation coming off them.

The seasonality of Greek debt negotiations is upon us and though I am pretty sure that most of the last batch of bailout has been spent, the tone form the negotiations is one of quiet understatement. Not so much quiet understatement of the positives but the negatives. Whilst the 'We all are working towards a positive outcome' comments sound great, it really doesn't tell us much.

And here is the problem the EU has. Though the EU Battleship plays hard ball with the UK EU referendum, firing warning shots across leavers bows as to what will happen if they don't follow instructions, the EU know that the image of Europe in British eyes is key to the outcome. They have to have their ship spic and span and looking as lovely and powerful as possible. This involves sweeping the dust under the carpet and trying to spray as much air freshener as they can over the stinking heads (nautical term for lavatories).

Which makes for a very interesting timing issue. Can the Eurocrats keep the woes of European banks off the Radar long enough to get through to July and will their methods of obfuscation also go unnoticed. If the ECB decides that it's going to buy banking stock as part of its QE program, with the secondary effect of rescuing the likes of Deutsche Bank, then I hope that someone points out to the UK public exactly how bent that is.

Meanwhile the Greek negotiations must be a headache and a half. On one hand the EU would love to replay the draconian threat policy that cowed Greece a year ago, but of course they can't be seen to be an authoritarian overlords at this critical time.

Image is everything, as the Child Catcher from Chitty Chitty Bang Bang knew


If I were negotiating for Greece right now I would be using the situation to demand as much as possible and digging my heels in. Europe cannot afford to have any imperfections showing as we come into the June referendum, let alone have their sewers explode publicly.

The mighty dreadnaught must not be shown up for the tramp steamer in camouflage it may really be.

An iron pyrites of market crashes.

I have been sitting on the sidelines with regards to markets for the last week or so hoping to get an idea of what is going on as I am getting different signals from different areas.

Commodities started rolling a few days back and this has had me twitching to try the short side of risk in general but the grind higher in US markets over quarter end and into the start of April had me wary. So let me try and break down the inputs.

Oil - definitely on a roll lower and being so momentum driven by models within about a $15 range of true physical supply and demand, I can imagine it picking up speed. Let us not forget that there is still a glut and on that basis the trend should be lower until something physical happens. Russia is pumping more than ever and Iran is not going to stop until it gets up to the speed it was at pre sanctions. More importantly, the oil story noise has gone pretty quiet recently. Nothing like a good dose of being wrong to shut people up but they are still there.

Copper - It was a key indicator on the way up and yet over the last couple of weeks has managed to unwind all of its gains since breaking resistance and is back at that break level. I was wondering yesterday if I was brave enough to buy the old support but having seen it lose all its gains it’s looking as though it is more likely to lead stocks lower rather than suddenly put in a sudden bounce. Having said that I wake up this morning and see it has done just that. Bounced off the support line. Hmmm.

High grade copper

USD/JPY - Two stories in one and it is worth remembering the it is USD AND JPY, so often people like to think it is only one - (GBP/USD is a fine example where commentators flavour there own story bigotry by claiming any falls are due to Brexit and any rallies on a falling USD). The JPY component of USD/JPY, as expressed through risk and carry, has been a two way street. Carry and risk on saw better measures such as AUDJPY creeping up as the USD was falling post Yellen. This saw USDJPY pretty stable. But AUD/JPY cracked.

Probably helped by the commodity turn, seeing USD/JPY then play a massive catch up. If it is only a catch up is it important? Yes, because people look at it and believe it leads other risk markets and will act accordingly and being at a round number of 110.00, “bigfiguritis” is going to kick in and grab the headlines. Nikkei always correlates to USD/JPY so noise from there will probably pick up too. So mark JPY action as a negative in the carry call and negative re up coming shouty commentary noise.

Fed Watch - Sounds like A UK nature program where they would put small cameras in the nest boxes of small birds to 'ooh and aaah' over their every move. Indeed very similar, as that’s exactly what happens when analysing the Fed. The pattern would appear to be FOMC or Yellen causing a massive dove spike, then a slow leakage of much smaller odd comments from other members sprinkling hawkish dust on expectation. It’s a ratchet. Dovish spike vs hawkish creep,  but with us still so close to the last Dove spike I am expecting hawkish tone to contaminate the market’s dove joy further.

Deutsche Bank shares - It looks as though the patient is in relapse. the last couple of weeks have seen DB’s recovery give nearly everything back to not far off February’s lows.

Whoops. Standing by for this to become a quoted theme again even if it wont actually blow up completely.

China - Looking pretty good relative to the doom called in January. Equities are up/stable PMIs are perkier that called and the region is looking as though it is turning better. I wouldn’t be selling global risk on the China picture.

Positioning - Much flatter in equities than it has been for a while so no huge drag either way.

US Buybacks - Mentioned before, "'tis the season not to buy back, tra lalalalaaaa lala la la"

Commentary noise - The bears have gone pretty quiet having been quelled by CB policy bazookas and the bulls have seen momentum wane. No clue there

The Conspiracy Theory - Many folks have speculated that etc G20 in Shanghai brought agreement on rates policy. A few folks thought it was more focused on weakening the dollar. Yet I think it was neither. If there was a tacit agreement then it was to STABILISE the dollar. If this is indeed the case then EM markets should do pretty well going forward as fx volatility retreats and carry risk reward increases. Overall a stable dollar is risk asset supportive.

Brexit - Yada yada yada. I’ve said enough and still expect it to be really close. But buying EUR/GBP is not the cleverest hedge. It won’t be long before falls in Europe are pinned on Brexit induced instability to the whole region.

The Now - European open and things are looking mighty shaky for risk assets.

The Call - Putting it all together the plan is this. Run the sneaky shorts I put on in FTSE and DAX before commencing this post expecting a sort of mini panic as equities tip sharply lower and the old bear toys are brought out of the cupboard such as Commodities, a swing away from uber-dove Fed expectations, the Deutsche Bank stories and central banks running out of ammo. The usual stuff. But keep a very close eye on commodities as they have actually stopped falling, with oil being pretty stable  today and copper a bit higher against that important old support. China isn’t in on this sell game either, growth is still actually OK in DM and corp earnings are not looking as bad as many expected. There is a strong chance that this is a fake dump and not the real thing. There is too much underlying improvement in growth and stability to see this going all 'February' on us again.  For those prospecting for a market crash, this is probably only iron pyrites.

I am therefore going to start buying copper again and if that starts to perform roll back into AUDJPY and then cover DM equity shorts to go long again. If copper doesn’t perform then I will no doubt be stopped out but still be running my equity shorts so survive.

Offshore Accounting Industry vs Narcotics Industry

I continue to sit on the sidelines of the financial markets as I can't see a blinding trade out there at the moment so I will move off into the other field of finance that has everyone's attention today - that of how you handle the money you have made and how and to whom you report it for taxation. The release of the 'Panama Papers', naming names in the world of profit maximisation, has been a gold mine for anyone looking for change,  as the status quo of a lot of individuals has been shaken.  Even if the legal army are going to have problems nailing down some of those named, the moral army is pitchforked up and demanding action. The reaction of the press and public to those named is, in my eyes, much as it is when a famous person is found to have consumed drugs. It really depends on who they are and how their actions marry up against their previously public stated opinions on the issue. If a rock star is busted for snorting a line of coke off a 19yr old's body then no one tends to blink an eye. But if it's a UK House of Lords geriatric who has previously loudly sponsored anti-drug legislation, then of course the hypocrisy is rightly exposed to the point or career annihilation.

So it is with offshore banking and the use of every trick in the book to maximise personal gain. Some of those on the published list I would be surprised not to see there and I doubt that seeing a relative of the Syrian President fingered is hardly going to change the state of Syrian presidency. With those listed spread globally there is no 'one case fits all', as differing local laws mean different legal scenarios, but in general the Panama Papers are questioning the boundaries of legal and moral perceptions. I have a basic autistic belief when it come to legal versus moral debate. If it's legal and you don't want it to happen then try to make it illegal. If you fail then it is because your beliefs are in a minority, so get over it. Morals are hugely subjective. If they weren't, they would be laws.

I have taken a slightly glib look at the differences between the offshore accounting industry and the drug industry and deduced that the similarities outweigh the differences.

	Drugs	Offshore Accounting
Is it illegal	Generally Yes but depends upon your country of residence.	Generally No but depends upon your country of residence.
Is it morally wrong	Generally Yes but depends upon your morals	Generally Yes but depends upon your morals
Users	Across all classes	Mostly the rich
Public perception of users	Mix of sympathy and revulsion depending on intensity, with the 'well we all did it a bit, though I didn't inhale, and a little bit doesn't really harm does it?' clouding the picture	Revulsion with the 'well we all use our ISA allowances and max out our own personal tax choices to greatest advantage' doing little to counter the feeling that those who have more find it easy to get more.
Government's response to users.	It's a problem and we must be seen to be doing something about it but we also understand that if we bang up every user no matter how trivial, then we will lose voters and have a huge increase in costs for enforcement, Justice and internment.	It's a problem and we must be seen to be doing something about it but we also understand that if we bang up every user no matter how trivial, then we will lose party funding and have a huge increase in costs for enforcement, Justice and internment.
Suppliers	Shady people in Latin America	Shady people in Latin America
Marketing	On the quiet 'who you know'	On the quiet 'who you know'
Need for discretion	Total, unless you control your own legal system and don't give a damn about what anyone thinks of you	Total, unless you don't give a damn about what anyone thinks of you
Reaction of those caught whose position is based on popularity	Embarrassment, excuse that someone else told you it was Ok, remorse, commitment to change and offer of full support to clean up your act ( though it wasn't really your fault you got caught up in it). Employment of PR agency to manage a positive spin to potential custodial sentences.  Explore new legal highs	Embarrassment, excuse that someone else told you it was Ok, remorse, commitment to change and offer of full support to clean up your act (though it wasn't really your fault you got caught up in it). Employment of PR agency to manage a positive spin. Explore other legal ways to achieve the same results.
Reaction of those caught to whom popularity doesn't matter	Do what you can to avoid a custodial sentence but apart from that carry on as normal after working out how to do it again without being caught next time.	Carry on as normal after working out how to do it again without being caught next time.
Reaction of those caught who control own legal system and don't care about opinion	Carry on as usual and leave those beholden to you to sort out such trivial matters	Carry on as usual and leave those beholden to you to sort out such trivial matters
Those who aren't caught	Stay quiet and carry on as usual but recheck security and communication channels for potential risks in light of the other suppliers and users being taken down	Stay quiet and carry on as usual but recheck security and communication channels for potential risks in light of the other suppliers and users being taken down
Legislative response	Introduce new laws increasing punishments. Crack down on money laundering and search all cross border shipments for signs of illegal activity.	Introduce new laws increasing punishments. Crack down on money laundering and search all cross border payments for signs of illegal activity.
Supplier response	Invest in more ingenious ways to supply that bypass cross border detection. Tighten internal data security and invest in unconventional money transfer systems	Invest in more ingenious ways to supply that bypass cross border detection. Tighten internal data security and invest in unconventional money transfer systems
Risk reward response	Price of supply increases as does cost of being caught. Risk reward shift sees reduction in use by marginal users but those at the top with enough money and influence carry on as usual and absorb the increased costs of use.	Price of supply increases as does cost of being caught. Risk reward shift sees reduction in use by marginal users but those at the top with enough money and influence carry on as usual and absorb the increased costs of use.
New industry status	Evolution has weeded out the weak in the chain leaving only the strongest to take over the landscape. Increase in cost to both supplier, users and enforcement agencies who are trying to crack down on ever more devious methods of concealment. International agreements are sought and agreed to loosely with the odd high status bust cited as success of policy, meanwhile corruption and greed carries on subverting from the inside.	Evolution has weeded out the weak in the chain leaving only the strongest to take over the landscape. Increase in cost to both supplier, users and enforcement agencies who are trying to crack down on ever more devious methods of concealment. International agreements are sought and agreed to loosely with the odd high status bust cited as success of policy, meanwhile corruption and greed carries on subverting from the inside.

Yellen, are you fully in the price?

Yesterday started well for this born again bear. Commodities continued to roll over with oil and copper indeed leading the way with European markets not taking long before they got the hint and headed south. the FTSE hitting levels about 100pts below its overnight future equivalent highs. Oil was off 3% when the US markets opened and the US markets opened on a down wave. But the subsequent price action in US stocks was not really melting. Of course we then had that Yellen speech which stamped a great big dove over the recent hawkish tweakings of various other FOMC members.

The one take away from Yellen, more than her being hawkish or dovish, is that she was decidedly 'stockish'.

I’m now going to say something sacrilegious amongst us macro folk, I did not listen to nor read one word of what Yellen said. I just watched the price, well I watched lots of prices. And here’s why. I just cannot compete in speed of comprehension, analysis or action against the rest of the players in the market. It’s not that I am too old and senile, it’s because I am a human and not able to keep up when the actions in the market are conducted by robots. These players can parse text at near the speed of light, deduce the tone using key word sampling and then act on it. So what chance have I to get ahead of the price before the price reflects the new information? Very little if the information is binary or relatively simple. So instead I watch the price and that tells me most of what I need to know. I will, later on, probably read what was actually said and see if there is any undiscovered discarded morsel of germ in the chaff discarded under the dining table of the algos, but let’s be honest, there probably won’t be.

The 'beat the algo’ game is easier when it comes to the ECB. The complexity of the ‘unconventional’ policy actions does need a human mind to unravel the non price dependent linkages to the economy. Here we stand a chance. But with FOMC type statements it may be easier to play the counter moves to the knee-jerk ones.

In the case of today’s new Yellen information we had the spike, we had the second spike and then I assume that the information is in the price. Granted there are good old fashioned funds who will it down at their monthly asset allocation meetings and discuss the new information and act upon it with respect to rebalancing, but they are now in the minority and normally have missed the bulk of the price move. I would be happy to say that any modern day player worth their salt would have reacted to the Yellen information by now. So that’s done.

So I examine the price of stocks in the context of the other factors that appeared to be driving them the morning and deduce that, not suprisingly, the bulk of the action was in the US markets. No genius involved deducing why. But it was interesting to watch the response of oil, copper, European stocks, and FX.

Oil ripped higher off some new lows but couldn’t hold it for long and still looks offered. The same with copper. As these are the two puppies have been so influential in the original market woes and the subsequent comfort bounce this is notable. AUD and AUD/JPY meanwhile caught me out through the morning's down moves by really not joining in. A counter clue there. FTSE made new recent lows but bounced, yet is now looking as though it's the higher part of a new lower range rather than the base of a higher range. Dax is caught in a EURUSD vs global stocks move and is not really showing any general love form Janet. The rates markets have liked it though, with USTs and Bunds both enjoying the ride.

So here I am thinking out aloud. The markets and relative inputs into price were looking shakey into Yellen’s announcement. Since then stocks have rallied and the US ones are threatening recent highs again. This I take on board as it challenges my ‘things are rolling over’, 'born again bear' theory of last week. In these markets you can be as dogged as you like about your fundamental theories but at the end of the day you are paid by price not on academic peer group review.

But against this all the risk ducks are not lining up. The peripheral ones I am watching could well turn and join the flying formation but as yet this doesn’t look like a full set. Being so close to my stop levels on my medium term positions I am not going to towel chuck to the upside just yet, instead I am going to leverage up some larger short term shorts with tight stops. As I consider us at do or die levels, that justifies do or die trading. Well not die, but larger risk than is usual for relatively small moves.

By the time you read this my stops may well be done and you’ll have have started laughing long before you reached this line which was written with SPX at 2051 (market price, not my stops - they are above 2060 and dependent upon other indicators being in line too) .


One last added factor to the short loading rather than longs - The market, especially the US market commentary cannot cope with grey (as we saw with their interpretation of Europe a few years back). It has to be black or white and with the fed only looks at last thing spoken by anyone. So, last week was tending more hawkish than FOMC and now we are back to total dovishness expectation. The truth lies in between. But market narrative doesn't do in between. That's actually one reason I chose the short side to load up on rather than the long, on the belief that the next oscillation of Fed expectation has to be back from this current uberdove puff.

And finally, having embarked upon the series at last, I ask fans of "House of Cards" - Does Yellen have a Tusk?

----
Addendum 8.30am London Time 30th March.

That didn't take long. An explosive Europen open leaves me stopped out of all shorts. I will sit back and watch the fun from a distance as I de-stress and spend time in pursuits that don't involve staring at price covered screens all day.

Have fun out there, I'm planning a long lunch.

In the waiting room

I consider the current state of the market much as the time between the ignition of the fuse and the ignition of the charge.

I have declared my hand in looking for the markets to turn ‘risk off’ in a hurry and I am waiting for them to do so. My short positions are the lit fuse, I now just need the explosion. As with all fireworks, the time between striking the match and boom is occupied by a fizz. I am just hoping that this is not a damp squib.

Thursday saw the markets turn tail refreshingly swiftly but the recovery and lacklustre day on Monday, despite being a European holiday, defused any fear momentum. In fact there appears to be very little fear at all. But I will stay my ground until recent highs break again at which point I will consider the short play a dud and throw a bucket of wet sand over it, though I always wonder as one is never meant to return to undetonated fireworks, if there are tiny pockets of the world considered as mini Chernobyls. “Wooh up there sir, you can’t go down to the bottom of the garden. Why? Because in 1934 a Mr. White attempted to set off a Catherine Wheel down there and it failed to go off”

Without a bijou dumpette in the markets soon, momentum is going to get the better of us and we are going to creep higher again as no big news does tend to bias carry creep. If we look at that greatest of carry crosses, AUDJPY, we can see that it’s still looking perky despite shouting about the RBA and housing market. But there are signs that the pressure is still downwards. As I look at things this morning, copper is down again, oil is lower and China sold off. Without positive news to bolster things it is hard to see FTSE and finally the other DM stock markets not following.

Turning points are never easy to play with the most usual pain inflicted through them not turning out to be turning points. They are made even harder when one thinks they will only be corrections, as I do. So though I am in the waiting room at the bus station waiting for a bus heading South, if the one heading North comes first I’ll cross the road and jump on that in a flash.

"Stuck in the Middle" - North London remix

Stealers Wheel wrote 'Stuck in the middle with you'. Here's the North London luvvy remix "Stuck in the middle with no clue"




I live in North London, am arty and despite,
I’ve got a two mil house, I really hate the right
I’m on 250k a year yet have a socialist air
And right now I'm missing the days of the Blairs.

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.

Yes and now the Brexit voters want us out of EU,
And I'm wondering what it is I should do.
It's so hard to keep from losing face.
Keep writing to the Guardian, it’s the only place.

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.

Well I started off with nothing
Well, my mum was vegetarian
yeah
Now my friends at dinner parties say,
"oh darling, can’t you make it all go away?"
Please . . .
Please . . .

Trying to make some sense of it all
But I can see that it makes no sense at all.
Can I represent the shop floor
When I've a two mil house and I‘m definitely not poor?

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue

Stuck in the middle
Stuck in the middle

Corbyn to the left of me!
Boris to the right!
Corbyn to the left of me!
Boris to the right! (Stuck in the middle)
Corbyn to the left of me!
Boris to the right! (Stuck in the middle)
Corbyn to the left of me!
Boris to the right! (uh-uh)
Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.

Well I started off with nothing
well, no more than any Oxbridge man.
ah-ah yeah
Now my friends they all are tweeting,
"Please, we can't carry on this way'
Please . . .
Please . . .

Well I know the editor of ‘Newsnight'
Even he's got the feeling that something ain't right.
I'm so scared, about me they don't care,
Why can’t we just bring back the Blairs.

Corbyn to the left of me!
Boris to the right!
Here I am stuck in the middle with no clue.
Stuck in the middle with no clue (ah-yeah)
Stuck in the middle with no clue
Here I am!
Stuck in the middle with no clue
no clue, no clue, no clue ....

Turning to the dark side.

As regular readers would no doubt have become infuriated by, I have been pretty bullish for risk assets for for the last 2 months as the original game plan for the year sort of played out as hoped, apart from a pretty painful interlude whilst I was away in Austria in early February. Though it was a skiing trip, it felt more like a visit to a very Germanic Spa run by Herr Doktor Proctologist but I survived the delving of the market depths during maximum noise and rode the move back higher to this point.

And here we are effectively at the end of March having had nearly every great ‘trade for 2016’ washed out, stopped out or back to flat. Or all of that. Which really does justify the timing rule of ‘how to make your annual market predictions’ which states

"If you have to publish before the start of the year then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for the year in March of that year, or even later. The first few months of the year nearly always go the wrong way and you will have three months extra information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternatives”

Where now? After the ECB and the Fed it looked as though it really couldn’t get much better for equities. The ECB had unleashed a package of unnatural unconventional methods to get things going, The Fed had shocked, nay stunned, the market with its swing away from outright hawkishness (though I'm not sure why the market was surprised as this was what the market wanted to hear) and outright fears of imminent China death or Western recession were receding fast. Great stuff. Metals and commodities did the “hang on, they aren’t meant to go up” move that backed the whole ‘risk on’ thang and credit obliged by stepping down from the parapet after being told how important it was that it didn’t jump .

But the last week has been a bit of a quandary to me. US stocks spurted up but European versions have struggled with Dax at 10000 and FTSE at 6200 being veritable struggles to breach, despite the US rallies. Now much of this can be excused by USD FX plays but still, it’s FTSE that has been troubling me as it really hasn’t breached that 6200 level I was so looking to break a couple of weeks ago and it should be nicely representative of all the things that are putting in bounces - miners and oil and emerging market interests all with a good US stock reflection. But it hasn't.

The way it has behaved around the 6200 level would, if I saw that in an FX market, make me think that someone has an awful lot of optionality at that level, but surely we aren’t being driven by a large option position all the way through March? No. I’m probably being too suspicious but the price behaviour has tweaked my concern.

Today added to my concerns towards a continuing upward path as a certain degree of momentum is needed in supposedly correlating markets to keep the third party on its way up, yet the momentum is fading.

Metals - a favourite lead indicator for me since mid February. Copper has lost its bottle

Oil - likewise, but it has the added concern that the storage figures really haven't given much hope despite the monster bounce. It's an overhang that is hard to ignore forever.

AUDJPY - Another of my favourite 'up' trades has lost momentum and today was a notable down spike.

Fed speakers - The tone of recent individual Fed board Governors is not as dovish as the group speak suggested at the last meeting.

Financials - Whilst banks are pretty zombified, with them not being allowed to make great profits but having their downsides cushioned to protect society from contagious meltdown, the action of ZIRP on their profits is devastating. The state of the financials is picking up as a meme.

ECB - We’ve had two weeks to digest that their actions are actually pretty good news but prices have stopped responding.

Aussie Stocks - OK, these double count minerals price action but the chart pattern looks worryingly double top like with a neck line that has past history.

China price action - SHCOMP is rolling a touch but alone looks unconvincing, yet look at H-shares and it looks like a more convincing roll over

Buyback blackout - Corporates are entering a period of buyback restrictions.

April - Tis the season to look at Europe. Greece should be causing stress by Brexit time in June, Brexit should be causing Brexit stress by any time now (I still see the Exit vote as higher than the 37% currently priced at the bookies so of course I’ve bought that price looking for a nailbiting just sub 50ish outcome).

Algos -  Imagine you are a vast algorithmic trading fund and you have parsed the hell out of the last few CB minutes yet prices have stalled, momentum has faded to the upside and is starting to pick up on the downside in assets you use correlation matrices against. What is your model most likely to do on the European open?

Marc Faber - Someone told me he’s turned bullish.



So, put that lot together and apply an aphorism of my own that "Trading markets is like yacht racing. You have to watch the wind and the tide but it's most important to watch for when the others tack" and I have done something I haven’t done for a while. I’ve gone short stocks but will of course flip out should recent highs breach (and yes the large SPX short positions are still there to play havoc on a run).  But for now, I’ve joined the church of the sellers and I am sort of hoping for Chinese stocks to dump overnight as some form of corroboration. I’m not looking for complete doom but a correction in an uptrend, but hey, if it does melt I can still claim a victory. Who needs to be right for the right reasons?

Please excuse me, I have to go now. I have to write a really complex academic paper on why the world is doomed (see yesterdays post here)

It's not bigger and it's not cleverer (to call doom rather than boom).

Is it clever to be bearish? There does seem to be an assumed intellectual bias towards calling disaster rather than 'Ok'ness. One only has to read the Prof of Black Swans, the Nobel Memorial Prize in Economic Sciences Prof New York Journo fellow, or the British Scottish Laurence A. Tisch Professor of History at Harvard University Senior Research Fellow of Jesus College University of Oxford Senior Fellow of the Hoover Institution Stanford University and visiting professor at the New College of the Humanities History Prof writing economics man.... or infact any of the Prof Prof Prof of Profdom to notice a sell pitch of intellect towards calling doom.

Or is it just the way it's reported? One rarely reads a headline along the line of '"Everything to be just fine and stocks will probably grind 2% higher this year" says Dr Professor Nobel Laureate who also called the pretty dull year of 2004 absolutely correctly'

It is fascinating psychological field which I think rests upon a feeling that OKness implies no need to do anything, so no need to think, so an implication that those being carried in the tide are unthinking and lazy. Whereas those who question the tide and worry about waterfalls ahead are therefore perceived as thinking and sensible.

But this assumes that the tide of laziness is to be long equities or yield versus cash as there is more risk in equities so therefore those who express a full understanding of the risks to being long will be best evolved to survive. Which is right. But where a market is just as driven by people taking active shorts the reverse is just as applicable but often not noticed. The value of wisdom of knowledge of why not to be short is just as valid as why not to be long. This should apply to 'long only' managers who have to explain away any underperformance to their stock index benchmark and for whom being short in a rising market can be as career threatening as being long in a falling market. For these investors, cash is the riskier asset and so the intellectual bias should be to evaluate every nuance for why the value of cash versus an equity would fall.

If we were to use this year's US stock market performance as a measure of the wisdom, intellect or sageness of either camp, we can see it's a draw. There may be very clever intellectual reasons as to why the market has/should/will fall but that cleverness needs to have a deeper level of cleverness applied to it to explain why the first level of cleverness has been wrong. The easiest, dismissive self placating, ego rectifying, world modelling way is to state that everyone else is stupid and you are clever. You see this everywhere. But really, assumed intellectual bias is self disproving. You may think you are clever but if you are wrong by the measures you yourself have set then you are not. Unless of course cleverness is not measured by outcome but by process. In which case we need to reweight the importance of cleverness in making money in markets (now that is a huge topic in it's own right).

But here's a thought. If the market price is the weighted sum of all expectation, and the cleverest are in a minority by definition, then the minority of cleverest are not those that can deduce the most complex of reasons for future moves but simply those who understand the less clever the best.

You be as intellectually clever as you like but the way to making money in markets is understanding what other people will do before they themselves do. And that has no directional bias.



Addendum -

In today's world there are so many 'academic' papers in existence there's one for every cause. I have thought of developing an app called ' "acrapadimiciser" a tongue twisting name for an app that automatically finds and attaches supportive papers to any argument, no matter how crap.

But here I introduce the paper that will support not just my argument of the futility of supporting your argument with papers, but also the point first mentioned in this post of academia really not being able to call social and behavioural outcomes as science really is different from the social arts (yes social arts they are not sciences). I give you the infamous Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity by Alan D. Sokal http://www.physics.nyu.edu/faculty/sokal/transgress_v2/transgress_v2_singlefile.html

If you don't know why it's infamous read THIS

And finally a paper on why papers are more likely to be believed if written by a 'name' https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/4570/false%20enforcement.pdf which used the Sokal paper as its subject matter.

Papers on papers showing papers may not be worth the paper they are written upon.

Gone skiing again.

Sorry for the lack of posts this week, I'm fortunate enough to have the opportunity to go skiing again. So I have. A more sedate affair than the Austrian trip as Mrs P is with me this time. We are in Italy, in the three little know valleys of Champoluc, Gressoney and Alagna abutting the southern side of the Monte Rosa Massif a vast high terrain of wonderful off piste adventure married with unspoilt Italian mountain refuges and villages. As one of my party noted "not only is it stunning skiing but the coffee up the mountain is cheaper than at a Starbucks in Hertford". There, the old Polemic coffee PPP style index so often used to indicate the necessity of continued Greek pricing adjustment is wheeled out again. 1 Euro for an Alpine coffee in Italy, take note Kefalonia.

I would like to be able to comment on perceived changes to local demand and business but I would imagine that the place being near empty has more to do with it being late in the season and out of school holidays than a collapse in European disposable income. Or it could just be that the likes of Ischgl, where it was so packed when I visited a month ago that the poor girls had to dance on the tables and bars, have soaked up the flash cash.

So I apologise for the fact I won't be commenting on FOMC, or Chinese Tobin tax proposals, or even joining the hoards of 'well it will all end in disaster one day, even it's not today' army in a spume of commentary. Instead I will be supping Bombardinos, lamenting that my thighs don't work as they did 10 years ago and that these damn ski trousers don't do up anymore.

Back next week

ECB - It's impressive.

Despite having last posted about the growing influence algorithmic momentum trading has on volatility and recommending buying volatility, I really can’t claim proof of theory based upon Thursday’s ECB led market gyrations but one does have to wonder how much was heightened by robots.

The original sell off in Eur/Usd was a formulaic  'lower Euro rates =  lower Euro’ which would have fitted with basic algo programming but the turn from 1.0850 lows back and up through the 1.1000 magnet, that Eur/usd finds hard to move far away from, was blamed on the ‘no more deposit cuts’ comment. At which point the market claimed to interpret this as the ECB running out of ammo meaning we are at the end of CB effectiveness and so we have to run for the hills.

Gold ran for the log cabins, equities did a U-turn and rates were, well, wild. But though the narrative was convenient it didn’t fit all assets. If this was the end of CB effectiveness leading to the end of the world then no one had told the oil market and Dr Copper, though wobbly, was not tanking. Other risk indicators such as AUD/JPY retraced a bit but nothing in comparison to the falls elsewhere.

It was at best looking confused, which isn’t surprising as ECB policy announcements are not your average +/-25bp affairs and the devil is in the detail. Unfortunately detail isn’t something the markets like doing in the first minutes after an ECB announcement and with our algo friends chasing moves (and really struggling to translate complicated ECB transmission pathway wording into algo language), you only need the pack to set off in the wrong direction for the algos to drive them miles away from their final destination.

Though there are no prescribed further deposit rate cuts, Dr. Aghi has opened up a huge new highway in buying corporate bonds which could well lead to the road of equity purchases. This in its own right is a new Draghi Put and ’should' be exceptionally bullish for European equities.

The move of focus from cutting the deposit rate also implies the de-emphasis on using Euro FX rates as a channel of easing and allows the Fed room to hike. no deposit rate cuts it means fx channel of easing is no longer focus so allows the fed to hike. This may well also lead to currencies remaining more range bound with longer term volatility easing, even if our algo friends keep gamma high. With transference of FX drivers away from ECB,  the Fed Factor will pick up and though European stocks will always be effected by exchange rates, they will no longer be responding to the same overall input implying that Eur/Usd and Estoxx correlations may well loosen.

There is complexity in the TLTRO announcement but the addition of lending incentives is very important. If a bank can lend over a threshold they can replace their senior bonds with TLTRO money. So if they have been under pressure with their credit widening, CDS pushing higher and their senior bonds suffering they can buy back their bonds at the lower prices with TLTRO money which means they have just monetised their Debt Valuation Adjustment (DVA being the profit that GAAP rules makes them post against falls in the value of their debt). Voila! A capital gain.

This is massively positive for Eurozone banks but it feels as though not everyone seems to think so and I’m wondering how long it will take markets to work this out. Do you remeber what happened after Dec 2012 LTRO? Back then we wrote a post singing its praises as a major turning point but the markets hated it and sold off heavily until the Italians issued bonds and everyone bought. Well this could be one of those moments.

On this basis I am looking for a sizeable rally in european stocks and risk in general, even if many in the market won't be happy until we have the recession they are demanding and pricing for.

Now finally for light hearted relief, for those folks who just love overlaying the present chart with a pattern from somewhere in the past to infer what the future entails, try this. It's the intraday Dow today.

And what happens next ?

Well obviously a T-wave repolarisation of the ventricles. Who needs charts of 1929, 1987, 2000 or 2008 when you have an ECG to follow. The heart beat of the market.

Algo isolation driving markets bonkers.

The world of finance can be blinded by its own feedback. It’s like sitting in a hall of mirrors where all the other people you are looking at for clues are actually you.

The most basic of markets works on the physical supply and demand of the good as dictated by the producer and the consumer. The addition of intermediaries, speculators and investors is like plumbing in a huge storage tank in the pipe that runs between producer and consumer. This tank fills up and runs down as expectations of future supply and demand are anticipated by those wishing to hedge or make profit. In the simplest example it’s oil storage in the oil market. It’s the warehouse where the physical is stored against futures. Yet it is also represented in the complexity of interest rate swaps and the most bizarre of speculative financial products.

But the volume taken into that tank will still eventually have to end up with the consumer of the good. The tank is only storage. Buying commodity futures? You'll need to sell them back at some point or physically deliver. The long term true supply and demand rests with producer and end consumer.

The world of finance is effectively that tank on strapped to the supply and demand pipe of everything tradable with a forward value, representing expectation of future demand. If everything traded spot with no storage facility there would be no financial market. Without the dimension of time finance vanishes (so it is probably a good thing that time is regulated!).

But the tank of financial markets can get so complex that those acting in the dankest murkiest parts furthest from the supply and demand pipes find it hard to see what is going on and instead look for indicators from others nearby. The markets since January have, I would strongly suggest, been more driven by the price of other financial instruments than they have by changes in the underlying economy. Oil falling and rallying by 35% has not been because of a 35% change in physical supply and demand but on the expectation of what may happen. The moves in equity prices oscillating -20%/+10% have not reflected actual changes in profitability of companies but rather expectations based on moves in credit, oil and interest rates. The sharp move up in metals hasn’t been caused by smelters suddenly consuming masses more, but the change in expectation driving those who had borrowed to short to buy back to cover and those anticipating future demand rises to buy and store.

All the while the new driving force in the markets, algorithmic driven funds, look at the price actions around them in the finance tank and follow the trends. This whips up more moves in the finance world which leads to the algos noticing that the real world data is having smaller impacts relative to the actions of prices around them. They then rebalance the weightings of real world factors and focus more and more on price correlations. This drives the disconnect between finance and economic reality so far that the tank of finance is in danger of spawning off as its own budding universe of introspection and self importance leaving reality far behind.

Is this not what we are seeing? The year of 2016 has been relatively shock free as far as new issues go yet markets have been bonkers. It’s been like driving a car with loose steering linkages, with the steering wheel being swung hard left and right to just keep going in a straight line.

Algorithmic trading is one thing, but applying algos to investing with the new game of robo-advisory will no doubt result in an 'algo squared' situation where the algo robo-advisors see algo-trading systems doing well and allocate more money to them. It is building a nasty bubble, not a bubble in price but a bubble in price volatility as the amplitude of oscillations in the market is driven by the rise of the robots. This is not exactly what those calling for computer driven trading wanted when they insisted that computers would tame the excess of of human trader emotions.

So buy volatility. Not for the classic reason that you think the markets will dump, but for the purist reason that the recent bonkers price moves will probably get worse. Meanwhile the real world will drift along minding its own business and wondering what all the fuss is about.