ISIS Attacks Short Volatility Positions

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

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

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

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

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

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

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

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

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

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

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

Two-Speed Regulatory World

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

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

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

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

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

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

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

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

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

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

20 Stages of a World Cup Market

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regulation Killed the Forex Star.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

——

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

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

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

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

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

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

Young's Modulus of Macro Managers

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

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

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

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

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

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

Ukraine Quiz

It's a bank holiday here in the UK so time for some questioning on Ukraine. Some lighthearted and some not.

Where is the Ukraine?

- Southwest of Russia bordering the Black Sea and rest of Europe.
- The west is in Europe and the east is in Russia.
- It's a town in mid-west USA.
- Up shit creek without a paddle.

Does the Ukraine situation matter to the global markets? 

- Ukraine does matter - Prices are being held back even though at highs so if resolved will fly higher.
- Ukraine does matter - But Western policy will be enough to deter any further Russian actions so prices are marked neutral.
- Ukraine doesn't matter - So no market impact.
- Ukraine may matter or not, but even if it does matter we've seen all bad news result in higher prices anyway over the last few years and Ukriane has nothing on CB policy impacts so back to Fed watching.

Is Putin -

- A man resurrecting Russian glory that has been castrated by the west.
- Just cunningly using the provoked Western sanctions to smokescreen a failed domestic economic policy.
- Doing a "North Korea" and using military scaremongery to negotiate better terms for Russia elsewhere.
- Really truly only just working for the best interests of his countryfolk in Ukraine.
- Dr. Evil.
- All of the above.

Is the West -

- Convinced that sanctions will win the game.
- Prepared to use military force if it doesn't.
- Of one voice.
- Of one intent.
- A diaspora of individual interests incapable of coordinated action beyond the vague, platitudious and marginally ineffective.
- The X-men.

If you were brokering a land deal between Ukraine and Russia would you -

- Uphold historic political boundaries though only go back to the 1950s.
- Uphold historic political boundaries going further back and invoke Mongol hoards.
- Offer Crimea and some Eastern Ukrainian towns to Russia conditional upon them also taking back Chernobyl.
- Suggest a good marriage councillor.

- Have it decided in a 3 year running Saturday TV talent show hosted by Simon Cowell and make a fortune on the phone vote charges. 

If you were voting at the upcoming Ukrainian presidential elections would you vote for - 

- The boxer fellow though he says he won't stand.
- Julia - she's fit.
- Von Rompuy.
- Obama.
- Farrage.
- Whatever the only box on the vote slip says (usually 'Mr Putin').
- I dunno it's all too confusing.

If you owned a successful company in the Ukraine would you -

- Be glad of a falling exchange rate as it's making your exports more competitive.
- Pack up all your assets into containers and set sail down the Dnieper in the middle of the night for Bulgaria.
- Laugh at the west freezing $100m at JPMorgan of your $7 bio wealth.
- Hoist a Russian flag.

If you have a holiday river cruise on the Dnieper booked do you -

- Cancel it.
- Go anyway, it can't be that bad and anyway the exchange rate is making it cheaper.
- Take some pepper spray just in case.
- Camouflage up as you are actually a part of a GRU special force planning an infiltration raid on Kiev.

Which, if any, do you dispose of when found in your sock drawer -

- A signed photo of the time you were awarded an honour by Mr Putin.
- A letter you had penned but not sent to the Times  praising Putin for his Westernification of Russia.
- A wad of 2bio Rubles that a 'friend " had asked you to look after.
- The tickets to meet your internet bride in her home town of Donetsk
- The spare phone you reserved for slagging off Russian policy to your mate Edward Snowden.

if Ukraine were a fish what type of fish would it be (hat tip to social media style questionnaires) -

- A pilot fish.
- A lamprey.
- A puffer fish.
- A kipper.
- Nemo.

If Ukraine were a tea towel what type of tea towel would it be -

- A nice new blue and yellow striped one.
- A blue and yellow one with red stains.
- A red one marked "return to manufacturers for cleaning".
- A picture of an idyllic village printed on material so thin you can see through it.


And finally - If Ukraine were an enzyme which type of an enzyme would it be -

- Ethanukraniase - Breaks down Ukrainians in the presence of alcohol.
- Ukraniase - Breaks itself down in the presence of Russians.
- Euroase - Breaks down European union in the presence of decisions.
- Putinase - Breaks down Russian resolve in the presence of sanctions.
- Oscarpistoriase - Just breaks down.

Carry Creep and Risk Reversals

One of the characteristics of carry trades which extends through to many emerging markets and even the quiet function of equity markets (never sell a quiet market) is their tendency towards "carry creep". In absence of all other information prices will generally creep on up as the carry benefit of either interest rate differentials or dividend payments makes them continually more beneficial to own than the alternative. But the question is always how far can price go up before it outweighs the carry advantage.

With respect to equities, yields fall with price rises to naturally stabilise the price rallies around some sort of equilibrium - unless the function of future expectations swamps yield differentials and we head of into another reasoning that ends up as it happens with the same price action.

But with FX the interest yield differential is maintained no matter what the entry price is. The self levelling function then is dependant upon a more complex route of the secondary damage of runaway FX rates to core economies which has a natural lag involved. That lag is when things start to heat up and a prime example is the Aussie Dollar where yields were being driven by high rates maintained to control an economy booming on the back of mining during the commodity boom. It led to the central bank wanting FX rates lower but the currency only really fell once the China slowdown hit future mining outlook and the risk of holding the carry was felt to be greater than the benefit. At which point the carry trades started to unwind as price volatility vs return thresholds were tripped.

But in general without any other external inputs FX will be subjected to carry creep before an exogenous shock trips prices dramatically lower with carry unwinds accelerating the pace. So though the total price rise as money goes in will, all else being equal, equal the price fall coming out, the pace will be very different. And hence we get our classic sawtooth price action.

But how do we play a sawtooth? If there is, for example, an 80% chance of making 2.5% on the up creep but a 20% chance of losing 10% on the down fall then the game looks pretty flat. But things might be different if you use options to take advantage of speed differentials and the use of risk reversals has always been a conceptual favourite of mine when it comes to trading carry creep. With the idea being that you pick a shortish period, say a week, and extend the carry creep line that price has been following to the expiry date and sell a call with strike above that line and meanwhile buy a downside put for the same premium you receive. A zero premium risk reversal. This will either hopefully expire within the strikes and not have cost you anything, or in the case of the dump, have smashed through your lower strike leaving you a tidy profit. If it hasn't paid off and price is higher but within strikes at maturity just reset with new higher strikes. Something like this

But there are some naturally self limiting functions that will undermine the benefits. First that you will be pricing against the forward which if the yield is high (why you are going in) will mean that the stretch between call and put strike is already against you and then there is the function that you are probably not the only person to work this trade out and the market is already pricing it away. In equities puts always tend to price over calls and the example is interesting in AUS where a put bias was dramatically present all the way up to the point that some were arguing that as AUS was no longer an emerging currency it didn't deserve to have puts so skewed over calls. As it turned out - it did. But this was more due to its carry component rather than any other EMness (though of course the ability to liken Australia to an EM is often too great for a Brit to resist).

But despite the normally skewed pricing, it could well be flatter than your fears and as an alternative to running carry costs directly against yourself via a cash short, this might be an alternative. It is certainly worth looking at when you have the saw-tooth dilemma worrying you that though the trend may be your friend it might be about to run off with your wife.

Sanctions Through the Ages

As the US announces new sanctions upon Russia let's have a look back at sanctions through the ages.

Thermopylae

Battle of the Catalaunian Plains

The Viking Raids

Rorke's drift

El Alamein

The Death Star

How some hope it will work this time

It's quiet. Too quiet. Time to buy puts.

I know, I normally quote "never sell a quiet market" but this may be too quiet.

Up until now I have been happy to run with the theme that the market is in denial of an up move and price would grind out the bears. As such indeed bad news has been ignored, or rather it has tried to be traded but the response of the market is to keep on its steady course which created the behavioural learning feedback loop of desensitising further bad news. So in effect bears have been ground down and have been emotionally stopped out though prices are pretty unchanged over the past couple of months.

So with markets desensitised and beginning to think that bad news isn't bad because the markets haven't dumped, our risk is that instead of an 'unknown unknown' coming and kicking the markets lower, we are perhaps much more likely to have a 'glaringly obvious, but previously discounted, known' coming back and kicking us in the teeth. Which will be a real double whammy to market psyche as there is perhaps little worse than trying to justify to you superiors why you missed the bleeding obvious. So what will it be?

Well Ukraine has not gone away and is getting worse. The West is threatening to use it's economic deterrent of sanctions that has become their weapon of choice over armies and nukes presumably egged on by their successful implementation over Iran. But will they really be the stick to hit a Russian president who appears to be playing a short decisive game rather than one of longer term siege ( as with Iran) where sanctions have a greater impact. Much like a threat of "I'm going to fine you $10 per week for a long time rather than fine you $1m up front" doesn't have much impact if you are expecting the issue to have been resolved to your benefit within the month.

There is a nagging fear I have that something may well happen this week. Why now? Well Putin is busy playing a shorter game and playing the national hero. If you are playing on past glories then what better day to re-brand in the Russian populace's mind as a day of glory than May Day. So though it is currently camouflaged as Gazprom price rise day, it may involve something else.

If we add that fear to normal May resolutions, a ridiculously low Vol that is beginning to look like low vol complacency (see above), and a NZD that may be showing signals of a general risk off as it has started to move down on nothing, then this punter has decided to load the boat with a ladder of puts in DM equity indices out to 1 month and has even put on some eur/usd one month 1.3600 puts where vol, as Macro Man points out, is at basement levels. But if nothing has become clearer by this time next week will be looking to lift them all.

Banker's Bonuses. Where do Morals Stop and Practicalities Begin?

This last week has seen the subject of banker's bonuses come screaming back to the fore again. First Barclays shareholders registered protest against the decisions of the bank's own remuneration committee but failed to gain a majority to force action. Then came RBS where the ultimate shareholder has voted unanimously with the one vote "I, George Osbourne, declare" that their bonus cap of 100% of salary shall remain in place.

First the Barclays case. Barclays is a public company in as much as it is publicly listed and shares in it can be bought by the public should they wish to do so. Many members of the public do indeed own Barclays shares and have the right to vote as shareholders over issues such as overall renumeration or delegate that responsibility to those they feel better positioned to make those decisions for them in the best interests of the company and therefore themselves as shareholders.

RBS is more a super-public company. It has publicly listed shares that can be bought by the public as well as publicly listed shares which have been bought by the State which is very public money indeed, but this money has not been invested with everyone's blessing. It is this second tranch of share ownership that is causing the problems as unlike the individual shareholder who can express individual free will to sell their investment this tranch is effectively being run by committee which by its nature becomes one of consensus.

Ruling by consensus is not usually a recipe for success when it comes to solving a crisis where strong leadership is more often needed and it is verging on disaster when those making the decisions in the case of RBS are not doing so for the benefit of the bank or the shareholders but for their own political careers. The decision this weekend to reverse previous indications that the government would allow increases to 200% of salary (as they have allowed with Lloyds in which they have a 25% holding) smacks somewhat of political dealing within the coalition as a sop to the Lib-dems and their bank hating Vince Cable.

Nick Clegg commented that - 'A loss-making bank that is basically on the kind of life support system because of the generosity of British taxpayers shouldn’t be dishing out ever larger amounts of money in pay and bonuses and, you know, it needs to continue to come down.’ And a Government official stated ‘Under this Government's long-term economic plan bonuses are down, the banks are recovering and the economy is growing.’

Now did you notice what the Government official did there? Though true facts, the way they were stated delivered an assumptive correlation of "Bonuses are down SO banks are growing and the economy is growing". And this leads us to the value of limiting bonuses and the question that do bank bonuses really make much difference to profits against the deafening roar of the core problems that the likes of RBS are trying to overcome?

Most of the arguments against bank bonuses appear to rest on the moral rather than the pure financial as I can't remember if there has ever been a media piece on the effect of money saved by cutting bank bonuses on the dividend payout per share. Now your author gets a bit autistic when it comes to moral arguments and prefers to ask questions about the importance of the underlying evidence and much more importantly the veracity of the equality applied to any moral cases.

Lets look at some of the arguments being put forward:-

Big bonuses are bad as they engender a widening of inequality in pay - A fine point but if this is the basis of capping bank bonuses why do we very rarely hear of this argument  being applied to other professions - let's say lawyers or accountants or if you want to keep this in the state sector - the pay of senior BBC journalists. Or even the self-made man. This argument is more one of socialist personal beliefs and the easiest solution would be to apply a supertax on everyone earning over a certain amount as this is not banker specific.

But banks are different from other industries as they are deemed too big to fail and so therefore have a hidden subsidy of the "bailout put option" given by the state. They thereby have to adhere to the EU 100% cap. - This has been a bone of contention since the crisis but it is worth noting that not all banks are the same. If this applies to all banks then there is little point in being a small bank that could be allowed to fail yet still pay the premiums of assumed rescue insurance. This will drive the evolution towards fewer big banks that are too big to fail rather than encouraging competition and diversification of bank risk across a wider sector. There is also little point in overseas banks who have never been bailed out, nor needed it (large asian or middle eastern banks) establishing arms in the UK or Europe even if their lending could be locally beneficial.

But banks aren't like other private companies, they provide a public service without which we would all suffer and so they have a duty to provide it and with that comes a duty not to profiteer and over reward themselves for doing so. - And at last here we have the problem at the core of all of this. What is a bank? Is it a social service or is it a private company whose only responsibility is towards its shareholders? Whilst many will say that every company also has a responsibility towards its customers, so therefore an implied social responsibility in this case, it could be suggested that the responsibility towards the customer is only a secondary function of the responsibility to the shareholder as if you lose your customers you lose your business and the shareholders lose their money. Ryan Air is a good  example of profit vs customer responsibility thresholds. Perhaps the banks had done too good a job in the past projecting the caring sharing image of sheep for many to really believe they are sheep forgetting the existence of the wolf beneath wearing the sheeps clothing to the point that there is now a belief that banks have a duty to be sheep. Taking this analogy one stage further, if we kill all the wolves will there be any sheep? For this is the next point raised about bank bonuses -

 Bankers don't need to be paid all that money as there will always be someone else of equal capability willing to be paid less to do the same job. Which raises the question that if that is the case then why hasn't the cut throat efficiency seeking machine of city finance and particularly the large banks with their continual drive to reduce costs not already found this font of cheap labour and utilised it? Having worked in the industry for years I have yet to find that golden institution that pays out one cent more than it has to in order keep a productive member of staff in their seat.


We shouldn't have institutions as important to our society as banks run by people solely motivated by money. It drives moral hazard and focuses on short term gain rather than long term reward. - After a gaffaw of incredulity over banks being run by people that aren't motivated by money, the question is shouldn't that apply to every institution or the whole of society and not just banks? We are back to socialist ideals rather than bank specifics. But back to banks - Whereas a doctor should perhaps be expected to find reward in curing people as well as the pay, or an engineer find a reward in the process of his creation a bank's product is money so someone motivated by something non-money is unlikely to ever want to enter a word solely involved in money. However the point about long term incentives is absolutely right and fair, to the point that the politicians arguing the case should themselves be forced to act for the long term benefit of the country rather than just the next election, but the long term incentives being introduced to replace large instant bonuses are hardly incentives at all. If my experience is anything to go by the deals offered on long term share structures instead of cash bonuses are often severely skewed to the banks benefit. For example, the right to the longer term payout is not only lost on voluntary resignation from the institution but also on redundancy or dismissal which dramatically increases the incentive for a bank to turnover staff faster and lets not forget the chance of clawbacks should someone completely unrelated to your side of the business screw up. The long term incentive is often worthless.

If a bank doesn't make a profit why the heck is it paying any bonuses at all? Basically for the same reason it pays salaries. The argument of no bonuses if no profit could theoretically be extended all the way to "If no profits then no pay at all" and so the company folds as everyone leaves. So if we agree that that example is too extreme then there has to be a point of logical compromise inbetween. But where does this lie and how is it chosen? This is where some delegation of judgement has to be extended and whilst it is morally easy to say that if a company has no profit then it should not pay a bonus one has to look at what you want the company to achieve the following year and who you want around to help you get there. Inherently the company itself is going to have the best view on where it stands against its competitors in the field of remuneration and what it has to pay for any specific post whereas the shareholders will have a more woolly perceived view, so the bias should be to let the company make that decision within its remuneration committee, with perhaps a caveat that the remuneration committee has to be sufficiently distanced from those over whom it is making the decisions. But there is a deeper issue. Earnings are never smooth across an organisation's units. How do you cope with wanting to reward an individual who has regularly contributed hugely to your bottom line when the institution itself has made a loss through other divisional errors? If they take their team elsewhere you will be that amount worse off probably resulting in a bigger loss. There is a strong case for recognising people who prevent even bigger losses. This is the risk RBS is now taking. Talent is leaving and despite cries of good riddance from the peanut galleries it will impact the banks ability to recover from losses. Which brings us back to the problem of RBS. It is caught between having to make a profit to repay the tax payer who bought it and the moral strangleholds that the taxpayer/politician imposes of how it thinks a bank should be run rather than how a bank can be run to survive in an internationally competitive market. The same sort of consensual interpretation of nice verses hard nosed reality can be blamed for the current plight of the UK's Co-op.


One last question back though - does anyone actually know how dreadful most jobs in the City are? Yes there are abysmally poor jobs out there but if you add up the stresses, short life expectancy of a job, hours worked, bullying, abuse etc I am pretty sure that if there wasn't that lure of the lottery ticket pay out the talent and intellect queueing up to get in at the university milk rounds would dry up pretty quickly. Even at the later end of the age scale I know many who if they are clever enough to adapt are leaving the city as the reward vs enjoyment payoff has rapidly changed with both reward and enjoyment dropping hard. But this may actually be the point of it all. There is a huge pool of intellect sucked up each year into the world of finance and if you were to believe that finance is just the oil in the wheels of the rest of the economy then that is intellect that perhaps could and should be better employed in something more productive but this argument could and has lead to tomes being written and is probably a good point to leave this tricky subject.

Gamma Chameleon

With option gamma driving the equity markets I can't get a particular song out of my mind.



You're a trader hedging deltas all the day
If I knew your strikes then I too could play.
But I'm a man (a man) without conviction,
I'm a man (a man) who doesn't know
How to sell (or buy) your contradiction.
I hate your flow, I hate your flow

Gamma gamma gamma gamma gamma chameleon,
You buy then sell, you sell then buy
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Oh the spreads and strikes you'd give away
Added value to the street, I used to say
That your trades (your trades) would show direction
When you bought ( you bought) I'd just go long.
But your flow (your flow) now whips forever.
Strings me along, strings me along.

Gamma gamma gamma gamma gamma chameleon,
You buy then sell, you sell then buy
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Every day is like survival (sur-vi-val),
Where my colleague (my colleague), is now my rival
Every day is like survival (sur-vi-val),
Were my colleague (my colleague), isnow my rival

I'm a man (a man) without conviction,
I'm a man (a man) who doesn't know
How to sell (or buy) your contradiction.
You come and go, your bloody flow.

Gamma gamma gamma gamma gamma chameleon,
Why don't you slow, your evil flow.
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Gamma gamma gamma gamma gamma chameleon,
You lost my love, long time ago.
Profits would be easy if your flow's weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Gamma gamma gamma gamma gamma chameleon,
Hope your books blow, that'd be a show!
Profits would be easy if your flows weren't on my screen
Buy, stop then scream. Sell, stop then scream.

Questions Questions Questions!

Will EU QE be more like US QE or Abenomics or something else?

If it's something else could Euro actually go up on EUQE due to bond portfolio inflows, stimulus to growth stocks or just a credit improvement as rubbish is bought?

If the EU are targeting FX levels and yet they have a projected growing current account surplus is it going to reignite the battle of EUR/CHF where Switzerland are also battling a strong c/a ?

How swiftly will any IMF Ukraine money end up in Putin's back pocket through him squeezing them dry through Gas prices?

Should there be a cut off in how far back historic ethnicity or past land ownership can be realistically considered in current disputes (and should any country that has 100% inheritance tax be allowed them at all) ?

Are the US's warnings to the world on various issues becoming a little thin?

Am I right to be losing faith in all sides of the Ukraine issue?

If Scotland devolves what happens if the occupants of the Scottish Borders decide they want to be part of England? Does it go Crimea?

If independence wishes are fractal, how small can you go yet maintain rights to self determination? Kensington and Chelsea would have gone independent years ago on economic grounds. Remember "Passport to Pimlico"?

Will the BBC's economic editor Robert Peston declare an economic indicator and the level it needs to hit before he will admit the the UK is not a basket case.

Why are the UK's Liberal Democrats given so much relative airtime and assumed to be the 3rd party when they only have 7% popularity.

Is it possible for Nick Clegg or any Lib Demmer to consider that the UK could leave the EU and still do good trade with them (see Norway, Switzerland)?

When will someone declare Bitcoin mining environmentally unfriendly as they realise that the likes of KnCMiner's had a March Electricity bill of $450,000?

If all that electricity ends up as heat should Bitcoin miners instead sell subsidised electric room heaters to the poor in cold countries that are actually small Bitcoin mining computers sending their results back via mobile data?

How much extra CO2 gets breathed into the atmosphere by London Marathon runners and how much more environmentally friendly was I by lying still in the sun?

Why couldn't Samsung have made the Galaxy S5 just that little bit better to make it a no-brainer.

Why don't they fit silencers ( mufflers) to chain saws? Is it a man thing like the audio boost to engine noise in some cars?

Why don't car manufacturers build solar panels into the top of dashboards in cars to keep your battery topped up rather than use them just to melt your Mars Bars.

Is the south coast of Devon in the UK one of the most beautiful places on earth when the sun is shining?

Farm shop economics.

Today's Polemic pain is far away from Ukrainian destabilisation, or biotech dumps or China slowdowns or ECB unconventional actions,  though as some have asked "what is unconventional about implementing a monetary policy that everyone else has done already?" to which my reply is "the Germans accepting it" because that is about as un-German-conventional as it gets. No today's pain is food labelling.

There has been a steady campaign in the UK and probably in every other over regulated, over litigious, overweight and over civil service staffed country in the world to protect the consumer from products that he/she is deemed too bloody stupid to work out is bad for them. Traffic lights, grids of nutritional daily recommended intakes and ratios of long chain organic compounds all grace the packaging to the point I wonder if they are going to follow the example of cigarettes and insist pizza is sold in plain packaging displaying a picture of the grotesque effects of consuming the product. In this case perhaps a picture of a big fat oaf in a dirty tee-shirt and underpants on a burst sofa surrounded by empty pizza boxes with Jeremy Kyle on the TV. So with all this ubercare and love being extended to the logically challenged food shopper how come merry riot is being led in what must be the biggest mislabeling and misselling scam that has hit the streets since Bernie Madoff teamed up with the Wolf of Wall Street to set up a PPI scheme on Libor fixing for student loans? Namely - Farm Shops.

Many moons ago farmers started, quite rightly, to complain about the effective enslavery they were suffering at the hands of the oligopolic supermarkets. The large buyers were crushing the prices they paid through contractual straightjacketing whilst at the same time raising their own prices to effect huge margins. Something had to be done and so we naturally waited for what happens in any other market with large margins to occur- competitors step in to undercut that margin. In this case who is best placed to step in? Why the farmers themselves. It was not long before the UK saw every village high-street planning its own farmers market and any roadside farm with a spare barn set up a farm shop. Here came the revolution at last so off we set to support our local embattled farmers, but no! Something must be wrong? Has the farmer not had enough practice with the pricing gun? For these prices must be wrong! Surely those canny farmers must have passed economics 1.0.1 to get this far? Because surely the simple requirement to undercut your competitors is that your prices are LESS than your competitors? Not twice as much.

Seriously Mr. Farmer, if you want my business and you want my respect and you actually want to be free from the yoke of the supermarkets and you want  to make serious money other than by levying a stupidity tax on the gullible middle classes then just simply charge LESS than your competition. It's simple really and before you mention supermarket buying power and lower costs let me point something out to you. You are the producer. You can get no lower cost of distribution than already having it in your shed. So if you don't want me to tip off all those PPI cold calling misselling legal companies then act now. If the UK FCA can threaten to backdate misselling actions on pension annuity companies all the way back to when Noah bought an annuity that didn't pay out past his 600th birthday as he thought it would, then a simple case of 3 times the going rate for misshapen parsnips should be a snip.

Having dealt with the mispricing scandal let's move on to the mislabelling scandal. The use of the word "Artisan". If there was such an august body, as there should be, as the National Society of Artisans (regulated by the FCA, SEC and the Historical Society with oversight from English Heritage and the National Trust) they would by now have trampled underfoot and bathed in the blood of the "artisan" infidel.

There was an era when coffee came black or white. We coped when that all changed, but then came loaves of bread. We have just about learned to cope with the myriad of additional strange grain ingredients but just when we have and learned to pay the doubled price for the addition of a thimble of a central american cereal of unpronouncable name, they go and stick the word "Artisan" in front of it and double the price again.Is the addition of the word "artisan" really justification for selling the same article in a  misshapen form for twice the price? No it isn't.The term "Artisan" originally referred to a craftsman who made items or decorations, but the term has now been bent to mean anyone who makes anything by hand. By which frame of reference this blog is now artisanal. Note an artisanal blog not artisan blog, otherwise it would be a blog for an artisan, not made by one.

Yet I passed three different establishments today all proclaiming "artisan bread" on their signs. Without a national regulatory authority of artisanship this just means that someone made it. It could have been a kid and it's actually Play-doe or it could have been Raymond Blanc. So the word artisan is completely and totally redundant other than in price, where the purchaser is expected to have his "fxxk me that's expensive" naturally explained away with a "well it's artisan innit". We surely can't be far off the McArtisan burger at which point the counter resets and a new word has to be found as complete debasement has been reached.

Now back to the farm shops. Guess which word  they are already swiftly prefixing with black marker pen onto the labels of  their already uncompetitive produce?  These boys are smart if not artisanal, though a hyphen after the "s" in that word might fix it. So good luck at your local farm shop.

----

I have spotted this sign locally indicating that even our birdlife is being targeted by the artisanal loafers.

You've Been Warned.

Yesterday I was rather hoping for the bears, or perhaps I should say "correctionists" to get Edward the Seconded by a red hot poker rally but this has instead turned into a red hot poker party with said instrument being gleefully applied to everyone in the room - Bull, bear or correctionist - without lube. I touched yesterday on general April behaviour and using the selective view methodology which I also mentioned I can say that this price action still fits. It's sexy whippy and we know it with more loss of control of the ball by each side than an under 7s soccer match.

China data is rattling some cages and this Citi surprise chart that Gavin Davis tweeted yesterday is pretty startling

It does beg the question "Well what the heck did you expect?" to the point that whoever's expectations they were should be totally ignored in future or sacked. But then I have suggested before that China is just like a currency NDF market - There is the offshore market (what we think is going on), the onshore market (what is really going on) punctuated by the odd NDF Fix where the offshore market finds out how wrong it is. China will probably be just fine. In fact that reminds me of one of the best Daily Mash articles "I'll be just fine, says planet" and like that,  maybe China will be just fine but that doesn't mean you will nor that it cares.

But the US is not happy with China and is again warning them over their currency policy. US warns China after renminbi depreciation . We have heard this before and because of that it's market impact is diminished as nothing really came of the last one. Which brings us to the value of warnings in general as warnings are only as good as the threat they carry behind them (as every small child knows). I am pretty sure that there has been an explosion in the issuance of warnings recently which has led me to tap "warns" into Google News to see what pops up and it's staggering.

But a few -

Putin warns Europe of gas shortages over Ukraine debts
U.S. Warns Russia of More Sanctions as G-7 Talks Ukraine Aid
IMF warns on rising debt levels
EU's Juncker warns over UK hopes of EU renegotiation
British economy too reliant on people spending money, warns IMF
Italian navy warns of 'biblical exodus' in Mediterranean
UN warns Burundi leaders on violence
Dimon warns regulation will push credit costs higher
UN warns of Syria food shortage due to looming drought
Malaysia not impervious to external shocks, warns Najib
WTO chief Roberto Azevêdo warns on trade recovery
Cameron warns against Ukip vote
Don't jump red lights, coroner warns cyclists at Bow roundabout lorry death inquest.

The currency of "warning" is seeing greater inflation than that of "Hope" at a US investment bank . Naturally we tend to instantly make a risk decision based on said warning based on the benefit in continuing against the warning, the cost of the alternative and the probability of the alternative. But there are two types of warning - one which points out a downside that the warner is not proactively administering. E.g. "Watch out, there's a tiger behind you" where the detriment is self administered and the type of warning that involves proactive intervention "If you don't stop doing what I don't like I'll hit you".

We can quickly scan through the above warnings and separate them into the two camps but there is a bit of an overlap where avoidance of what is being warned against will benefit the warner. "'Every other cake shop's cakes are poisoned' says cake shop owner". Unfortunately it's this type of warning that completely devalues the currency of warnings and the most obvious current example is in the Scottish independence issue.

But back to the big warnings. The gas one is probably the one that has me going "Oh God, here we go" the most. Yes Russia needs the revenue but then Europe really does need the gas and though both sides are diversifying as fast as possible (Russia just signed new deals to supply China) it's probably going to go to a Mexican stand off. I'm looking at buying more UK gas fracking stock as if for no other reason Putin is helping the UK Governement's stance towards fracking even if its not an immediate solution. On that subject I would have though that an instant response to NIMBYism would be to apply a geographic normal curve over the effected area with energy subsidies applied accordingly, e.g you are right next to a wind turbine you get free energy with subsidies diminishing by distance. In that case I would be a STIMBY (stick it in my back yard).. oh! Does that sound rude?

Right enough rambling I'm off to do my proper job.

Tell 'em like a man.

Even the Fed and the market's expectations and responses are playing to the mean reversion theory. Fed read as hawkish, market therefore extrapolates more for the next meeting then, lo and behold, the Fed de-emphasises the factors that as the market had picked as indicative of future policy and reiterates those that were previously sidelined and we end up with an out of phase pair of sine waves  of Fed and market expectations that in the long run average out to flat.

But "Vicky" Yellen  should get a grasp on what forward guidance involves as unfortunately she may well be employing a common communication error that, as the first female Chair, we have not seen before. Now before anyone accuses me of sexism I would like to explain. As a caring empathetic soul (however not according to Mrs P) I have sometimes found myself in the position of the shoulder that female friends will lean on when their male amores or soon to be ex-amores, are not responding properly to instruction. The converstaion will inevitably culminate with me asking "well did you tell him that" to which the answer is nearly always "not in those words but he should have known". This is the point I take their hands, look them in the eyes and with as much gravitas as I can muster explain a basic fact of life. MEN NEED TO BE TOLD CLEARLY AND PRECISELY IN THE FEWEST NUMBER OF WORDS EXACTLY WHAT YOU WANT THEM TO UNDERSTAND. So, dear lady, if you really do want to dump him, you say "you are dumped and I don't want to see you again" because phrases like " I really don't think this is working" or " I really like you but .. " leave a sliver of hope on which the recipient can hang their own beliefs.

Fed guidance -

So Ms Yellen can you please note that the market is that dumb-arse boyfriend who will always pick out the bits he wants to hear to substantiate personal biases and if you really want to act as a guide you are going to have to be reading from your basic children's Janet and John , not Joyce's Finnegans Wake.

I am wondering if we might be seeing something similar in China to the headline "China Reiterates It Won't Stimulate Economy". But that is conditional "As long as the economic growth rate, employment and other indicators don't slip below our lower limit and inflation doesn't exceed our upper limit, [we'll] focus on restructuring and pushing reforms". So this really sounds like every other central bank around the world including the Fed, who will "do what is necessary if its necessary but not if it is not necessary". Apart from the ECB of course whose mantra is "we will do what is necessary if it is necessary only once we have realised it is necessary which will be far too late to have prevented market panic." The ECB being like that mad Turkish taxi driver who is trying to light 2 cheroots in his mouth whilst leaning over his shoulder jabbering at you doing twice the speed limit on the wrong side of the busy highway oblivious to oncoming swerving traffic yet still somehow manages to get you to your destination in one piece though exceedingly shaken.

Now on to something else. I had been thinking that the UK's RBS was a sure fire winner for the title of "the next British Leyland" but it would appear that the Co-op is making a strong late run that may well see it take the line. I have never been a fan of Lord Myners since his pension management reform plans effectively forced fund managers to switch from equities into bonds at the bottom of the post 2001 equity crash due to his perception of matched liabilities and risk, all post-event of course. But he has my sympathy with his resignation from the Co-op as the disparate consensus style underlying management structure has decided they don't want to be told what to do. Considering the state of the Co-op this conjures up images of village committees arguing over the colour of the doilies in the tea room on the maiden voyage of the Titanic. No wonder Myners has decided to jump than go down with the ship. In fact I am wondering if the underlying management of the Co-op is made up of the occupants of the Hitch Hiker's Guide to the Galaxy's Golgafrincham B-Ark (the one full of telephone sanitisers and hairdressers).

But back to markets - I guess it is make or break day now to see whether the early post-Fed euphoria will be maintained. With that in mind I'm willing to play the direction today sets as the next trend but harbour my bullish longer term views. April often sees bears try and fight the tape and and end up having to chase things higher so it could be pretty mixed. This could well leave the market bereft of new buyers by the start of May which is traditionally the opening of the European freak show. Cue song "There May be trouble ahead" but before that "Let's face the music and dance"

My search yesterday for a sacred cow that has yet to be slaughtered has led me via a tortuous route to the shores of chinese commodity companies. The china news dip overnight is providing an opportunity to get into China against consensus and marrying that against a feeling commodities are going to lift and adding Alcoa's outlook for aluminium prices I may have found my Cow.

As a tabloid headline would say - "China Chrades Chrigger Chalco Chow".

Anorexic tails, beer bellies and a lost cow.

.

First something I am struggling with. Writing "I" instead of "we". As Team Macro Man we decided very early on that we would be "we". It inferred agreement and probably more importantly it implied that there was an august body sitting in reverential committee thrashing out all the pros and con and only delivering the distilled and vetted nuggets of true worth. Which of course was bollocks. Suddenly referring to the "we" in the singular "me" makes me very much aware of a loneliness of opinion and understand the reader's immediate natural assumption that the singular implies no checking, no validity and of course no value. It is perhaps for no better reason that writing in the third person or under a collective makes it easier to express off the wall and out of line opinion. But tempted as I am to adopt such strategy for my own comfort I will not. Yet. But if you find this blog being written by someone termed as "Polemic's therapist" then you can surmise that I may have caved in.

Yesterday was a tad painful at Polemic Towers as your author (see I'm nearly slipping into third person) decided 3 days ago that his cash on the sidelines should be gainfully employed again to usher in the new UK financial tax year. An overweighting to EM has not been enough to counter the short term damage in some of my old favourites, my own sacred cows (A theme Macro Man is running today). But it's early days and compared to the forced liquidation of long/short trades it has been but a flesh wound. But though we (no seriously that is a "we" as in you and me) may have seen many of the market's sacred cows slaughtered over the last couple of months then the unwind of the short Jpy long Nikkei trade is going to be more like the processing of a blue whale on a Japanese factory ship. It has to be the biggest and most comfortable trade that has been languishing on many a macro book and it feels like they have only just started work on the tail of that position leaving me expecting a good old shock and awe 95 handle on Usd/jpy before it's out.

Now talking about tails, it's probably worth looking at investment returns vs risk and expectation this year. I have touched on this before when writing in another place but 2014 is fast beginning to mirror a trait of 2013. That is one of mean reversion. We have had many potential market catalysing blow ups presented to us but after a week or two of predictable panic prices they have all pretty much reverted to where they cam from. UST yields are where they were a few months back, equities too, even emerging markets are OK and knock me down with a feather if the bete noir AUD/USD isn't back within its holding pattern of last summer and at its one year average. Basically Mr Shouty-Screamy has grown horse crying wolf as the markets are leaving the the normal curve Fat-tailers anorexic and mean reversionists with beer bellies. Those tails just ain't happening.

This leaves me wondering where the next reversion will come from, in a way I am looking for the last sacred cow in the field that is making like a tree and to my mind it's hiding somewhere in commodities. But I am late, the moves began at the end of March and it looks as though most of the herd of short commodity trades is already on the way towards hamburgers, being led by the short Aussie equity with short AUD$ trades. Bah..

So basically I'm on a commodity cow hunt and ask, "Where's my cow?".



All help appreciated.

"It's Panic Captain - But not as we know it"

We could consider that what we are seeing is a form of market panic but to paraphrase Dr. McCoy on the USS Enterprise, "It's panic captain, but not as we know it".

The normal anatomy of a panic goes something like this. A price has risen, price becomes news, leverage is employed to extend the gains, an unknown unknown appears to introduce doubt, leverage trades are unwound, prices fall and then price falls shake out even the steadier hands due to money management rules.

This year we have seen plenty of debate as to whether various markets are overbought and though property is the people's choice when it comes to bubbles, in this case we are looking at equities. But as a quick aside I do wonder what happened in popular property commentary between "Property is dead, it has to rally" and "Property is in a bubble it has to fall". Can anyone remember the "Property prices are just right, how wonderful" bit that should logically have occurred somewhere in between?

But back to equities. It has struck me that there has been something very different in this run up in equities to previous ones in that the professional investor circles (and we only need to look at our own dear comments column at Macro Man to detect this) has had a bias towards the belief that equities are generally too rich and so should correct. To the point that retail appear to be mocking the professionals as they lead the markets higher. This, I suspect, has led to a consistent underweight positioning by many professionals that has led to a mix of responses.

First, the indices have tracked higher and general fund performance has under-performed the very visible (and easy to compare against) indices which has pressured funds to invest not so much because they really want to through belief but because the have to in order to remain credible and avoid redemptions in favour of index trackers.

Second, to play catch up, high beta has been sought and as ever that is to be found in the land of the techs, bio or otherwise (remember the more unknown the product the more that dream hype can be built into it).

Third, to incorporate the beta performance yet still maintain an overall sanguine macro view on the markets they have been employing sectoral plays of long high beta and short cyclicals as this "should" partially hedge any overall falls in the general indices that has become the visible performance benchmark (as in in the first point). Going one stage further long DM tech and short EM cyclicals takes things one stage further.

This has all left the long/short equity plays loaded.

Now let's look at what has happened this year so far. We came into January with popular opinion geared towards  DM rallying over EM, a begrudging feeling that equities might still perform ( ref that "begrudging" back to the points above) and a feeling that global growth would continue and apart from a risk that the EM component (that we were selling to fund DM) might cause some general contagion.

By mid January the EM contagion story took hold and we saw the general DM long trade come to a halt, or rather - Pause.

Next Mr Putin decided to don his Napoleon hat which has led to a media frenzy extrapolating that his Crimea adventure will only end once he victoriously enters Napoleon's wedding venue to Josephine in the Orangerie in 3 Rue D'Antin (which may upset any foie gras reception that the current occupants, BNP Paribas, may be throwing there).

Meanwhile, back in homeland USA the Fed stool Yellen has been projecting the image of a UK teenager - to the point that I am wondering if we should call her Vicky Yellen. Her first presser was on a par with this.



However through the "yeah but no but whatever" the message of unabated tapering was clear.

Under normal circumstances one would have expected the above melange of EM, Putin and taperage, seasoned with China slow down and credit fears and general deflation to pull the rug from all things risk. But it hasn't, though many will respond "yet!" I would instead suggest that the resultant panic this time in risk has indeed seen positions dramatically adjusted but that risk adjustment has been where it was piling up in long/short books and DM/EM trades. As has been pointed out in previous posts on Macro Man the rotation in rotation is getting positively gyroscopic in intensity. You only had to open an equity monitor page this morning to see the lack of consistency by sector or country.

 There is indeed panic in the books but it's below the surface of outright equity indices and there will be some more nasty performance figures appearing soon as assumed long/short hedges have been bonfired. Back to TMM's old favourite "If you want a good hedge, go to a garden centre".  However the lack of absolute equity index dump reinforces a view that whilst leverage catch up beta trades are getting hosed the overall market positioning is not monster long and the rule of "path of most positional pain" is indeed playing out but it will not lead to an overall equity melt down.

In fact - playing the path of most pain idea. If markets were to continue upwards what do the stopped out long/short high beta tail chasers do then? That would be a pain in their tails for sure.