Greece's Political Bargaining Chips.

So we have had the EUQE and the Greek Election. There appears to be a huge sense of disappointment from the economic editors of the non-financial media that there hasn’t been a good story of market panic to play in exchange for the huge expenses involved in sending their person with a microphone to stand in front of the Parthenon. Here’s a tip to media cos. - Bluescreen backgrounds are so good nowadays you can keep your journalist in the basement of your cheapest to run building and they can still appear to be wherever they are reporting on.

Robert Peston, the BBC's economic editor, decided to explain the lack of movement by first listing all the things that could/may go wrong and finished by suggesting that believing things will be OK is ‘Naive’. Listen to him here min 37.30 onwards.  It sounds like he's hoping he will have a story in this one day.

And while we are talking about media Europe woes. Remember the Economist front page indicator alert calling for Euro-doom back in October? Let's have a Dax update,

What now? Tsipras is declaring allegiance to staying in Europe and considering debt renegotiation a no brainier. So what makes him think that those who have lent to him are willing to forgo their investments? The old banker saying ‘If you owe me $10,000 it's your problem, if you owe me $100bio it’s my problem’ springs to mind.

But whilst many feel that the main Greek threat is of killing (through default) the overseas debt hostages that it holds, this may not be the strongest card in Tsipras’s negotiating hand. If push really came to shove that debt could be buried in the ECB coffers and QE’d through an accounting fudge. Printing money to replace money that has otherwise vanished outside the EU with a Grexit, can hardly be considered inflationary. It’s more a loan guarantee backed by printed money.

Perhaps the biggest threat Greece can hold over Europe is over who they may 'have to' turn to for financial help in future and these new partners may not be the West’s best friends. I have been trying to dig up commentary on what would happen if Greece did go whole-hog and leave the EU, yet all I can ever find is references to economic outcome and deep delves into what happens to the debt. I am finding it very hard to find anything on potential political threats to Europe's most geographically important south-east border or opinion as to whom Greece may turn to for new allegiance.

It’s probably worth referring to a couple of old stories covering these issues as a reminder that stories of associations between Greece, China and Russia  are nothing new yet seem to have been forgotten in current commentary.

US Mediterranean Powers
http://www.reuters.com/article/2013/01/24/us-mediterranean-powers-idUSBRE90N0F920130124

China eyes Greek gateway to invest in Europe
http://www.seatrade-global.com/news/asia/china-eyes-greek-gateway-to-invest-in-europe.html

However Greece is a member of NATO, so any such future link ups would be frowned upon yet could be used as leverage for compromise.

Greece and NATO: a long lasting relationship The Alternate Minister of National Defence of Greece, Yiannis Ragoussis, tells NATO Review how important NATO is for Greece, as well as about his country’s active membership in NATO
http://www.nato.int/docu/review/2012/turkey-greece/greece-nato-partnership/en/index.htm

(bold highlights are mine)

'In concluding, I would like to underline that Greece’s current difficult financial situation actually contributes to the moral strengthening of its forces which are working harder than ever to maintain high standards and are making sure our people and our country is secure. Also, allow me to stress that Greece contributes positively in creating the appropriate structures and policies for regional security. Last but not least, enhancing security and stability collectively by forming Alliances has deep roots in Greek culture. Ιn ancient Greece, Athens took the initiative to form the first long lasting Alliance, the Delian League which has frequently been described as having many similarities with modern NATO. Greece, due to her geopolitical position and regional role, her active participation in all international organizations, her initiatives, her bilateral forms of cooperation and her explicit political will for peace, plays an important role in supporting the NATO of the 21st century'

This last paragraph highlights Greece's skills in alliance building but it shouldn't be assumed to always refer to building alliances with your friends.

But this FT article from 2012 is worth revisiting
Greece: Moscow’s new naval partner?
http://www.ft.com/cms/s/0/073d1212-71c5-11e1-b853-00144feab49a.html

With this paragraph being of particular interest,

"But as western investors retreat, state-owned Russian and Chinese companies have gone bargain-hunting. Cosco, China’s state-owned shipping company, has already won a 35-year concession to operate the Greek port of Piraeus. Russia’s Gazprom is reportedly eyeing the privatisation of Greek gas company Depa and grid operator Desfa.
A 30- or 50-year deal that provides Russia’s navy with basing rights at Piraeus might one day make sense for both sides. Over time, the deal could bring Greece’s cash-starved government as much as $200bn.
It is impossible for Lucas Papademos and his technocratic government to cut such a deal, in part because Greece’s Nato allies would strongly object. But a future Greek coalition led by the New Democracy party, under enormous populist pressure to raise money and to resist demands from Berlin and Brussels, is another matter."

That last line sounds as though it could now be invoked. If for nothing else but a very strong negotiating weapon.

Finally, let's imagine one more threat that Greece could hold over the EU. They could set up as a financial centre happy to handle the grey money of the world to a point that would make previous ventures in Cyprus look positively schoolboy. Sitting outside the EU they could also sell themselves to financial institutions as environments to operate from free from the growing strains of EU regulation (including bonus caps).   Just a thought....

Three Bells in a Row and Euphoric Highs.

At last we have a full set, the global slot machine has finally hit the three bells in a row jackpot payout. The BoJ, Fed and now ECB have all paid out.

You will have to excuse this doctoring of an old Tenpole Tudor album cover that has been sitting in my collection since the glory days,  but the aghast faces add a little soupçon of market QE commentary.

So what now? To be honest I was surprised at how long Eur/Usd took to make up is mind as to what to do with a dithering around the 1.1550 area until the details started to emerge of the who how and where's of the actions. But now that Eur/usd is on the move it won't be long until the extent of such moves are being quoted in standard deviations. Have you noticed how standard deviations of moves are only ever used to explain losses? Never profits of course as those are down to genius.

In the press conference Draghi was asked about Euro FX rates and his response was that FX rates were not targeted nor part of policy. This should be of absolutely no surprise to anyone as if he were to suggest that FX was an essential policy tool for rebalancing economic imbalances he would immediately be contradicting the logic of the original implementation of a single currency across Europe and effectively the existence of the ECB.

I haven't been through the whole structure of the ECB QE mechanism and there will be much smarter folks than me digging through the complexities.  I am half waiting for one of them to get to the bottom of it all and declare that actually it's all another accounting game dreamt up by the Obfiscators General, once again leading the market on a Euro Keystone Cops chase after the real stimulus.

As it is, we have a cart load of European debt being bought up and the yield curves being played with. Short term rates are unchanged in Europe but Denmark has gone even more negative (-0.35%) and bond yields across Europe are all doing their bit to make cash (as in piles of notes) the most attractive hold by yielding 0.

I have suggested before that with bond yields at zero any equity paying a dividend can be priced up to near infinity and still give better yield, but now with bond and cash in bank yields going negative we can say that an equity doesn't even have to pay a dividend to give a better yield. How strange it would be if we end up with negative dividend equities where holders are charged each year for the pleasure of owning the stock, but I guess that's only what a company doing countless rights issues is actually doing.

So whilst various quarters remark on the equity valuations being at historic stupid highs, with respect to earnings expectations rolling and dividend payouts, on a yield basis they are very good value. Add to that the fact that the market has been fighting every up move and is not monstrously allocated to equities I can still see those babies moving higher. It ain't over 'til the euphoria is at its highest but the market, like a clubber afraid of missing the fun, is only just fumbling in its pocket for the pill.

This of course applies to European equities more than the US, which is just coming down from its own MDMA (Monstrous Debt Monitising Action) induced high. Considering the mood toward Europe expressed by every US commentator from Novemeber to mid-January I would be very surprised if any of them are not longer than 'very short' which suggests there is plenty more Edward the Seconding to be administered to those positions.

Europe looks grim, but I am tending to look at this dip in the European economy as being near a natural low anyway, into which the ECB have now thrown a QE stimulus bomb. Like a homeopathist's argument with a near death patient, if the economy now grows they will claim success, if it dies they will say they were only cleared by the Germans to act too late claiming if they'd been allowed to do it earlier it would have lived.

I know that everything Europe is in focus, but if the emerging markets were bleating like hell that the Fed was cutting off their liquidity a year ago should we be looking at the ECB having provided the replacement? If so then the biggest flows could be coming from EM doing Euro issues instead of Usds which will really crack Eur/usd.

Now oil - I am going to own up to being a bit illogical and ill disciplined here. I own rather a lot of 'oil going up' related stuff now and am looking at this last 2 weeks of stability as a base formation. CTAs have been monstrous short, yet their greatest friend, momentum, is fading. Stimulus in Europe should be better for it than no stimulus and shale co's are shutting down faster than I thought. One other function I am wondering about is the cross hedging by owners of High Yield oily things. A logical hedge would be to sell oil forward against your HY risk. If this has been the case then any rally will see not only the High Yield pick up but also the oil hedges against it get lifted, creating a greater up move (and repeat).  I am hoping, in a not clever trader way, that the damn black stuff goes up again.

Interestingly oil co's are now saying there will be a supply problem further down the road if prices stay low. Which shows up an interesting feature of commodity markets caused by the harmonics of supply and demand along the forward price curve. If they are right then this fall in oil may not be the start of a steady low phase but more the start of oscillations, which if not damped, will cause a Tacoma Narrows bridge price event. 

A Chocolate Based Solution to National Debt

I have just received the most baffling email, which has left me unsure as to how to respond. Is this the latest attempt by some bot (though the address looked genuine) or Nigerian scammer to raise a reply and syphon all my personal data and bank account contents from me, or even a genuine one trying to get their money out as the Nigerian FX market has frozen up. You have to feel a bit sorry for the poor Miss who's uncle really is trying to get $40m out of the country. She must be wondering why the heck no one is accepting her genuine $8m for helping.

I thought hard about publishing the email as it was directed to me but as it is actively asking me to press you, dear readers, to act I feel I am but assisting towards that request.


Dear Polemic,

Perhaps you can urge your readers to write to their elected representatives along the following lines:

People who have made correct predictions in the past, and/or have good BBB ratings, predict that another Great Depression could arise from the popping of our national debt and money printing bubbles. The latter could eventually cause hyper-inflation such as was seen in the early 1920’s Weimar Republic. We must stop printing more money—or we risk starvation, social unrest, and threats to our democratic freedoms.


As for the national debt, I read that due to the drought there is expected to be a shortage of chocolate in the next few years. One of the more sustainable uses of the tropical rainforests is the harvesting of chocolate. If we purchase rainforest land for $75 an acre (we can pass a Constitutional Amendment if need be) and then sell it to chocolate makers for $2,500 an acre (with there being two or three billion acres,) then we can eliminate the current deficits for the next ten years. Perhaps by then the economy’s growth will be enough to cover it.



Best regards, xxxxx xxxxx

Is this just

a) A nice person trying to do their best.
b) Someone trying to jam up the wheels of political administration
c) A nice person who consumes a lot of chocolate.
d) Someone who knows me very, very well and knows that this level of wind up will leave me scratching my head as to its authenticity - if so well done.

If you have any comments, you would like me to relay to the author I will happily pass them on. We may just have time to warn the ECB that QE is not the answer and that a chocolate based solution to the world's financial woes are only a rainforest away.

Swiss i-flation and the absurdities of negative rates.

The Swiss National Bank has managed in one fell swoop to conjure up deflationary pressures beyond the worst fears of the ECB. A 20% currency move in a day has resulted in record withdrawals of Euros from ATMs and mass migrations across the borders to fill up on fuel and empty the shelves of supermarkets during this "20% Off Everything Sale” for Swiss shoppers. There is a teeny positive for Europe in that anywhere 30km from the Swiss border can raise prices and create a bit of Euro inflation due to the massive new demand, but it won’t take long before Swiss retailers drop prices at the next restocking as the goods on their shelves are cheaper to import and basic competition means they have to. At which point all inflation measures in Switzerland go deeply negative.

To balance this the SNB has cut interest rates on sight deposits to -0.75%. Interest rates have been negative at -0.25% for some time, but we have coped with the logic of Swiss negative rates by confining all things Swiss to a little box that works in a parallel universe of finance on different laws of financial physics, where cuckoo clocks, expensive watches, hard cheese and mountain shaped chocolate bars operate in their own airport duty-free shop of unreality.

But a move to -0.75% is hoped to counter the huge deflationary pressures via the effect on FX with regards to negative carry for overseas investors which will weaken CHF and the via the effect on Swiss locals encouraging them to spend money rather than holding it in banks where they are charged for the pleasure.

With regard to FX moves, carry costs are only a detractor if those costs exceed any gains perceived to be coming through underlying price moves. If we assume USD/CHF has a 1% negative carry (note that is 1% over a full year) then they are hardly a consideration when spot prices are flying around by that amount a day, an hour or, as with last week, a fraction of a second. It only becomes a consideration when all other considerations are neutered, hence quiet markets tend towards carry creep.

As for the domestic saver what do negative rates mean to them? At the moment negative yields sit firmly in electronic-money land with paper money immune from holding fees other than the cost of storage and security. In the case of Switzerland we have seen demand for highest denomination notes go up through the roof. The most up to date on the SNB website are for 2013 and one can only assume that since then demand has only increased.

As the SNB themselves have noted  "The high proportion of large denominations indicates that banknotes are used not only as a means of payment but also – to a considerable degree – as a store of value.” .

How could the powers that be detract from this parking of money in cash rather than forcing it to recycle into the economy? Other than introducing unenforceable laws about maximum cash holdings, an alternative is to reduce the supply of bank notes in issue. This could lead, through the arbitrage of holding costs, to bank notes trading at a premium to face. 1010 electronic CHF for a 1000 CHF note sir? If we are to move into extreme absurdum thoughts, other fanciful ideas could include biodegradable notes that decay under your pillow or perhaps a reverse bank note auction on Saturday evenings on prime time TV where random bank note numbers are drawn and those notes cancelled!

But what do we call this new scenario? It's related to the cost of cash itself in money terms rather than other asset terms. It isn't inflation and it isn't deflation. It's off on an axis all of its own where cash is subject to its own inflation, creating all sorts of confusion. So far the only kind of 'flation' it has produced in the real world is imaginary and theoretical rather than observed. Just like the imaginary numbers we learned about at school, perhaps we should call it i-flation.

The whole idea of making money a costly and toxic asset does lead us into a parallel universe of negativity with negative money spawning from negative rates, where money avoidance is the game. Negative pay, you are paid to take food from shops, paid to fill up with fuel, muggers would hold you up at gun point and stuff your pockets full of money and most ironically bankers are made to take the biggest bonuses possible. Basically the name of the game is to keep your bank balance as negative as possible. Which socially would be quite acceptable as the 1% and the 99% immediately find their positions in life reversed. Cheaper than revolution.

--------
* This post has drawn massively from a post I originally wrote on the Macro Man  blog back in 2012 when Euro rates went negative. But it is so topical now it was too apt not to.

Trust Me, I’m a Swiss Central Banker.

One trade structure I have always liked is the peg break trade. I first deployed it in 1997 with the Thai Baht. It is fairly simple and involves the option market pricing smooth curves of probability, thanks to nice models, over realities that are far from such. If I had had the confidence to put it on in EURCHF, or rather a lack in confidence in the Swiss national bank, then It would have looked a bit like this. Sell 1.2000 Eur puts Chf calls and buy twice as many 1.1750 or there about Euro puts choosing the period to make this 1x2 put spread at zero premium. The payoff being zero if no break but if there is to be a break I lose between 1.15 and 1.20 but make on everything below. The theory being that when pegs break they don’t mess around with 500pt moves instead jumping right over the loss zone into profit. This isn’t a bleat about missed trades, but an idea for future application and, more importantly, a lesson in faith.

Hands up. I had complete faith in what I was told by the SNB with respect to their attitude towards the everlasting floor. Wasn't it only a couple of weeks ago that the peg was held up as a cornerstone of policy? Why did I have faith in what the SNB said? Because removing the prop of central bank credence in the midst of a market that is completely controlled by central banks and the expectations of what they will do to save the world leaves a financial world orphaned. It's is a bit like hearing that your parents aren’t yours. If this faith is destroyed we have to question the worth of analysing Fed dots or every word from Draghi. Central bank policy has been working as much through words than actions, as has been clearly seen with the ECB and EU manipulating the Euro's bounce from the edge of doom in 2012 through threats of future actions rather than their implementation. However the SNB have effectively done for central banking what the Ferguson Police Department have done for community policing.

I feel betrayed and I feel confused. How could they do this to me? Am I fool for trusting them? Like that orphan I am searching for reasons as to why they made the decisions they did and questioning my own naive belief. There are times when you have to package up risk assessment into a bundle and put it in the drawer. You can’t live life unless you have trust in some of the building blocks. Time would be wasted in a dither and decisions never reached in time to act.

What was so important for them to deceive us and to threaten the very integrity of the cornerstone of Central Bank policy?

Let’s look at why the floor was put in place in the first place.

6th Sept 2011

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.
The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

At that time the Euro was imploding and the CHF was seen as a Euro type currency but without the risk of Euro implosion and so CHF was seeing vast inflows as money sought a safe haven. The moves were indeed causing short term dislocations for Switzerland against its natural trading partners within the  Eurozone. The action was justified on this basis and combined with super low interest rates did indeed stem the flows and take the steam out of the run.

But the Swiss economy was and has been since, running a trade surplus against which, without the allowance of FX moves or recycling of those surpluses to adjust, has meant that even after the short term flood of safe haven seeking money abated the underlying pressure has been for CHF to strengthen. This constant has eroded any slack produced after defusing the Euro panic speculators and this in itself is a fairly good reason to question the floor policy.

But it has been the recent collapse in European growth and falling yields that has provided the latest wave of pressure. The SNB has been buying Euros at an increasing rate but unlike the 2011/12 panic there is little to see the pressure slackening without a rise in European yields. The opposite is most likely to occur with the ECB lining up to cut rates further. With EU QE a distinct possibility were the SNB really ready to stand in the way of a potential 1 trillion Euro of QE flooding against their dam? Faced with that it would make sense to step back, open the gate and wave the truck through rather than being mown down by it.

Another function is what the SNB have been doing with all the Euros they have been purchasing through intervention. Most of it is parked in bonds. Most in Euros, but the SNB has been diversifying reserves from the start. I can well remember the impact these diversification flows had on the likes of Aus$ and Swedish Krona as their first purchases were moved from Euro into diversified higher yielding currencies. Since then I have always had in the back of my mind the level of FX losses they must have been racking up as SEK and AUD fell and that these diversification would one day come home to haunt them.

Yet the SNB' latest figures show a profit of CHF38bio so something else has countered the FX losses (if they are taken into consideration at all). One only has to look at the performance of bonds, particularly the least risky Euro ones that they are most likely to hold (Bunds), to see where the plus side of the equation has come from. The SNB is in a fortunate position, being a central bank, of not having to mark its FX reserves to market so this has meant that intervening and parking the proceeds in bonds has provided a healthy profit. But the yield compression that has served them well now sees Bund rates negative out to 5 years, meaning that there is now a cost to parking the proceeds of intervention.

So the SNB have stepped back from an impending wall of Euro about to hit the market through QE and they are avoiding future costs in continuing the policy. Two further reasons to desist.

What of the SNB’s huge existing holdings of European bonds? Well, if they were to sell them all in a rush they would suffer moving the market against themselves. But the QE that threatens their floor through FX pressures is going to provide a massive bid for European bonds into which, should they chose, the SNB can hand their holdings painlessly, effectively passing the bond risk at very favourable levels from their balance sheet to the ECB's. Thank you.

How ironic if market positioning looking for the ECB QE to support their long Bund positions is usurped by the SNB filling the bid. Going forward the removal of the SNB floor has also removed a very strong bid in the European bond market and, to that matter, the likes of AUS and its other preferred diversification holdings. The end of SNB intervention will have a small part in increasing global yields as they desist from exporting negative rate pressures via their actions. Swiss negative rates will remain more Swiss.

To summarise the potential reasoning for the SNB removing the floor and in the process undermining all faith in their future commitments -

- The pressures on the CHF through real economic functions has mounted to a level to make the CHF no longer expensive at 1.2000
- To get out of the way of up to EUR 1trillion of EU QE.
- Yields are so low on their reserve holdings there is no cost benefit.
- EU QE will provide a bid into which to exit their existing holdings.
And let's add - Popular opinion in Switzerland towards the size of the SNB's balance sheet has made the whole policy a political hot potato.

There has been talk that they are preempting the risks to the Euro from a Greek Exit from the Euro. I would suggest that this is NOT a factor.

Nearly all of this reasoning premises ECB QE and with that in mind it is the strongest possible evidence that ECB QE is about to occur and central bank liaison has occurred. The cut in CHF repo rates could also been seen as an indicator as to where the SNB ( with maybe ECB help) have determined the effect of QE will drive effective rates in Europe to.

The lowering of rates to -0.75% on sight deposits to counter the tightening pressures of a stronger CHF is not universal though. It only applies to financial institutions and to amounts over a threshold. Whilst deposit rates are two tier in this manner negative interest rates can not be considered to be the actual interest rate consumers will experience.

If the general public were to receive negative rates on all their bank held funds one could assume that CHF1000 notes (yielding 0%) will demand a premium and the sales of hollow mattresses will boom.

The lesson is that if you peg yourself to someone else's monetary policy without the ability to recycle within a joint central bank then stresses to your own balance sheet will become intolerable in either extreme. If Switzerland had joined the Euro this would not have happened. This should be a lesson to all those considering currency pegs (including the Scottish National Party).

So where from here?  The first rush of CHF buying may well abate as the negative rates kick in and though we have seen EUR/CHF crater to 90 I would not be surprised to see a bounce, whether it is great enough for the SNB to start to reduce their balance sheet into is a harder call.

The effect on the street has been catastrophic. There would have been plenty of correlated trades crucified too and losses in CHF catalysing the closing of other positions as risk rules kick in as VaR models go into apoplectic spasms.

I imagine that senior managers have queues of 12yr old quants at their doors explaining how this wasn't meant to happen as their models didn't predict it.

Chainsaws at the trunk.

The greatest risk to the most blindingly obvious of trades is when the base of the trunk from which all those implied and correlated trades expand in a spreading tree is threatened by either rot or the axe with those far up in the foliage knitting their esoteric finesse missing the obvious. So to those putting on fiddly-widdly cross emerging correlation trades, or those happily selling EUR/USD on European QE expectations, or those selling EM USD debt on funding costs in domestic currency, "HELLLLOOO UP THERE ! Hi, Yes you! There is a bloke down here with a chainsaw chopping through your trunk of ‘Usd rates are going up’

"What was that? No I’m not talking tosh, look at the retail sales figures and look at the response US Treasuries have shown to it. Can’t you hear the shrill screams in the wind up there of ‘New low yield in 30yr?"

I am so concerned that nearly every trade out there is premised upon Usd and US rates going up and Euro growth and Euro rates going down that when the time comes, just as it did last year, for expectations of US rates to be pushed out yet another year (as they are in the UK) then the response across all asset classes will be stunning. All the usual trade suspects will be welcomed back into society and interviewed as persecuted heroes on national TV. “They did WHAT to you Mr High Yield Emerging Market? How could they!” Into that rebounding shock you can throw oil too.

The time is getting closer and my 19th Jan date still stands as the day to roll out the wheelbarrow from the shed and start shipping in the harvest of this year’s yield crop.

Before I go lets look at one thing to cheer us up - Bitcoin sub $200. A large glass of your finest Shadenfreude please landlord. The whole point with bitcoin that nearly everyone seems to miss is that it doesn’t have to have a value. It is a payment system and as such the bitcoin itself is only rented for the nanosecond needed to transfer my Gbp to bitcoin to the Usd that Mr Techno geek selling a bong in colorado needs to use to buy his lump of marsh willow, leaving bitcoin as valued as the electron in a credit card payment or even the plastic the credit card is made of. It really doesn’t have to have a value at all. With only the Winklevoss Bros and the tinfoil hat brigade and the pump and dump industry built up around it holding tomorrows relic perhaps its time to guess the next iron pyrites of financial fashion.

Europe - Stormy Weather Clearing

Today's Uk weather forecast could be applied to how I feel about Europe. "Today's stormy weather will clear to the east bringing in scattered showers but with sunny periods'

Current storm 

Growth data is terrible
Inflation data negative
Interest rate expectations are through the floor (QE et al)
Russia
Greece
Structural problems

Gaps in the clouds

Collapsing energy prices is good deflation (stimulation)

Falling currency (stimulation) - I haven't seen or heard any data on how many fewer petrodollars EU now has to buy, probably because it doesn't support the sell EUR/USD meme.

Potential to patch things up with Russia - Yes, I do see this as being a big part of the confidence problem in Europe but I am holding probably more hope for positives out of the 15th Jan Astana conference than most

Greece is not sinking EU - No, it won't and German hints at debt restructuring defuses extremist Greek policy.

Structural problems - The one thing we have learnt is that the EU is built not out of rigid girders but out of copper piping. If it doesn't fit there will be some plumbing lawyers capable of bending it to do so.

Merkel being a diplomatic genius - The lady is impressing me more and more and I wish she was standing in the May UK elections. I'd vote for her over any of the current UK leadership offerings.

-----

This leads me to think that the growth data we are seeing is lagging some immediate positives. The immediate negatives are all definitely negative but could quiet easily improve.

If I therefore look at this dip in the European economy being near a low but the ECB sees this as a dip deep enough to warrant  throwing in a QE stimulus bomb. Which, in my eyes, could be like throwing a firework into the petrol store because it feels a bit cold in there.

None of this means that the EUR will bounce as a currency because that's all wrapped up in interest rate expectations but considering how extreme the views on US/EU interest rate paths are it shouldn't take much to tip it.

The only positive effect of the horrendous Charlie event is that I don't think I have seen Europe so unified in response to anything. Awful events such as this scratch off the hard skin of nationalism and show that underneath Europe is more unified than perhaps many had realised.


So, come on folks, Europe isn't THAT bad.

2015 - The year of the whip for markets but also index funds.

One of the most notable things about 2014 was the demise of the macro funds at the expense of the index tracker. But 2015 feels as though it is going to be a game of many halves. As we saw towards the end of 2014 sector rotation was massive and though the performance of your long only general index may have not given you cause to think there was anything wrong with your investment decision paying minimal fees as all equities rallied, there was monstrous opportunity lost. Discretionary performance picked up into the year end just as long only indices started to put in shabby performance vs spectacular volatility. Plenty of this performance will have been currency related but when the index fund holder looks at their risk return vs discretionary they probably won't care as when the trends abate and the performance dwindles they will start looking for something a bit more creative.

So here are some calls for the fund market in 2015 -

 - Trends in equities and bonds will end. This is the year of the whip.

 - Though general equity indices will see a path of general sidewayness with high volatility there will be large sectoral oscillations.

 - Because of the above, funds will start to move from index trackers towards discretionary as the point above means that GOOD discretionary starts to perform.

 - Discretionary macro will find they are short of portfolio managers as they have mostly been replaced by quants who are absolutely brilliant at working out value in their space but unfortunately don’t have a clue as to how someone else’s space effects their space, especially if it hasn’t happened before.

 - Macro hedge funds that have sold their souls to pension funds and real money investors will feel like straight jacketed loons peering out at freedom from the confines of their asylum as the risk rules imposed upon them by their new masters of dull money mean that they can’t participate in the way they would really like to. Or stay in when under pressure.

 - Fast swings will seek out and eat at the edges of risk boundaries. Much as lions will take down the wilderbeast on the edge of the heard, funds that can’t move fast enough or are too restricted by process will under-perform as their positions are taken away from them in a steady stream of stop losses on both sides of the market.

All in all it's lining up to be a very whippy year.

Let the slaughter begin.

I was thinking that the start of the year butchery was going to be along the lines of sacred ritual with the sacrificial victim soberly paraded in white gowns through the crowd before being laid on a slab to be sacrificed to the Gods of Trading. But yesterday’s action looks more like the market lynch mob has rounded up the usual suspects and is stringing them up from the lamp-posts having heard down at the pub that 'they did it’.

The usual suspects are oil and US/EU divergence but unfortunately also being rounded up are the usual suspects' wives, kids, cousins and anyone in the same gene pool. Anything that can be argued to be associated with oil or US/EU differentials is being culled too in a BSE like bovine massacre. Cows to the slaughter, sacred or not.

The funding is dead long live the funding.  Differential CB policy, or at least expected differential CB policy, is saying that the king of funding, the USD, is dead and a new king is being crowned - the weak prince Euro. If bankers are the public’s scapegoat for all wrong, then Europe’s two Gs (Greece and Growth) are the trader’s banker.

The extrapolationistas see it like this.  Europe is a basket case that doesn’t need any further debate so just sell everything Euro. Even the steady hands of reserve managers have voted with record disinterest in the Euro as a reserve currency.  It is amazing how shallow the central bank world is when it comes to reserve management. Whilst the dollar yields zip then it’s all 'reserve diversification blah blah' for risk reasons (remember the days China bought EUR/USD on every USD/RMB intervention?), but now that the USD might be getting a bit of yield back and Mr Bund is asking you to pay HIM to hold his issuance (call the police), it’s suddenly “Diversification? Nah, we are just yield tarts”.

Meanwhile the call goes that a strong dollar and higher US rates double whammies Emerging Market USD based debt, on the refunding side by higher funding costs and the repayment side due to FX making it more expensive. This will lead to the tide of funding receding as risks increase, leaving the waters shallower (less liquid) in EM but, more dramatically, the EM of EM, the frontier countries, will be left beached high and dry. Worst case you are a commodity producing country that hasn’t actually run a surplus because you’d rather spend it and what is more you have used the commodity USD income to back USD debt but now you haven’t got a USD income as commodities have fallen so far. So the likes of Venezuela, Russia and Nigeria are considered ebola cases.

I would suspect that there is/will be a hot money panic in everything EM, especially Frontier, as risk rules override long term fundamentals. There will be some bargains being thrown out with the bathwater and I'm going to be waiting with my baby catching net. In the longer term a yield is a yield and you can't keep a yield addict off the gear for long.

Stepping back one could say that if a change in rate policy is destabilising the world then is rate policy the right tool to use? A whole generation of analysts, economists, traders and investors have been brought up to believe that monetary policy is the only tool in the box, but your author remembers his time at the LSE having socialist ideals of fiscal policy drummed into him by sandal wearing beardies (back in those days beards weren’t hipster cool, they were usually soaked in real ale or patchouli oil). But there would be some merit to applying fiscal policy instead of raising US interest rates. I have suggested it before with respect to the falls in oil prices and am still waiting (we must be close) for the first country to hike energy taxes on a green ticket. But a more generalised move to tax raising, if targeted correctly could have benefits

- It would counter deficits run up in the great economic bailout when debt was transferred from private to state hands. It’s repayment time.

- It would be local to the US and so not cause global imbalances via funding knock on effects that we are seeing in EM.

- It would counter wealth disparities that QE has produced.

Of course the problem with invoking tighter fiscal policy is that it is decided on by politicians and with that comes a lot of baggage. How inspirational it would be if the politicians could, as they have with Monetary policy, hand responsibility to an independent agency.  Or maybe 51% of the  responsibility. But until that happens? in the US? FAT CHANCE.

Let’s get back to the markets. It all feels very deja vu. If we were to turn back our watches by a year we would be hearing exactly the same thing, at similarly deafening volume. Turkey and South Africa were toast ane EM in general was going to blow up by March. Which they didn’t. Why not? Well as far a i can remember it suddenly looked as though the US wasn’t going to raise rates as fast as everyone thought. We could well be in the same play now. We have extremes of belief that the Fed is going to hike asap, that Europe is going down the Swannee and oil is lubricating the ride down the every increasingly slippery slope.

I’ll stick to my plan in my last post as so far everything is going to that plan - buy risk immediately before the ECB and Greek elections.

Europe - Dawn of the Dead or a Bad Ghost Train?

The trading background - 

We are in the last couple of days of the year where funds are most unlikely to do anything. First, because they don’t want to screw up positioning or performance in the last couple of days before benchmark fixing with respect to performance and, more importantly, bonuses. Second, because they are sipping sloe gin on a shoot or stuck in a traffic jam in the alps. Or if US based, they are in holiday homes in warmer climes. Bank desks, if they are now allowed to take positions on the relaxation of Volker rules, will be staffed by juniors whose simple instruction is not to mess it up and to quote everything defensively.

So who is left to play? Short term speculators and the noise.

The noise background -

Over the last couple of weeks the commentary towards the EU has turned from one of background resignation to one of imminent doom. The oldest and darkest reasons for a collapse in everything EU have come crawling out of the ground zombie-like having been buried two years ago. The arguments are not new but they are dusting themselves off and rallying around the colours of the Greek election.

The noise is getting positively apocalyptic from the US commentary where, with greatest respect dear US friends, opinions appear to once again consider Europe in black and white terms rather than appreciating its grey adaptive nature . The lessons of the pain felt when short Euro risk assets positions were torn asunder over the last three years has obviously been forgotten. Or perhaps there is a hope of pride being restored in a ‘there told you it would happen in the end’ sort of way.

Yet calling EU to break with no time frame reference is not a way to make money and can be put in the same (very full) camp of China permabears calling a credit bubble explosion as a reason to be short China stocks and long China bonds which, as an 18% rally in SHCOMP in the last month and a fall in bonds of 4% attest, would have been a very uncomfortable position. It’s a bit like holding gold at $1500 calling for the end of the world (or Bitcoin come to that) where one needs a decent alternative income to live on.

The Greek elections

Despite the noise today the greek elections are not as Euro threatening as the binary zombies would call. Syriza don't want to leave the euro now and there is a Euro firewall against internal problems. Even the massive Cyprus collapse and subsequent bail-in didn't rock the boat, a default on official lenders only hurts Greece not anybody else. What is more the consequences would serve only to refocus reform momentum in the likes of Spain and Italy. Greece looks to be running twin surpluses now anyway.

Let’s also consider that the polls show that the Greek Public didn’t want another election anyway. Syriza lead has shrunk to 2.5% and now that the presidential vote has failed the government parties can throw it back at the independents who forced the unwanted election. This is bad from a sectoral standpoint (ie for Greece) but doesn't mean it's a general Europe down trade this time. Especially with the QE carrot dangled for late January where I really can’t see the ECB holding back on anything they plan to do because of Greek politics.


So what’s the plan Stan?

The market always needs a victim to sacrifice on the altar to the Trading Gods at the start of the year in order to bring great wealth and fortune. Last year emerging markets were dragged off, dressed in the ceremonial robes of strong USD and high leverage and given a good stabbing only to get up a bit later and wander away. But this year the screaming for blood appears to be directed towards the EU. The sacrifice is being prepared predominantly by the US priests.

So for timing. Traditionally I have always held the 19th of Jan as a turn date away from the first moves, but with the ECB and Greek elections a few days afterwards it is safer to call a EU bounce after that. So the plan is to buy any dip in EU risk assets (only of there is a dip and this hasn’t already played out buy the end of the week) around the 19th Jan in readiness.

Moving on to a more general view, there was an interesting Bloomberg article a week or so ago. There has been a 12% S+P500 rally over 2014 vs a 6.5% fall in USD denominated international equities. The widest divergence since 1992. There have been four other instances since 1970 and each time the MSCI rallied the next year outperforming the US by 14%. Now of course I am usually the first to poo-poo ‘happened like this before, will again’ arguments. But as this supports my own beliefs I will of course shout it from the roof tops.

Europe is most probably not experiencing a zombie dawn of the dead,  we are rather experiencing a rather poor end-of-pier ghost train.

Happy New Year and may the noise of the markets not drown out your celebrations!

Financial Twitter Templates

With Christmas coming up this may well be my last post for a while as I get down to some serious not doing anything. But before I go, I thought I'd help out all financial twitter users by providing some ready financial twitter templates to save time and effort during this socially busy time. If used sensibly they should provide the appearance of superior financial twitterance whilst you are actually inebriated and trying to defuse family bickering.

Just cut and paste a line from below inserting where prompted - I hope they come in useful.

------------

WOW!! [insert asset] hasn’t been this [insert high/low] since [insert last time]

The [insert yield curve] is [insert bp] [insert flatter/steeper] after that.

[insert number] #[insert acronym for upcoming data release]guesses

If [insert asset] goes through [insert price] then it’s really in [insert trouble or take off mode]

That's that then

[insert central banker] says that monetary policy will remain [insert tight or loose] for [insert period of time]

Picketty on [insert any social science] [insert a not working link]

[insert fund manager] has had drawdowns of [insert %] and hasn’t made any money since his [insert fund manager's only winning trade] call

Booom.

[insert name of someone you think people will listen to] says [insert anything they say that supports your view]

Am I the only one that thinks [insert something obvious]

Germany's Weidmann says [insert something that will not rescue Europe]

[insert asset] breaks [insert price] *NOTE - VERY IMPORTANT NOT TO INCLUDE ANY OTHER INFORMATION SUCH AS WHY THAT FACT IS RELEVANT.

Must read! - [insert a link to a 2000 page document of mind numbing stupor]

Ha, [insert someone clever], not looking so clever now after [insert only market move to have gone against the clever person ever]

Hi, I'm doing a sponsored [insert something fun you've always wanted to do] can you please give generously at [insert your Just Giving webpage where all the existing contributions are at least $500]

[insert bank name] say [insert asset] goes to [insert price] in 2015 [insert link to bank report]

This is interesting [insert link to a subscription only site costing $20k per month]

#ff [insert 7 people you want to follow you]

[insert any twitter handle] hey that's funny dude!

[insert asset price] approaching [insert support/ resistance] at [insert any number between 1 and 100] fibonacci level

[insert asset] is going [insert up or down] as [insert a random asset] is [insert lower/higher].

Woooooooaaahhhhhhhh. * NOTE - CAN BE USED AT ANY TIME BUT MOST SUITABLY AFTER A DATA RELEASE.

I’ve just had lunch with [insert important person], what a really decent person.

Thanks to everyone at [insert large institution] for hosting my talk on [insert a subject that sounds complicated]

Jeezz [attach a twitter picture of random intersecting lines]

[insert random news headline] * NOTE - ONCE AGAIN DO NOT CONFUSE THE TWEET WITH FURTHER EXPLANATION AS TO ITS RELEVANCE.

Happy Christmas!

------------

That last one was meant from me but also makes an ideal tweet.
New templates gratefully received in the comments section.

If I Were a Russian Leader

If I were a very proud Russian leader I would default on all non-ruble debt. Or at least threaten to do so. Who's it going to hurt? Only those putting the financial pressure on me in the first place. Buyers would be back soon after anyway. Yield is a drug.

If I were a scheming, power hungry Russian leader I’d enjoy the economic squeeze as it will depower the oligarchs and give me an opportunity to ‘rescue’ their businesses by taking them into State (my) hands.

If I were a chess playing Russian leader I would sit it out and wait for my opponent to make their next move having already thought eight moves ahead.

If I were a pragmatic Russian leader wanting to sort things out sensibly and was willing to swallow my pride then I would do the following. As the size of my domestic money supply is about the same size as my FX reserves (Hat-tip @barnejek) I would set up a currency board pegging the ruble to my reserve currencies. I would lose control of my domestic monetary policy in the process but hey, I’ve pretty much lost it anyway with 1 month implied rates currently trading around 41% which is a complete disconnect from the CBR. This may not mean much to the man on the street but as his banks have to do chunks of their funding through the cross-currency then it will pretty soon. If I was then to look at my current exchange rate and plot it in real terms back 14 year against brent crude then I might suppose that my currency is cheap all the way down to $25 Brent.

Brent in Orange the JPMRUB index in white with the down arrow showing where it's expected to be when next monthly published including the recent ruble falls.  

If I was to think that sanctions would warrant 25% of that weakness then ruble is still pricing brent at $35-40. I would consider that my imports are going to collapse anyway but even taking the higher historic October number there is still 15 months import cover. Considering the undervaluing of the ruble, with a currency board peg, or even a cap at say RUB70/USD, I may still gain some domestic credibility. Doing this would halt my domestic outflows, stabilise inflation expectations and provide a nominal anchor. As a little side swipe I would allocate a few billion to buy oil swaps from an investment bank in order to get 10x leverage in non-deliverable oil. Which should crucify all the CTAs who are mega short oil, killing two birds with one stone.

And finally if I were a rich man Russian leader I'd fiddle on the roof.

In the Bleak Midwinter

In the bleak midwinter

In the bleak midwinter, investors gripe and moan,
Oil and stocks and yield sank, faster than a stone;
Ruble had fallen, low upon low, how far can it go?
In the bleak midwinter, only losses show.

Dear God, CBs cannot hold them, nor growth sustain,
Buyers bids shall flee away, I can't bear the pain.
In the bleak midwinter. a stable price sufficed
But no, oh God Almighty, Jesus Christ.

Enough for they, who calls things down, screaming night and day,
“Just look at all the technicals, It's going all the way"
Enough for they, who missed all the longs before
Who mock the bull and disaster adore.

Bears and shorts and doomsters, all have gathered there,
Emerging Market chaos poisons the air;
And a madman only, would dare to buy this
As like into a gale, is taking a piss.

Yet I want to buy here, poor as I be.
After stop loss dumping, oversold is all I see
If I were a Wise Man, I would not take part
Yet I’m about to go long, it is in my heart.


---------


We have had a nigh on 10% fall in the FTSE over as many days, a 5% fall in SPX, Oil has continued down its mad Cresta Run of descent and emerging markets are finishing the year much as they began, with the whole world convinced that all the EM chickens have come home to roost. It is probably worth noting that if there was a winning model to trade the EM FX by this year it was simply a ‘coffee price in a local cafe’ PPP as demonstrated aptly by TRY and RUB. On that basis it is debatable as to whether RUB has actually reached fair value yet.

But price falls been notable, so notable that they are the news. 'Price is News' is amongst us. Positions have been tested to the extreme and the falls that we have been looking for with respect to stresses on vulnerable year-end positions have occured. The level of screaming would now suggest that the worst is over after the ‘That shouldn’t have happened, that never happens in December’ rout has run its course and leveraged runs for the finish line have been right royally tripped up.

But apart from prices in the falling knife department, other news isn’t that bad. EU data was strong this morning and there isn’t any EM news to make me think their world is about to end despite the mood today being similar to early February. Before anyone mentions that growth in China might fall to 7.1% please remember that it's 7.1%. What would you give to have 7.1% growth in your portfolio?

So having got out of my European equities and most of my US on 'ECB/Putin Thursday' 12 days ago and having nursed various entry/ tight stops on oil related things to some pain, it is probably time to look at buying back some of these falls. It being a Tuesday as well makes it all the more tempting to call this a 'Turnaround Tuesday’. With most fast money portfolio year-end positions now forced out, it would be amusing if we now close the year at stock levels last seen 2 weeks ago.

And if you think that is all too much on sentiment and not enough fact then read my friend @GMacTrading 's great quant look at it here  at  https://globalmacrotrading.wordpress.com/2014/12/15/recap-2014-12-15-time-to-btd

So at the height of this bleak midwinter, I’m in.

---------------
Added 17.00 GMT

And, your honour, I call upon the following witnesses as 'spikes du jour' in the case of a Turnaround Tuesday

EURNOK 

USDRUB 

EVEN SPX 

AND USDJPY 

Falling Oil - The New Banker for Blame.

There is always one. The poor sod who takes the wrap for everything. In the case of the 2008 global crash it was bankers and in the case of all my friends' bad behaviour, in the eyes of their spouses it was me.

But today sees a new scapegoat on the block. A convenient muster point for all things bad. A flagpole up which to run the colours of doom, no matter what their nationality. A kitchen sink into which to throw all personal failings. A mass grave in which to bury all loose ends, even if they are still alive.

What is this new black hole of bad news? Well if you've read the newspapers this morning then you couldn't have failed to notice that it's oil.

The FT kicks off the lynch mob with this story (article here) that manages to blame oil for not only high yield but also all equity falls but also a collapse in global growth, which is ironic as I am pretty sure that when oil prices were doing exactly the opposite 6 years ago they were getting the same blame.

Even the Scottish press has finally woken up to the fact that 0il prices have a) fallen b) aren't going up and c) may have an effect on an independent Scotland's budget. But this story in the Daily Record is more notable for the brevity of it acceptance, with the whole article running to a length only 5 words longer than its headline. Is that a record held by the Record?

Though I am not convinced that oil is the sole culprit, it just being a casualty of its own Bauhaus Chair-like supply and demand curve, with everyone else now blaming it for the High Yield collapse, stock market melt down, global instability, the death of the dinosaurs (actually wasn't the death of the dinosaurs more likely to be responsible for oil), the rise of fascism and the loss of Flight 19 in the Bermuda Triangle,  I assume that oil will take the place of bankers in the lexicon of hate. Not of course completely replacing them, but appear a more in touch, informed modern day excuse.

In the courts

At sea

At home

On planets far away

 CERN

Wimbledon

 Transport

 Prime Ministers Question time.

On the ranch 

And finally in the banks.

Oil Supply and Demand - The Bauhaus Chair Model .

Oil. It's all supply and demand isn't it. Yes it is and of course when we talk about supply and demand economics 1.0.1. supply and demand curves appear in our brains. Neat crosses or gentle curves that intersect at the efficient price.

The oil market is currently over supplied, so theoretically prices will fall until there is no longer an over supply. Demand must go up or supply down.

But the supply side in oil has turned into a great big game of chicken. The mexican standoff, the staring game or perhaps more aptly a breath holding contest because as with a breath holding contests, the breath is held because though you are underwater you know that you are about to surface and so can take the sufferance in the short term... or until you run out of air. It doesn't help though when you are being held underwater by your competitors strong hand.

In oil it looks as though everyone is toughing out lower prices and there hasn't been a glimmer yet over who will cut production first to lower that supply. In the meantime  oversupply remains at a steady level even as prices are falling. Someone needs to crack and I wouldn't be surprised it will be at a time where lots of people crack, at which point the referee lifts the Saudi’s arm in the air, announces him victor and prices can rise again. To confuse things further supply can actually go up as  prices fall as extra oil is pumped by a producer to try to maintain overall income (volume x price).

On the other side oil demand does not necessarily rise with falling prices. Oil is already a social pariah so a fall in oil prices is most unlikely to see a surge in the  purchase of less fuel efficient engined cars, the building of new oil fired power stations to replace wind, solar or gas, or even an increase in the demand for plastic bags. Green issues effectively cap the lower end of the demand curve turning it flat. However there can be a temporary boost in demand as strategic reserves are boosted, but then this oil isn't being used, more rented.

So I have had a stab at drawing my own  supply and demand curve as I see it as prices are falling.  Far from being a simple X,  it is a rather nice designer Bauhaus chair with supply in blue and demand in orange. Yes the Price is on X axis in this case, otherwise it wouldn't look like a chair

We are now traversing gently left between the parallel tracks  only expecting to stop when someone finally cuts production.  As everyone knows, though I would be very surprised if anyone has ever expressed it like this before, that point is where the front of the seat meets the legs. 

Market Cycle Crash

Well it’s all going much as expected.

2014 has been another year of tail chasing with most macro and discretionary traders finding it hard to make money, so coming into year end the clock has been running down and the sprint for the finish has getting more and more dicey with positions that would have preferably been put to bed for the year having to be run to the line. November trends normally extend into December so those desperate for last minute reprieves would logically look to join the nicest of these and lever up to make the line. Long equities, having given up on the bear case through 2050 on SPX, and of course the ‘what could possibly go wrong’ long Nikkei / short yen trade together with a catalogue of other 'if you can't beat them join them' trades.

So we end up with the portfolio managers going hell for leather to cross the year-end line ahead of target but as with a cycle sprinter going flat out for the finish, it doesn’t take much to upset their balance, with the smallest stone or bump in the road tipping them up. At which point things start to go wrong pretty fast. Those around are swiftly caught up and those coming up behind jam on their brakes and get off and walk rather than risking their own health. In other words, if you have any form of profit and you are running up to year end bonus/performance finish lines you are not going to want to risk what you have and will get out of positions pretty fast at the first sign of trouble.

I have managed to persuade a French street theatre group to enact what I am talking about using metaphor, simile and some bicycles. See the video clip of them below



And just as the commentators of that scene didn’t really have a large overwhelming story to pin the cause of the crash on, neither do we need a huge cause for the last three days action other than positional stress and attempted profit protection.

But if we were to labour the cycle crash analogy, then it would be interesting to pass that clip to various media to imagine what they would come up with as the reason for the crash. Some suggestions below.

Bloomberg - Cyclists crash the most since last time as chicken sales fall in Indonesia.

CNBC - Cyclists crash but surely Dan, isn’t this just a correction and opportunity to pick up your bike down here and get back on it?

Zero Hedge - Cyclists crash due to bicycle manipulation, as we always said. The race is fixed so there’s no point in competing, just buy gold.

Reuters - Cyclists doing fine - CORRECTION Cyclists crash.

The Economist - Cyclists crash due to embedded structural problems within the global bicycle industry, cycling popularity could fall to zero.

FT - Cyclists crash as take overtaking manoeuvre is forcibly rejected by majority. Boardman resigns.

Bank Strategists - Cyclists crash due to a slowdown 3 years ago in Debt/GDP ratio correlations with rubber prices as outlined in this chart on page 74 of the powerpoint presentation. Did I say chart? Sorry I meant ‘exhibit’.

Technical Analysts - Cyclists crash due to bicycle continuing to fall over once it had started to fall over.

Sell Side Advisors - Cyclists crash due to stop losses.

Goldman Sachs - Cyclists crash due to something we can’t talk about due to conflict of interest.

The Sun - CYCLISTS CRASH DUE TO CONFLICT OF INTEREST!

BBC - Cyclists crash due to Government cuts in funding of road surface research.

Russia Today - Cyclists crash due to Keiv government refusing to respect the will of the cyclists yet Russia is sending puncture repair kits protected by a battalion of T90s

FCA or SEC - Cyclists crashed today and we will be conducting a full investigation as to why. Any cyclist found in breach of regulations or moral duty will be suspended or face criminal prosecution. We advise all bicycle teams found not to have enforced codes of conduct to prepare for significant fines.

New York Times - Cyclists crash in Europe but it’s their own fault.

FOX news - Cyclists crash due to Obamacare and maybe Ebola.

Daily Mail - Cyclists crash in a foreign country due to foreign people riding the bikes and eating potentially carcinogenic tomatoes. Something must be done.

Vogue - Cyclists crash due to clash of colours

Singapore Times - Cyclists crash due to littering and antisocial behaviour. Cycling to be banned in Singapore.

Australian Financial Review - Cyclists crash just temporary and long term demand for new bicycle iron expected to soar. Ain’t Australia Great!

'Twas The Night Before Christmas - Markets Style

'Twas the night before Christmas, when all through the house
Not a keyboard was stirring, not even a mouse.
The portfolio stocks were all picked with care,
Knowing Santa's Rally would leave profits there;
So happy, were we, with our views of the EDs;
That visions of profits danced in our heads;
With a late market rally as sure as could be
A bonus so large would be coming to me.
When out in the markets there arose such a clatter,
I ran from the bar to see what was the matter.
Away to the screens I flew in a flash,
Tore open the charts and saw oil crash.
The red candles of doom showed a newly made low
And a horrible vision of no bids below,
When what to my wondering eyes did appear,
But deflationary pressures that filled me with fear
My High Yield structures were looking quite sick
I knew in a moment I should sell ‘em real quick
More rapid than eagles things went insane
As I whistled, and shouted, and sold them in vain
Damn, contagion’s kicked in. Just look at the VIX
Not Spoos as well? And look at the BRICS!
Oh my poor profits! Just look at them fall!
Now dashed away, dashed away, dashed away all!
Even long Nikkei short JPY,
Now turned into losses, oh why did I buy?
But In central bank halls, the concerns, they grew too
Growth was now falling, what could they do?
And then, in a twinkling, I heard on the wire
They promised a plan, as they knew things were dire.
As I mourned my losses that weren’t turning around,
Down the chimney came Draghi with a great bound.
His clothes were all tarnished with soot, ash and snow
As he cried out ‘Sod Weidmann, come on! Let’s go!"
'Unconventional methods' he had flung on his back,
And he looked like a pedler just opening his sack
To buy any old junk, he just didn’t care.
Anything to stop deflation’s nightmare.
And with him was Abe, who as everyone knows
Plans to print money 'til his country grows.
His balance sheet open to yet more QE
As he sprayed me with yen and bought JGB
And then down the chimney came Fed Chair Yellen
Who restated low rates despite Hilsenrath’s yelling.
She was blowing a bubble that threatened our health
But I laughed when I heard her, in spite of myself.
A wink of eye and twist of the curve
Soon gave me to know I should hold my nerve
They spoke not a word, but went straight to their work,
Buying up debt. Prices rose with a jerk!
Then laying a finger aside of his nose,
And giving a nod, up the chimney they rose;
Draghi sprang to the sleigh, to the team gave a whistle,
And away they all flew like the down of a thistle.
But I heard them exclaim, ere they drove out of sight -
“Happy Christmas to all, and to all a good night!”

ABS From Me to the ECB

Well I read the events of last Thursday very wrong. By the end of the day there was nothing to make me think that Europe was a better place to be than when the sun had risen that morning, so I trimmed my European equity holdings and saw them frustratingly rally. I still can't see the attraction but it hasn’t taken long for the market curve of QE expectation to steepen out of sight. The chances of immediate QE may have fallen to zero but the expectations of QE in January or February had gone stratospheric. This compression of all hopes into a single day payoff has Draghi’s next meeting much like the final visit from the Kray Twin’s or Corleone's debt collectors. No more excuses. If he doesn’t pay up there's going to be blood not only on the streets but up the walls and on the ceiling. However, for now, European assets have gone QEtatsic. 

I'm beginning to feel very sorry for the ECB. The EU has kitchen sinked them with having to solve all the problems that the structure and fiscal impositions of member states are creating. The poor ECB is expected to administer aspirin to the obese smoker EU patient without the EU giving up any of their vices. The only effort the EU are contributing towards their own recovery is homeopathic. My original concern that the €21bio they are putting up as loan guarantees is not enough has been heightened further by this article by Frances Coppola that drills down further  to identify that in fact NO new money is being allocated with the €21bio just being redirect from other stimulatory measures. So as with other homeopathic remedies, the active ingredient is being diluted beyond detectability and the remedy only contains the memory of stimulus.

But back to the poor old ECB. They have said that all assets have been up for consideration as QEable, except gold, which had me thinking just how far they could go and rather than dithering along the credit path to buying junk they should they just get on and buy it. But not just financial junk as that is soooo discriminatory towards those who don't own it. With this egalitarian ethos in mind I have drawn up a list of things the ECB could consider for QE that puts money straight into the pockets of the average public end-user without it being first syphoned off by banks, large corporates or asset rich grandees. 

So lets see what we have here, ah here we go -

- The gordian knot of tanged wires associated with chargers of long lost electrical devices in the plastic bag in the study, 

- The pile of housekeeping and cookery magazines that a member of the family resolutely refuses to throw away. 

- The special peculiar shaped bits of metal in a box in the garage belonging to power tools from bygone eras. 

- The half rusting and nearly broken gardening tools in a cobwebby mess in the garden shed together with broken hose attachments. 

- The old suitcase of CDs, DVDs and VHS tapes. 

- The shelf of bottles of multicoloured fluids associated with cleaning and maintaining various vehicles, past and present. 

- Shelf upon shelf of half used pots, tubs and tins of semi-set or leaking paints and decorating materials in the garage.

- All the miniature sized equivalents in the bathroom branded as ‘makeup'.

- The collection of all things bicycle. Yards of rubber tubing, bits of plastic that no longer clip on things, pumps that don’t fit current valves, Lights that batteries no longer fit and digital displays that long ago forgot what they were meant to display. 

- The massive box of clanky crockery stuff, old plates and china ornaments that is certainly not displayable but may come in handy for the kids one day or a charity shop. 

- The crate of plastic things that the kids used to play with for 3 minutes after Christmas before discarding for new bits of plastic.

- And finally the man drawer contents of batteries, bits of string, bloomberg fingerprint readers, radiator keys, solid superglue, broken torches, lighters, airgun pellets, micro-screwdriver kits missing the fittings most often needed and ticket stubs to matches and concerts once considered life changing.

Of course should all of the above not be considered of good enough credit they could be repackaged into a large skip as Asset Backed Securities and delivered to the ECB in exchange for cash under their current program

Putin + ECB = Urghh

What a depressing day.

Putin moves further towards isolationism in the face of Western pressures. Well perhaps it’s worse than that. He’s not anti-everyone, just the West as he’s planning to build further ties with the rest of the world. It has so many parallels to the Cold War it is depressing. Nationalism is pulling Russia together whilst, ironically, in Europe nationalism is pulling it apart. If it comes down to toughing it out I'll have my money on Russia. They have a hell of a track record in the face of adversity.

ECB - For people who enjoy correlations here’s a massively negative one for you - ECB days and my serotonin levels. So no QE but a commitment to the ABS program and a suggestion that they think it will work when it hasn't so far. No change. The German camp have effectively waved the rule book under Draghi's nose and he stated clearly that he will not break the law as there was no hint of a ECB two fingered salute to Germany.  Consensus is solid, though no longer unanimous, and once again fails to produce action.

I do wonder if a solution to today’s problems would be to swap presidents. Make Draghi the President of Russia and Putin the President for the ECB! A bit of decisiveness in the ECB exchanged for a bit of consensus moderation in the Duma would be a great trade.

Was the market really looking for QE? Well since the announcement periphery bonds are off (having lost a potential QE bid) and European bank stocks have all slumped. So yes they were. Peripheral banks take a double whammy from local bonds falling and less likelihood of growth.

Having been long European stocks, especially growth stocks, since late October, adding today's events to concerns expressed two days ago about capitulation from equity bears I am going to change camps and move to the short side and see how it goes for the next couple of weeks. This could be enough to tip the US too.

Liquidity meltdown? So what's the problem?

Before we get onto liquidity just a couple of other thoughts-

Russia - Must be one of the only countries where oil prices are rising in local currency at the moment. But the lower oil goes the more likely it is that Putin will have to step in to ’save’ the large local oil companies by taking them into State ownership. Depowering the oligarchs. No wonder he doesn’t want to cut oil production. Meantime the Ruble is making imports more and more costly helping domestic suppliers. Default on Russian bonds? Well if you know you aren't going to get refunding from the West then why not indeed default on any non-Ruble issued bond. As for Ruble issued? Well you can always print more Rubles to repay them. I am still worried that the more the West squeezes the stronger Putin gets, like one of those Star-trek alien beings that feeds on negative energy. Stop firing your phasers at it, it just grows stronger.

Osborne's Autumn Statement - If any member of the banking profession were to leak such financially sensitive information (as new building and infrastructure plans most certainly are) they would be in court. Why is this stuff allowed to be leaked?

Oil - There will come a point when there is so much to lose in correlated leverage plays that it would be cheaper for those facing such losses to buy oil itself to get the price up. I remember talk of a famous fund buying gold when they wanted to offload a massive gold mine holding as they could move gold prices with ease due to gold's low liquidity relative to the liquidity in the mining stock.

Protectionism - Opec is allowed to manipulate prices on Oil, De Beers are in a similar position with regards to diamonds (by the way have you ever tried to get a bid on a second hand diamond?) and yet financial markets can’t be seen to be moving a price a pip.

Ok now on to Liquidity - There is a lot of concern, correctly, that liquidity in some markets is so dire it could lead to some serious meltdowns. Eyes are on High Yield via the energy sector. But should we be concerned about a meltdown caused by low liquidity? The normal response is "Yes of course! Prices will collapse and there will be high volatility and and and" but am I allowed to ask “So what? Does that matter?"

If there is a meltdown in something it's triggered by an adjustment in perceived value. When there is no liquidity then prices pass through where people think fair price sits (otherwise they wouldn’t be moaning of no liquidity) to prices which they feel are unfair or downright silly and don't reflect actual probabilities of default or yield outcome. So why are they selling at values that they think are absurd and moaning that it's due to lack of liquidity?

Most likely it can all be boiled down to money management rules creating large gaps between actual outcome probabilities and priced probabilities. this is particularly true in systems that use price as an input of probability in the first place, as we saw with CDS prices being quoted, wrongly, as actual probabilities during the EU crisis. So we could argue that any huge swings in pricing because of lack of liquidity will punish those who have to employ short term money management rules over those that can take a sanguine long term view. So rather than all being bad, it creates opportunity and acts as a feedback hopefully moving fund management away from the, sometimes cretinous, short term consultants tight risk rules back towards a more balanced macro big picture world.

But what about the losses? Well if the true price that reflects future outcomes has indeed moved then tough. That is nothing to do with liquidity. For those that are being forced to sell below what they see as the  real price, due to no liquidity,  their loss must be someone else’s gain as those selling must be selling to someone else who is picking up a bargain. So the negatives due to bad liquidity are offset by someone else’s positives.

So if there is to be a High Yield meltdown  due to poor liquidity I look forward to buying some at stupid levels caused by some VAR calculation deep in a fund saying  'spew at any cost'. Thank you.

Of course the wealth destruction argument is different. If leverage is involved, which of course it is, then book values will tank and no doubt the value of that book has been used to borrow to fund some other asset, which then has to be sold. Now THAT is the transmission risk to other asset classes.

It's not liquidity that is the problem, it's once again leverage.