GBP goes EURCHF. What's going on.

Ok, so I was wrong. Cable was not a good buy two days ago and just to prove me REALLY wrong the marvelous Antipodean time zone decided to ram GBP in a way that hasn’t been seen since the SNB spoofed EURCHF.

It’s the small hours of London Friday morning for me  and the reasons for GBP's freediving world record attempt haven’t yet been formulated. Now I'm afraid that if you started reading this expecting me to tell you what is going on in GBP, then sorry, I don't know. But having worked in FX for a good chunk of my life I can have a good guess at what is now going on in the banks.

First, every salesperson is struggling to call all their clients who had 'call levels’ at zones never expected to be hit, whilst trying to fill orders in systems at levels that they think they can get away with. Oh, hang on, no they can’t do that anymore as they need audit trails. So, they will all be huddled around spot desks arguing over whose order was hit at what. Said spot dealers will be shouting a lot and staring at an automated blotter that is slowly dripping in a queue of trades that their antiquated order and back office system in some far off distant place on the planet is trying to process. Basically, there will be a lot of ‘WHAT THE F### IS MY POSITION.. ARRRGH ‘ going on.

Meanwhile, clients will be calling in demanding to know why their stops were done 7% below current market and why no one called them. Because if they had been called they would have bought it back at 8% below current markets because they are all retrospective geniuses.

Managers will be trying to recite the rules of engagement for filling stops but can’t find them so call compliance. However, compliance is asleep because they are mostly based in Head Office and that isn’t in the Antipodes, apart from the Antipodean banks whose compliance officers will be teaching some course to the catering staff on how not to deal with Yemeni banks.

By now the dealing systems will be catching up with what's going on and the spot traders now fit into two categories:-

Group 1 who look at their position screens and see a vast profit who split into groups 'A' and ‘B'. 'A' stays very quiet knowing that sales will want some of the profit if they see how much it is and ‘B' who stand up and declare themselves as trading Gods.

Meanwhile Group 2, on seeing vast losses, immediately write emails to every manager under the sun blaming their staggering losses on system latency and the ridiculous guaranteed stop levels that sales made them undertake. If they are lucky management will swerve the losses into a contingency book, but if they are unlucky and the bank was thinking of replacing them with a 'Raspberry Pi’ algorithm, they will be out of the door by close of Friday.

But back to sales. Those that are still on the phone are quoting the reason for the fall on anything that they feel everyone else is saying because no one has a real clue. They will probably repeat what JPMChase or Goldman say as they reckon that the guys there are cleverer than them and more likely to know. So, clients will currently be being told that it is due to- "Barriers being hit at 1.25, 1.20 , and 1.15" and if they can't even manage that will say "Stop losses”, which is a great generalised term that demands no justification. But some foolish folk will have done a Bloomberg News search for GBP and decided that it is due to the news that fracking had been allowed in North West England. Which is of course rubbish, because we all know that it happened because Diane Abbott was made the shadow Home Secretary.

By now very senior management will have come down to the dealing room. Bearing in mind this is out of London time zone, the senior managers involved will have absolutely no idea whatsoever about Sterling so will ask questions to frantic spot and sales folks along the lines of "Has Brexit been announced?" or "is this is a big move?" The frustrated dealing staff will have to tread a thin line with them, alternating between wanting to tell them to p### off and ingratiating themselves with them as, with the size of the losses they can see, they may well be up before them the following morning.

Meanwhile sales are noted to be only saying, into phones and Bloomberg chats, “But seriously, that’s where it was” and starting to swear at overseas sales coverage who are trying to goad them into either filling their clients better or having any profits accruing through their clients stops reallocated back to them rather than staying in the center that ripped them off did the execution.

The options trading desk will have appeared to have turned Greek as that is all they are speaking, shouting things like .. "Watch your gamma", "check your theta”," where did I trade that delta" and "Oh shit, they said you made money shorting vol. “

For the sales guys with no clients with GBP orders, they will be feeling rather smug and trying to sound intelligent by quoting correlations as to what this should do for other pairs. Such as “Well with the cross correlations we should see a pick up in CNH/MXN vol and our model says that the 3m/1yr calendar spread is the way to play it”, only to find that if they try to get a price from their options desk they are told "you  moron! haven’t you seen what's going on in GBP?".

So, it will all be fun and games. Do I care? Not a bit. Because I am sitting at home, it’s the wee hours of the morning and I am about to go to bed chuckling mischievously to myself, knowing that London FX sales folk are going to have one hell of a miserable start to the day explaining to their clients why they have just lost 7% of their company's hedge book.

Oh and let's not forget all those corporate treasurers dusting off the wording for their 'due to FX volatility, losses were greater than forecast' statements to add to this year's accounts.



------
Addendum - 15.30 BST.

Oh look, in record time, The first corporate excuse appears. Fancy that!

"You are filled, yes at the low sir, well someone had to be the low and it just happened to be you"-

So if he lost £15m over a 0.1100 GBP/USD move, face value of the FX trade must have been just over £160m. Not that huge and no where near the £1.6b I first eyeballed. I never was any good at FX.

Noise signal in the Pound.

Oh look, the Pound is at levels not seen since the last time and the FTSE is at a number. So say all my twitter feeds over and over again. No comment on where it goes next, just where it is now. Which is as useful as a bag of sick.

One of the most important trading indicators of the last 3 years, in this effectively mean reversionist market, has been journo-noise. Toys out of prams, headlines, panic screaming and pointing at numbers with no reference to what may happen next, other than pulling out a ruler and pencil and implying that something terrible will occur (have you ever heard them do the reverse and imply something wonderful will happen in the future?). I am convinced that journo-noise trumps fast moves, rulers and pencils as a signal and I am convinced that this morning’s cacophony of Sterlingness is a signal.

The price of GBP has fallen and it is assumed that it is related to Brexit. Though the chance that it is related to Brexit is pretty high, it's worth pointing out that no one actually knows for sure. Correlation, causality and all that. The reason GBP is lower is that the natural equilibrium between buyers and sellers has moved. Or in 'spot shag' talk, someone sold it and no one bought it. Now, unless you wish to ask every seller of GBP in the market why they sold GBP you will never know for sure why GBP has fallen. I know this sounds pedantic but though the probability is hugely skewed towards it being Brexit, it is important to know that it isn’t a 100% certainty on which to base secondary assumptions, which is what our brains tend to do with anything over 50%.

Anyone who as worked in the FX markets will know that momentum is a major factor for model trading accounts and they will follow trends no matter what the cause. Technicians will trade no matter what the background and VaR models respect no macro. But we all like to think we know why things happen.

But, pedantry out of the way, if we  take it that the move is Brexit linked, does it tell us anything about tomorrow? The news was out on Sunday. The news was that Article 50 will be triggered. No surprise other than to those still at the ‘Denial' part of the Kubler-Ross curve of grieving. So no, it doesn't really.

Next is the assumption that a weak GBP is terrible, terrible news. Most G7 nations would give their eye-teeth for a currency devaluation. One of the main reasons for the economic stresses in Europe is that Germany is benefiting from an artificially low exchange rate. A weak pound can benefit the UK in the same way. We should also note that attention is always applied to the most spectacular GBP cross. GBP/USD may be at impressively long time lows, but EUR/GBP was toying with parity much more recently. USD strength over the last couple of days is exaggerating cable moves.

Here I may be opening myself up for abuse but I feel that May and Hammond are actually very smart people, especially compared to the last incumbents, and despite the sound-bite sniping that is aimed at them, will handle things in a sensible manner. The fact that they are not telling us their every move is to be expected. I am sure that there are multi-layers of diplomacy at work and, as one of the most important issues for all sides is ‘face saving’, staying quiet and avoiding a 'them and us' media sponsored battle is to be expected. Of course, everyone wants to know what will happen, but as with Christmas, we will probably have to wait for Christmas.

Last suggestion, which I’ve made before - Any comment on where a price is should be accompanied by a view as to why it matters.


Positions -
I am adding Long GBP/USD through today. It could be called an emotional trade but GBP is an emotional trade.
Long USD/JPY from friday, so call that long GBP/JPY
Long USD/TRY still.
Long Oil still.
Short BTP’s still post Draghi
Long Trump to win. Wild prices but back at 25% it still looks cheap as a hedge.

Yen Bomb

To parody Tom Jones -  "Yen bomb. Yen bomb. You're my yen bomb.  Everyone is long it just as it all goes wrong".

My friend Ryan Shea wrote a very good piece on the importance of the BoJ's actions soon after they were announced, but work commitments have prevented me from commenting upon them until now. His post is here https://amareos.com/blog/the-fix-is-in/ and should be read in its entirety but I’m going to pick out the nuggets that interested me most and thank him for permission to do so.

His first point is that the BoJ is about to lose all control of its balance sheet-

The reality is that once a central bank adopts a long-term interest rate target its balance sheet shifts from being exogenously determined (ie under the control of the central bank) to endogenously determined. This is because even an institution as powerful and far-reaching as a central bank cannot set both the price and quantity of an asset (Japanese government bonds in this case). If its commitment to targeting the 10-year JGB yield is to be maintained, it must necessarily lose control of its balance sheet[3] as it has no way of determining what excess market demand or supply of JGBs there will be at the target rate as this depends upon the preferences of the private sector over which it has no direct control (influence perhaps, but not direct control)[4],[5].
The amount of JGBs the BoJ finds itself having to purchase to ensure its yield target is achieved could, over time, be potentially significant given they also shifted their monetary policy goal – namely the CPI inflation target – up from 2% to “exceeding 2%… in a stable manner”

But he goes on to point out what he sees as the real reason for the action - facilitation of fiscal stimulus -

Nevertheless, the significance of the BoJ announcement is that they have made a change that is (always was in our opinion) a necessary prerequisite for the successful reflation of Japan’s moribund economy. It is a policy-making stepping stone, but a very important stepping stone.
As we made very clear in the previous post (and numerous others before) Japan’s fiscal position is dire; government debt is on an unsustainable trajectory and given the current level is nigh impossible to rectify via fiscal consolidation. Correcting this problem is not just an economic imperative but it has become a political imperative as well, as evidenced by the emergence of Abenomics. Japan needs sustained positive inflation- it really is that simple. It is just achieving this objective has been much more challenging than widely expected.
If the BoJ is unable to generate sustained positive inflation by calibrating monetary policy at super accommodative levels, then it will require the intervention of the fiscal authority, namely the Japanese government. The BoJ even hinted as much in their statement when they referred to “synergy effects” between monetary and fiscal policy.
Such thinking is hardly new or cutting edge. Indeed, as Tily (2012)[9] points out Keynes concluded as much in The General Theory of Employment, Interest and Money, published in 1936. To wit,
“Keynes’s support for fiscal policy did not follow primarily from any lower bound to this process but from a recognition that a low long-term rate of interest might not be sufficient for recovery. A low long-term rate of interest was necessary to prevent recession, but it might not be sufficient to effect recovery from recession.”

But here is the really interesting bit -

By agreeing to backstop the JGB market, the BoJ is, in effect, facilitating the Abe government’s ability to engage in reflationary fiscal stimulus by loosening its constraints. After all, with the BoJ guaranteeing the price of government bonds, the threat of increased bond issuance triggering a JGB “death-spiral” is completely eradicated[10]. It also removes a more realistic threat that a back-up in interest rates chokes off the recovery as and when it materialises
To those still sceptical about such a reflationary outcome, it is worth noting that a yield target not only facilitates, but is a pre-condition for, outright monetary financing (OMF – or helicopter money in the vernacular); a policy that is very effective because the government can just keep issuing bonds – at a price now guaranteed by the BoJ – to satisfy the demands of any stimulus programme[13].
It is for these reasons that the BoJ’s adoption of a yield target is so significant.

So whilst many appear to have shrugged the BoJ actions off as interesting but really not that impactful (targeting only one point in the curve, cranking up inflationary wishes etc), Shea points out that what they have done may not be money printing but it is laying the path to effective helicoptering of money into the economy via an accounting wheeze that opens up the fiscal/monetary backdoor. He has long been a proponent of the idea that the end game for this phase of central bank action is yield curve control, so I was straight on to him when the BoJ took the first step. His thesis is that it ultimately leads to capital controls.

Commentary on what will happen to JPY since the BoJ has been pretty much focused on the US to JP bond switches with many suggesting that the attractiveness of JGBs has gone up on a relative basis. I can go along with that view to an extent for two reasons -

1- If you have a bond thats price is effectively underwritten via the central bank targeting its price then your risk in investing in it drops dramatically and your incentive to buy it on a risk-weighted basis increases.

2- as my own thoughts would suggest that if you take a bond, and you pin its price at zero you have effectively turned that bond into cash. It behaves in just the same way as cash. Its capital value won't change and it pays zero interest. It is cash. The difference is that this bond can have a denomination of any size you like and it won't take a huge safe to store it in. You could fit a bond who a face value of Yen 12billion in your wallet. Now compare that to a Europe where with the demise of the €500 note you need a fairly big vault to stash away €100m. The BoJ has just issued the biggest denominated bank note in the world which could be hugely attractive to those stashing cash.

However, I agree with Shea as to the ultimate outcome, as these considerations will be outweighed in the end by an upcoming fiscal tsunami BoJ. As he points out -

It is patently obvious from the current level of crowd sentiment towards Japanese stocks and the JPY that this reflation theme does not yet feature on the radars of most investors. This suggests that once investors look beyond the lack of immediate monetary stimulus, and begin to comprehend more fully the longer-term ramifications of the BoJ announcement, there is potential for a very significant price move in both (unlike nominal JGBs).

And back to his theory that the curve pinning trade will be the end game for many central banks -

Regards the global implications that flow from this decision. As we have previously stated the BoJ is a monetary policy vanguard; it has had to be because of circumstance. This remains the case. With global debt levels now higher than they were at the onset of the Great Recession, Japan may be the first country to have entered the era of fiscal dominance(possibly by some margin) but it won’t be the last; currency markets will see to that.

If you didn't read his whole post linked at the beginning here it is again https://amareos.com/blog/the-fix-is-in/   and you can follw Ryan Shea at @BlackSwanEcon

And for disclosure - I am now long USD/JPY having waited for post BoJ JPY buying to fizzle.

The Fast Markets Song

Friday's fun in financial scout camp started by looking in the bear story box and bringing out the old favourite of Deutsche Bank. Which promptly did what nearly every new disaster story has done this year,  it recovered.

Sunday's flappy panic is over Brexit's article 50 being triggered by end of March 2017. Quite why it's such a sudden disaster I am not quite sure, because there was as much chance of the UK not Brexiting as there is of Morgan Freeman ever playing the bad guy.

But it's all good news for the panicky news feeds that will be peddling UK doom. Do you remember the children's playground, fast food song? The one that starts 'A Pizza Hut, a Pizza Hut..' which was the basis for this..



Well, with a bit of tweaking, we can create the market commentary anthem.

The Fast Markets song:- 
(All together now!)

A Deutsche Bank (make a square in the air)
A Deutsche Bank
Brexit flappy panic (flap your arms like you're doing the headless chicken dance)
And a Deutsche Bank
A Deutsche Bank
A Deutsche Bank
Brexit flappy panic
And a Deutsche bank

Oil Prices! Oil Prices! (use two hands-make an "M" in the air, starting in the middle)
Brexit flappy panic
And a Deutsche bank
Oil Prices! Oil prices!
Brexit flappy panic
And a Deutsche bank

A China fix
A China fix
Italian banks
And a China fix
A China fix.
A China fix
Italian banks
And a Chinese fix

Greek bailouts! Greek bailouts!
Italian banks
and the ECB
Greek bailouts! Greek bailouts!
Italian banks
and the ECB

A hiking Fed
A hiking Fed
Falling productivity
and a hiking Fed
A hiking Fed
A hiking Fed.
Falling productivity
and a hiking Fed

High Yield! High Yield!
Falling productivity
And a hiking Fed
High Yield! High Yield!
Falling productivity
And a hiking Fed

A Donald Trump
A Donald Trump
A rising Right
And a Donald Trump
A Donald Trump
A Donald Trump
A rising Right
And a Donald Trump

A Putin! A Putin!
A rising Right
And a Donald Trump
A Putin! A Putin!
A rising right.
And a Donald Trump.

Risk Parity
Risk Parity
A massive spike in Vix
and risk parity
Risk Parity
Risk Parity
A massive spike in Vix
And risk parity

Stop losses! Stop losses!
A massive spike in Vix
And risk parity
Stop losses! Stop losses!
A massive spike in Vix
And risk parity

A rogue trader
A rogue trader
Whopping bank fine
And a rogue trader
A rogue trader
A rogue trader
Whopping bank fine
And a rogue trader

SEC ! SEC!
A whopping bank fine
And a rogue trader
SEC ! SEC!
A whopping bank fine
And a rogue trader

A BoJ
A BoJ
Failing Abenomics
And the JGBs
A BoJ
A BoJ
Failing Abenomics
And the JGBs

Gold Prices! Gold Prices!
Failing Abenomics
And the BoJ
Gold Prices! Gold Prices!
Failing Abenomics
And the BoJ

A CDS
A CDS
Spreads are widening
and a CDS
A CDS
A CDS
Spreads are widening
and a CDS

All Panic! All Panic!
I told you so
And I'm never wrong!
All Panic! All Panic!
I told you so
And I'm never wrong!

Transferable skills - Football manager to bank CEO

Is being a world famous football manager so different from being the CEO of a world famous bank? Let's take a look.

Mourinho on today's match, Manchester United vs Watford (these were his actual words).

“I was completely aware that we were not the perfect team, that we had lots of players who are not end products and can make their own mistakes,” Mourinho said. “My only doubt was the way they can cope with the negative moments that come sooner or later. I feel that some individuals probably feel too much pressure and that responsibility.

“But from a collective point of view I only have good things to say about them. If you analyse our three defeats in the last week, we were always the best team in the second half. We didn’t start well today but then in the second half the players showed quality, intensity, desire, commitment and ambition. And we lost again in our best moment.

“I can split this into three factors: one is the referee’s crucial mistakes – that’s not in my control. Against Man City you know what happened in minute 55 [when Claudio Bravo made the challenge on Wayne Rooney], today you know what happened for the first goal, against Feyenoord you know that the goal was in an offside position, so we were punished by these mistakes and I can’t do anything.

“The third thing is what is in my hands, which is the improvement of the team,the improvement of individuals, trying to stop with the defensive mistakes. I knew that I had a task because, for example, the first Man City goal and this second goal today, you can find an incredible similarity.This is tactical but it is also a mental attitude. It’s something that you don’t go there and in a couple of weeks everything becomes perfect. So we have to improve, no doubt, individually and collectively. And that’s my job because lady luck you don’t control and referees mistakes you don’t control.”


Now if we transfer Mourinho from Manchester United to CEO of Deutsche Bank let's see how he gets on

Deutsche Bank vs the US 

“I was completely aware that we were not the perfect team, that we had lots of traders who don’t know their products and can make their own mistakes,” Mourinho said. “My only doubt was the way they can cope with the negative moments that come sooner or later. I feel that some individuals probably feel too much pressure and that responsibility."

“But from a collective point of view I only have good things to say about them. If you analyse our three fines in the last years, we were always the best team later on. We didn’t start well but then in the later period the players showed integrity, intensity, desire, and commitment to clients. And we lost again in our best moment.

“I can split this into three factors: one is the regulator’s crucial mistakes – that’s not in my control. Against the DoJ you know what happened at the last minute [when Loretta Lynch made the challenge on our mortgage book], you know what happened for the first fine against FX, you know that the fine was for an offside fix, so we were punished by these mistakes and I can’t do anything.

“The third thing is what is in my hands, which is the improvement of the team, the improvement of individuals, trying to stop with the defensive mistakes. I knew that I had a task because, for example, the first fine for LIBOR and this RMBS today, you can find an incredible similarity. This is tactical but it is also a mental attitude. It’s something that you don’t go there and in a couple of years everything becomes perfect. So we have to improve, no doubt, individually and collectively. And that’s my job because lady luck you don’t control and regulators mistakes you don’t control.”

Spooky isn't it?

Chemical brothers.

I was just plowing through the Sunday opening prices, that part of a Sunday evening where you watch FX open up first and try to garner a sense of how much emotion there is in the market before equity futures get going, but couldn’t really see much going on. I was wondering what to do with a couple of positions and what to initiate, if anything, but really couldn’t get a grasp on what to do and thought I was going to lose my mind. This feeling of confusion grew until I realised that the subliminal power of the Chemical Brothers track 'EML' was the cause as it emanated out of my laptop speakers. “I don’t know what to do, I'm going to lose my mind’. I don’t know why it’s taken me a year to find The Chemical Bros album ‘Born in the Echoes’ but the first two tracks are fantastic with 'Sometimes I feel so deserted’ an electric tonic to lethargy, borrowing a strong stylistic reference from Swedish House Mafia. 

But enough of the background music, now for markets. 

I was out playing on beaches on Friday so missed the dump and even now I’m not sure what caused it. I get the ECB, indeed I shorted BTPs during Draghi (again, oh widowmaker) but I don’t get the equity dump, it took 24hrs after Draghi spoke to get going which seems too long for it to be purely him causing the shake down.I know it’s September and I know that we all have cupboard loads of reasons to sell equities, those cupboards having been stacked full over the last 3 years, but why now and how far is the fall going to go? 

There has been some messy stuff going on for a while.  JGBs have backed up, Draghi has taken his foot off the accelerator, Brexit hasn’t induced a slowdown demanding global easing, US data is implying a slowdown and all the while, well for the last 2 years, we have had the soothsayers telling us doom is around the corner. Central bankers see themselves as financial environmentalists, guiding behaviour to preserve financial habitat. But they're killing financial diversity and masking environmental signs of trouble. Central Banks are not environmentalists, they are just the opiates of the economy - instead of treating disease, they just mask the symptoms whilst the disease gets worse.  And not just opiates. Ecstasy to masses, MDMA to the banks, crack to the bond market, smack to the politicians and LSD to traditional economists who are having the weirdest trips seeing terrifying things from the future crawling up the walls of worry. 

The central banks are the Chemical Brothers here and most of them are at the point of “I don’t know what to do, I’m going to lose my mind’. 

In one of my posts from last week, I mentioned that volatility could go up without the underlying falling.  I can see vol moving higher again, but I am a bit surprised to see a return of volatility already starting to stir  up the ‘I don’t know what's happening, let’s blame risk parity’ brigade. Which has me believing that risk parity is not the game, though I am smirking at the funds who have sold vol as a hedge against no vol. 

It is September and there are things one could hang a fall on retrospectively but I am not excited about this fall yet. Look at it this way, 50pts SPX may look a lot over two days but it's still only 50pts over 2 months. However, my key indicator as to how bad and how far this could run is if we see bonds AND equities dump. If I wake up and see both getting torched then I am out and running for cover. Deep cover as when bonds and equities fall we are in for a mess that hasn’t been seen in the past years that indicates confidence in CB policy is finally over and the financial world becomes a Hieronymus Bosch painting of fire, brimstone, helicopters, inflation, and worshipers of Zero Hedge (who have quite rightly blocked me on twitter - I wear it as a badge of honour). 

It's midnight here in the UK now Sunday night, I’m going to go to bed and will be buying the European open, hopefully by then everyone will have bigged up a fall and Stop Loss City, New Zealand, will have had their pound of flesh, all Asian traders done what they think someone bigger than them has done (rather than think for themselves) and we have a lovely chance for a 9.30 am London reversal as Asia come out of their K-Hole, as the Chemical Brothers may say. 

Positions -

Long oil, was great , now not so great as risk off. 

Short BTPs. Going well since Thursday. 

Long USDTRY, More good news in risk off environment. 

Long Trump to win - I really wish I had bought because I want him to win rather than just believing he will, but it’s going my way, sadly. 

The only iPhone review you ever need to read.

The only reason I am writing this is because apparently no one cares about anything else and a title like the one I've used should be pure SEO gold.

 iPhone launches are like Non Farm Payroll releases. Everyone gets very excited about them but 24hrs later have moved on and are guessing what the next one will be.

Stereo speakers - Unless they produce 150db each, can be spaced 10ft apart and have 12+ inch bass units I don’t care.

The new camera has optical image stabilisation - Useful for the caffeine or 'morning after' DTs. 

 6 element lens with f/1.8 aperture. 60% faster than previous iPhones. The iPhone 7 has a single lens camera; the 7 Plus has a dual lens camera (wide angle and telephoto). telephoto   - Useful, I guess, for wedding photographers.

iPhone 7 Plus: New 'portrait' effect on the camera to add depth of field to photo No Interest, not a selfie fan.

Water and dust resistant  Excellent - caught up with Samsung

Longer battery life  Good, but still would prefer replaceable and will still probably die after 2 years.

Comes in jet black, black, gold, silver, rose gold.  I'm not a 14yr old girl.

Headphones will connect via the lightning port. A free set comes with the phone, plus an adaptor for traditional 3.5mm jack headphones - Backwards step. Buggered if you lose your adapter or headphones. Can’t borrow others. Go long Chinese copy adapter makers.

And AirPods - wireless headphones (with a microphone) that have infrared sensors that detect when they're in your ear and only play then. W1 chip connects the AirPods to your other Apple devices. The batteries last for 5 hours and the Airpods come with a charging case that holds 24 hours of charge. We tried this with Bluetooth headsets. No one can be bothered with devices that need separately charging and if you do use them you'll look like a dodgy limo driver. Drawer fodder, or more likely lost on first outing. San Francisco drains will be full of them. A wire stop you losing them.

A10 Fusion chip with a 64-bit four core CPU  Should I be excited? Or even know what that means?

Storage: 32GB, 128GB, 256GB  - A 256GB Micro SD card is about £140, how much is your upgrade?

Cost: $649 for the 7, $769 or £649 £769 in UK money. A lot for a better camera you can drop in your beer.

Summary - The only thing you need to know about the iPhone7 is that it will be an out-of-date lump of metal and glass within a year.

Will I buy one? No. But then I've never bought one.
Will it change the price of Apple Stock? Someone will pretend it will, but not in the long run.

Spread betting for the masses.

September is a remarkably shitty month for many. Not as shitty as November which has to be up there as one of the grimmest months of the year, but just the thought that you have 2 months of inexorable approach to November after returning from a summer holiday makes September shitty. And that’s without the run up to year end nonsense that will have kicked off with appraisals, KRAs, fawning, backstabbing and general Roman Senate behaviour that is booting off in the glass corner offices of Investment banks. Bonus allocations to management are being decided along with debate as to which tiny teaspoon to use for staff bonuses. Sorry folks, I feel for you. Sort of.

But I think you have to have been on the inside to be able to be on the outside to be able to look back in and be glad you are out. I say this because as my own sanguine attitude towards the glaring hypocrisies of city life (the way the regulator regulates and management manage) only grow, the world around me still appears to consider the wheelings and dealings of dealing in financial markets a holy grail to wealth, happiness, and, believe it or not, intellectual respect. Cough cough.

A wall of cash has pushed personal investment into higher risk products and taken the owners of that wealth down a rabbit hole of financial discovery that could have been penned by CS Lewis. Whilst banks cannot offer the simplest of products to their client base, without carrying out Know Your Client inquiries using anal probes, spread betting firms are happily engaging in providing sharp objects to financial 2-year-olds. The rise of the binary option as a punting tool has been remarkable. The ability to bet on financial markets via traditional institutions has been squashed yet the betting industry is stepping into its place. Very odd. And I still don't understand why any profits on a spread betting account are tax-free yet the same trade through a traditional market is taxed.

The tax advantage, the technical ability to replicate what to all intensive purposes looks like a professional dealing screen and the  underperformance of cash in bank accounts is handing Joe Public all the tools to dress up as a professional city dealer and..... be taken to the cleaners.

The playing field just isn't flat. Spread betting companies may offer exceedingly good spreads in their shadow markets, but look at the funding costs and roll over charges and it all adds up to a tax on playing. The other fundamental truth is that Joe Public just isn't very good at trading either. The proof? The fact that most spread betting companies don't bother hedging any of their client business. Clients tend to lose. This could also be the reason that spread betting profits aren't taxed. Tax deductible losses would exceed taxable profits.

But the lure of the casino is huge. The pub bragging rights on making a buck on long Eur/Usd just seem so much better than saying you won it on roulette. But the overall odds for most punters are similar. With the rise of the punters comes the rise in the financial snake oil salesmen. The 'follow my foolproof way of trading (though if it's foolproof then why the heck am I telling you)' sites. Twitter is alive with promoted snake oil tweets. But there is money in it as I am afraid to say it, the easiest target market to take money off are the not the cleverest. It's depressing to realise that if you want to make a quick buck the the easiest way to do it is to leg over someone not as smart as you.

I can cope with trying to win by coming up with a trade before anyone else acts on it, but to suck folks into a casino of rigged tables seems a little harsh, especially when gambling has been banned at banks and institutions. And gambling it is. Binary options? How many real world exposures find binary options to be the natural hedge? Apart from as ahedge against the other binary options you already bought.

I passed a slot machine arcade in a coastal town in England last week and wondered how long it would be before all the various gambling machines within it would be replaced by dealing screens with betting on financial markets. Why not? A live stream of SPX index prices to bet on is much the same as the higher/lower electronic card games. In fact....

Emerging Markets. They all moved but you got the wrong one. 

Short carry. It never drops more than you put in 

Brighton Pier at 1.30pm on NFP day.

Binary Options - 7 ways to lose faster.  

FOMC - It's always coming around but no winner.

The new precious metals dealing desk .

Yet there is a place for the high octane of risk taking that can be achieved using these facilities. I use them to adapt risk in longer-term underlying portfolios. In fast markets where liquidating underlying assets takes two or three days and involves larger spreads, then a spread betting account is a way to hedge.

But probably the greatest reason I use them is because I am finding that funds just aren't what they used to be. They are either so balanced they don't add any value, or they are so specialised they have passed the risk of asset class selection back to me. Or they are so hamstrung by their own risk metrics that anything fun gets chopped at bottoms or profits taken too early on rallies. And then there's the ultimate curse. You ride out an investment in a fund through thick and thin and just when the market is about to bottom the fund closes down because it isn't performing and hands you what's left of your money back - Looking at you Rennaisance Sub-Sahara and Rennaisance Africa.

I want a good old fashioned broad spectrum punting fund that has balls and is run by someone who is over 21 and doesn't have an ego. Or an algo. And understands politics as much as economics.  And doesn't care what fund consultants think. Oh, and being right helps.  Is that to mich to ask? Of course it is, but answers in the comments section please.

Yours, mine, I is a geezer dealer 'cos I've got a spread betting app on my phone.


-------

Stop Press! - Just out in the FT about spread better CMC markets.
CMC Markets shares slide 13% on worst day since IPO
I hope that wasn't my fault.

Same old same old

It’s been a while since I wrote a post. I could pretend it was because I have been on holiday. It isn’t. It’s because I really haven’t felt there's been anything of note to change my view of the world. My last post was titled 'Wrong Wrong Wrong' and I do feel as though I could add one of my own long-running beliefs to that. The way the Turkish lira has gently strengthened has caught me on the wrong side.

However, I have a right right right with my expectation of an unwinding of Brexit hysteria. Carney’s 4th of August move was so predicted I put a bet on it not happening. A small loss but I still felt it worthwhile as his ability to do the unexpected, or rather not do the expected, has been magnificent. I thank him for his actions as they have reduced my mortgage costs by 25% (1% to 0.75%) but I can't help thinking he has reacted to his own induced panic rather than anything proven. Of course, anticipating is the job of the BoE but I am interested at how the reputation of BoE forecasts appears to have gone from ‘pretty lousy’ over the past few years, to 'God-like' over Brexit.

I have been waiting for August data to appear because there was no point protesting the validity of July’s PMI’s as the armageddon brigade were waving sharp objects and their eyes had turned sparkly blue (a Game of Thrones ref there). The recent rebound in the UK data, manufacturing and service PMI’s, employment, housing, even the low inflation so far, has driven the army of the dead back north of the wall. But their screams can still be heard in the distance.

The Stark warning that Winter is coming may yet be true. But an Indian summer is upon us now as now is not the winter of our discontent. Well not mine, anyway.

I haven’t been tick watching markets as I haven't been that engaged. It's a fine thing to step back and have a financial form of out of body experience, looking back down on the chatter as you float above it, wondering what the point of all that noise is. Nothing has really changed. The hunt for yield drives on, data comes out, people jump and shout but then get bored and everything mean reverts. NFPs are a class example. They are like a solar eclipse passing over the market. They cause excitement and even panic but all they really are is a big fade. And in the background, the SETI project of Fed watching grinds on. Yeeeeeaaaawn.

On irregular visits to Twitter, I note excitement every now and then as a stock index somewhere puts in a 0.nothing move lower. Which backs up the general theme of ‘most hated stock rally for ages’.

The low volatility environment has many saying that volatility compression through funds selling vol, to fund underperformance, will lead to a vol explosion. I can empathise with this but it doesn't mean there has to be a massive move in underlying. Implied volatility can do some mighty strange stuff all on its own. High vol is read to lead to market price falls and low vol is read to lead to high vol which leads to price falls. Did you notice a certain bias in reporting there?

We all talk about negative yields and how it's all part of the great plan to drive money into more productive parts of the economy, but with low volatility and making a basis point in financial markets harder and harder, I wryly wonder if crushing vol is a clever master plan to drive workers into more productive parts of the economy. There is an irony in fund managers and traders bemoaning the lack of yield when all they would have to do is leave and get a job in any other field. Margins in non-financial businesses are measured in 10s of percents rather than 0.01s.

We now have G20 upon us and the changing shape of real global political power is much more interesting than Fibonacci levels in weasel poo prices. The longer term concerns of a changing landscape with regards to international relationships has been judged by the markets as immaterial until they get an economic data point to react to. Even if Greece don't get another EU payment for a while, or Turkey raises the Hammer and Sickle over Ankara or China links their mainland to Los Angeles through geo-forming, no one will really care unless it is reflected through Fed policy speak or NFPs come out 100K +/- from expectations.

I am still fascinated by Turkey. I still see it as the keystone or lynchpin or even grenade pin, to the many many current issues. From what I gather (no names, no pack drill) subterranean diplomacy is a hive of activity. The Russians are in there like Flynn, and the Europeans are busy trying to repair the damage of late support. The EU did not see a coup coming and their response was disastrously delayed. They will now have to over compensate in acquiescence as they still need a refugee deal but are now negotiating with a stronger counterpart backed by their old foe. The coup has been a wake-up call not only to the West, but Erdogan himself who now owes his life to the Russians and despite an appearance of authority is fast learning some of the basics of governance needed to successfully run a country of multiple cultures. He is restructuring his advisors, both domestic and international and has a stronger hand than ever to play the Uzbek game of mix and match when it comes to international courtship.

I have been short of Turkish lira and intend to remain that way for a while as it will be a while before foreign direct investment has the confidence to return to counter their trade deficits. But play this right, which I feel he is, and Erdogan will be able to extort favors from all sides. Who will open the bidding?

It is still interesting to see that GBP/TRY is much lower than pre-Brexit which obviously proves that leaving the EU is judged much more serious than having a dictatorial purge, moving away from ever joining EU, cozying up to Russia and changing the shape of Western/ Middle East politics.

Trade ideas? Is one allowed to even hint at trade ideas in this regulated market? Oh, hang on, I'm not regulated. Or am I? Or was I? Or rather will I be? For if I will be, I could possibly be prosecuted for breaking rules when I wasn't and didn't have to abide by them. The Apple dilemma. Or FX dilemma. Politically motivated retrospective legal action is today's great game.  I am sure that the next step is when the authorities go 'Minority Report' and start fining start-ups billions now for tax avoidance they may carry out in the future should they become hugely successful.

Of course, I can't advise you, but I can warn you that if you have the same positions as me, (long a bit of oil, long USDTRY, long Trump to win and short Eur/Gbp) then you may or may not lose or make money. Why am I long Trump? Because the odds had closed to 20% on smart people betting that stupid people won't be stupid. Which is stupid.

Apart from that, I have little idea, though it is becoming abundantly clear that though economics is all about predicting behaviour, economists are appalling at predicting behaviour at political tipping points.

Wrong Wrong Wrong

If there has been one party worse at forecasting rates than central banks it has been central bank watchers, actually we should add the markets though I would put the markets above economists in their forecasting ability. The winning trade for the past 18 months, longer in the case of the Fed, has been to fade expectation into rate announcements. 

Last BoE - Wrong. 

Last ECB - Wrong. 

Last few Feds re-direction of guidance (hawkish vs dovish) - Wrong. 

Last 2 BoJs - Wrong.

Even the Brexit outcome - Wrong. 

And the saddest forecast I think will be wrong - Trump will not be president. 

And while we are on wrong ‘uns -

China to kill the global economy in 2015 - Wrong. 

Greece to kill Europe - Wrong.

Deutsche Bank to sink Europe - Wrong.

Italian Banks (a perennial weed in the garden of economic disaster) to screw Europe - Wrong. 

Emerging market debt to screw the world - Wrong. 

Oil related High Yield to screw US markets - Wrong.

US stock markets collapse due to earnings - Wrong (new highs). 

Ukraine, remember Ukraine? No? Neither does the market.

Okokokok.. so maybe some of them WILL be right, one day, but if you count up the amount lost by 'five minute macro' on all of the above, you have to be in awe of their earning power to subsidise those losses. 

So why have they all been wrong? Basically for a couple of reasons

First reason - The power of negative interest rates has twisted economic behavior in ways that the textbooks couldn't predict. Putting a minus sign in the equations doesn't mean that behaviour does what you think. Elasticity and substitution, the two biggest Econ 1.0.1. fudge-factors, have had to be employed dramatically to explain why things aren't doing what they should do. The numbers head into another dimension, much as i, the square root of -1, invokes in maths. In economics, we head off in a direction that economists really aren't very good at predicting which is the ....

Second reason. Politics. When folk get annoyed enough about their standard of life they bypass economics and instead change the governing rules. If you change the rules of how business is done it can swamp any monetary inputs. Rich mill owner? Monetary economics really don't matter much if your workers put you in prison, steal half of your mill and smash up the rest. Political change is happening faster than anything monetary policy will be able to control. Rules will change and the allocation of wealth is not far from being decided by vote rather than the evolution of business. 

Economists are rubbish at predicting the rule changes. Even if they all think they should set the rules, 

And finally, as for the whole idea of printing money, it's amazing what you can do with a printing press. Caxton (the printer) should be given a posthumous Nobel prize for peace, economics (yeah, I  know technically there isn’t one) and physics for overcoming the first law of thermodynamics by proving perpetual motion can actually exist. Even if it is by monetarist example. 

. 

The Turkey Quiz

If you were a British tourist about to go on holiday to Turkey would you

- Go anyway, you owe it to the kids and the beaches should be less busy.
- Don’t go and blame Brexit as GBP/TRY is still lower than it was before Brexit.
- Tell all your friends you are going to Turkey but actually go to Greece.
- Pack camouflage towels.
- Still be paying €3 for a tiny coffee on the seafront.

If you were Jean-Claude Juncker would you be

- Expressing concern over the turn of events in Turkey
- Making sure that a meeting was scheduled for the Commission deputies to table a feasibility study into a further meeting for the Commission in 2020 to discuss the potential impact of the recent events in Turkey.
- Examining the latest terms from Mr. Erdogan with respect to limiting the flow of refugees through Turkey.
- Hoping that nothing blows up in Turkey until August 1st, when you will happily be away for a month somewhere in the South of France.
- Threatening Turkey with non-membership of the EU if they don’t comply with the EU directive on effecting autocratic states.
- Taking keen notes as Erdogan seems to have nailed the transition from democracy to autocracy that you've been so yearning for. Genius.

If you were Frau Merkel would you

- Be staying very very quiet.
- Threaten Turkey with no EU membership if it reintroduces capital punishment, even though you made it clear to the British during Brexit that Turkish EU membership would never happen so please don’t consider it as an issue.
- Be secretly hoping that Turkey opens the flood gates to immigrants because despite the populace's protests, immigration may be the answer to Germany's demographic problem.
- Be building another wall. But this time around the whole country.

If you were a Human Resources consultant would you be

- Wishing you'd got that Turkish contract.
- Wishing you'd got that Turkish contract.
- Wishing you'd got that Turkish contract.
- Arrrgghhhhhhhhhhhhh!

If you were a cafe owner in Bodrum would you

- Reprice all your menus down because the fall in tourism means you need to attract more customers.
- Borrow from Greek economics and double your prices because to make the same money from half the customers you need to.
- Reprice your menus up due to the inflationary effect of a falling Lira
- Continue to charge in Euros as you always have. A small coffee remaining resolutely at €3, because that’s just the way of the world.

If you were the Governor of the Greek island of Kos would you

- Start an import business taking advantage of the falling prices 2.5 miles away in Turkey.
- Sound the alarm as 14 Turkish naval vessels bore down on your island
- Call your cousin in Athens and ask him for the market price on the 14 second-hand naval vessels that have just surrendered to you and are cluttering up your harbour restricting your import business.
- Pack your bags and head for your mother’s place in the Pindus mountains as you are far too close for comfort.

If you were Mr. Obama would you

- Be on the Bat-Phone to Mr. Erdogan personally offering him your every support, including water cannon if he was short of them.
- Be expressing your utmost support for those who support democracy, but not mentioning any names in case you are held to them.
- Be reclassifying one building in Pennsylvania, containing a certain person, as Turkish territory but restricting all access to it?
- Hoping it all goes to hell in a hand basket but not until you hand over the reins to the next poor mug incumbent. By God, both of them deserve it.
- Threatening to expel Turkey from NATO

If you were Mr. Putin would you be

- Praying for Turkey to be expelled from NATO
- Expressing your wish for stability in the region and the continuation of democracy in the country.
- Working out how the changes in Turkey would affect your humanitarian work in Syria
- Skyping your new best friend in Ankara.
- Google map searching suitable sites for your next mega-villas on the Datca peninsular.
- Falling about laughing, whilst pressing the GO button on your ‘Turkey 5 year plan’ control panel.

If you were a US investor in the stock markets would you

- Be concerned over earnings data about to unfold over the next few weeks.
- Be watching the Trump circus and wondering if it will effect Fed policy
- Be looking at the trend lines and buying more.
- Have forgotten every reason you had for not buying stocks when they were 20% cheaper.
- Be 25yrs old and never needing a job as this day trading, long only, is easy.
- Be asking what all this Turkey nonsense is about when it isn’t even November.

Turkey. Markets think it’s all over. It certainly is not.

The way the markets have opened up after the weekend you’d think the Turkish event hadn’t occurred. DM equity futures have unwound all the Turkey move and USD/TRY has moved back from the 3.0400 spike to 2.9600, a level it was trading at in May.

Pieces I have read from US commentators definitely carry a ‘Move along please, nothing to see here’ tone and I don’t understand why. Is it because everything really is back to normal? Or is it because it is so far away from the US and US-centric things that it is considered a 3rd rate emerging market that really can’t impact on US things? I first noticed this tone during the coup itself with the Head of Strategy at Charles Schwab saying the whole event was a fade as it wasn’t a global issue. This was said before it was known what the outcome would be and it stunned me. Was a senior US investment strategist unaware or dismissive of the importance of the stability in Turkey to maintaining stability around so many global issues? Is this lack of understanding reflected in the behavior of the bulk of US investors? Wow. How worrying, but then also; wow, this is a huge opportunity to be ahead of them in the markets.

But we know the outcome now. The coup failed and it is no surprise. It looks like one of the world’s worst organized coups and the result of it has been a dramatic increase in Erdogan’s power.

This is not a return to how the world was on Friday morning. There has been a dramatic shift in power in the Middle East and I feel a realignment of allegiances in Turkey. Already Erdogan’s rhetoric towards the US and Europe has changed leaving one wondering how other (Russian) influences are gaining a foothold in the country. This is a NATO country so there is only so far one could imagine that going, but the situation is still of concern. The US reaction to the coup needs close examination and silences will be as telling as words. The US have Gulen and Turkey has Incerlik.

As for Turkey itself, the deputy PM, Simsek ,may well have had his longest phone call today spending 2:15hrs talking to investors to placate them. It seems to have worked with what I have read so far tonight from sell-side banks reflecting that message. ‘It’s over, fade it”. No. Think of it more simply than that. You were invested in Turkey thinking that it was a nice general EM recovery and yield play in line with the general mood. Or you were thinking of a long term investment in infrastructure there. Would you be as happy to do so now as you were last week? To the ADHD short-term traders, it may be easy to pack up your trading bags and move on, but this is a slow burner.

If you get notes from your sell-side counterparts telling you that Turkey is not an issue and that everything is as wonderful as it was on Friday morning, if not better, use them to light your barbecue.

I have bought USD/TRY at 2.9600 and am still short of DM equities. I have even added to my US equity shorts on this bounce as it appears that the US markets don’t get it as much as I feel they should. If you wish to accuse me of taking my book then go ahead. I am hardly likely to be positioned one way and think the other. That would be plain stupid.

Erdoganised Putinisation.

Turkish coup - Thoughts so far.

I'm going to write this on the fly as I really don't know what is going on in Turkey, beyond an attempted military coup. There are probably plenty of facts and figures out there that make the following look naive. So be it, they are just my own thoughts. I have not conducted research and apologise to anyone with greater knowledge for the lack of my own.

Turkey has a strong history of being run by military juntas so this is not like a military coup occurring in a main stream western democracy. I first visited Turkey when it was under military control in 1980. I was a teenager and nearly got shot because I misinterpreted my mother's instructions to be "back on the boat by midnight because of curfew" as her just wanting us back. No, there was a curfew with frightening, shaven-headed, boilersuit wearing, AK47 toting, giants wandering around. As I found out.

Nowadays Turkey is much more Westernised but we must not forget its roots. It is a melting pot of East and West and has, over the last few years become the overlapping bit in the middle of the world's geopolitical Venn Diagram. Syria, ISIS, Russia, US, Greece, EU , Iran and Energy all meet there. The country has long had the possibility of being the next global battlefield as it has already become the world's political chess board.

Just read the history of Constantinople to wonder how it has managed to stay so stable for the last 70 years.

We have a coup against a leader who has become increasingly autocratic. He has been sponsored by the US militarily and the country is a member of NATO. This is the fourth military coup in Turkey since the country joined in 1952, the other's being in 1960, 1971 and 1980 (when I was there).

We don't know whether the coup will be successful yet, the worst possible outcome would be a civil war with Erdogan going 'Assad'. This is unlikely due to the level of US and EU interest, but Russia is the other key local player and having had a jet of their's shot down, they would probably be happy to assist Erdogan's downfall. God forbid any Spetznaz are spotted in the coup.

I would suggest the most important question is who is supporting who. Worst case scenario would be Russian backing on one side and the US on the other.

Better scenarios would be:

- No external support and all domestic, though it is unlikely that anyone would try a coup without first getting their international ducks in a row, the military have normally held the position of supporting a secular state.
.
- The coup is backed by an international consortium representing broad interests. I see that Kerry happens to be in Moscow at the moment and is wishing for 'continuity' in the country. That doesn't differentiate between Presidential continuity or overseas alliance continuity. there is even the small chance that Russia and US are making up by getting together to topple Erdogan. Low probability but this is all just guesswork from me. Interesting that France closed its consulate two days before the coup.

Kurds. If things aren't complicated enough the Kurdish situation has me wondering which I the worst outcome for the Kurds. A militarily driven government where the military leaders have spent their whole lives fighting the Kurds, or a leader who likes to squash uprising like flies. Rock and a hard place.

ISIS - The back door to Syria has allegedly been open for years and terror groups have effectively been holding Turkey hostage to keep them open. This brief from Aimen Dean outlined it 18mths ago. http://www.bbc.co.uk/programmes/b04wwqcp The recent bombing of Istanbul airport would suggest that the equilibrium has tipped and the threat to the south-west tourist resorts would be growing. Perhaps the military sees this rise and feels not enough is being done to stop it. Indeed there were accusations from the Russians that the President's family has been aiding and abetting the Syrian oil black exports.

The coup is hardly a people's uprising against an undemocratic leader as military juntas are notably less democratic, But it depends on what the military coup next produces. If it just plans to topple Erdogan and then hold new elections without him or his family on the bill then this could be a good outcome.

But my overriding fear is that, as Turkey is such a tinderbox where everything meets, the risk for something going badly wrong is great. This coup is like defusing a bomb, a bomb with lots of multicoloured wires and lots of people trying to cut them.

My knowledge is not great, most of this is pure guesswork but from where I sit this is much scarier than Brexit, which in comparison will be like waving off guests after a jolly dinner party.

I normally counter extremes of mood with a tendency to favour mean reversion, but in this case, I will own up to being very worried.


00.25 BST - Hearing that the coup looks like failing. In which case add the outcome option of Erdogan seizing complete control over the military and becoming even more authoritarian. This would just accelerate the process to the next round of unrest. Ergodanised Putinisation.

Carney's Song

Carney sings The Stranglers.



Hold'em down, that's all I've done
Change a rate? You're having a laugh son,
Think they'll go tight?
Nope, you're not right.
Never a frown, just hold’em down

Every time just like the last
Hint I’ll move rates. Just having a blast
You think I will cut?
They’re stuck in a rut.
Never a frown, just hold’em down

Hold’em down, I’m a temptress
Through the ages, I tried my best
Rates, not to sway
Unchanged on the day.
Never a frown, just hold’em down

Next time around
Just hold’em down
Next time around
Just hold’em down

[repeat until retirement]

Fifth wave or sweet sixteenth and sell?

Another goal for the Polemic FCBE 'Fade CB expectation’ trading model. I feel very sorry for Carney’s kids who must be so confused in late December to find the presents they were strongly hinted to get may not turn up until January. How old are his kids? Maybe they’ve never seen a Christmas present at all, though they have often been mentioned as imminent. 

THE BoE vote to hold rates steady came in at 8-1 which wasn’t exactly a close run thing so I do wonder how the market got it so wrong. But that didn’t stop sell side analysts immediately chuffing out reems on why it was a ‘hold’ despite swearing blind it would be a cut an hour earlier. I should have taken this as a clue that self-doubt is not part of the behavioural makeup of the protagonists because my first thought was that if I had screwed up the BoE forecast so badly shouldn’t I question my ability to forecast other central bank actions? This lead me to believe that the BoE inaction that led to GBP rocketing and FTSE falling (double whammy from interest rates and GBP moves), would lead to a questioning of the current complacent maxed out belief that central banks are going to print until we have hyperinflation. So I sold some US stocks. It was like micturating into a hurricane.  

But many of the reasons for the belief in the need to cut rates and stimulate are less acute than they were mid-Brexit panic. The UK markets have not melted, the BoE have not had to do emergency anythings, Osborne didn't have to present an emergency budget, UK stocks are fine and the mighty pound is less unmighty than it was last week. 

Meanwhile, expectations of BoJ action are hot, scorchingly hot. But then so is the BoJ's ability to disappoint. The Fed targets many things and most of those are sentiment and most of that  rhymes with ‘Rock Rices’ and those are at record highs. Surely the pressure for them to stay accommodative is waning fast, so why the mad onrush of stock buying? "Because it's going up ‘innit”. 

There is more to it than that. There has been a massive sentiment change. There has been a throwing in of the towel from the bear camp with ex-permabears wandering around picking up reasons to buy like used cigarette butts from the street, or more like spliff roaches as they may well be toking on the tail ends of a high. But when people only just latch on to the reasons they should have been buying 20% lower it normally means one of two things 

1- The fifth wave (Elliot chart theory). The euphoria one, the irrational exuberance one. The FOMO rally. The 'load the boat' and 'mortgage the kids' rally. Indeed the analogies to 1998/9 have already appeared. I am hearing some ghastly reasons to buy but I haven’t seen the TDI (Taxi Driver Index) being triggered yet. With bonds, equities and commodities rallying one could say that the only thing actually moving is cash. Cash has fallen in value against everything. Now this fits nicely with the belief that money is going to be printed and could be the first signs that monetary policy is truly and utterly broken and we all need to buy gold, which is also going up. The fifth wave should be detectable by record leverage being employed but at the moment it still only feels like stop losses on long cash positions. 

2- It’s a towel chucking blow off. The shorts and cash positions being stopped out and the sudden deafening silence from the peloton of disasters that we're normally subjected to has me thinking something mighty nasty is going to creep up on us. 

Volatility is pretty cheap at the moment in stocks and it may well be worth buying straddles in SPX. No, not just buying VIX, we want direction too. But for my pennyworth, I’m going to short stocks on the belief that CB euphoria is going to wane and something, something.. is going to upset things. By the way, What happened to China? Wasn’t it meant to have vanished up its own economic fundament by now? 

Now, lastly, I am going to unveil my secret weapon. Under this dust sheet is, not a planet busting laser, but the mighty 16th of July indicator. Every year I trot this out and sometimes it works and sometimes it doesn't but it used to work very well in the heady days of the massive late 90s bull run and fairly well since. Tthe July 16th/18th  period used to mark turns in trends. As to why, I have no idea, but option expiries and US Humphrey-Hawkins Testimonials have all been cited. 

"Sell into strength," they say. Well, it hasn’t been much strengthier for ages. They also say "never sell a new high". Hmmmmm.

Markets. Where physics meets psychology

I wish I was clever enough to work out the real detail in things I have hunches upon. Or rich enough to have a retinue of turtles, as Lord Brown did at BP, or Richard Branson, to throw ideas at and for them to work out if it would actually work financially or physically. It would save me a lot of time. Perhaps that’s what crowd-funding is all about. You have an idea, post it on a crowd -funding site, everyone votes by throwing their money at you, you then spend it until it's all gone and if, as a passing coincidence you happened to make something that worked then it was proof that it worked and if you didn’t it was proof of the greater fool theory, where you were not the greatest fool. A poor man's version is twitter, where every now and again you can throw 140 characters out there and see what happens. 

I have a mind that likes to see everything in visual representations, it was always a struggle for me to cope with maths once I couldn’t visualise the mathematical world as a rolling landscape of curves and lines. I would cope with multidimensional maths by picturing series of slices of lower dimensional representations, but basically, if I couldn’t picture it I slowed right down in a morass of squiggly greek things. It has been the same for markets. I visualise a seething firmament of probability curves and prices, as multidimensional as my feeble brain can manage, yet nothing as powerful as the algorithmic chips buried in correlation models, but it has sufficed. 

This vision is something that I have tried to drum into my children. Nothing is certain and every decision you make will have been formed from a summation of all of your experience, to derive a probability curve on which to make your decision. There’s a car coming down the road. It looks miles away and a second later it still looks miles away. Therefore it is most likely not to be moving very fast so you have a high probability of not being killed if you cross the road. Though do watch out for the Tesla on auto-drive, with no lights on, coming the other way. Smaller probability, but there none the less. A infintesimal probability if you were to ask Tesla. 

So, markets are a hotch-potch of probability curves all zapping around and interacting with each other influencing the things we see that are called prices. A Brownian motion where the cloud of probability is the air molecules and the price is the lycopodium powder. My point is that the market analogies to physics are copious, yet the inputs are psychological. Perhaps it does make sense because at their very core both physics and psychology are built on probability curves. A particle is only a waveform of probability as is our decision-making process. 

I am going to digress a little here to touch upon another long-held hunch that if we are looking for quantum computing then we should look further than our own brains. A hum of probability clouds kicking up abilities that really shouldn’t be possible. Behaviour and physics. But this leads to a paradox hunch of mine that we will never be able to work out how we work because we can never be cleverer than the system that makes us clever. 

But back to the physics of behaviour and the hunch that I threw into twitter. It was this 

It's a damped oscillation and very mathematical it is too. But for me, it represents price actions after news events, political responses to emotional issues and media responses to just about everything (Brexit is covered by all three). 

I had a nice reply back from a follower (@financeinottawa) who noted it looked exactly like a Cauchy distribution, which had me thinking back to the Witch of Agnesi, which preceded Cauchy but none the less produced a nice swooping line I could visualise (Wiki it, There’s a nice gif that draws it).  I am now on the lookout for Witches of Agnesi in market patterns, much as a new breed of nutter is looking for Poke’things in the fast lanes of the motorways as they test the behavioural response of drivers and the theories I expanded to my kids about crossing roads. Nintendo is doing nothing more than accelerating gene selection. Genes - more physics and behavioural overlap. 

How the heck do animals inherit behaviour? Wilderbeast know how to run from birth and humans are able to believe, from birth, that they are cleverer than all other humans. I know this because I had an online chat with an old non-markets friend asking about binary FX options. That always sets off alarm bells. Much as Homer Simpson walking into the room holding a lump of glowing plutonium asking if it would be a good way to warm the baby would. "Just put it down and run away". Some firm was trying to sell him short time frame binary options, which MUST be a sure-fire way to lose money because why else would a spivvy firm be spinning them to him? I am amazed at the disconnect between regulated bank behaviour and bookies. The regulators should make up their minds. If banks are really just casino’s then let them be run as casinos. If not then put casino’s, sorry spread betting firms, under the same regulations as banks. But they are. No, they are NOT. Once you have tried to have a triple A sovereign wealth fund cleared through a bank’s credit and compliance department and seen it take 3 months and even then with no trades allowed that could be considered leveraged (such as selling options even if they had bought them already from another bank) then you’ll appreciate that your friend being allowed to punt 5 minute binary FX options after putting his grandmother's passport details into an online account, is NOT the same thing. 

Unlike this which is obviously exactly the same thing. 

It is both the tracks left from subatomic particle collisions in a magnetic field and the price action of my friend's 5 minute binary FX option portfolio. 

Brexit bounce, nuclear CBs and new highs.

The Brexit trade is suffering a reversal. GBP is motoring higher, as is the FTSE 250. The FTSE250 is significant as once the FTSE100 stopped tanking and reversed to ‘not since the last time’ highs, it was rightly pointed out that the FTSE100 is loaded with non-UK producers of global stuff, that happen to be listed in the UK, so naturally any percentage fall in GBP fall should be matched by similar rallies in said companies when expressed in their listed currency of GBP. Thus the FTSE250 became the 'bearometer' of Brexit for many commentators.

With that in mind it really should be noted that the FTSE250 is back to pre-Brexit ranges. Asking what that is in USD terms should be discounted as the lack of currency effect was being cited as a reason why FTSE250 should be watched in the first place.

Now it’s at this point that I start 'umming and erring' as I have two opposing thought processes.

Whilst I am fully onboard for a Brexit squeeze as expectations are so extreme with respect to GBP, BoE and UK Corporate doom, I am concerned that the back fitting story of new Prime Minister May as a softer Brexiter than Leadsom troubling. Brexit is Brexit. The only debate I can see is if the UK takes the EEA route or goes out alone. The idea that Brexit won't occur under May is absurd and, as with the belief that a load of lawyers can upset the process, a part of Kubler-Ross model which sums up the Brexit circe

Denial and frustration are still rife. I, however, am trying to work up the recovery side of the curve and it would appear that I am not alone in the ‘let’s get on with it’ camp. I am impressed at the speed with which Osborne has started peddling UK Inc in the US and  Sajid Javid’s trip to India. However we do need a dose of reality over the likelihood of positive outcome from that India trip. The EU has been negotiating a trade deal since 2007. I was wondering if the UK could pip them to a deal from a standing start but I was educated last night by twitter friend 'Brahman @_Financeguy' whose tweets I aggregate here -

"India won't agree FTA without free movement of IT personnel. EU negotiations stalled on UK objections to that. India also seeking equivalence in recognition of professional qualifications - law, medicine under Mode 1 with rights of Indian qualified professionals to practice freely in the EU (for these purposes the UK) . U.K. resisting this too. India also seeking recognition of its data protection regime as equivalent to that if the EU for privacy etc. India also seeking recognition of its IPR (eg for pharma ethical drugs and generics) as equivalent to EU & lastly India seeks recognition of its whisky as equivalent. All these resisted by UK on its own or with one or two others. Point is that ex-UK India-EU deal more likely with India competing with UK to supply some services to EU market”

So don’t expect anything soon. That bit about the whisky equivalents really surprised me. I  wonder what would happen if India insisted their wine be ranked equivalent to France’s finest left bank Bordeaux.

Japan - The gloves are off and it’s blindingly obvious that Abe is about to throw the whole quiver of arrows at stimulating the economy. Nikkei has responded as expected but USDJPY is still not really that far off its lows. Though I have bought Nikkei, JPY hedged, I am a bit concerned that its SO obvious 5 minute macro have piled in and there is room for disappointment. Isn’t there always with Japan? So I am cautiously long the Abe trade.

The most obvious effect I am seeing in the market is that of central bank response. The reason that most market have taken off is due to a massive verbal response by central banks to the Brexit event. But there is a timing issue here. The verbal intervention is instant yet the effects it is meant to counter have not yet been seen. The effects may indeed never appear because of eh verbal intervention but there is a strong chance that the global economy drifts along as before and the market expectation for extreme CB accommodative policy will fade as data such as the NFPs continues to surprise.

Now here is a something. The Citi US surprise indicator is pretty much at zero. BUT some are surprised at no surprise being the highest surprise since the last time there was no surprise. Which is a surprise to me.

How am I trading this? I have cut my long FTSE250 this morning but I am still running long GBP and have actually shorted some FTSE100 ( stops above recent highs). If it rallied on GBP’s fall then it should suffer in reverse. Indeed it massively underperformed yesterday but I have a feeling that whilst positionally the currency part of the Brexit trade has further to unwind, the equity part has already to a great extent and so will be more susceptible to a first rollover should the May effect fade.

Meanwhile, in ‘Oooh I forgot all about that' land, oil has been drifting lower and just for fun I have put on some trades looking for $50 again. Oil hardly trades on fundamentals within a $10 range, the rest is speculative, so in a mood of new highs in so many asset classes oil may well do the same.

With bonds and equities all pushing highs we could summarise everything simply as long cash positions being stopped out.