Price is news and all news leads to China.

Price is news. And with it is the retrofitting of all news to the price. Has anyone found any news that doesn't base itself on price? What is the news other than price over the last week? Chinese PMI Down, US retail sales disappoint. Is that really worth $5trillion of global wealth wipe-outs? Note here that once again the S.I. unit for stockmarket falls is $s of market cap lost, whereas gains are mere points or at best %s up, if commented on at all.

It would be a fascinating experiment to be able to deprive analysts of past prices (using a 'Men in Black' memory erase flashbulb device perhaps) and see how they get on. Hard enough with stocks, but nigh impossible in FX, Gold or oil where the theory of infinite equilibriums appears to hold true.

If I were to lay the comatose market patient on the table for diagnosis or confirmation of death, I would see a body riddled with price gun shot wounds but I would be looking for the real cause of the problem. That tiny pierce mark between the toes that could signal poisoned injection, the cherry pink in the cheeks pointing to carbon monoxide poisoning or the high radiation count of polonium 210.

Because though the cause of the falls is apparently blindingly obvious, I am afraid that this market doctor doesn’t buy it. Well not all of it. Yes, the riddling gun shots from the assembled uzis of the market drive buy shooting are not to be ignored as a contributing factor, but those are a consequence of the cause not the cause of another cause.

A year ago I posted a master plan of how this could all pan out  painting a picture of one last hyperbolic spike in leveraged risk with equities going ‘taxi driver’ long. The end game being one more huge collapse in everything that will be the test of the CB mettle and leave them resorting to real money printing rather than this QE smoke and mirrors type. Or ‘Corbynomics’ as we will now call it, named after a potential UK opposition party leader.

This morning I have been deluged with evidence as to why this market collapse is the big one. It is different, the world has changed and the expected collapse is here at last. But the reasons being offered are old wounds and depend on who you ask, as whatever reason that person ever had for being bearish is now encapsulated in a ‘See? I told you the markets would fall because of x’. Yet nothing has actually changed over the past couple of weeks to justify most of those reasons. The reasons have been there for the last 3 years so don’t come running to me now saying told you so for explaining the last 3 weeks price falls.

Yes I think we know where I am going. All clues to the current diagnosis point to asphyxiation and asphyxiation demands that airways are cleared. And there,wedged down the right bronchus, is a lump of Char Siu. No matter what your tin foil beanie reason for the current market collapse it all actually rests on a market belief that the Chinese State has lost control of its economy and that economy is about to collapse and take the rest of the restive world with it.

But the anatomy of the markets is really not weak enough to see this choking kill it.
- The banks are in a better shape than they were.
- US rates effects on EM debt should have been unwound from a month ago as Expectations of a September rate rise fade
- The call that equities have run up from 2009 lows by history breaking lengths of time ignores that that measure is being made from history breaking lows. Just take your base back to 2007 and stock markets are not at all overpriced. 8 years of no growth in the FTSE value is almost historically low.

Most importantly, the market has not been through a hyperbolic euphoria. A 'taxi driver high', where everyone is long equities and risk. This chart of macro and CTA exposure to US equities as we go into a fall is not conducive to it being a major event. They were short into it. Markets need to be long to be properly wrong and they weren't.

I have also had debates with colleagues and friends into the psychology of today's traders and risk takers. Their argument is that the current generation have been brought up in a world where prices only go up and so are geared that way. I disagree. I still feel that the current generation have been programmed by disasters and are always over-positioned for fat tail events. They all want to be the next Taleb. There may be stability in the crowd but there is no glory. I drag Twitter and social media in general to the witness box. Want to make me a price on the ratio of 'buy it, everything is good' to "sell it, it will all go wrong' posts? I don't know for sure but I can have a good guess.

There is chronic disease out there but chronic diseases are not swift killers and this market doctor is pronouncing that after a Heimlich manoeuvre to expel the Chinese concern the rest of the markets will recover.

This is a misdiagnosis of the 'big one' and rumours of the market's death are exaggerated. But if you do think its the big one then you should be selling US treasuries as Asian reserves have to be unwound. If you don't think it's the big one then you ought to be selling US treasuries for a risk rebound.

Towel chucking - Commodity style.

Yesterday was a towel chucking day in commodity land. 

Oil did it again and I hold up my hand with regards to getting oil wrong as that held up hand is devoid of fingers. The kevlar gloves, donned last week when buying for a bounce, provided no protection from the falling knife of prices. 

Glencore shares melted yesterday too along with most other miners. 'Caught out by fall in Chinese demand" said the head of Glencore

He also goes on to blame the price collapse on hedge funds pushing prices to unreasonable levels. HOHOHO Kerbonk (Laughing my head off).  Glencore is more hedge fund than most other hedge funds. But as always profit is genius and losses are someone else fault. In the same way as you never hear a corporation explaining away surprise profits through lucky moves in FX, though the reverse argument is often used.

So how many corporations are going to be looking at their balance sheets for Kazakh Tenge exposure this morning and hoping to find a small nugget of exposure on to which to kitchen sink all their management filings, as the Kazakh Tenge devaled 20% overnight? This has caused many shops to close for the day as they convert the devaluation into pure inflation by repricing everything accordingly. Do you really want inflation? Ask a Kazakh how it feels.

Kaz Minerals shares quoted on FTSE up sizeably (even priced in GBP) on the belief that this deal will give commodity producers a shot in the arm.

Not so sure how long that will last as a devaluation is identical to giving your workers a 20% wage cut, and like a wage cut they either take it, or demand more pay. But you have to take your hat of to them that was one hell of a devaluation at making China's 'deval' look like a rounding error. With the vietnamese Dong 1% softer too after manipulation by its CB, perhaps the headlines should read 'Emerging Asia revalues the CNY"

But the market is now in FX peg hunting mode and it appears that the only qualification needed to be a potential peg break goldmine is the word 'peg'. Some of the pegs appear to be being attacked by angry lynch mobs rather than reasoned investors. Take the Saudi real for example. It encapsulates the fears of whats happening next door in Yemen, Iraq and Syria, it captures the falling oil price and it encapsulates 'Emerging market' ( as much because most people have never heard of its currency rather than it actually being an emerging country). Ambrose Evans Pritchard* catapulting it to the fore a week or so ago also helped. But Saudi hardly have any debt and have about $670bio of reserves which would see them through 4 yrs of 20% budget deficits even if they never borrowed.

But why worry about the detail when you can just scream 'this is 1997' and ignore the background reserve structures. Even the Hong Kong Peg was being raised as a suitable peg break candidate today.   Just do the reverse. If the Central banks had any sense they would be writing all the USD call options being bought against their currencies. Oh but they can't. No, but their Sovereign Wealth Funds may be able to. Even if they can't trade their own currency, they could come to an agreement and sell each others currency usd calls?

The Fed - Fed fed fed fed fed up with the amount of time wasted by humanity trying to guess what the Fed will do when actually the Fed are spending their time watching what you are doing to work out what they will do. I am still sticking with my March 2016 call which took 30 seconds to come up with two years ago and is still as valid then as it was now. Call it my $5 plastic cheapo Fed watch to everyone else's Patek Philippe Grande Taille Fed Chronograph. It still tells the same time and yet I have enough change to buy a boat and a car.

With the air thick with towels and me bleeding to death, I am wondering if I should also chuck my towel or just use it to staunch my blood loss. I am a stubborn fellow who really should know better but this is still august and I have to keep reminding myself that it is silly season.  The market does suffer ADHD and though China, Emerging Markets,  commodities and High Yield may look like the four horsemen of the apocalypse right now, only a month ago those Horsemen where Greece and Europe and they have effectively been turned into donkey rides. If attention can switch that rapidly before then it can happen again.

As I finish this post the markets have gone strangely quiet. Is that it? Are we done? Can we now get back to buying again? I hope so. 

And one last thing . To the market acronyms of RORO and MOMO I would like to add one for the UK weather.  SOSO - Summer On Sumer Off. This year has seen high frequency oscillations between Summer weather and November weather. Today is another November day. 

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

*Has someone hacked Ambrose Evan Pritchard ? He wrote this about Chona and rather than calling for the end of the world he suggests quite the opposite in that China will be just fine. Odd. Also odd that John Ficenec has taken over the uber-apocalyptic role. Perhaps AEP has seen the light, is repenting his sins and becoming a missionary. 

August blues and doomsday clocks.

There is something odd about Augusts. A holiday season for Europeans that sees EU policy directed to making sure that the Eurocrat beaches in the South of France remain unsullied by irritating Euro issues. Problems are swept under the August carpet to be readdressed in September. One look at seasonal volatility backs up this picture with Septembers being the back-to-school new term mayhem.

Personal feelings are similarly enshrined. That longing as one waits for the pre-booked summer holiday with the excitement of getting away from it all. But the return from holiday is bleak. The nights are already drawing in and the next holiday event in the diary is Christmas. With that thought returns a depression of grey cold despondency. Pushing back the family holiday to September just results in the summer being wished away in anticipation, only to arrive back to post equinox gloom.

But August is a strange month for markets. It's as though you can tell who is waiting for their holiday, looking for reasons to do nothing, and those that have returned eagerly revving up September's expected volatility, whipping up the crowd in anticipation, even if there are few new themes.  Price moves are substantiated with off-the-shelf pre-used excuses probably purchased on Ebay.

Talking of such, it looks as though the UK’s Daily Telegraph writer John Ficenec has not only returned from holiday but has been on-line buying some secondhand 'market concern' beauties. Like any expert Ebayer, he is repackaging them and selling them on as a set. And what a set! Who would have thought you can assemble, in your own laptop, some well known and well worn household market concerns and link them together to make a doomsday alarm-clock already set to ring in just one minute's time?

Aug 16 2015 Doomsday clock for global market crash strikes one minute to midnight as central banks lose control - John Ficenec
http://www.telegraph.co.uk/finance/11805523/Doomsday-clock-for-global-market-crash-strikes-one-minute-to-midnight-as-central-banks-lose-control.html

But this isn't the first doom call from the author. His clock has been a bit faulty over the last year, so take heed and check all the YouTube assembly instructions and reviews.

10th April 2014 10 warning signs of a stock market crash - John Ficenec http://www.telegraph.co.uk/finance/personalfinance/investing/10755780/10-warning-signs-of-a-stock-market-crash.html

19th Sept 2014 10 warning signs of global financial meltdown - John Ficenec http://www.telegraph.co.uk/finance/markets/questor/11109440/10-warning-signs-of-global-financial-meltdown.html

2nd Oct 2014 How market correction could become a crash -John Ficenec http://www.telegraph.co.uk/finance/markets/questor/11137343/Market-correction-could-become-a-crash.html

27th Oct 2014 Stock markets threatened by collapse in Chinese consumer demand - John Ficenec http://www.telegraph.co.uk/finance/markets/questor/11187002/Stock-markets-threatened-by-collapse-in-Chinese-consumer-demand.html

2nd Jan 2015 Ten warning signs of a market crash in 2015 - John Ficenec http://www.telegraph.co.uk/finance/economics/11322623/Ten-warning-signs-of-a-market-crash-in-2015.html


Is a stopped doomsday clock right twice an day? If so we should probably hope that Mr. Ficenec keeps writing to keep the clock ticking.


"Work is a necessity for man.
Man invented the alarm clock".
Pablo Picasso

"Doom is a necessity for man.

Man invented the doomsday clock". 

Polemic Paine

I am somewhat caught. I have full sympathy for the bear arguments I really do but the preponderance of such doom views expressed above, married to surveys showing ultra-bearishness towards equities both in positioning and sentiment by the professional sector whilst equity markets really haven't fallen has me reaching for the buy button. But I stall. It's August after all. 

China Apocalypse Now - Kilgore Quotes

China Apocalypse Now quotes from the infamous character, Lieutenant Colonel Kilgore of the PBOC played by Robert 'Deval'.

With thanks to  @5_min_macro @southernmacro  @georgemagnus1 ‏@Macronomics1 for their contributions as the theme that developed on twitter.

Kilgore: You can either surf the move, or you can fight it!

Willard: Are you crazy, Goddammit? Don't you think its a little risky to move the fix?
Kilgore: If I say its safe to move the fix, Captain, then its safe to move the fix! I mean, I'm not afraid to move the fix.  I'll fix it over the whole fucking place!

Kilgore: China don't suffer!

Kilgore: Smell that? You smell that?
Lance: What?
Kilgore: Carry, son. Nothing else in the world smells like that. I love the smell of burning carry in the morning.

Kilgore: What the hell do you know about FX? You're from the goddamned SNB!

Kilgore: [Explaining what the PBOC helicopters use during market assaults] We use FX fixes. It scares the shit out of the markets. My boys love it!

Kilgore: I will not hurt or harm you. Just give me back my growth, Lance. It was good growth... and I like it. You know how hard it is to find growth you like...

Kilgore: [after the PBOC spectacularly knocks out a heavy FX positioning] Outstanding, Red Team, outstanding! Get you a case of beer for that one.

Kilgore: Lieutenant, bomb that fix about 300 points back! Give me some room to breathe!

Further quotes from PBOC Colonel Kurtz Kurtosis

Kurtosis:- I watched  USD/CNH crawl along the edge of a straight razor. That's my dream; that's my nightmare.....

Kurtosis: "The horror... the horror..."

Kurtosis: "Are my methods unsound?"
Willard:"I don't see any method at all, sir."

China, a peg on which to hang your bear hat.

I don’t think I’ve ever seen a 1.8% FX move cause such global consternation.

But of course it isn’t the move itself that is causing the problem, but the implication that they can do it again with the predictable now becoming the unpredictable. It opens up the ruler and pencil cupboard to the extrapolatinists who are now free to draw future conclusions as to where this action can lead with little other than fresh air to stop them predicting the end of the financial world. Yet this also raises the spectre of 'availability heuristic' and ‘recency' behavioural biases associated with recent events, which can be encapsulated into overestimating the probability of a recent event reoccurring and underestimating the probability of distant past events reoccurring. Earthquakes and terrorist events are good examples. The vacuum of other financial news in an August market leaves the landscape clear for these biases to propagate.

The China devaluation is being employed as an excuse for every wild market move and accepted as such by a willing global audience - to the point that I wonder if those accused of Libor and FX fix fixing were to cite ‘China devaluation’ in their defence they would be instantly acquitted. I was thinking of rerunning the cartoons I did here depicting oil price falls taking the blame for everything, only substituting in 'China deval’.

China news is big but is it THAT big? Quite often markets are set for a move but just need a trigger, so we also have to add in to the equation the background situation into the interpretation before we apply all causality to China. Oil prices trending down anyway, equity market directionless yet in wild ranges in a quiet August and the expectation of grief in September via high yield, Fed rates, Greece re-ignition and global slow down which includes a China function anyway. China can be seen as the trigger rather than the bullet.

One statistic being banded around is the impact the 1.8% move has on Chinese oversea debt.  Costs of $10bio are cited but this really is nothing in the great scheme of things. There is also the other side of the equation. State figures and private sector figures are regularly cited separately to highlight arguments. In a country such as China it may be more appropriate to look at the net 'China Inc'.  China holds +$3 trillion in foreign reserves so in the net balance for China Inc  things are fine.

I stand on a limb in thinking that China will be fine and it has enough control over itself to get through. The Chinese long game is long with short term fluctuations often working to long term advantage. I have talked before here about the opportunities China has to acquire commodity infrastructure due to the collapse in commodity prices. Shifting reserves from US treasuries to purchasing the structure to supply your future needs seems eminantly sensible, even if the balance sheet accountants of the world feel ‘reserves' should only be overseas debt.

China has opened up a new front for intervention but the response by the market appears extreme. it reminds me of the classic Daily Mash spoof with regards to global warming - 'I’ll be just fine says planet’. As with Earth and global warming, China will be just fine, it’s just you that may not survive. 

Car manufacturer websites - Worse by design.

These days I am spending more of my time in the world of design and a fascinating world it is. The folks I work with are exceedingly talented and have creative skills that I just envy. Everything they touch turns to beauty.

Yet the world of design is not about just making things beautiful, they also have to be functional to the point that whilst the beauty and representational aspects of the design inspire emotions that support the product, the functionality must not be encumbered. If both functionality and beauty are enhanced then we are definitely moving in the right direction. I say right direction because something  I have noticed and am doing my damnedest to change, is that left alone a creative’s project doesn’t have a deadline, it has a half life. A thing of beauty can, fractal like, never be perfect to the nth degree. Pixel 1475.674 may just not be the right shade of grey, so the Pantone swatches magically appearing from the designer bible of Pantone swatches to decide if Pantone 431 suits the mood better than 432C for that individual pixel.

To us City folks this is just anathema. A project has a deadline and we aren’t used to there not being an absolute best answer spilling from a black box under a desk coded by the best 12 year old quants that France and Russia can produce. Yet I am constantly amazed at the quality of work the creatives produce, yet agonise over. And they don't just agonise over the beauty, the functionality is key and this is where I step in. I am used as the creative’s test client where my short attention span demands that messages are arrived at promptly and delivered clearly. God forbid there is one unnecessary click enroute.

After a life time of reading financial research, or trying to with limited time and patience, it didn’t take long to work out that the best pieces were written backwards. Not the words, the layout. Conclusion first, preferably in simple idiot terms such as “X asset - BUY it”, followed by the bullet points as to why to buy it, followed by the breakdown arguments of each bullet point and finally, for those that really could be bothered (not me), a fat appendix of all the workings and supporting references with Greek letters. No one has time these days to start on an unplanned adventure into a 10,000 word document in the vague hope that at the end of it there will be something more tangible than - "In conclusion we find that there is no supportive argument for believing what we hoped we could believe in the first place. Thank you for allowing us to waste your time".

Instead the headline is key, the next level has to be the hook and then the drop (I sound as though I'm describing a house music template). The reader has to be lured into the exploration of the argument for at any time, if their attention wanes, you’ve lost them. And so it is with any form of marketing.

The critical space for marketing is now the web and building websites is an artform at many levels. Providing the information you want to provide whilst providing the visitor with the information they entered wanting, with the whole experience enveloped in visual or (to be avoided) audio background designed to shape the visitors emotions requires skills married from different professional backgrounds.

And here I pause and take a deep breath.

Because

Here goes … WHY THE #### CAN”T ANY CAR MANUFACTURING COMPANY DO IT?

Car companies have the world’s greatest financial resources, in many cases greater than those of governments, they have the world's best engineers, they have an industry built on selling dreams and aspirations, they are highly dependent upon marketing and advertising, yet they cannot produce websites that are easy to navigate. Instead they have websites that must have cost fortunes as they employ every available piece of up-to-date web designer bling, to the point of making the things more difficult to get around than London on a tube strike day.

Here’s an example and a little test. Start a stop watch, click on http://www.volkswagen.co.uk . and tell me how long takes you to find the performance and fuel efficiency data for the top of the range sporty Golf diesel versus a mid range, both with the automatic box.

Dumdy dumdy dum... How are you doing?
I’ll just go and put the kettle on.
You not finished yet?
I’m just popping out to lunch...
Saw John down at the cafe, he sends his best..
Ah, you are back!

So did you enjoy that website? Did you find out that the sporty Golf is not actually listed with the Golfs? Did you stumble into petrol engine land unable to return or find diesel land? Did you enjoy the fact that each category of data demanded a drop down list that that could not be open at the same time as any other data? Did you discover and delve into the parallax scrolling down the page that wasn't obvious, in case it harboured, but didn't, the information you were after?

It is not the worst by far with Ford, Mercedes, you name it, all dragging the poor visitor into an Hieronymus Bosch styled web experience. Faustian nightmares. Websites designed along the same architecture as the film ‘Inception’. Yes I got lost in that too, not helped by falling asleep during it and having nightmares of the Audi website only to find that I was a dream within a dream and I was looking at the VW site.

I am a simple soul who wants the information he want’s, like.. NOW. And if I don’t get it I will be gone. I have no interest in two giggling morons acting out a car review in a video insert. I have no interest in 'clicky here, ooh the door slowly opens to show the inside graphic'. Why do I have to wait for the door to slowly open? Just to please a smarmy developer who has unloaded another £50k’s worth of web-bollocks on to an over-keen marketing director who has more money than sense? I have no interest in cross referencing to things I didn’t ask to look at, such as a Venezualan tribesman admiring the vehicle airlifted into the jungle to represent its 4x4 'go anywhere’ ability, when the toughest obstacle the transmission is going to suffer is a quinoa and pomegranate salad spillage outside Ottolenghi’s.

It is late at night, I am tired, I have had a day willing up oil prices. I started willing them up as I put my neck on the line on Friday looking for a bounce in oil, but ended up willing them up in the vain hope that oil becomes so expensive no one can afford to run a car, car companies go bust and no one has to experience their dreadful websites anymore. Or at least they do so badly their marketing budgets are microtomed down to such a thin wafer of their past bloated selves their websites are a simple one page PDF comparison sheet.

Oh, imagine that. A car company producing a single page PDF comparing all the key variables of each model. Those were the days. But, Mr Large Car Company, if this missive has landed on your desk and you are willing to bring in a team of highly creative geniuses, managed by a man who knows functionality when he sees it, to create a website for you that gets the message across without inducing hate in your brand, then I may be able to help.

Commodity dumps, rate rises?

When I wrote two day ago that I was concerned that credit and leveraged tech could be on for a walloping I really didn't expect you all to read that and smash the market the following open, But thank you. At this point I should publish a book and set up a hedge fund beginning with P and appear on CNBC every lunchtime because it is obvious that I am a guru and we can all ignore the fact that most of my calls are rubbish and I happen to have got lucky for once. It works for many 'gurus' out there so why not me.

The last bit of luck I had was back on March 17th when I wrote a post  here suggesting that oil would base that day using clues in oil stocks.  Luckily it did and it has taken 5 months to get back down to the levels seen then.

The psychology of oil prices feels very much Elliot 3rd wave, and 3rd waves are meant to drive to lows well below the wave 1 low, yet there has been an overwhelming capitulatory mood for the last couple of weeks. Supply supply supply. The story has even gone 'Ambrose Evans Prichard', with him moving on from Europe to waving his 'end of the world is nigh' banner over Saudi Arabia.

But now price actions are beginning to suggest another base may be in place. Yesterday saw dramatic falls in my dodgy oil stocks that  looked capitulatory. But more interestingly the price action this morning is reflecting the pattern I last saw on March 17th with the stocks putting in healthy bounces.

Premier Oil vs Brent 

BP vs Brent 

Tullow vs brent 

So, I am trading my luck from the credit /tech call and doubling up for a call on a base (for now) on oil.

Now call me old fashioned, but one thing I am having problems tallying in my brain is how we can have an environment of strong enough growth to produce interest rate rises yet weak enough growth to crater commodities. I know that there are ways we can explain it, but the explanations feel too complex. I am looking for a simple Grand Unification Theory formula of e=mc^2 simplicity, not the complexity of the proof of Fermat's last theorem which has to invoke jungle treks through diverse mathematical fields.

On the commodity side we have China and EM demand falling matched by increased supply (as @georgepearkes beat me up over). On the rates side we can say (as @M_C_Klein of the  FT's Alphaville team kindly reminded me)  that the US move is not inflation expecting but just normalisation. All true, but I still find it hard to marry the basics. If we have strong enough growth to justify rate rises then we shouldn't be seeing cataclysmic commodity sell offs. Either commodities are going to bounce from or we are heading for a Greenspan rate moment.

By the time you read this we will probably have had US NFPs,  seen as the last clue for Sept US rate action, but I am completely bored by them.

NFP  - NFI

Leverage and hope - Twins of the financial apocalypse

Yesterday we saw Fonterra announce another 10% drop in milk prices. So you can slice another 10% off this chart updated last month from their website

Once again the antipodean dream of never ending Chinese demand is turning into more of a nightmare. It’s a simple rule of business. Never expand production reliant on one client unless you are sure the contracts are binding. New Zealand is just experiencing what any UK dairy farmer has experienced at the hands of the large UK supermarkets. China is behaving like a UK supermarkets who promise the earth then backtrack and pin the suppliers down once they have no other buyer.

I went into this in last week’s post with regards to China’s next logical step being to buy distressed commodity companies and infrastructure rather than the commodities themselves so was reassured to see this mornings headline that a Chinese state owned company is looking to buy into Australia’s Fortescue.

Shares in Australia's Fortescue Metals Group jumped 9 percent on Wednesday, boosted by a report that China's Hebei Iron & Steel Group and Tewoo Group could invest in its infrastructure and mining assets.

Well there you go then. The greatest asset the Chinese system has compared to the West is long term planing unclouded by 5yr leadership rotation.

The outlook for equities is confusing me. On one hand I am looking for a move lower as growth and data disappoints, but I am very wary of a bearish sentiment that is getting worn down by lack of moves lower.

Sector rotation has kept the indices fairly intact with commodities being offset by tech but it leaves me wondering how long the ‘make up a number’ world of tech stocks can withstand the latest slew of soft data instead just absorbing sector switching from hard ’stuff’ to investment in hope backed by a reverse justification that as it’s at relative highs it’s ok.

My core concern is that we have seen a compression in credit that still sees real default risk miss-priced through the price anchoring effect of low global yields. I am particularly struck by the very low yields demanded on financing deals. There have been very few notable company failures recently and knowing how pricing models work, lack of past defaults is normally priced as lack of future defaults. Ooo err.

Most balance sheets have been wrung dry through accountancy tricks normally sponsored by private equity buy-outs NPVing future cash flows based on current optimism, borrowing against it and walking away with the borrowings leaving the less savvy lender, who by definition doesn’t understand the company as well as those running it, with the risk. Much as CB monetary policy has little ammo left, should things turn for the worse, these corporate buffer zones are wafer thin. If there is a turn down or a hint of a problem the disasters could be March 2000 re tech and Sept 2008 re financing leverage unwinding.

Of course we are absolutely fine until borrowing rates increase. For the past two years I have doggedly been putting ‘March 2016’ against any survey for the first Fed move higher. I may well be baled out by recent data, expecting expectations in the most time wasting game of this decade (Fed hike guessing) to once again be pushed back. But I am much more concerned about swings in credit related spreads than the core CB 25bp here or there. As anyone with a poor credit history knows, the base rate is the least of their financing concerns.

Where will the tip come? As regular readers would have noticed I have an inherent loathing for arguments based on past event arguments (normally expressed through clever scaling of past and present charts) BUT, I am willing to agree that some of this is looking very 1999. Commodities through the floor and tech through the roof. So my money is on stupid tech being the weak point, not Apple cash cows, but the 99% of the start-up portfolio that has been bought on the assumption that the 1% mega-winner will compensate for the loser rest. Tie my 'tech hope' and financing concerns together and I worry that if there is a turn down or a hint of a problem the disasters could be both March 2000 re tech and Sept 2008 re financing leverage unwinding. Don’t get me wrong, i’m not calling this as a high delta outcome but it is a fat tail.

But back to the shape of equity markets and I am till fascinated by the tech/commodity spread and find a glut of extreme commentary particularly interesting. to the point I am going to stick two fingers up at popular opinion and buy some oil and commodity stocks. Nice low geared big ones.

French Management.

I have just returned from a delightful few days on the sunny Mediterranean island of Ibiza. At this point, if you have heard of Ibiza, you will be probably readjusting your perceptions of this author as visions of large throbbing nightclubs, drug fuelled raves, foam parties and beaches covered in tattooed european muscle and scantily clad ladies flood your stereotype receptors.

Well, I am happy to report that there is another Ibiza. One of massive isolated luxury villas, frightening expensive beach bars (dripping in cool), superyachts (my word, the bays were rammed full with them) where time can be spent lying on shaded terraces, dipping into empty infinity pools and dining on the most exquisite food.

I am also happy to report that I can’t afford the latter or cope with the former, so sat on less expensive terraces in less expensive villas looking at other people’s superyachts and sipping just a couple of drinks at the Blue Marlin and ordering the pizza rather than lobster before my credit cards stopped working. It was delightful and relaxing none the less.

But dozing in the Mediterranean sun, the distancing from the markets and reducing the inputs whilst freeing the lolling soporific thought processing appeared to be more profitable than the high frequency overdosing of every single bit of news that most traders and screen jockeys are subject to. I managed to close equity shorts and go long on Tuesday open and have just reversed that trade on the Friday open on very few inputs. This is a theme I have found echoed recently by other ex-City Gods who have also found their predictive powers of market moves have become easier since they rid themselves of the clutter of IB chat inputs, the stream of Bloomberg headlines that nowadays appear to have a random red function to them as Bloomberg's talent for spotting what is important or not is becoming positively UK Labour party like. I am, of course, referring to the Labour Party’s instance that the most important issue in the world now is the use of the word ‘swarm’ by the Prime Minister.

The practice of moving attention away from 99.5% of the issue by focusing on an irrelevant 0.5% of the issue is classically political and I think we have all seen it used in dealing rooms when a cock-up occurs to attribute blame to the person chosen to take the fall. Pricing models might have may have failed, bank process may not have been in place, management may have turned a blind eye or implicitly encouraged, the phones might have been dicky and the client a duplicitous bastard, but some poor sod will be going down and reported to the FSA because he didn’t use the correct shade of blue pen when signing the deal slip. I have particularly found this method applied in French banks as the French do tend to have a skill at picking out the irrelevant 10% of an plan to stall it or trip it up.

Having worked in said institutions it wasn’t until too late in my management careers with them that I worked out how French project management varies drastically from the Anglo method. In the Anglo world to solve a problem, lets say bridging a gorge, the team allocated the task first assess all their needs (how much timber, ropes, man hours, pully blocks etc) and present the plan to management who then sanction the allocation of resources and the project goes ahead. However this isn’t how it works in French management, who are famous for asking the question "That is all very well in practice, but what about in theory"

The French method is for management to mumble that it might be a good idea to cross the gorge. Any plan presented to them by an underling is studiously ignored, instead all teams below are then expected to scavenge resources - read as 'fight each other, steal, stab, betray and compete for’ - to build a structure to cross the gorge which is constantly under attack from the other teams trying to steal its components and make it fail. Whilst this is of course hugely inefficient it has huge benefits for management. If it fails then it was not their responsibility as they never sanctioned it, but if it succeeds then it is their success, with the winning team leader, who is now proven as a vicious backstabbing bastard, being promoted one step up the ladder.

This should come as no surprise as it was Napoleon who most effectively employed this management technique, making sure that all his generals were fighting each other enough to leave his own position safe from threat. There is one other person who may be a skilled master of this technique too, a man whom I once met and was depressed by his propensity to talk about the size of his personal wealth over business issues. He is now Chairman and recently self appointed CEO of a large UK clearing bank. I think they even have a branch at Waterloo.

Commodities - China plays a blinder, Gen Y are renters.

Back in 2006-7 commodities were on a tear and oil was following not far behind. Speculators were hoovering them up as part of a the next great asset theme that was, like most new asset classes, based on the fact that the price had already gone up so it must be an asset(I wish you add here that foreign exchange is not an asset. A foreign currency can be but being told by your friendly FX salesperson that playing the currency markets is an asset is nonsense). Buying commodities for speculative or investment purposes is a game of storage. The commodities that are on their way from miner to end user are syphoned of into a metaphorical and often physical storage tank and held to be sold at a hopefully a higher price. When the markets turn this tank of speculative holding is off loaded adding to the supply. Rather than smoothing price moves they are exaggerated.  

The love affair with commodities is well and truly over. Many of the largest producers have been through a phase of hand wringing and CEO dumping as avarice induced supply investment has lead to Wiley Coyote moment of self induced collapse. The lags between investment decision and outcome are painful and you only have to look at the Baltic Dry Index to see what a pre-emptive glut in ship production has done to shipping prices. Through all of this I think China has played a stormer. I know that there is a natural tendency to believe that China has little  control over its behemoth economy (Exampled by recent Chinese stock moves) but in the bigger plan I do think they know what they are doing. With commodities they have sucked in Australian commodity producer hubris and spat out the bones. 

If I had a 20 year plan I would have done exactly the same. Allowing the idea of massive future demand to proliferate catalysing investment in new supply at an unprecedented level. At the same time watching speculative demand drive prices even higher adding further justification to the Capex spend. But once greater supply comes on line you then reduce your demand and watch the price of the commodities you ultimately need collapse. The speculative storage tank drains in a panic pushing prices down further and the reaction hits the stock values of the producers. 

I mentioned in my last post that this stage of the commodity market is much like a breath holding contest. The strongest companies will survive with the weakest drowning (much as we suppose the Saudi oil policy has been) leaving the survivors with a scorched and fertile ground around them on which to build even stronger. The current commodity price collapse is similar to the misuse of antibiotics. They wipe out 95% of the bacteria leaving the resilient MRSA types with no competition and fresh space to colonise.

I know this is speculation but the next logical step for China is to buy up distressed commodity providers for a song. Not the commodity, the company and infrastructure that supplies it.   

But what of core demand for hard metal things and all the stuff that is made from commodities? Global demand is weak it is true, but there may be another trend arising. Aspirations appear to be changing with the arrival of Generation Y, they appear to be a generation of renters rather than owners with little desire to own one of everything. Perhaps this is born from having to live in ever cramped accommodation where it is impossible to store a lawn mower ( even if they had a garden), chain saw, workbench, ski kit, surfboard or garaging a couple of cars. Not a bad thing perhaps as I survey my garage suffering a lifetime of power tool purchases that probably see action once every two years. Renting when needed is a much more efficient use of materials. As they say, if it flies, floats or fulfils a rare need (I had to change that) - rent it. 

Perhaps the West is reaching an end to its insatiable demand for personal stuff. We have an overhang of it as my garage is testament to. Give the next generation a phone, a laptop, superfast broadband is a shoebox sized apartment, with a Starbucks and artisan burger dive next door, no car and they appear to be as happy as Larry. Suggest to one of them that they buy a large house with 6 acres for the same price as that shoebox and they ll run a mile at the thought of having to look after it. Perhaps the common theme is that the next generation cannot be bothered to look after anything as it gets in the way with enjoying themselves or earning money in jobs that program machines rather than making them. 

Summer Ramblings

Amy Winehouse, Back to Black. Or rather going back to oil, as the Black is in the Red. The first dump in oil prices was always going to see support from those looking for supply to fall in response to price. It didn’t. The bounce was mainly short covering and we are now seeing a more realistic pricing to supply. This time we could make new lows.

Resurgence of High Yield/ Oil linked concerns. Companies and individuals can only hold their breath for so long. The first dip was manageable out of cash reserves or lending lines. This second dump is like being pushed back under water just after you broke the surface but before you managed to catch a breath. Nasty. Minor oil stocks reflecting this pushing to lows below those seen when oil was $6 lower than here.

The bauhaus chair model of oil supply and demand is proving valid with price sloshing around between the horizontal sections with no supply side change.

Individuals in the oil industry are also going through a capitulatory transition. Friends I have in the technical side of exploration have given up hope and are running out of cash and are seeking any jobs to plug the gap. 'FX Taxis’ faces competition from ‘Oil Taxis’.

Having said all of that my gut says oil will pause and bounce after its recent move lower, as my pertinent leading dodgy oil stocks stopped falling 2 days ago.

Commodities - Much like oil the second wave downwards is doing more damage than the first. BHP and RIO now coshed to new lows but I feel that the big boys finally falling is part of the last move. Fact of the day. The earths crust is 5% iron and 8.3% Aluminium. Ok, I know it’s density of distribution and cost of purification that counts but it’s still worth reminding people of when they go on about global shortages of stuff.

Almost as good a thing to remind people of as the population of New Zealand. Last night the newswires and twitter-sphere was alive with NZ rates news. I love New Zealand to buts ('bits' in English) and would happily spend the rest of my days there, but for Joe Blogs speculator or Mr Large US bond manager, it is worth remembering that it has a population the size of .. errrr.. West London or let’s say 1/5 that of Sao Paulo, or many major Chinese cities you have never heard the name of let alone can pronounce once you have. The NZD is a great currency to trade, it moves, it has yield, you can pretend you know what it’s going to do by watching esoteric Fonterra dairy price auction websites and you can even pretend you know where New Zealand actually is on a map, but let’s remind all those armchair dairy farmers in the FX market, that it is a tiny economy and a tiny island but the danger is that speculative flows can at times become positively Icelandic. The only contagion that could ever come out of New Zealand is via hot money lost. It could sink without trace and the only ripple in the markets would be a 4 foot break on a beach in the Cook islands. Don’t worry NZ, love ya really.

Gold - So it’s a metal that, much like bitcoin, has no relevant method of valuation other than the price it is at. Large collapse or rally so what? It’s immaterial to all other than those have been buying everyday since 2011. Gold is the ultimate buy and hold as the reasons expounded for buying it never go away. A religion in as much that it is selling a dream afterlife, but you’ll be dead before you see it.

‘Techapple’ - So they didn’t kick the ball out of the park, but I’m reading the price response to the poor figures 2 days ago as much as a comment on the state of tech indices. Flighty and fidgety. With gold and oil falling and Tech rallying it was all looking so late 1990s. But to be honest tech is a nightmare unless you are on the inside. Oh, that's illegal isn't it, in that case I guess Bono is a financial genius. There was me thinking he was just a jumped up singer man with over inflated impression of his worth to the world with good connections. Silly me.

Greece - EU policy has been to cover the turd on the Greek beach with a towel. Still sure the EU just want the problem to go away until September so they can all head off to Antibes for their nice August break. 'Nightmare on Ellas Street 3' is in post production. Odds on any Eurocrat doing the decent thing and spending their holiday in Greece? They should make it compulsory. As banks make their employees do a day’s fence painting in the local community centre so they can tick off their 'caring for the community’ marketing spin, so EU should send employees to Greece for a day’s pro-bono work. For anyone who hasn’t yet worked out why Greece can’t work go and read up on the Mundell Fleming model and realise that the only escape valve is capital movement which is exactly what the EU is strangling.

What else? Ah yes - Jeremy Corbyn leading the polls for next UK Labour leader. Can we really, one day, see a global leaders summit consisting of the world’s mightiest statesmen and there amongst them a guy looking like a 1970’s Open University lecturer?

The Pluto Crisis.

I asked the simple question this evening "Has Pluto been reclassified as a planet again yet", having witnessed the meteoric, or perhaps 'planetary', rise of Pluto's popularity. Its exclusion from the Solar System swiftly turned into a Twitterfest of analogies with the fate of Greece. Rather than leave that 'fest to fester in the ADHD black holes of past tweets I thought I should assemble them in one place in memoriam. So with huge thanks to my sparring partners @sanderwagner and @zatapatique for the wittiest in the list and to assists from many other dear friends, here is -

The Pluto crisis timeline -

Pluto only accepted into Solar System after GS made it look bigger than it is.

"The solar system is 'irreversible'", says Sun.

Pluto to hold referendum on accepting gravitational pull of Solar System in exchange for sunlight.

UK's opposition MP Dianne Abbott signs letter of solidarity with Pluto in its fight to break free from laws of physics.

Pluto to temporarily #plexit the Solar System if it doesn't follow path of other planets.

Asteroid belt divides planetary attitudes towards Pluto.

#Plexit is not an option

Jupiter blames Plutocrats for astronomical breakdown in trust.

Alpha Centauri puts pressure on Solar System to come to an agreement over Pluto. Worried about destabilising Milky Way.

"I’m not going to tell you. It’s somewhere on this moon." Pluto on existence of a new plan to stay in the solar system without accepting gravitational pull.

Jupiter and Pluto locked in precession until agreement is met. Gravity of situation not to be underestimated.

Sun proposes plan for all planets to lend mass to Pluto until it can grow by itself.

Pluto's newly discovered water to be privatised under new plan in exchange for another eon of continued sunlight.

#ThisIsAnEclipse starts to trend.

"I shall wear the astronomers' loathing with pride" Pluto.

Gallifrey informed it will also contribute mass to Pluto even though it's within the constellation of Kasterborous.

Ambrose Evans Pritchard: "Pluto reinsertion poisons solar system as backlash mounts against planetary servitude"

"An imperfect solar union" says asteroid.

"Ill conceived from the start. How can you have one central sun for such vastly different planets?" -Nobel prize winning astronomer.

Proof of Alien Activity on Earth

I am somewhat stunned at the resolution of the bijou Greek debt problemette. The idea that resolution, after extreme dissent and acrimony, was only found once Merkel and Tsipras were locked in a room under compulsory orders to come to an agreement is just bizarre.

Just what was in that room that persuaded the two leaders to come up with a proposal, by themselves after months of team negotiations, that was guaranteed to alienate both of them from their electorate? Was the Pope in there revealing the apocalyptic third secret of Fatima? Or was it just the US secret service revealing all the goat photos they have on them both? Or was there a representative from Nevada’s infamous Area 51? Because I have had to reach into my drawer, pull out and dust off my tin foil beanie (last employed when I spoke to my estate agent) to filter out some of the radiation that the EU is trying to use to take over our minds.

The deal is less permanent than applying Polyfilla to the Grand Canyon (though there’s an advert idea for Polyfilla) with the divisions now apparent across Europe as gapingly wide and deep. What a load of bollocks.

This newfound EU skill in bullshit diplomacy has even been extended to foisting EFSM Greek rescue contributions on the UK. How clever is that when they should be trying to curry favour ahead of the UK EU referendum? OK, perhaps Schaeuble is wanting UK out before they are even in the Euro, but he’s too clever for that. It must be a higher level of control .

So my highest ranking probability for outcome for all this, or as the banks like to put it, my 'base case', is that this planet is indeed populated by a master race of aliens. Eat your heart out Von Daniken, David Icke, Christian Scientists and all you nutters trying to dig through ancient archeology for proof, you been wasting your time. You have to look no further than the recent activities at very high levels in Europe for proof of alien existence and their influence on this planet.

And if you don’t believe me? Ask the former Canadian defence minister, who probably came to his conclusions whilst at a European Summit. Dan Brown? There's a book in this for you.


A list of things the Aliens are obviously responsible for

Nazca Lines.
Greek referendum.
My missing socks.
EU proposal to Greece.
Flight MH370.
Tsipras's U-turn after a mind replacement.
Enforcement of EFSM contribution on UK.
Pyramids.
French foreign policy.
Greek government's interpretation of how to represent the outcome of the referendum.
EE Customer service.
Greece’s acceptance of EU proposal.
London tube driver unions.
Atlantis.
German finance minister's planet conquering psyche.
Donald Trump.
Jeremy Corbyn’s ouburst on Channel 4 (his lizard face was almost seen). 
Chinese stock market.
Iran nuclear deal.
End of the dinosaurs.
The Bristol Pound.
Mass hypnosis of the Greek populace after the EU deal.
Everything in the Daily Mail.
30 miles of inactive roadworks on the M3 - obviously an extraterrestrial signalling device (see Nazca Lines).
Mark Carney’s paralysis over UK rates.
Sunspots.
EUR/USD exchange rate
Artisan food markets.
Bitcoin.
The Tunguska event.
EU summits.

Last week in pictures.

Deadline devaluation - Quick thoughts on the procrastinations

Deadlines come and deadlines go. But deadlines really aren't what they used to be. Much as red lines in Greek economic policy are as flakey as dry chalk on an old wall, EU deadlines are as dead and liney as a snake on speed. Sunday is past and there is no deal. The Greeks have two days to implement changes as lack of trust means that reforms now come before the money. Once in place there will be a further deadlines before which to complete new agreements in time for further payment dates towards the end of July.

Meanwhile the stranglehold on the banks via ELA will keep the pressure on the Greeks to do something. Delay is no longer a negotiating advantage to Greece. It now works in the EU’s favour.

I am still waiting for it all to boot off on the streets of Greece. So far material supply shocks with respect to imported goods haven’t filtered through to the shops (well in any meaningful way) but it can’t be long. The video of Tsipras going home to have his own Neville Chamberlain moment with a piece of paper even more onerous than the one Varoufakis returned with, is going to become a classic in future ‘how to sell’ courses. We are yet to see whether it's a success or failure example, but either way it’s going to be a corker.

France - Germany rift widens. As discussed many times in this space France has vested interests and frightening Deja Vus to defuse. France going behind the Germans' backs to ‘help’ the Greeks with their proposal (read as ‘cheat at their homework’) has done nothing to foster trust between the two. We know that France will do anything to protect its Eurobaby, but what is less understood is that so will the Germans. Even if it requires an amputation.

Hard response to Greece fits in with any German plan to use Greece as an example to the other villagers southern countries. A rotting corpse from a lamp post. Whilst this may focus the minds of the politicians and populace of the peripheries, it will have a destabilising effect on their debt. If Greece is hung out to dry then the threat function of what can happen is equally reflected through their bonds markets. These now have to reflect the additional risk of being cut adrift so yields will jump higher. If you are constantly threatened at gun point, you may well be more willing to comply, but your life insurance premium is going to rocket.

It also means that at the first hint of slowdown, recession or budget squeezes the vigilantes are going to really go for the peripheries with less fear of meeting a coordinated EU defence.


Markets - Friday had all but discounted an agreement, let's say 90%, the highest hope function of the past 3 weeks. The ship is back on the rocks and pricing of equity and European bond markets should be heading back to the disaster style levels but they have opened up on the futures as I write only marginally down (Spoos down 12). But Eur/usd is steady and no-one really seems to care that much. Odd. Odd to the point I am shorting index futures on a feeling that the move lower will be pretty sharp.

-----

Post script - 8.30am Ldn
I wake to find a deal has been done, it may be a classic European fudge based deal but the markets love it and I m sitting on losses.  But even if there is a deal between the Greek Government and the creditors there still has to be a deal between the Greek Government and the Greek people. As the Kaiser Chiefs sang "I predict a riot"

DIJSSELBLOEM: ASSETS WILL BE TRANSFERRED TO FUND TO BE RUN FOR PROFIT AND USED TO PAY DOWN DEBT; TO CONTRIBUTE TO BANKS RECAPITALISATION. That sounds like asset stripping into a non sovereign entity controlled by Creditors. There is monetisation of assets. In other words leasebacks. Like a few islands? Mykonostadt? Corfurt? Rhodesterdam?

And finally, the latest picture of the deal signing with Mr Tsipras and Mr Tsakolotos about to take their seats (left) .

2011 Euro redux -

We may be heading for another case of can kicking but it is worth remarking on how far the can has already been kicked. I was looking through pieces I had written back in 2011 on the Macro Man blog as Eurocrisis Part 1 was kicking off and I was struck by just how apt some of those posts are today as they were then. Merkel and Germany were getting just as much flack for intransigence as they are today.

So here are three pieces I wrote back then that are worth resurrecting

First Tennyson's 'Charge of the Light Brigade'

The Charge of the Euro Brigade.
First published here Oct 2011

Half a year, half a year ,
  Half a year onward,
All in the valley of Debt
  Rode the unfunded
'Forward, the Euro Brigade!
Charge for the loans they said:
Into the valley of Debt
  Rode the unfunded

'Forward, the Euro Brigade!'
Was there a bond unpayed?
Not tho' the Eurocrats knew
  Some one had blunder'd:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do or die:
Into the valley of Debt
  Rode the unfunded

Spending to the right of them,
Spending to the left of them,
Spending in front of them
  Follied and blunder'd;
Storm'd at, all rushing to sell,
Boldly they bought and well,
Into the jaws of Debt,
Into the mouth of Hell
  Rode the unfunded

Flash'd all their policies bare,
Flash'd as they turned into air
Shattering the investors there,
Meetings and summits while
  All the world wonder'd:
With policy of mirrors and smoke
the global economy they broke;
Chinese and Russian
Reel'd from a rate cutting-stroke
Shatter'd and sunder'd.
Then they rode back, but not
Not the unfunded

Selling to right of them,
Selling to left of them,
Selling behind them
  Follied and Blundered
Storm'd at, all shot up to hell,
While investors continued to sell,
They that had bought so well
Came thro' the jaws of Debt
Back from the mouth of Hell,
All that was left of them,
  Left and unfunded

When can their story fade?
O the wild charges they made!
  All the world wonder'd.
Honour the blunders they made?
Honour the Euro Brigade?
  Forever unfunded!

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

And looking back at this take on Sinatra's 'Lady is a tramp" with regards to the German Chancellor

That's why the Lady is a Tramp -
First published here Oct 2011

She gets impatient, over the Greek debate
She'll never rescue, lazy people she hates
She loves to tighten, just don't do it late
That's why the lady is a tramp

Won't go to Athens, there's nothing to see
Doesn't like crap games, with the ECB
Won't compromise, with the FDP
That's why the lady is a tramp

She loves the free, free Germany
Export ecstasy
PIIGS broke, but it's "OKE"
Distrusts the French, they're not in her camp
That's why the lady is a tramp

Doesn't like dice games, with the Finns or the Nords
Rides in Mercedes, not Seats or Fords
Will dish the dirt, wont sign the accords
That's why the lady is a tramp

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

And finally back to Tennyson, Merkel as the 'Lady of Shalott',

The Lady who Shall Not.
First published here Oct 2011


On either side of Europe lie
Yields on bonds that reach new high,
All up on "risk", not CPI,
And all pray for a bailout by
The place that just won't spend a lot.
And up and down the people go,
Gazing where the credits blow
Yet hope a lead the Germans show
So please don't say "shall-not".

Knuckles whiten, lips a quiver
Little rumours dance and shiver
Through the markets, run for ever
About the union they may sever
Will they please just spend a lot
Four bust nations yet o'er all towers
Committee rule that lost its powers,
Yet up against this mess now cowers
The Lady who "Shall not"

Eurodome! Two men enter, one man leaves

With the Greek negotiations fast becoming one of face saving excercise for both Germany and Greece, Schäuble and Tsipras are becoming the competitors in the Mad Max Thunderdome. Two men enter, one man leaves.





Welcome to another edition of Eurodome!

Announcer -Listen on! Listen on
This is the truth of it.
Fighting leads to killing,
and killing gets to warring.
And that was damn near
the death of us all.
Look at us now, busted up
and everyone talking about the end of the Eurozone.

But we've learned by the debt
of them all. Eurotown's learned.
Now when men get to fighting,
it happens here.
And it finishes here.

Two men enter, one man leaves.
And right now,
I've got two men.
Two men with a gut full of fear.
Ladies and gentlemen, boys and girls. . .
. . .dying time's here!

He's the ball cracker.
Financial Death!.
You know him. You love him!
He's Schäuble

The challenger,
Direct from out of the Wasteland.
He's bad. He's beautiful.
He's crazy!
It's Mad Alex !

Eurodome's simple. Get to the
money, use it anyway you can.
I know you won't break the rules.
There aren't any.

Remember where you are.
This is Eurodome.
Your voters are listening, and will take
the first man that screams.

Prepare!

Two men enter, one man leaves!
You know the law!
This is Eurodome!

[A violent fight ensues resulting in Mad Alex pinning down Schäuble]

Crowd Kill him!

Onlooker - No, no! Look at his face!
He's got the mind of a German.
It's not his fault.

Mad Alex - I'm sorry.

Schäuble -This wasn't part of the deal.

Mad Alex - Deal?! What do you mean, "deal”?

Europa - You must have tasted it.
It was in your hands.
You had it all!

Mad Alex What do you mean, "deal"?
No more Euro, This place... finished!

Europa -No, little man.
We've only just begun.
Do you think I don't know the law?
Wasn't it me who wrote it?
And this man has broken the law.
Right or wrong, we had a deal.
And the law says,
"Bust a deal, face the wheel."
Bust a deal and face the wheel.
All our lives hang by a thread.
Now we've got a man
waiting for sentence.
But ain't it the truth?
You take your chances with the law.
Justice is only a roll of the dice...
...a flip of the coin,
Fix lt.

Mad Alex - You run Eurotown.
You fix it.

And down again

And there you have it, everything rolled over soon after the last post and we started the European open testing lows again.

News and comment has seen even the nice Mr Noyer saying that with no agreement ELA will have to be stopped and that he is very concerned over the outcome. It's naturally unsettling to hear the pilot of the plane warning how scared he is of an imminent crash. In fact the chorus of 'very concerned’s has spread through all official ranks all the way down to minor UK MPs. That must be the political equivalent of a theme going ‘Tabloid’.

Though the potential outcome probabilities for Greece have not changed overnight, expectation appears to have, with many more expecting Sunday to be a rubber-stamping of an exit visa into the Greek passport.

Meanwhile the other shock function to everything has been China. A move down in the stock markets of 30+% has noise levels rising to 'deafening' and the wealth destruction involved vs book value from the highs is, on paper, huge. But (and here I get beaten up by many of my Financial Twitter friends), considering where the market has come from and were it is back to, I am not as concerned as they think I should be.

Wealth construction/destruction is indeed assymetric but all the money that has actually been lost has to have gone somewhere. Leverage is the killer though and there are two types of leverage on a stock bubble. Borrowing to buy the stock originally and borrowing against the book value of the stock to spend on lifestyle. Now in the case of housing bubbles, which are used as an example of wealth destruction when bubbles break, there were huge knock-ons as increases in book values had been used to borrow to spend and change lifestyles which were then exceedingly hard to readjust down. But in the case of Chinese stocks they were at this level earlier this year and I find it hard to believe that the rally has had time to cause dramatic irreversible lifestyle changes.

Leveraging to buy causes debt stress for those that bought but for every penny spent on a stock someone recieved that in payment. The move down has been redistributive as far as the real non-book wealth goes. Companies issuing at the highs cashed in, those selling cashed in but we are only hearing about the losses. Even those losses for the unleveraged aren’t that large. If we look at Chinese fund returns since Jan1 2015 we can see that they are down but not a lot.

I thank my friend @BrokenBanker for the following - 

which is about the same as we have seen in FTSE on which we haven’t heard a squeak. 

We know that catalogues of Chinese stocks are closed frozen holding them from dropping further but the shape of recent falls is panic and the volume of noise over it is at crescendo. Everything associated with a strong china trade has been washed out too with iron ore making 5% distress moves. Of course if you are in agriculturals it's the other way around. 

The concern is that China is not able to control an economy that is under pressure as well as a stock market crash. But China is China. The Chinese Government controls everything and has proven constantly, to the despair of China bears over the last 5 years, that control often produces results that are unwanted to the speculator but very much wanted by the controlling regime. The better question is not whether the Chinese can control things, but what they want the outcome to be. The terror reported upon the faces of Chinese stock brokers and punters may well be what they want. And driving the speculative longs out of the commodity markets has just made the deliverable a lot cheaper. 

And now what do we do? Risk was indeed sold off heavily from the last post, the distress noises first thing this morning was high again. Price action this morning has seen things stabilise and now that the US has opened up it's interesting to see SPX stuck around that gamma target of 2060. Whilst my feeling is that a Grexit on Sunday is very likely I have never underestimated the EU's ability to protect it's baby even if it does involve schemes and policies straight out of the Twilight Zone. With this in mind I have taken back shorts bought some bombed commodity/china linked suff and will step back off the field and into the stands for the next four days. Unless of course something breaks before then.. or I get bored.  

PS.. Gone a bit quiet from the German corner. Someone trying to gag them with a star spangled banner?