MINE

Monday went pretty much as planned with everything risky fading again. After the $5 rally in oil it makes sense to give half of that back and indeed the indications of no rally from China yesterday were followed through with a dump there today.

Which leaves things looking pretty grim for prices into European open, with little to see out there to change the down pressure other than price itself. Yesterday's plan was to look for a down day followed by a return higher today yet looking at momentum and mood, what with China acting as a peg to hang your bear hat on, it seems hard to imagine ait occuring as I write. But I am going to stand by that call and look for markets to base somewhere today and resume an up leg.

There is little to back the idea of a turn higher from the ‘new news’ front but my A.I. neuro-algorithmic market timing model is saying it goes higher. What is my AI neuro-algorithmic trading model? It’s an organic base of billions of flexible self linking quantum driven multilevel units each self optimising to search for the most efficient data processing network using a complex set of feedback loops based on multi-particle based transmitters. Yes. My Brain.

So whilst some feel that financial schisms directly lead to economic downturns I will keep calling this a financial overreaction to a potential economic problem rather than a critical economic problem being rightly reflected by current market moves.

"Price in Risk please”…”MINE"

What next? Fade the ratings

Before anything else, here's today's 'Alex' cartoon from http://www.alexcartoon.com/index.cfm?cartoons_id=5065 

Not much news apart from 'price is news’. The German IFO missed but is still on a healthy 107 handle but apart from that not much. With little news to talk about the first thought that jumps to mind is ‘don’t short a quiet market’ but when 'price is news’ to the extent that it has been over the past three weeks the news may be quiet but that doesn’t mean the price need be. More importantly in the ‘price is news’ inputs, China markets did not rally - they fell again. China is the missing link to this being a proper market turnaround. Yet the mrket commentary is beginning to resemble a bottom ibeing in as much as long term arguments for selling that were used as short term arguments for shorting are now being pushed back to long term again. We saw this with Europe during it's demise where shorts were justified as 'now'was pushed back to 'one day' with respect to EU collapse yet all those short PIG Sov bond possies were anhiliated none the less. So it is with the rcurrent recession calls. One day you may be right but the ammo we have to make that call right now is much more subjective than recent price action deserves so we have plenty of time for things to shake off the current doom. This is very much like any January. It was only a year ago that Greece was meant to take down Europe.

Without news, we are left with mood. A big big down followed by a big up leaves both camps with arguments for them being right and whilst I am in the ‘up’ camp, the bounce we have had has been impressive enough to drive models out of positions and leave the current status in limbo. I’m working a low probability call that we see more down today and then tomorrow it’s up again. ( 'it' being anything that has dumped since Jan 1). But in general today is a tussle day.

In minor other news, ratings agencies have downgraded oil stocks and it was bandied around as another reason to be gloomy, but I don’t think I am alone in having built a mental picture of S+P and their ilk being a bit of a joke when it comes to stating the bleeding obvious. I had wondered if their complete uselessness as a tradable indicator could be measured and was very grateful to @zatapatique for furnishing me with this little nugget. It’s the price behaviour of CDS, the market’s pricing of insurance against default, in the run up to and then after an S+P upgrade or downgrade, marked as 0 time. The original paper is here

As we can see the market prices have started moving long before any S+P move and the ratings change tends to mark the extreme. So it was most apposite to see the S+P moves in big oil firms tie in with their base and meteoric rebound

16 hours early

Though we all like to pretend we are cool unemotional system and process driven investors, even the hardiest algorithm driven fund management company has the WTF moment when the algorithm or process results in losses that ultimately interact with the most crucial human resultant  - the take home pay of the fund employees. The only difference between dropping  15% of your clients money in a macro, algorithmic or passive fund rather than just spending it on a fund manager holiday in the Maldives is the excuse. 15% is gone no matter what else. I don’t actually know which I would prefer. If I HAD to lose 15%, which fund manager would I most respect. The one whose investments were flat and he blew the 15% on himself, or the one who was so rubbish at their job they lost 15% in the markets.

Why do I mention emotions? Because although the mnemonically challenged  'Polemic Investment Services Strategic Offshore Family Fund’ is meant to be a balanced portfolio designed to weather storms, this week it has been far from that. Feelings and beliefs have been backed to the extent that nights have been sleepless and calls for new underpants regular.

Regular readers will know that I have been touting the 19th of Jan as mythical turn date since the end of last year. So I am hoping that, with the longevity of the call having been so long, I will be forgiven for being out by 16 hours on the base of the markets. Now if I was writing a fund manager letter I would of course adjust that to the latest time benchmark possible. So applying a Pacific time zone I reckon I can explain my miss down to 6 hours.

Of course the greatest debate is ‘is it a turn, is it a correction or is it superman’? A superman being one of those V shaped ballistic take offs that leave the world with a post party paranoia wondering if perhaps someone dropped Rohypnol in their drink, rogered their longs senseless, stole their money and threw them on the street positionless and penniless on a rising market wondering if any of their strange dreams of a mass global financial panic had actually occurred.

Now I don’t know, but my money is on a continued grind higher in risk stuff from the panic lows. My normal indictors of excess doom are pinging warnings (the Peston Bollock-o-meter hit 100 this week) and I haven’t been let down by my prediction of Davos stories of fear, though to be honest I was pleasantly surprised to see bit of temperance with regard to excess China concern. At this point I am going to hand over the reins of the bull cart to my old Team Macro Man compatriot ‘Global Macro Trading’ and ask you to
read this --https://globalmacrotrading.wordpress.com/2016/01/21/its-time-to-start-building-exposure-to-risk-assets/

I do hope your really did read it

But back to price action.

-Oil is up 12% in a couple of days. But don’t be fooled by percentages. That’s only 4 bucks, which in old money (pre oil crash) is 4%.
-FTSE is up 300 pts (5%) from it futures low on Wednesday as mining stocks are all roaring
-Ruble is up nearly 10% from its lows of the last couple of days.
-Long Nikkei short JPY has done a “Watanabe bounce’
-All other risk assets are up accordingly.

Yet there are areas of worry that haven’t done their bit. China stock price are decidedly ‘Meh’ and even US stocks haven’t caught the blast that the Europeans have - (Hat tip @Draghi). So though I am delighted that we have a powerful turn, I can't believe that we are out of the woods until all the ‘sell the ralliers’ have sold and been stopped out and all the ‘this time it is differenters’ have found that it isn’t. So shall we say SPX back to 2080?

One last point, t"he amount of debt in the world". Something I hear more and more, especially when markets are falling as it’s a great back fitting reason and the "We are about to see the biggest biggest round of default the world has ever seen and the central banks have no ammo left to counter it". Of course they can. They can monetise it. And if you think that’s a sin because it causes inflation then just rethink that thought.

A shame that you cant buy 'fuel card' from BP or Shell that you top up as you would a travel card. Only you don’t top it up in monetary terms instead you add in volume of fuel terms. If they did I’d be putting 10,000 litres of diesel on mine right now. Hmm.. The thought has some interesting optionality to it - much like postage stamps, but I have never known the cost of postage to fall.

Iran. You ran. WEF ran.

Iran
Petrol is now cheaper than most bottled water and considering that the price of petrol in the UK is 75% tax, at 99p/litre, without the tax it is rivalling even the most basic everyday ownbrand supermarket water. I do not believe that selling oil on the Iran deal increasing Iranian supply is wise. That news is not new and the Iranian sanction lift has been obvious for months.

The Iran deal has been done and with it comes the first twist in the realignment of Middle East allegiances. Obama is playing the statesman in getting the deal through yet it will most probably be European interests that are first through the door as sanctions are lifted in stages. Iran has historically been the Russian bed-fellow in the Middle East with Saudi Arabia being the American's. Opening the doors to trade with the West will see infrastructure companies race in and a population that has been desperate to have their their aspirations for betterment satisfied rave happy. The Westernisation of a population that was once pretty westernised anyway will continue and as such this is pretty much the best thing the US can do to moderate the country. But my suspicious mind leads me to ask one of you clever readers what is stopping Iran from now acting as a conduit for West/Russia sanctioned goods? Doesn’t take much to change the label on a Brie to Iranian Brie. Or much for Russian oligarch money to get lost in an Iranian infrastructure project built by Siemens. Iran now have one foot in each camp.  Running short Saudi and Long Iran may well be the trade of the next few years.

You Ran
Price action on Friday was pretty similar to the one before. A horror close as the market ran for cover in a dump that has been printing percentage moves daily that would normally encompass weeks. Yet the VIX volatility index hasn't blown up that much. Whilst on one hand, the usual hand, that can be taken as an indication that we haven’t hit panic levels yet and so therefore we are not yet at the bottom, but pos the other hand it could also mean that their isn’t a desperation to buy volatility. Perhaps because there are fewer leveraged stock longs that need hedging. I say leveraged longs as the total amount of longs out there has to be constant as someone always owns the stock.

It is January the 19th tomorrow. That has been my mythical buy date for January. I have long held that this date is the first turn date of the year but have never really had any good reason for it other than US holidays tend to produce turns, so I was most pleased when a good friend offered this explanation to back the theory. It’s option expiry. OK, we know that but why this one? Well it’s the first of the year and option traders are even more averse than usual to show losses on the books. They like to make a loss against existing profits and only 2 weeks in there are unlikely to be many. So they will be hedging even harder than usual resulting in price moves being exaggerated and chased until the expiry is over. Which certainly fits this year's start and though this hypothesis is not yet a theory I will run with it for now.

WEF ran -
Davos is upon us. Do not muddle Davos with Davros, though the leader of the Daleks may well be attending. Bono probably is. I was thinking about how the psychology of the World Economic Forum works and of course it's exactly the same as politics anywhere. People do not go to these events to defend stasis, they go with an agenda to get more of what they want. Which implies change. To sell a story that results in change involves selling a story of how stasis is not an option and to sell that idea the here and now, the present, has to be depicted as sub-optimal. But sub-optimal is never enough to spur people to rally around your cause it has to be stronger than that. As with religion, you have to threaten your audience with doom and damnation should they not follow your reasoning and proposed course of action. Yes, with religion it’s the threat of some invisible unproven being smiting you and sending your as yet unproven non-molecular remains to a spookily anthropomorphic hell of your own worst imaginings. With politics it’s actually pretty similar but involves threats upon your proven humanity.

So with this in mind we can expect that the bias of the commentary coming from Davos will be undoubtedly swung to the decidedly gloomy. In simplistic terms, if there ain’t problems to be solved then who’s going to sign the expenses. So the first mission is to highlight, or when desperate make up, some problems. Which is why the journalists just LOVE it.


Before I leave you, I'll try to get you to cough your breakfast cereals over your screen with this gem.  Jeremy Corbyn is suggesting that the UK get rid of Trident but keep the submarines that are specifically built to launch it. I can only assume because of pressure from the Unions and SNP as the object to job losses arising from its scrapping. Right. This would be exactly the same as banning bullets, but insisting that the gun industry is kept alive as jobs rest on gun servicing. Putin must be pissing himself with laughter.



Standing by to go BOLIVIAN tomorrow (Balls Out Long, Infinite Var, It's A No-brainer) and one trade I am going to involve in that is a market favourite that everyone has probably been driven out of  - Long Nikkei / Short JPY. On a de-stressing that one could fly.

Hostage negotiations.

10 US sailors are in Iranian captivity. But worry yee not, we have a plan

So here’s the plan. We buy stocks in US arms companies , law firms and 'Latin American Gentlemen Outfitters (Camouflage our Speciality) Inc" on the idea that (and God knows I might be really miles off with this, but hey, you never know) - One way out of this crisis would be for, say, the US to sell arms to Israel who then channel them as a third party to moderates in Iran who in exchange promise to help to get the hostages freed. The money coming back from the Iranians for the arms could be syphoned off to maybe, just an idea here, support US interests in Latin America who are fighting governments unfriendly to the US. I know that no one could possibly think of doing something so whacky, but you never know it might just be worth a punt.

Or perhaps we should be thinking like a bank finance structuring desk -

So the US buys arms gives them to Israel, who pass them on to Iran who in return ship oil to Scotland to refill their North Sea reserves. Scotland in return send Haggis to Latin America.. no no no .. that can't be right.. So how about .. Iran send the hostages to Goldman Sachs who amortize their ransom demand cash flow, after applying Israeli Factoring discounts, and issue a 3yr mezzanine subordinated bond backed by the final ransom payment, with the coupon payable in Scottish Haggis with a knock in, should the hostages be released, paid in surface to air missiles from the US deliverable in Colombian Pesos. The CIA in turn hedge with a USD/SAR 10delta call.  Does that work? No ?

Or we could do it the Jeremy Corbyn / Dianne Abbott way

So this is what we do .. we’ll write a letter of support to the Iranian jailers who are having to look after the Americans, because if the Americans hadn’t been aggressive Navy sailors, they wouldn’t have turned up in the jail forcing the jailers to look after them on abysmal wages. And on a weekend too.

Or the EU parliament way

So this is what we do .. We table a motion proposing that each member state set a date within 2017 to discuss a further proposal to form a committee of representatives to decide if the progression of the concept of hostage negotiations could be addressed in the planned 2020 EU ministers meeting.

Or the Russian way

What hostages? There are no hostages. We invited a select group of your fine proud countrymen to join us to celebrate their err.. birthdays.. and they are having a wonderful time. They are free to leave whenever they wish but are currently taking a nap in their 5 star hotel rooms. And no, there is no mobile reception around here, it seems to have gone down, sorry.

Or the German way -

So this is what we do .. We invite the whole of Iran to live in our country hoping that the 10 hostages are amongst them.

Or the Donald Trump way

No actually please God no, just forget that.

The games at the Colosseum.

It's bad, It's very bad. It's so bad that we know we might as well join the crowds and head down to the Colosseum to watch the great spectacle of the markets being put to death.

Will they be crushed beneath the great weight of falling Chinese demand? Or torn apart between copper chariots,  or scorched to death with burning oil, or will they be Fed to the rates lions? Or perhaps just killed in the stampede of wild sellers?

And so it was on Sunday night (Monday morning to you Kiwis). The show started well. There were oohs and ahhs from the crowd as the South African Rand was hurled to near death, falling 7% in only 4 minutes. Then DM equity futures took a beating falling 2%. The crowd roared with delight when the Chinese stocks walked in and were lanced between the eyes. They were loving it.

The program included a drubbing for the CNY, with the likes of Nomura forecasting a sizeable move in the fix.


(H/T @etleggett for the clip)

But it didn't happen. The CNY just dusted itself down and stood there unharmed. The CNY fix was pretty much unchanged.

And that was where it started gong wrong. From then on all the not-quite-corpses staggered to their feet and started to head off up. By London open equities were pretty flat to up with the Dax having put in a 300 point turn higher from its overnight base.

The crowd were confused but hoping this was just part of the show, the tease, as something was going to come into the Arena and finish the job in style. And lo, the drums sounded, the US arrived and oil came pouring down. 6% down. The crowd screamed and cheered every dollar oil fell. This would finally do for the markets and indeed, they choked, spluttered and fell again.

But then something extraordinary happened. Once oil had done its worst, the markets again staggered to their feet and the last hour in New York saw them revived. The rumours of their death are somewhat exaggerated.


So, enough with the commentary, what next?  Clues -

- Spikes blow off in the basket cases such as ZAR. All the more interestingly happening at stop loss social hour known as New Zealand open only to pull back again in sensible time.
- Continuation of calls for 19 USDZAR and $20 oil (extrapolationists in force)
- Oil doing 6%.
 -China Fix unchanged - defusing the apocalyptic deval camp (please remember to look at the basket not just vs USD)
- Press suggesting this is 2008 again.
- George Magnus on TV a lot. George is a genius on China (follow him at @georgemagnus1) and rightly gloomy, but when they invite him on the whole time you know the story is tabloid.
 -AUD/USD recovering
- Past darlings being ditched - FANG and biotech.
 -High yield holding in.
- Risk appetite indicators at extremes.
- Iron prices recovering despite the headlines being grabbed by copper.
- Stocks holding.
- Baying crowds on Sunday night fully prepared  for Armageddon.
- Tuesday tomorrow
- Huge sell off on price alone for the whole year (a whole week).
- Price is News - it certainly was last night.
- RBS says 'sell everything' and AEP amplifies it
- High yield holding in.
- CNH funding at 70% - most likely due to short positions being squeezed in the face of direct intervention. CNH is back to flat on the year.
- No new bad news, apart from the death of David Bowie.
- Finally I have started getting those emails. You know the ones, from the sort of people you don't hear from for ages but when you do their messages are serious amalgams on all the reasons why the world is about to implode yet none of the reasons listed are new (last emails in similar vein recieved in the first week of  September).

The masterplan had been to wait for Jan 19th for the turn but with the markets having come so far so fast, and imagining the algo boys must be wetting their shorts due to bursting momentum bladders, I have once again jumped the gun and started buying equities in both DM and EM.

The punchiest trade of all is to buy Russia. But the Oil situation is not resolved yet and I'd like to see some form of 4 or 5% bounce before even entertaining that thought.

Finally some comments on the Aramco IPO suggestion

Great for Saudi as it  :
- Diversifies income away from oil
- Amortizes future cash flows allowing them to effectively borrow against future sales.
- Sucks in investors into having a strong interest in protecting the stability of their investment i.e. Saudi Arabia.

Good for investors :
- Allows them to hedge their future oil demand through shared ownership of supply
- An easy way to go long oil whilst receiving a coupon.

Incredibly dangerous for investors :
- Never trust any insider cashing in on future cash flow unless you know they are desperate for short term cash. Saudi may look short of cash but they aren't really yet.
- You are buying a share in huge oil reserves but not in the land or armies that sit on top of them. Ownership of these can change.
- You are taking a view on oil prices and prices can go down as well as up.

Idea for Russia - Buy the lot and then 'protect' your investment.

I am praying that when I wake up tomorrow morning the markets haven't dumped. Goodnight.

Notwitter

Welcome to Notwitter. The site where you don't publish all the things you shouldn't say. Where the things that should remain silent, remain silent. The antidote to twitter.

Technology - 

Our servers are the fastest on the planet and yet the greenest, using no energy to store the globe's countless things not said. Our quantum algorithms compress all of that data to a mind-blowing 0 bytes.

Notwitter currently contains 60% of everything that the globe has decided not to express. Within 5 years that will be 99%. This makes Notwitter the most comprehensive database for the marketing and profiling of nothing on the planet. Should you wish to join us on our exciting journey there will be an Initial Public Offering pricing the company at $15,000,000,000.

User guide. 

To not post that thing you nearly wanted to say but thankfully realised you shouldn't -

1. Just don't press the button that isn't there but if it was would be marked Notweet.

2. Don't even think about it

3. Press 'page back'.

4. Continue with what you were doing before you had that thought.

To search -

Our retinal and neural telepathy algorithms allow the user to search for any notweet just by staring at the screen. The relevant nothing will appear.


Below is a constant stream of user notweets. Scroll to view. Enjoy!

The cost of the Bristol Pound

On the introduction of the Bristol Pound I wrote a cynical spoof of the life cycle of this new local currency and was subjected to some vehement admonishment for decrying a scheme that was going to bring prosperity to Bristol by 'preventing money from leaving Bristol'.

The idea that preventing your currency from being used anywhere else, thus staying local, supports your economy, if realistic, would see every village, hamlet and even household issuing their own currency. Of course this isn't efficient otherwise economies would have evolved that way naturally centuries ago. Running your own monetary policy, flexible exchange rate and maintaining a belief in the value your currency holds would be impossible. This is why the trend has been the other way with larger currency blocks evolving.

But the Bristol Pound tries to get around the difficulties of managing a different monetary policy by piggybacking that of the rest of the UK by pegging itself to the UK pound. The Bristol Pound is therefore a UK pound that can only be accepted in Bristol shops that have decided to accept it, much like a gift voucher. Or rather - exactly like a gift voucher.

I could go on about the value of local currencies but Tim Harford does better HERE deciding that any benefits are social as a currency pulls people together in a common cause, something a well organised traders committee can do anyway, and not economic with relation to the transmission or retention of money.

Though the benefits are at best murky, the costs of the system are quantifiable and my discovery of the latest Bristol Pound accounts is what has prompted this post. I have been watching their website for a while eagerly anticipating the 2014 accounts but, unlike the 2013 figures, these have not been released at an annual general meeting during 2015. I have not seen any proposed AGM or mention of the accounts on the Bristol Pound website but they are available from Companies House directly - https://beta.companieshouse.gov.uk/company/07346360/filing-history (H/T to @MayfairCynic for locating them for me)


So, 2014 -  Circulation in mid 2015 was quoted as Bristol Pounds (BP) 700,000 but let's assume that was the same at end 2014 (though probably less).


Administration costs for the scheme in 2014 were £340,000, up from £78,000 in 2013. 

£280,000 was contributed to the scheme by the government in grants.

The directors' remuneration was £115,000.

That means that in 2014 nearly 50p was spent in administration costs for each Bristol Pound in circulation. If this was the cost ratio for running UK notes in circulation (£66.03bio on 31st dec 2014) the treasury would be paying £30bio per year just to maintain the currency in circulation. If we cranked this up to the GBP equivalent of M4 (as B£ includes an electronic version) the costs would be £1 trillion a year.

So who is paying for this huge administrative expense? It looks as though the rest of the UK population is as profits jump from £1000 to £282,000 after adding in Government grants. So the tax payer paid about 30p towards the maintenance of every Bristol Pound in circulation in 2014.

The net assets of The Bristol Pound are listed as £9,000. If you consider that they have received £280,000 is State aid in one year alone, one could say that the scheme run by non-bankers pretending to be bankers because they don't like bankers is costing the State more in bailouts than RBS or Lloyds ever did on an aid/asset basis.

The scheme is a volunteer led project but there are staff costs (they are hiring paid staff to join in the marketing of the project http://bristolpound.org/jobs ). The directors are also remunerated.
taking 15% of the face value of Bristol Pounds in 2014. This puts the odd 0.01% of the FX fixing scandal into perspective.

I can only anticipate the 2015 figures and expect that by then each BP in circulation would have cost £1 to administer. At which point one would wonder if it would have been easier just to hand that amount of cash to the Bristol traders involved.

Bristol Pound have never stated what their performance metrics are other to imply that the more currency in circulation the more successful it is. The part of the CIC report filed citing success solely rests upon the marketing success of the project with no proof of association between the Bristol Pound itself and economic improvement.

But when we consider the costs involved as shown above we should wonder if the benefits justify the scheme as an alternative to using Sterling which has no incremental costs and would have saved £340,000 in 2014 alone.


The lack of publication of the annual accounts on the Bristol Pound website may be due to the organisers not wishing to attract attention to the costs. Indeed there is very little reference to any of the downsides of the scheme anywhere (the wikipedia entry appears to be tightly curated by the supporters) but rather than this being due to a lack of sceptics I assume it's due to those who consider the project a farce just leaving the believers to get on with it.

There is an interesting part to the CIC declaration that needs to be completed annually that asks if stakeholders are regularly in consultation.

As for that part about "making the currency available in more disadvantaged areas", why? Using Bristol pounds doesn't make goods cheaper in fact by definition it must be making them more expensive otherwise users would be buying local anyway without the need for a Bristol Pound to force them to. The disadvantaged areas are just as well served being handed cash instead of gift tokens. 

As the main stakeholders are the holders of Bristol Pounds and those that fund them, us, I would suggest that the annual reports and accounts are of primary importance with regards to consultation and should be raised for debate and at least published on their website. 

-----------

Finally as a tongue in cheek footnote - Bristol should beware. Their mighty Bristol Pound is also leaving the community. There is a place on the south Dorset coast taking them.  Which then opens up another point - How would Bristol justify the success of the Bristol Pound in supporting local business if the rest of the UK abandoned GBP and adopted the Bristol Pound instead? A huge circulation would result but there would be no local differentiator. The value of using 'highest circulation' as a success metric is thus disproved. 

Weak week. Waiting.

We are now a week into 2016 and due to the small sample set we can take the week’s moves and also quote them as the month's and year’s moves. Hence promoting "we are down x% for the week" into "down x% for the year", making it sound like a long trend rather than a week's noise.

The year has indeed started with a clatter and though my last post’s musings of what might happen in 2016 included a start of the year dump and references to Saudi Arabia being the lynchpin (or grenade pin) for 2016, I didn't anticipate them being THE themes of the first trading day. Throw in Chinese stock price action, a fall in CNY,  a continuing collapse in oil and all you are missing is a Greek Crisis to have every poltergeist of 2015 returning to scare the heck out of the market.

I have done very little since the end of November and likewise have had little to say. But the extremis of market gloom does appear to be outstripping reality. Now before you start listing all the bad things in the world as evidence supporting the case of my naïvety - I KNOW. But the speed of the flip would imply that we have a crisis on our hands.

But let's separate out a market crisis from an economic crisis. A market crisis can occur when all else is fine but there is a sudden repricing to a new reality. In this case it's anticipation of higher US rates and an anticipation of Chinese demand collapsing. An economic crisis is when growth collapses, people lose their jobs in droves and there is no money to be had. A financial crisis becomes an economic crisis when money stops flowing around the system. Panicking that there will be an economic crisis caused by a financial crisis itself caused by tightening rates, tightened because there is less chance of an economic crisis, and thinking there would be no back tracking on policy to counter both crises strikes me as absurd. I am still convinced that if we got to that state then more money would be printed and injected.

But Western economies are not collapsing although the media do their best to convince us that they are. Notable was the BBC headlining, yes headlining, a -0.1% revision to UK GDP. Unemployment figures in the west are improving. The US NFPs were storming today and the European PIGS are putting in steady improvement figures


H/T @AlanLMGN for the chart

It isn’t a melt down. In fact the paradox is that if the US economy was in dire straights the Fed wouldn’t be telling us so clearly that they will be raising rates 4 times this year.  If this is an economic crisis you can forget the Fed hikes, but it isn’t. It’s a market adjustment (and not yet a crisis). The US economy is doing fine, as is the UK, with service industries growing strongly.

At this point someone says that’s the problem. Our manufacturing sectors are out of balance with services and manufacturing is not showing a recovery normally associated with a 'proper' recovery and it's an imbalance needs to be addressed. When I ask people why it needs to be addressed I usually get a reply along the lines of .. well.. that's the way it has always been.

The UK is the second largest exporter of services in the world and the US economy is currently 88% services. In a competitive world it is better to export high value goods rather than low value goods unless you can make those low value goods at such low prices that (price x volume) =  big. Whilst there are countries with populations willing to accept lower wages than us for their day’s work we have to sell goods they can’t. And that is now mostly services.

A case in point is my recent purchase online for one of the kids. A new mouse and external CD/DVD RW Drive. The mouse contains a laser, interferometer, micro computer, wheels, buttons wires and a USB socket. The DVD RW thing contains technology thet could probably have run the Apollo 11 moon landings.  Cost to me, including shipping?

Mouse £0.99. Apollo launching DVD RW £6.99.

Yes this Darth-turbo mouse cost less than 10 minutes of a UK minimum wage, including shipping. I cannot imagine any UK manufacturing plant able to turn out a mouse and a CD DVD RW drive, including shipping, on just an hour’s worth of UK minimum wage labour. My local garage tries to charge £90/hr just to change a wiper blade. So lets stop bothering and keep exporting the high value services.

Once upon a time the UK’s agricultural industry accounted for 90% of the country's economy. It is now about 3%. Should we readjust back to that too for nostalgias sake? As long as we are exporting services that pay for the lower valued manufacturing stuff we buy in then that's fine. Yet services are lost in the data.  The historic way of measuring trade data demotes many services into the invisibles part of  the equation leaving attention resting on the more obvious manufacturing figures. It is worth listening to this excellent BBC radio program ‘making the invisibles visible’ http://www.bbc.co.uk/programmes/b05xxc08 which was out last summer.

But back to markets. China kicked all this off again with a late fall in asset prices on Monday. No new news, just restrictions on shorts being lifted and the rich racing to take their money offshore, apparently. China’s currency has been in the headlines again as it has been allowed to weaken prompting new terror over a massive devaluation upsetting the region. But note that though USD/CNY has strengthened, against its trade weighted basket it is still in the normal range (just). This is best expressed by my old mucker, alter ego and Alma Mater - Macro Man here http://macro-man.blogspot.co.uk/2016/01/a-chinese-take-out.html

Western equities prices are moving. I know that sounds obvious but there has been little else this week to drive that move other than other (Chinese) equity prices moving. But emerging markets are beginning to look cheap (ignoring Southern Africa) however trying to persuade anyone to listen to that narrative in a January is utterly pointless. We are at that point where the man in the crowd with the pitchfork waves it in the torch light at the castle and leads the charge up the hill -  only next to be seen as a town gate pole decoration. January the 19th is still my mythical turn date but I may bring that forward as sentiment is already extreme. Let's see what Tuesday brings.


Oil - This is it folks, we are at that famous economic point called the front leg of the bauhaus chair of supply and demand.

Saudi Arabia has indeed become the centre of attention and a new Iran / Saudi spat has blown up. But this isn't as clear cut as previous spats where the guy in the white is always seen as the goodie. My thoughts on how this one is different will have to wait for another post but suffice it to say that old allegiances are being sorely tested and will change as the fog of complexity in proxy wars becomes even denser. Saudi and Iran are as much proxies to other superpower battles as various Middle East factions are to Iran and Saudi's own spats. 

One last reference to one of my 'calls for 2016' - that sanctions against Russia will be slackened - https://www.foreignaffairs.com/articles/russian-federation/2015-12-14/not-so-smart-sanctions

As I go to post this, US markets are having another bad close so I remain sitting on my hands. I am not going to sell risk and still wait to buy it. Roll on Jan 19th. 

That's a wrap.

So here were some calls I put out last year for 2015. And it's time to appraise.

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

I think we can score that as a categoric HIT

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

Again a HIT. SPX closing much where it started in the general scheme of things (even China's SHComp outperformed it by 12% over the year) with sectoral plays having been massive.

- 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.

MISS. Looking back on it there was a self-inforcing escape clause in it. GOOD discretionary has been good, or it wasn't good. The problem is that discretionary in general has been pretty bad. But then so have most indices. So I am a bit lost on this one.

- 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.

MISS, though I’ll claim an assist as Discretionary Macro have indeed found themselves short of portfolio managers but that should have been caveated by ‘GOOD' portfolio managers as performances have been pretty abysmal. The quants are still dominating the world and the discretionary macro has at best had a ‘year of living dangerously’ or at worst completely screwed it up.

- 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.

Not sure -  Funds have found the combination of lack lustre performance within the confines of rules implied by their investors egregiously restraining, or, ok , their performance was just rubbish but many have decided to hand back investor money and go it alone with just their own. Bluecrest a case in point, but a number of macro funds have hit the headlines this year, handing money back or closing.

- Fast swings will seek out and eat at the edges of risk boundaries. Much as lions will take down the wildebeest 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.

HIT - Hard to tell now how much the whipsaw destroyed returns through stop losses being triggered without the agility to get back in in time for bounces, but 2015 has certainly been the year of the whip and stop loss. Either you took them and missed the re-entry or didn’t and wished you had.

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

2016 - I've been looking at trade recommendations from some houses and the complexity of some of them e.g. GS’s ‘Stay long a basket of 48 non-commodity exporters and short a basket of 50 EM banks stocks’ has me thinking that no one really has any confidence in anything at the moment. The idea that a year that has left many confounded ends with an outlook that is also bathed in confoundedness is not really to be unexpected. As a general rule, forecasts are normally an extrapolation of current mood.

If I was to be completely true to my faith, now would be the time to go for some big calls that sit outside confused tweaks of yield curves or spreads of things that are pretty much reliant on good fortune than real cleverness. I don't want to be fooled by complexity. It may look clever, it may sound clever, it may even be funny, but it can still lose you money as fast as betting that Trump would be out of the running by now.

But I don’t have any brave calls other than thinking that 2016 may see the following

-People will think that the Fed will hike faster than currently discounted, discount that, and then the Fed end up trailing market expectation again.
-The UK and GBP will take a hit as the rest of the world wake up to the fact that the ‘leave EU’ vote is going to be a very close run thing. I would love the UK to join NAFTA instead. If Turkey can be considered part of Europe then why not UK part of the North American continent.
-Europe will continue to politically melt like a lump of fat on a hot plate - From the bottom. The only hope is that economies grow fast enough to defuse nationalistic unrest. Greece will become an issue again in June.
-China will be just fine but relations with the west will continue to cool politically.
-Something will happen in the oil markets to see prices rise, the breath holding contest between marginal producers is going to see drownings. Or someone forcibly goes in to turn the taps off in Saudi.
-ECB will continue to trade Oil. ( i.e. energy and commodity price inputs will be the main sway to EU inflation and ECB will follow the swinging watch chain, hypnotised)
-Iran becomes more of a friend to the west putting further pressure on Saudi Arabia.
-Saudi Arabia will come under someone’s cosh in general. Too many points of interest coincide at Saudi Arabia.
- The West reduce sanctions against Moscow. I don’t know what will be the catalyst, but something will thaw relations.
- Equities will have a shake down at the beginning of the year and there will be the usual 'EM is going to collapse' call (seems a regular feature of Januaries) but then you scoop them up with both hands. Probably on the 19th Jan.
- Banks will continue to morph into old fashioned post offices as they are squeezed between regulation and Fintech. The intelligent output of Universities is now going to where it always should have gone, science, engineering and creativity.
- Inflation will be back. Great for deflating debt but only as long as real rates stay negative while inflation rises otherwise the cost of servicing debt could wipe out borrowers before their debt levels denude through inflation.

I am not going to put any trades on until something sticks. And I dont mean to fur.

Now finally, here are some things I would LIKE to see happen in 2016, but are, unfortunately not very likely.

- Amazon is found to be run by creatures that otherwise occupy the 'Tripods' in 'War of the Worlds' as I gather the way they treat humans is similar.
- SKY TV go bust.
- The road works on the M3 will be finished, or at least finished before the world is engulfed by the sun as part of its natural evolution towards a red giant.
- People will fix your computer rather than telling you how to do it.
- Trump and Putin meet in a cagefight - on the basis that two men enter and hopefully neither leave.
- Politicians are fined for every proven untruth they tell. Check your stats folks...
- Banks will work with retail so that all transactions automatically attach an invoice to your online bank statement which is automatically downloaded into accounting systems.
- A large blank swathe of Syria is secured by international forces and new cities rebuilt to rehouse all the fleeing refugees. Better to rehouse on their own land than in foreign countries.
- A new ‘thing’ is invited that becomes the must have essential item for the whole world, kick starting economies (large TVs, phones and cars have run their course)
- Battery energy density break through.
- Someone events a new class of antibiotic.
- Scotland gains independence whether they like it or not.
- Peak Political Correctness occurs when my offence at your offence causes stalemate in the Ombudspersons judgepersonst
- People reading from 2000yr old books stop trying to change my life.

Nobody expects - ECB more dorkish than expected.

The ECB has added yet another positive data sample to support the theory that the most profitable trade of 2015 is to fade market expectations into central bank announcements. I have produced this simple representation using the Fed as an example before, but it is just as aptly applied to the ECB and their announcements. For the ECB we should replace 'hawkish' and 'dovish' with 'less dovish and very dovish' and apply a slight downward gradient on the black line, but you get the picture

I have seen comments this morning that the market was shocked by the ECB's hawkish tone. It's a funny old world where a central bank moves rates from negative to more negative and can be accused of being hawkish. Dorkish maybe, but not hawkish.

As I keep stressing, the thing that we should have learned over the past few years is that that expecting central banks to follow market expectations is like expecting the Spanish Inquisition. No one should expect it.

The element of surprise that the ECB has once again induced in the market has lead me to shamelessly rehash the post from October when the market was surprised by the ECBs dovish tone.

The latest ECB press conference Monty Python Style  - No one expects such little ECB action.





Market -  I didn't expect such little ECB action.

Jarring chord. The door flies open and Cardinal Draghi of the ECB enters, flanked by two junior cardinals. Cardinal Vítor Constâncio and Cardinal errr the other one at the press conference who never says anything.

Draghi - Nobody expects such little ECB action! Our chief weapon is surprise...surprise and fear...fear and surprise.... our two weapons are fear and surprise...and obscure communication.. Our three weapons are fear, surprise, and obscure communication...and an almost fanatical devotion to inflation targeting.... Our four...no... amongst our weapons.... amongst our weaponry...are such elements as fear, surprise.... I'll come in again. (exit and exeunt)

Market - I didn't expect such little ECB action.

Jarring chord. They burst in.

Draghi Nobody expects such little ECB action! Amongst our weaponry are such diverse elements as fear, surprise, obscure communication and an almost fanatical devotion to inflation targeting, and doing everything it takes, - oh damn! (to Constâncio)  I can't say it, you'll have to say it.

Constâncio - What?

Draghi - You'll have to say the bit about 'Our chief weapons are ...'

Constâncio - I couldn't do that...

Draghi bundles the cardinals outside.

Market - I didn't expect so little ECB action .

They all enter.

Constâncio - Er.... Nobody...um....

Draghi - Expects.

Constâncio - Expects... Nobody expects the...um…such little ECB ...um...

Draghi - ACTION!.

Constâncio - I know...I know! Nobody expects such little ECB action. In fact, those who do expect...

Draghi - Our chief weapons are...

Constâncio - Our chief weapons are...um...er...

Draghi - Surprise.

Constância - Surprise and...

Draghi - Stop. Stop there! Stop there. Whew! Our chief weapon is surprise, blah, blah, blah, blah. Read the charge!

The other one - You are hereby charged that you did on diverse dates commit heresy against the Holy ECB. My old man said you didn't follow the curve.

Constâncio -That's enough. (to Markets) - Now, how do you plead?

Market - We're innocent.

Draghi - Ha! Ha! Ha! Ha! Ha!

SUPERIMPOSED CAPTION: 'DIABOLICAL LAUGHTER'

Constâncio - We'll soon change your mind about that!

SUPERIMPOSED CAPTION: 'DIABOLICAL OBFUSCATION'

Draghi - Fear, surprise, and a most ruthless... (controls himself with a supreme effort) ooooh! Now, Constâncio, their expectations!

Constâncio cites obscure inflation indicators in support of the ECBs lack of action. Draghi looks at him and clenches his teeth in an effort not to lose control. He hums heavily to cover his anger.

Draghi - You....Right! Tie the market down. (the other ECB officials make a pathetic attempt to adjust the market expectations) Right! How do you trade?

Market - Still long Bunds, short Eur/Usd and running long Dax.

Draghi - Ha! Right! Not for long! Cardinal, give their expectations (oh dear) give their expectations a vicious twist.

Constâncio stands there and awkwardly and shrugs.

Constâncio - I....

Draghi -  (gritting his teeth) I know. I know you can't. I didn't want to say anything. I just wanted to try and ignore your crass mistake in leading the market to believe in October that we were going to follow Switzerland

Constâncio - MY mistake?

Draghi - It makes it all seem so stupid.

Constâncio - Shall I, um... Tell them that we'll continue QE until March 2017?

Draghi - Oh, go on, just pretend for God's sake

Constâncio mumbles about the effectiveness of QE and need for its extension. The market looks decidedly bored with this pathetic attempt. 

The doorbell rings. The market detaches itself from the ECB and answers it. Outside there is a dapper Fed official with a suit, slightly detached from reality.

Fed Official - Ah, hello, you don't know me, but I'm from the Fed. We were wondering if you'd come across the pond and do a sketch over there, in that sort of direction... You wouldn't have to do anything - just look as though you expect the Fed to raise rates

Market - Oh, well all right, yes.

Fed Official - Jolly good. Come this way.

The Pitch - ‘FiX Up’

The Pitch for working title ‘FiX Up’

After seeing the age of the criminals who pulled off the record breaking Hatton Garden vault heist and at the same time witnessing the outrage at the FX market's fixing scandal, I thought I could marry up the two genres in a typically British film, the pitch of which I have sketched out below. I was wondering if this could actually be pulled together into a film so if anyone would like to talk to me about making this real then please get in contact.

The tale is a familiar one of old criminals (lags) getting together for one last job, only in this case the lags aren't criminals but old school 1980's FX dealers. Imagine Oceans 11 meets Trading Places meets Sexy Beast meets Wall Street (only the Essex version). The old trading lags come together to have one last crack at the markets, but do so behaving as they did in the 1980s causing all sorts of financial mayhem and amusement as they apply 1980s trading skills in an electronic world. (All characters are of course fictitious and any resemblance to ..etcetcetcetc)

Synopsis 

Sitting outside the clubhouse of a golf club in Essex, England, supping lagers, two old FX spot traders are discussing how things have changed since their day and despair over the news of FX fix fixing. They reminisce over the old days and decide that the traders of today must be completely stupid to be caught out doing something that they all did but nowhere near as blatantly. At this point a waiter appears and while clearing the glasses catches their conversation and starts to chip in. He tells them that he was recently let go from an FX shop for not being profitable i.e. he didn't rip the clients off enough and regales them with a list of the absurdities of today's markets including algorithmic trading, arrogant Real Money fund desks, demanding Hedge funds, compliance officers and the regulators themselves.

The old lags start to fume at what has happened to their beloved market and decide that if a collection  of young muppets can so nearly get away with the FX fixing, but for being idiots, they would have a crack at showing them how it should be done, fiercing up the market one last time.

As with any good heist movie the target isn’t the public but the other evils in the market. The plot sees the old lags actions end up, Robin Hood style, benefitting the public good whilst taking down the modern evils on the way.

The two originators, Mickey and Danny, hatch a plan to get the boys back together.

The team cast list  (actor suggestions in brackets)

Mickey. ex-trader and now the groundsman at the Essex golf course (Ray Winstone)
Danny. ex-trader, recently made reduntant from the back-office of an Aussie bank (Phil Collins)
Dave and Steve. ex-traders who are approached in one of those green taxi cafes in London as they are now drivers for  FX taxis (the two bald actors from Eastenders)
Bugle (real name Charlie).  As a young guy he was the 'muppet' on the spot desk but now is a corporate FX sales guy at a bank, about to be busted for peddling 'charlie' to his clients. (Lee Evans)
Wayne. Now a compliance officer at a US bank. He doesn’t want to join, but they blackmail him with photos from a 1989 stag party. (Jim Broadbent)
Gerald.  A smooth investment bank type who used to be their boss in the old days who is now treasurer at a small private client bank but is about to be let go (Ralph Fiennes or Jeremy Irons).
Sparks. Ran the primitive IT at the old shop but is now running a porn website. (Timothy Spalls)
Jimmy (but now prefers James).  The old economist cum strategist - nervous and lacking in confidence these days - he is now writing financial blogs and running a failing online private trading advisory service. His character regains its old force throughout the plot. (Colin Firth)
Beverley. Telex girl and everyone’s old fling. Now a house-mum in Romford (Patsy Kensit).
Archie.  An old school french sales guy, always drunk but knows every important name in the European market as he has probably been whoring with half of them and slept with the other half (Gérard Depardieu)

Each one has a scene of them being approached and finally accepting.

When they gather Sparks tells them of a bank’s disaster recovery dealing room he knows of that has been mothballed and as the owning bank is going under due to regulator fines they seem to have forgotten about it.

The lags break in and start to set up. There are scenes of them all larking around trying to understand the new technology (even though it is old by modern standards) whilst Sparks gets angry and Gerald has to read the riot act.

They set up dealing lines with dodgy prime brokers using the credit card numbers Sparks has hacked from the client list of a high class City strip joint.

They start to trade and gain market credence by behaving as normally as they can though they often nearly let slip (such as asking for USD/DEM) which Sparks and Gerald have to cover via IT hacks and Gerald's connected shmoozing. E.g. when starting up they don’t know what an EBS is and nearly cause a flash crash by hitting it in anger (ends with Mickey throwing it out of the window and declaring that from now on its phone only like the old days. Cue more blackmailing calls to old school voice broker types).

As they get bigger  investment bank sales desks hear of the volumes they are doing (facilitated by tip offs from Archie to his sales mates)and start to court their business wanting direct access to this new client instead of via prime brokers. Wayne knows how to fool the Know Your Client regulations and Sparks links their credit references to those of a large Far East sovereign wealth fund, so large dealing lines are obtained.

Once all the credit lines are in place, it all sets up for the sting which is based around a set of data releases, could be non farm payrolls or an important CB rate announcement (a bit 'trading places').

The announcement is way off expectations but instead of doing what would be expected they do everything that theoretically they shouldn’t.  James “ECB cut 1% much much lower than expected.. so boys what do we do with EUR/USD?… well we should sell the sh*t out of it .. so… MINE MINE MINE”. The resulting price action confuses the hell out of the algorithmic trading models and new world theorists (cut to the odd 21yr old quant at a large investment bank muttering 'this shouldn't be happening'),

Cut to shot of the back of a chair in a chic glass office with a young preppy exclaiming to the occupant "We don't understand it sir!" The chair swings round as it's occupant, fingers steepled, quietly utters "I do". It is one of the old school macro hedge fund giants who was also around in the old days and was the lags' old nemesis (probably played by Ben Kingsley). The Hedge fund is called 'Nemesis'

The game then develops into a battle of old fashioned phone trade spoofing with analogies to real battles. It’s mayhem and the weaponry expands as the old lags realise that the Hedge Fund Nemesis has more than they are used to - ‘Shit he's got f’king options, he’s using options! Where the f’k is Willy?" Willy is a retired prehistoric options trader who they call in last minute only to find he is on oxygen in a nursing home, but he starts to help via mobile phone and manages to talk them through countering the option attack via a massive option barrier battle with him directing the spot desk through his oxygen mask (highlights option market manipulation).

It is now 3.30pm and the old sales lags, Bugle and Archie, are preparing for the 4pm fixes. Sparks has hacked the financial chat services of other major banks and the old lag sales guys are now using them to offer all the real money fund accounts reverse spreads on the fixing prices, but only on sell orders.

Cut to Real Money dealing desk hearing this and giving the lags all of their sell orders despite a junior there asking how it can be possible to offer reverse pricing and says something dodgy is going on, but the Real Money traders saying they don't care, as they only have to outperform the fix and get paid themselves on the difference. Thus they fall into the trap.

Come the 4pm fix they manage to coordinate it so the hedge fund Nemesis is about to unleash hell on the boys filling their bids, but the boys pull the bid just as Nemesis screams SELL. The market melts on the back of it right into the fix. This screws the Real Money fix orders and the regulator, now seeing the fast move and receiving screams from the Real Money sector start to track down who was responsible - leading to the Hedge Fund Nemesis.

The rapid move in the fix also triggers regulatory investigation as to how so many orders were effected leading to the exposure of the real money execution desks accepting reverse pricing.

In the background is the battle of the computer algorithms who can’t understand 6 standard deviation moves and there are scenes of barely out of teens quants and their ‘this shouldn’t happen’ cries. As the old lags notice stop losses coming in from the algo sector, they realise they have found the algo’s Achilles heel and crank up their 'do the wrong thing’ trading.

Meanwhile Sparks has hacked into Bureau de Change style holiday money changers via his old porn site dropping viruses into their front offices (cut to bored young FX teller in a Heathrow Bureau de Change late at night surfing porn).

By now the traders are raking it in over the algos but when the team’s profits hit $1 billion they start to transfer their profits back to flat by providing stunning FX rates via all the usual rip off holiday money FX joints (cut to scenes at airports/train stations/post offices of queues of people taking currency out)

 When their P/L is down to zero they plan to pack up the dealing room and scarper. But it’s a race against time as the authorities are closing in having tracked Sparks' hacks and compliance officers finally seeing cracks. They make it out just in time but not until after the police are seen on the CCTV breaking in down below. Sparks shouts that the Feds are in. Mickey shouts “The Fed’s in?” and instinctively buys 300m USD/JPY before being stopped.

There is a resulting huge media storm. Investigators dragging off compliance officers for not preventing it, the Hedge Fund Nemesis for manipulating the market, the real money guys for accepting impossible fix prices for personal gain and the algo shops go bust amid scenes of riots against computer trading. Finally, Parliament rules that Bureau de Changes must provide interbank rates. There are TV clips of embarrassed statements from all.

The final scene is the police breaking into the dealing room the boys have been using to be greeted with a mess and a huge spray painted slogan on the wall - “F'CKING MUPPETS’ (which will become a catchphrase forever linked with the film)

 Fade to Mickey and Danny outside the golf club chinking together their pints of cold lager.

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

Memorable scenes -

- Old lag calls new US Investment Bank dealer. New dealer -“He’s just given me a 100 and asked how I am left shag, what’s that mean? - He wants another price - But he’s just had one - Make him another - He sold again .. damn .. and again .. and again. Old lag marches the price down but then lifts the new kid in huge at a large loss. Old lag - ‘F’king Muppet’.

- The boys go to the pub for lunch and get legless coming back at 4.30pm - drunk behaviour party scenes, bins on heads etc. but hugely successful trading.

- A bank dealer to his older boss "That's odd, he just said that I am a monkey and put the phone down" Old boss asks "what EXACTLY did he say?", " He said 'you're a Monkey' and hung up" - Boss "SHIT! he said 'YOURS, a monkey'. A monkey is slang for 500, you are now long $500million USD/JPY and as I see it $500,000 underwater"

- Beverly being sent off to Mayfair to seduce the Hedge Fund’s critical quant over lunch in a smart Bistro/Cafe and dropping MDMA in his double espresso so that he goes back euphoric only doing nice things instead of the Hedge Fund God's instructions.

- One of the old lags deciding to be long or short by the way the crane outside the window is pointing.

- The team plan to hit the market on the US trade data. But nothing happens as no one cares about US trade data any more, only to be caught out when Non Farm Payrolls come out “What the f'k was that all about? NFPs? Not F’ing Playing.. that’s what I am ..”

- Old lags trying to visit old city haunts. Flash backs to seedy pubs and omellete shops - all gone and replaced with Starbucks and glassy wine bars. Plus reminiscing lines of past bad behaviours.

- Gerald being told he is no longer needed at the merchant bank as a new US MBA non market savvy geek is being moved in.

- The young kids around one of the old school brokers serving the old lags experiment with the old techiniques gingerly trying to say “and thank you too .. errr Mr… Shag?”

- Willy, the options dealer, in the nursing home asking why the price is spiking every 2 seconds when he mistakes his heartbeat monitor for a trading chart.

- Compliance officers in the investment bank queried about the new customer a/c saying everything does seem to be in order as they have a copy of a passport and two recent utility Bills - shot of one of the passports being that of a FIFA president.

- Old lag's first trade asking for Usd/Spain only to be told it doesn’t exist anymore. He screams "Ok Usd/Mark then". No not that either. He freezes in stunned disbelief.

plus many many others…………

I just don't Noah.

Apparently the next two weeks in markets are going to be the most important since Noah predicted the flood crisis. Thinking about Noah for a moment, I can only imagine how absolutely pissed off all his neighbours must have been with him. He was probably the Zero Hedge of his time, but rather than calling for everyone to build a cabin of wood and fill it with gold, he came up with the cunning plan of telling his neighbours to stick all their livestock in his floating cabin so he could sail off with it all.

But Noah is a literal case of survivor bias. 'Literal squared' actually, as he was the one who survived and he was written about. What we don’t hear about are all the other nutters who were building arks for the previous eon calling for doom only to go bankrupt as their long gophur wood positions suffered decay and they died long before their wild predictions of flooding would ever come true. So it is with markets. We have hundreds of financial Noahs telling us to build arks and not to squander our time and wealth on farming, procreating, lying in the sun and generally having a nice time. But as my wife says 'you only live once' so we might as well enjoy the now.

Living for the 'now' is apparently what ‘Mindfulness’ is all about so, with it being so fashionable, I am surprsed no one has launched a 'Mindfullness Fund' where they just spend all your money on the 'here and now', not worrying about future returns as it’s the now we have to be concerned with. Oh, hang on, they have haven’t they. It’s what macro funds have been doing with your money all year. Macro funds - where mindfulness is not mindfulness.

Everyone desperate for something predicatable to happen in the market is telling us that the two greatest predictable events are going to happen in the next two weeks and it is going to result in amazingness, where amazingness equals whatever they are predicting to happen once the two most predictable events have occured. The two most predictable events are the Fed and ECB rate decisions, but the follow-on predictable events depend upon who you are talking to. Spotted the problem here yet? Polemic’s Certainty Principle. 'If you can see how predictable an event is, the outcome is unpredictable. If the outcome is predictable then the event that causes it isn’t'. Back fitting of news stories to fit market moves is a case in point.

On the other hand there is an unpredictable event coming up that is so unpredictable people would rather not talk about it that much because predicting a tradable outcome from OPEC can be as exciting and probabilistically reliable as calling the lottery numbers, most probably because OPEC's decision are as much political as they are economic. Which makes it tough for the great mass of financial research which relies on the quasi-maths we call economics rather than the base cause of human inter-relationships which is called politics. Economics works really well until I smash you over the head and steal your belongings, at which point the supply and demand price curve bypasses price, instead verging into the i-dimension of imaginary economics.  Perhaps someone has written a paper on that, but though many seem to think citing someone else's 'paper' is gospel proof of their own arguments, most papers are only worth what they are written on (and I am not talking about a Macbook Pro).

I am getting pretty bored with markets at the moment. There seems to be an excess of navel gazing with respect to economics with actually very little happening in response. The next triggers to market moves will be via basic politics rather than newly found economic theory. I don’t know what the next trade is. Doom rests upon everything going caput re debt, but one man’s debt is another's asset so these huge numbers being bandied around probably net off to a huge extent. Imagine if there is a Martian life form up there saying ‘Fleep bodudle gweeb, have you seen how much debt there is on Earth? That planet is bankrupt!”. No it isn't, only in this respect are Flat Earther’s correct. Earth as a whole is flat.

Whilst talking about Martians, here's a philosophical question - is it possible to be criminally racist against a race doesn’t exist, but instead is only a figment of one’s own imagination? I bet it is.

As for EM and USD debt, the most likely outcome will be that EM switch to Euro or Swiss funding as close to negative as they can get and then just roll up the FX risk as usual. Bad for Eur and Chf, but then everyone is positioned for that anyway so probably nothing will happen.

Basically, if you don’t have to be trading and you don’t have to be writing about markets then don’t. If, however, you are employed to look busy in markets I recommend you buy a copy of ‘My Big Bumper Soduko Book’, make an excuse about a prawn curry and lock yourself in Trap 3 until everyone else has left for Christmas.

Swarm Economics

Whilst a lot of attention has been paid today to the BoAML fund manager survey my attention was more drawn to their lesser mentioned small business report which can be found here.  I was struck by the hugely upbeat nature of it with investment and hirings planned at a pace. This was particularly of interest because I think the world of small business is too often (always) lost in the reportage of big business.

I now run a small business. I used to work for big business. It has been eye opening.

Working for big banks dealing with big clients, analysing big companies and looking at the data that they provide gave me the impression that big business is the driving force in the world. Having left a large institution and been immersed in the small business world I can see just how misinformed and blind I was. Small business is responsible for 50% of GDP yet coverage is naturally biased towards the big companies.

Most small business is privately owned and because of that rarely gets reported on. If there aren’t myriads of investors then the audience for any analysis or reporting is reduced to miniscule. This leads the wires to be swamped with further perception bending pieces on big business alone. And then there is the matter of size distribution. Though that 50% of GDP is made up by small business it is easier to focus a biopsy on an elephant than each individual ant in a huge ant hill. Hence small business is further ignored.

Yet conditions for doing business as small business are improving and it is expanding in response. Technology is making it so much easier to establish small businesses, from cloud software to run accounts, legal functions, HR and reporting, to the internet making communication from a barn in the countryside as practical as sitting in an expensive city centre office. It is not that hard and the advantageous synergies of large business are being whittled down. In fact there are efficiencies in being a private small business compared to a public behemoth that has management sapped by and legions employed in investor relations keeping shareholders and regulators happy.

Small is good and with the model of egalitarian exposure proven for the individual through social media models it is becoming replicable for small business. Now advertising your wares is dependent as much on the viral nature of the idea or product you have rather than how much money you pay to put it through traditional costly media placements. The playing field is being dramatically levelled. I may not be unique in bypassing any tweet or facebook post sponsored by a large corporate, more likely being enticed by something novel from an unknown.

The mistrust of large corporates is not diminishing with the latest VW scandal further pushing large corporate reputation after than of bankers. The fashion for artisanal goods has naturally spread to that of artisanal companies, and the term ‘small’ normally suffices for artisanal.

The idea of a swarm of companies driving the economy, each being technologically enabled to communicate efficiently with each other is seeing the formation of a virtual super corporate and that swarm operative is exhibited in the way the swarm employ too. One of the past disadvantages of running small companies has been the inflexibility of hiring due to the huge commitment just hiring one extra member of staff can make. As a percentage of total employees that one extra body can be large making it hard to fine tune. Thinking you need half a person more results in one or zero. Yet the technology that is making swarm business possible is making swarm employment possible too. Freelancing works and though zero hours gets terrible press it is in fact the most efficient way of employing and, if onerous competitive clauses aren’t invoked by single employers, allow for huge flexibility for the employee too (though I acknowledge than many need security).

Freelancing can be considered as the water poured into that glass of golfballs, marbles and sand that time management consultants like to use as an analogy for efficient planning. I would not be able to run my current business if I couldn’t outsource effectively to specialist services and freelancers when needed. It is not just the oil in the machine, it is now part of the machine itself. Whilst many complain that employees are being exploited by big business on such employment terms, down in the swarm it can be considered as a socialisation of jobs. The relationship between owner and employee is much more entwined at a smaller level and whilst big corporations pay lip service to employee interests few really care. At the small level you have to care.

With the importance of small business and its relative size I do wonder if data is getting missed that is more easily harvested form large corporates. One, for example, is exports. 70% of my clients are overseas yet I have never been asked to report my exports. Earnings data at the small level can get clouded too where director of small businesses tray to take dividends rather than salaries. The change effected in the UK next year with increased taxation on dividends will push the balance back towards salaries so there may well be a jump in reported wage earnings

Big business will continue to monopolise big investment projects where massive R+D spends or vast equipment investmets are needed but I wonder if even there there there is an advantage to fracturing up into a swarm of smaller units. The greatest being the dissemination of risk. If VW, BP or the big banks, rather than being huge mammoths for the litigators and regulators to target, were swarms of smaller companies then corporate malfeasance would be harder to pursue. Attacking a swarm of ants is harder than killing a mammoth. One small component would be sacrificed and bankrupted for the good of the whole and the swarm would continue to function. In VW’s case it could have been the small unit that supplied the cheat software. Perhaps one day the documentation on car sale invoices will stipulate we aren’t buying one make but have separate contracts with each component supplier. Just as we do when we put together our homes.

The ants are making the elephant's life uncomfortable.


Other interesting links -

http://www.fedex.com/gb/small-business/export-report-2015.html

http://elitebusinessmagazine.co.uk/finance/item/small-businesses-might-be-the-solution-to-uk-s-productivity-woes

http://www.inc.com/jared-hecht/are-small-businesses-really-the-backbone-of-the-economy.html

http://www.census.gov/econ/smallbus.html

When in Doubt do Nowt.

The plethora of news headlines ending ‘as/because of Paris attacks’ is hugely infuriating.
The best one must have been the The UK Sunday Times with 'Paris attack rattles markets as ECB readies cash injection’ written on Sunday. Sunday, before the markets had a chance to show any rattledness through price. Pure speculation.

The subsequent move higher in global stocks has had journos scrambling to fudge away their expectation of financial meltdown, but we have to remember that those selling are not selling on the Paris event but how they think others will react to the Paris events.

'Buy the rumour, sell the fact' is better phrased today in a glorious 'Sell the fact, buy the hope'

Moving swiftly on, the moves lower in ‘stuff’ have fitted with my feelings expressed in my last posts at the end of October (Sorry for not posting since then, I have really had nothing to say) as the bullish momentum finally faded. Back then I was surmising that dovish expectation from the FED and ECB were at an extreme and any change would wobble things lower. So it has been with the Fed, where we are now back to expecting a December hike with confidence levels, as represented though Fed futures, at levels not seen since the Fed last moved. So it is very tempting to now think that market disappointment at a hint of no move would be worth playing.

My basic rule is that if we consider this game theory where H= Hawkish Fed and h = hawkish ECB and 'D' and 'd' the dove versions. Dd and Hh are equity trades whilst Dh and Hd are FX trades.
So since last commenting when we were at Dd we are now at Hd and indeed the equity trade has unwound a fair chunk to more neutrality and the FX trade is in play via EUR/USD. ECB expectations appear to be stuck in ‘d’ for awhile yet but there is another chance of Fed to move from H to D.

China - Xi says China GDP will be 7%. Really? Either he has more control of the economy than I thought or he is playing King Canute

Oil.- If ever there was proof that the world isn't expecting the Middle East to blow up to an extent that oil supply would be effected then the price of oil is it. Supply is assumed to be safe. I am surprised that the Saudis are being allowed to get away with such supply aggression. I am surprised that the Saudis are not being leaned on by many western allies to do something about it. I am surprised by many things that centre upon Saudi Arabia. Quizzical too. 

All in all I am worried about the state of the world but that doesn't easily translate into market prices as bad can mean good and good bad. It get's more complicated when I still feel that inflation is the end game and though central banks are shaking hard at the inflation bottle, it contains a genii that will screw everything. 

There are charts of doom everywhere but there have been charts of doom everywhere for the past six months and markets have only oscillated.  Nothing grabs me. So though I have been running short risk for the pat few weeks I am taking a lot of those shorts back. 

When in doubt do nowt.