Holidays

TMM are spreading themselves a bit thin over the next two weeks due to holidays, so posts will be even less frequent (if at all).

We are going to have crack at re-enacting one of the best ever film openings - The one from Sexy Beast.



In the meantime please use comments to keep discussions alive, especially the joke themes.

Annual Planning Glossary.

We are now over half way through the year so why waste those quiet summer months when you could be preparing your business plans for 2014. Whilst there are still 5 months to run TMM have heard the first murmurs of 2014 forward planning. So for all others who have to go through this painful process we offer a glossary of the most popular terms and phrases that appear in every annual plan.


Revenue Projection - A single number that has to be at least 20% bigger than the last one. It is guessed the median of a distribution of probability that is so wide it makes the result irrelevant yet will be held as 100% predictive by the MBAs who run the spreadsheets.

Five Year Plan - A hockey stick graph running flat (investment phase) for 3 years with the pick up point selected to be just beyond when the plan author hopes to have landed a better job leaving those behind to cope with the inevitable underperformance.

Revenue Breakdown by Product - Micro-management for those who believe that your markets are predictable enough to set budgets by but not to allocate risk to.

Leveraging the Franchise - Assuming that large volume sophisticated professionals will pay the same margins as your small retail clients, whilst assuming that your retail clients have an appetite for the products the sophisticated professionals use that are banned for retail use anyway by the regulator.

Low Hanging Fruit - All the business that was harvested 20 years ago by your competition.

Niche Market - Only doing one thing averagely well.

New Initiatives - Painting old initiatives a different colour.

Focusing on Core Abilities - Excuse for lack of investment in new initiatives.

Product Development - Hurriedly patching together something that will hopefully mirror the thing that your CEO read was mentioned in your competitor's annual report as having generated them outperformance. Guaranteed to be out of date and not profitable by time of implementation.

Cross-Selling Opportunities - Bothering your colleagues for business (instead of the clients) and blaming them for your failure. Missed Cross-Sell deals are always the other department's fault whilst Cross-Sell success is lauded in management PR memos but in reality results in a bun-fight over internal revenue allocation (if there ever was any).

Account Mapping - A process that involves explaining yet again to management why the world's biggest product users (a list they read in Forbes in the First Class lounge) are not the easiest or most profitable to deal with and are most often competitors rather than clients.

Staff Development Plans - Finding the least expensive and shortest course to send the fewest number of staff on covering a subject that will not give them aspirations or threaten management but can be used as a weapon against underachievers - "And even though we sent you on the self development course".

Human Resource Planning - Processing bodies as efficiently as possible whilst negotiating inconvenient local and international laws. See "Japanese whaling ship".

Team Motivational Planning - Guessing which day of the year will be quietest to buy the team a beer and sandwich.

Run a Tight Ship - Just read "Mutiny on the Bounty" for a fair description of life and inevitable outcome on a "tight ship".

Dependencies - A list to be ignored by management in a year's time once budgets are missed due to lack of whatever was on that list.

Cost Allocation - A very large number that you have no control of that is deducted from your profit centre to be given in its near entirety to the IT department in order to guarantee that your technology remains firmly 15 years behind that employed in your village shop.

Travel Policy - An algorithm (or virus) developed by travel agents as complex as any used in weather forecasting. Run by your institution to generate maximum inconvenience for the traveller at costs far in excess of those available online to the rest of the population whilst somehow managing to report "cost savings" to management.

Performance Measures - Probably the cleverest structured product your institution has ever dreamed up. Fashioned on a Las Vegas slot machine, it beams "Play Me" enticingly in bright lights yet achieving a payout involves getting at least 12 bells in a row.

Europe. Are you long?

Back to Europe

Growth - European PMI data this morning was good across the board and Italian retail sales outperformed too. It looks as though the crashing fighter pilot of European growth has started to pull up and is skimming the treetops having managed to avoid disaster. Which is nice for us.  

Unity - Germany's data was strong but it is worth considering the disparative impact a China slowdown would have on Europe. Germany, the great supplier of capital goods and modern machine tools is most likely to feel the cool breeze ahead of other Euro nations (barring Italian high end fashion). Which leads TMM to see another benefit to Europe overall. Recent German data has already pointed to an increase in intra-European trade and a further decline in external Asian demand will continue to flatten out the economic differences between Germany and the peripherals that in the past have resulted in the stresses within  policy unity. So basically, Germany getting "Edward the Seconded" (see glossary) by China/Asia demand is good news for European policy unity and should encourage relative longs of Peripheral equities over German stalwarts.

Positioning - OK, hands up if you are long Eur/usd. You are? Well we think you are pretty lonely out there. Despite a drop in Usd longs against a pick up of Euro longs in some reports we see, the trend we detect is that most still want to be long Usd (well they are raising rates aren't they? And look at their growth!) and short Europe (they have to cut rates next or at least stay on hold for eternity don't they?). The rallies in the likes of Eur/Usd (and Aud/Usd for that matter) have so far been met with "sell the rally, great opportunity to buy more USDs". Which reinforces TMM's belief that few have the upside trade on.  We noted a couple of posts back that historically US rate rise environments of the past in have actually seen USD fall in the following months, now whilst the circumstances are indeed different this time, that fact is another barb in the complacent "long usd" meme.

Meanwhile in the US, it's nearly August so that must mean we are approaching Debt Ceiling silly season again and it looks as though the Republicans are lining up a  "Monty Python Black Knight" scene with their proposed budget cuts. It may well be noise but it is another road bump in the path of dollar strength.

So TMM are beginning to think that if European policy makers can maintain the summer STFU policy so well used in 2010, Eur/Usd could be set for one of those up moves that "shouldn't have happened"

However there is one other place that TMM fancy being long Euro -  Against gold. The retracement in gold higher has seen the monstrous short positioning level out and as we still don't see a compelling macro story for it, we are looking to reshort. Hearing scare stories of physical demand emptying vaults (Hero Zedge having gone into desperate, even for them, overdrive recently) fits a nice psychological profile that upside is now expected/discounted. India increasing restrictions on imports on Monday is just another weight on its progress.

We hereby brace ourselves for the gold trolls in the comments section. Tin Hats. 

Li's Only Joking

Overnight has seen China return to focus and for once not in a negative way. Chinese stocks have been fading as steadily as opinion on Chinese growth prospects so the headline that Li is declaring 7% growth as the floor, leading to a 2-3% rally in Chinese stocks and a general purpose creep upwards in all things EM and carry, has been notable.

But TMM think that taking Li at his word on this is like taking the cougar at the bar on her age. If anyone thinks that Li's remark is more credible than her claim to be 28 today, someone is carrying a fake ID or is very gullible.

In our efforts to get a more realistic picture of what is going on in China TMM have resorted to progressively more exotic measures as many have been gamed. For example, the State Energy Regulatory Commission used to produce some pretty good daily data on power output that can be seen below. Sadly, we haven't seen this data since early June and doubt it is coming back - it showed very mediocre power generation growth up until then.

Stepping further away, we have been watching coal markets in Asia and the picture is very ugly. Chinese imports are down from all sources per Chinese Customs data and given this data tracks the ABARE data from Australia and Indonesian data fairly well historically we can assume it is real (for now). Things look particularly ugly in June which just so happened to coincide with a minor stroke in China's onshore funding markets.



And as has been reported elsewhere by Morgan Stanley and others, the credit quality of local corporates is not improving and debt levels are not dropping.



So, colour TMM sceptical - it's a crowded trade and due for a bounce but fundamentally speaking there isn't much to get excited about. Without a massive increase in the fiscal deficit or redistribution or exports it is hard to see where the growth pickup is likely to come from.

Looking at the response in European markets either our cynicism is mirrored by others or the summer lethargy is more pervasive than even we thought.

"Two Part Epoxy Wood Filler" - A Trading Parable.

Do you ever have those days where your trading just appears so cack-handed that everything you touch just doesn't do what you thought it so obviously should or what everyone else told you it would? Out last post touched on the "meh"ness of the markets as summer doldrums take hold. In these environments the sensible thing to do is to leave well alone and let core positions grind out their dividend or coupon. What you should NOT do is think that you are capable of trading new things due to bored curiosity. They really should be left to others.

It is with this in mind that TMM ask you to read the following account of their weekend experiences as a parable on such dealing foolery. [market comparative notes in brackets]

----------

And so it came to pass that the UK's weekend sporting victories and resulting "you can achieve anything if you try" mood, drove TMM to venture forth and attempt some DIY. (Do It Yourself - A quaint pastime which ensures the livelihoods of home improvement superstore staff and a variety of professional builders and decorators who will ultimately be called in to repair the resulting mess). The wood rot at the bottom of the French windows would surely be no match for supreme confidence and minimal experience. 

All progressed well as the rot was excavated with sharp tools leaving gaping holes ready for filling. [books and funds identified that can take the trade]. 

The next hour was filled fighting traffic and like minded fools with a trip to the local town's DIY superstore to buy wood hardener and filler. [check and set up lines with counterparts]

The application of the hardener was progressing well [deals initiated and so far so good]

Until the fast drying "super glue" type solvents resulted in the pot sticking to the fingers tipping the contents over the sill and terrace. [first "oh its probably just a dip" moment]

At which point Mrs TMM pops out and remarks on the staining and asks what is to be done about it [Boss asks why you have picked up some untidy losses and please do something about it].

Remedial attention with soapy water fails so gasoline is fetched from the garage. [oh this is getting inconvenient]

Stains finally removed after heavy scrubbing followed by a caustic degreaser (a product that dramatically degreases skin too) [annoying non correlated attributes finally tidied up]

Finally dry out the  flagstones to reveal the bits missed which have to be attacked with acetone [convinced now that ALL annoying non correlated bits tidied up]

Wash brushes with same solvents in the utility room resulting in complaints from Mrs. TMM about the solvent stinks [Boss asks whether you know what you are doing and why the group books still smell]

Move on to the filler. Open the tin to find  the catalyst/hardener you need to mix in is missing. Have to go back into town to exchange tin for a complete one, wasting another hour [Middle office calls to say not all the docs you needed to do the trade were in place]

Finally return home and mix the filler following the interesting instructions of "squeeze out 38mm of hardener and mix with a golf ball volume (38mm diameter) of filler". The filler is too runny to go ball shaped so its all very hit and miss. [realise that maybe this trade really wasn't such a good idea as pretty difficult to manage]

Start filling but find there is only a 15 second window between too runny to stay in place and too clumpy which results in dragging setting clumps through soft unset parts resulting in a moon like surface and chunks glooping back on to the terrace and sill (and no, we didn't masking tape it first). [Jeez why isn't this instrument doing what it said it would. I thought this would be easy. My book's becoming mess]

Every new batch of mixed filler is clagging on the once smooth pallet knife which is now growing into a solid epoxy ball devoid of straight edges with it's own gravitational field attracting half set clumps resulting in an apocalyptic mess of setting epoxy a fraction of which is where it should be [Ok I just want out of this trade but unpicking all my hedges is going to be horrendous]

Decide that more is better than less so liberal application ends up with a window that looks as though it's been sprayed with quick set concrete diarrhoea. Spend another hour chipping the stuff off self and tools, blocking the kitchen sink in the process [Trade is now locked down in a passive state hopefully not going anywhere but it's been a hell of struggle and you really wish you hadnt gone anywhere near it]

Mrs. approaches and is kinder than you were expecting "There dear, I really appreciate you trying. Don't worry that you just aren't very good at it" [Boss allows you to keep your job and warns you not to trade stuff you don't know, but unfortunately you and he know you owe him]

The moral of the story? Nice days are for going out and enjoying oneself, not embarking on foolish projects.

So with that we are off to the pub.

Summer "Meh"

Seasonal trading in London. A few days of hot weather and the media are trotting out spurious statistics on the number of deaths caused by the heat and looming water shortages. The authorities, to be seen to be "doing something" and avoid corporate culpability, are issuing warnings that boil down to  "Heat is hot" and "Don't do anything that sane people wouldn't do anyway"  such as  "If you can't swim - don't". 

With the average number of deaths per day in the UK at about 2,000 (so 28,000 over the past 2 weeks) TMM think the additional 700 being panickly reported as caused by heat is pretty insignificant. But the "Something must be done" media mentality has taken grip. TMM are looking forward to Government edicts that statistical blips (and the sun) are morally wrong and that those with fridges should do their "fair share" by leaving their fridge doors open (forgetting the 1st law of thermodynamics). TMM however say "Enjoy it while it lasts, you'll be moaning about rain within the month". 

So why mention this apart from TMM's running ire with UK press and politicians? Well, there is another reason why these stories are on the front page - There isn't any worse news to replace it. The UK is doing OK. Retail sales this morning confirm the recovering trend in data that has been in place since May and things really are looking up despite the BBC's continued attempts to blame government cuts, this time benefit caps, for our "disastrous" living conditions. They really are the Zero Hedge of UK economics. 

Moving on, yesterday's headline event saw The Beard manage to hold a central line and, despite our hopes of a market seeing him as more hawkish than they thought, it appears they have finally got the message. Policy will be responsive to economic conditions. Yes folks it's called nuance and as we learned during the European problems of 2012, the markets aren't very good at nuance preferring the black and white of either boom or bust.    

So if BB was, as many reported, dovish relative to market expectations we wonder why the performance of equities has been particularly lacklustre and any softening in USD vs EM we might have expected hasn't happened. In fact the reverse in INR with USDINR pressing on and Indonesia appearing to have chucked in the towel. US10y has dipped 7 bp to just below our mental anchor point of 2.50% but all in all not a ballistic response to a "dovish" Humphrey Hawkins statement. 

The Carneyage resulting from the 9-0 BoE vote was kneejerk as further examination of the minutes showed that things weren't all one way and that further QE could be useful (Para 28). But the BoE is generally adopting the new Monetary Policy fashion of forward guidance over action. Watching these central bankers get to grips with forward guidance is like watching a 4 year old's first attempts at riding a bike without the stabilisers. Exceedingly wobbly and prone to reckless deviation from the desired course, though Ben appears to finally be getting the hang of it. 

So, what are TMM doing? We are still holding out for a corrective turn in markets. EM hasn't calmed down post Ben and equities have not ripped higher so despite this "Meh" response, we would suggest that the market set up is vulnerable to a small bit of bad news tipping things lower pretty quickly. A correction is in order. But as for what that cause may be, well, as with the best bits of unexpecteds we don't know, but a friendly bet on some stupid comment from a European is top of the list.

Until we get it,  Meh = carry creep

Beware the Humphrey-Hawkish of July

We have mentioned in past years that we have clouded memories in the back of our minds of this week in July being significant for market turns. It was something we used to watch when trading equities in the late 90s in the heady bull run of that period and, just eyeballing the chart below (vertical lines indicating this week) we can see it working well nailing some dramatic turns since.



Ok, not every year (last year being a damp squib) but enough for us to be looking out for a turn this week. But why this week of the year and why the response? Well, it's almost as though some chairman of a Federal Reserve somewhere was saying something significant enough to turn markets! Indeed yes, back through the years these are the dates of the summer Humphrey-Hawkins testimonies. No spooky planetary alignment involved, just Al or BB doing their stuff to sound stimulatory or restraining.

We can effectively see this as during down waves in markets and any emergent recoveries, HH has tended to produce up swings  as policy was aimed to be stimulatory. During periods of excess, when policy was swinging the other way, we saw turns lower, though 2006 is a clear example of the Fed not seeing what it was getting itself into and effecting policy that just made things worse in the end.

As for tomorrow's impact, we run into this July's HH at full steam ahead for equities (at all time highs in SPX) leading us to feel that a turn obviously will be to the downside. Against that though we really can't see BB being anything other than "balanced" and not wishing to rock the boat.

Our best-fit scenario would be if BB tries to be central in message but (having had a market response that first read him as hawkish at the June statement with respect to tapering, that then swung to reading him as dovish in the post-minute speech) the markets once again over react and this time swing back to reading him as hawkish. That would catalyse our "3rd week in July" turn.

However there is also an extreme version of this "market misreading him as uber-hawkish" risk. If BB were to be asked a question along the lines of "Aren't you worried about equities becoming a bubble?". he may slip on his words enough to create a headline storm along the lines of Greenspan's "irrational exuberance" speech. Stocks would dump in a display of short term fireworks, but no serious long term harm would be done. Meanwhile policy could stay accommodative.

Nice idea, but a dangerous play. But hey, it is his last testimony so why not celebrate it with fireworks.

US Economic Ballistics

Now that the dust has settled somewhat from Taper-mania, it probably makes sense to take a step back and reassess the US macro landscape over a longer time frame.

The market consensus seems to be that everything will be fine. Consensus equity forecasts remain fairly bullish. Expectations for GDP growth the rest of the year hasn’t really budged. In fact, since 10y Treasury yields began moving higher in early May, 3Q growth expectations have actually ticked higher. (Q2 expectations have fallen, but appears to have been driven by yesterday’s weak retail sales figure rather than anticipated effects of higher rates)



A simple gut check, however, suggests that it is too early to signal the all clear. First, the pace of the move was substantial. On a 3 month basis, nominal yields moved over 90bps, which puts this recent episode as amongst the 6 worst periods for Treasuries over the past 20 years. (Chart below shows 10y nominal yields and the rolling 3m change in the bottom panel. Note that with the exception of 1994, all those episodes resulted in a stabilization in yields over the subsequent months)



As some of our astute readers have noted, these types of moves have historically had a significant impact on interest rate sensitive sectors such as homebuilding. The chart below highlights this, as well as the fact that this recent episode is essentially on par with the 1994 experience, albeit the pace is much faster this time. Note that we express the mortgage rate in percentage terms, since a $100 / month increase in mortgage payments is a much bigger deal if the original payments were $800 as compared to $1600.



There are, however, a number of offsetting factors that mitigates these worries. Homebuilding remains a smaller driver of US growth than in the past. The ratio of debt service payments to income are at multi decade lows. And the current mortgage rate of ~4.5%, remains BELOW the 4.74% to existing mortgages, unlike the prior instances when yields jumped.



However, TMM notes that personal expenditures growth has exceeded real income growth for some time – and TMM suspects that the refinancing activity was likely a key driver. I.e. even though real income growth has been broadly flat since 2009, (first chart below, bottom panel) consumers have been able to refinance their mortgages with a ~5% rate to ~3.5% and used to cash flow for consumption, which has grown at a fairly steady rate of 2% YoY in real terms. (Second chart below, bottom panel) If true, this tail wind is likely to weaken.





As a result, TMM thinks that a continuation of recent growth trends will require a successful growth handoff. The improving employment picture is a positive, but TMM thinks that ultimately, improvements in real wage growth will be needed. That could happen on its own as the unemployment rate continues to decline – i.e. the US economy may have already achieved ‘escape velocity,’ albeit at a slower pace than historically. However, the jury is certainly still out on this. The San Francisco Federal Reserve, for example, recently noted that the reluctance of employees to accept wage reductions meant that there may be a substantial amount of “pent up” wage reductions that are getting reduced via frozen wages that are gradually eroded away by inflation. The authors calculated that the number of people with frozen wages remains a substantial portion of the labor force:
http://www.frbsf.org/economic-research/publications/economic-letter/2013/july/wages-unemployment-rate/

On net, the balance of risks for consensus growth expectations after the recent move appears to be on the downside. This suggests US yields are likely to stabilize around current levels, at least for a while. Equity prices, however, are likely to be less affected, even if there is a slowdown. The chart below shows SPX performance in the months following historical yield spikes of comparable magnitude. All instances showed positive returns 5 months later.



As a result, equities we expect to carry on gently into outer space. (new highs)

Meanwhile something unexpected may happen to the Dollar. There is a strong belief, certainly positionally, that the USD is on a steady ride upwards too, but if we look at USD performances during the events above (BoE’s USD index used below) we see that it has actually come off:



So in the case of the dollar there is a fair chance that it may well not make it into orbit and fall down to earth.

In summary, here is a modern artistic representation of TMM’s views on US Equities, Treasury Yields, and the USD:

Central banks. Three Heads Are Worse Than One.

Whilst we are talking about central bankers we have found a clip of the ECB in action. Three heads are worse than one.


 

Having heard Ben and the FOMC minutes it would appear that all central bankers are from the same genetic stock.

More Central Banker Brass Balls

It's interesting that the BoJ , ECB and now Fed policy adjustments are following similar patterns.

BoJ - We had the first mad rush after the first messages of policy change which pushed USD/JPY to 103 and the Nikkei to 16k. Then a couple of months later came an element of doubt as to the speeed or commitment to change and we saw a wash out. Then confidence returned and jpy renewed its general weakening.

ECB - Easing was on the cards until Draghi was "accidently" hawkish at the beginning of June seeing a  move driving euro higher until he came back in July with an overtly dovish statement with forward guidance as a strong affirmation.

US - Tapering has been on the cards for a while with the market spending the last couple of months adjusting to it. But then last night Bernanke and the minutes introduced the element of doubt into the timing. The response has been everything you would expect on throwing a hand grenade into a crowded room. It was definately a crowded room but was it really a hand grenade? The tapering trade is still in play, its just a matter of timing and the economy. As TMM have said many times, the central bankers are not going to undo any boost in confidence they have already achieved by choking off liquidity too early.  All that happened last night is that Ben gave guidance that the US10yr at 2.80% is too high after previously suggesting that 2.10% is too low. To that extent we expect him to sound hawkish or dovish at either extreme to maintain a range.

If we were to have learned from the ECB and BoJ and the oscillation of expectation around reality then the Bernanke event should not really have been a huge surprise. What was more of a surprise was just how fast market pricing in FX swung to "no tapering". There is blood down "Change Alley" this morning. But the one common theme of all these central bank steerings is the play in the market. On announcement short and medium and long term players all get on board. A full bus. Then comes the element of doubt and the short players are stopped out, the middle term are dubious leaving the long term better levels to get in on the big trade. This leaves the short term players behind and once again running after it. Basically, a positional wash of shorter term positions as "5 minute macro "get taken out of the 3 year macro trade. Don't you love enforced trading discipline?

With that in mind TMM fade the usd drop.

Back to the ECB. After the dovish Draghi was backed by the introduction of forward guidance suggesting no rate rises for a good while yet it looked finally as though we knew where we stood and we were going to have a July free of European issues . But then, in true "European Unity" style, Darth Weidmann came out with this

ECB WEIDMANN: FWD GUIDANCE WON'T STOP RTE HIKE IF INFL PRESSURES.

And with that the European wallpaper splits open again revealing thee huge cracks beneath. What is the point of issuing forward guidance that effectively says  "We won't raise rates" if then one of the schizophrenic voices in your head says "unless we do". They are still not speaking with one voice. The ECB cannot function as a single entity when the Bundeathstar constantly decides to go native - it needs to be castrated. We have suggested in the past that as a quid pro quo for the French signing up to fiscal rules should be that the Germans agree that the National Central Banks become mere branches of the ECB ie no longer have national ownership. That is one way to give the Bundethstar "the snip" it needs.

What do we do from here? As hinted at in yesterdays quiz, TMM were looking to lighten up their loads in equities having worn the dip and doffed their cap to Mr Bradleys Siderograph (which, however nutty, nailed the turn in equities and the USD). We have lightened more on this spike this morning. As for new trades we are buying USD/JPY again. looking for 103. It's Abe's turn to "do what's right".

Fed Guidance

Fed Guidance

TMM's Pre-Ben Quiz

Quiz time

1. You are approached by your boss over the issue of missing all your budgets for the past year. What forward guidance do you give him?

a) Explain that you intend to remain inactive for at least another year (in the style of the ECB)
b) Explain that you have done far too much work already and it's your colleagues turn (in the style of the Fed)
c) Explain that you are really really serious about getting productive and as soon as the holidays are over in July you'll get on with it (in the style of the BoJ)
d) Note that you colleagues' endeavours are resulting in a harder environment for you to do your job so it's their fault (in the style of the BoE)

2. You are a tennis player who has, thanks to your mother, had the sole lifelong ambition of winning Wimbledon. You finally succeed and in the process win an enormous amount of money so do you:-

a) Repay the support the populace has given you for free by donating a large chunk of the prize money to charity.
b) Turn down any offer of a knighthood as you were just doing your job and achieving your own personal ambition and anyway you have already been handsomely rewarded for your efforts.
c) Set up an academy to train thousands of school children in tennis, turning the UK into a tennis based economy having forgotten that as there can only be one winner all you are doing is increasing the number of losers.
d) None of the above.

3. You wish to legitimise fixings and benchmarks such as LIBOR. Do you hand responsibility for them to:-

a) Yourself
b) The regulatory body so they have only themselves to put in prison when it goes wrong.
c) The Dalai Lama
d) An outsourced offshore "for profit" institution that promised you they could do it "better and cheaper".

4. You are a central banker and are coming to the end of your press meeting and fancy ending on a light-hearted note so do you:-

a) Make a harmless quip involving an esoteric economist in order to enhance your academic aura and persona.
b) Call the Swiss reporter "Rupert" in reference to his red jacket and check trousers.
c) In dead-pan delivery suggest that it took a long long time to decide to keep rates on hold implying you are about to cut at the next meeting.
d) Break wind loudly.

5. You are a UK Royal Mail Postal employee who has been lucky enough to hang on to your job despite the decimation and automation of your industry when you are suddenly offered free shares in your soon to be privatised company. Do you:-

a) Say thank you and count your blessings as you are lucky just to have a job.
b) Say thank you but realise that it's a bribe from the government to counter Union objections.
c) Go into negotiations hoping for more.
d) Trust the instincts genetically encoded into you Jurassic DNA, resulting in you lighting braziers and chanting "Maggie Maggie Maggie, Out Out Out"

6. You are a BBC anchor person for their flagship news program and you have the whole world's news to choose from as a main story. Do you:-

a) Choose to cover Egypt.
b) Choose the decision by the EU court of human rights that not considering the release of the UK's most heinous murderers is demeaning to them and removes their self respect. (TMM are still choking on this one)
c) Choose, for a change, to educate the population with a new story from a far off land that is relatively much more important than local issues.
d) Having found that banks have learned from their past and are doing everything they can to prevent money laundering, spin the story to show that in closing the accounts of money payment agencies (who can't be policed) they have made in harder for Somali's to send money home and so people may be starving thus proving the bank is still evil. (hint - it was this one)

7. You are a US hedge fund manager who wants to go activist on a large publicly traded company but don't have enough AUM to purchase the requisite shares. Do you:-

a) Try to team up with another fund.
b) Raise more assets for your own fund so you can pursue this.
c) Buy some shares first for your own fund, then try to raise a separate fund solely for the purpose of doing this acquisition, with a 3 year lock up, and announcing the details with a vague press release.
d) Try something else.

8. You are a member of the Eurogroup and have found yourself in the unusual and enviable position of being in July without a crisis. Do you:-

a) Sneak off quietly to Antibes for an early start to your August break.
b) Issue a press statement lauding the success of your policies before doing (a)
c) Take advantage, while no one is watching, to put the boot into a minor periphery.
d) Prepare your robes for this month's meeting with the Lizard Gods in the hope of making a place on the mother ship back to planet Zarg having done their bidding in rending destruction upon the Zone.

9. You wish to invest in a very liquid product open to all. Do you:-

a) Go online, find the cheapest reliable broker and buy it.
b) Mess around trying to get best price so long you miss it and never get the trade on.
c) Find an ETF that does the same thing for a lot more risk and cost but will impress your neighbours more.
d) Go short because if you want to buy it,  probably everyone else has already.

10. If your are Team Macro Man and you expect equities to roll lower now. Do you:-

a) Sell and stay quiet.
b) Sell and tell everyone why involving lots of charts and tables.
c) Sell it and find yourself wrong after Bernanke speaks and yet have to wear the shame having told everyone.
d) Write a quiz instead.

Organic Finance

TMM really don't have that much to say about markets. The NFPs nailed the lid down on US QE and enough has been written on that to sink a battleship, but to TMM the most interesting sign was the lift of equities while bonds were falling. The positives of growth are outshining the negatives of rates moves.

The "Short GBP, long FTSE" trade was given a boost today by the UK data kicking the crutch from the mighty Pound as we emerged from an Asian market already pretty buoyed. Even the hobbled AUD is looking perkier than it has for a while and the ASX is doing OK. As much a case of positioning rather than long term macro, as we can also see with gold's rally. So far so good with core positions all moving in the right direction. Even our "Central banker's brass balls" short 1650 SPX straddles are looking good again. But despite the rallies, today appears to be losing some steam and we may be near a short term top before we leg higher again. TMM's mystical mid July turn date is nearly upon us again. Having said that EM is looking like a buy again. But let's talk about something else -

Robert Peston's hysterical program about algo trading last night on BBC Radio 4 (listen here) has convinced TMM that -

a) The introduction to the program should be used as the case study at a master class on propaganda as it employed every emotional manipulator and anchoring devise it could to portray algos as, well, evil. 

b) In popularist opinion algo trading is to markets what GM is to food.

It's new, it's machines, its a Frankenstein, we don't understand it so it must be the Devil's work. So working on that premise perhaps there is room in the market for the equivalent of "Organic Food". A bespoke market set up and certified "algorithm free". As we know Organic has always commanded a premium over other foods (despite the savings on pesticides and fertilisers) so it would be interesting to test the boundary between ethics and price in the real world pitting the two against each other. TMM would imagine that it would not be long before, as has happened in the food world, austerity sees a gentle swing back to the cheapest product and to heck which type of financial horsemeat it's made of. In the meantime though, the establishment of no algo zones may just be what many banks need and could be their last "Himalayan Pink Salt" on the road to disintermediation.

Prices made by humans, for humans and yes, we will be able to detect the automated tones.

Broker  "Hello,  Sweetpea Organic Brokers"

Caller "Hello, I would like a price in EDU3 1000 lots please"

Broker  "Are you a human?

Caller  "Yes"

Broker "Sure?"

Caller "Yes"

Broker  "110101010111010110111"

Caller  "10100111010110111010101...  oh bugger"

Broker -  "Goodbye"

With the current mood of populace so anti-banks the regulators and politicians could easily be swung behind the introduction of Organic trading with the enforcement of strict standards. We are already seeing product health warnings on financial products stretching to 3 pages (have you ever read the disclaimers on the research you get?) so how about a more simple labelling system for the financially illiterate.

"Every 100k of this product contains 9k of unleveraged direction, 50k of risk and 38k of margin.  A total 1200% of your daily allowance".

But we wonder if under this new organic purity, precious unadulterated products should be sold in stores that may be tainted with by their own reputations. Libor being set by the NYSE Euronext is like vegan certified lentil bakes being sold in McDonalds. Handing the setting of a sacrosanct London based fix to a US based organisation that has a history of selliing early release of data to the highest bidder (NYSE) or cannot settle anything properly (our own experience of LIFFE) smacks of a commercialism that undermines the purity of the product. What's wrong with the BoE doing it? They are, by comparison, the equivalent of the Harrod's food hall.

If you want it to remain Organic then don't sell it in a chemical plant. Come to TMM's Sweetpea Organic Brokerage instead.

Holden Steering Forward Guidance

"What the Fed taketh away, the BoE and ECB giveth back".

We were not disappointed by Dr Aghi as he did indeed swing dovish to balance out last months Tourettish Hawk outburst. "TMM think that the usual oscillation in expectation and outcome for ECB meetings will result in a swing at the next event with Draghi producing a "more Dovish than expected". So, thank you sir.

The forward guidance bit was a bonus and reminds TMM of Daft Punk's "harder better faster stronger" but more along the lines "lower longer later slower". But then Daft Punk are French aren't they.

However, back to the QE relay race analogy. The baton left lying on the ground by Ben, appears to have been picked up by "Team Carnaghi". Carney came straight out of the blocks leaving little doubt as to his intentions, leaving us in turn wondering if "long FTSE  short GBP" is to become the new "long Nikkei short Yen" in five minute macro fashion land.

The process of wealth adjustment in the UK has so far been pretty smooth with the smarter of the population realising that it is a path that has to be endured despite the cries of closet isolationists who believe that local politics and command economy can preserve us in the face of globalisation (This issue makes the Trade Union/ Labour party associations appear all the more archaic. How UKIP can be accused of jingoism whilst those ancient bonds exist is beyond us).  But having accepted our fate of diminishing relative wealth, the least unacceptable route remains one of creeping local inflation with flat wage growth. So TMM feel that continuing Carneyage makes sense.

Draghi is a different matter, the ECB reminds us of the steering on a 1975 Holden  (an Australian vehicle that TMM once had the pleasure of driving around Sydney city centre  in the wee hours as its owner was too intoxicated to know his own name). This vehicle's unique feature was that the steering wheel was only loosely communicating with the front wheels with any form of instruction between "hard left" and "hard right" being left to the interpretation of the road surface, resulting in a wildly oscillating ride. Similarly the slack between ECB rhetoric and action is huge. We have had a 25bp cut from them but other than that and huge amounts of rhetoric/announced intentions/guidance/ noise/ speak they have actually DONE very little.  Cue the Monty Python " What did the Romans ever do for us" scene, only end it with the crowd going "errrrrrr..."

But that doesn't matter. The fact that the Mark "n" Mario show has shown a distancing from US policy, both having identified the steepening of yield curves as undesirable, the markets have kindly adjusted, doing their work for them.

 Oh and  NFPs?  DILLIGAF

TMM Launch the Atacama ETF

TMM were minding their own business yesterday afternoon trying to block out all the noise coming in through their screens and were diverting themselves by debating the strangest of indices that they knew or have used, having just been watching the Rajasthan Onion index for clues to rising Indian inflation (true). Of course the Columbian Kidnap index was cited but that ticker died so its marvelous correlation with the Columbian Peso stopped (also true).

Next there was the Icelandic Fish Catch index which in the early '90s was proven to correlate to USD/DEM better than oil prices (spurious yet amusing) and there were the Danube and Rhine water levels, invaluable to European bargees yet somehow superfluous to the rest of us then employed in the Bond and FX markets.

The mention of water levels flicked the conversation back to weather and that greatest of weather indices, the Pacific Southern Oscillation (relating to El Nino/Nina), which we watch in relation to soft commodity markets. Meanwhile we were still discussing Asset Class attribution, Bitcoin ETFs and our perennial bugbear- Sovereign CDS and its use in tail risk hedging, when suddenly an idea dawned.

Sovereign CDS is bought in many cases not because it is expected to pay out, but as a hedge for price moves in underlying assets. As risk goes up of default (however tiny) the asset price falls but CDS price goes up as more buy the hedge (even if it isn't a hedge). But we were talking about climate change, El Nino and El Nina's, so we wondered what the tail risk hedge should be for the equivalent of global weather default or basically massive global warming. And then it hit us -




We buy up cheap tracts of the arid and useless Atacama Desert in Chile in the belief that if weather patterns change dramatically enough rain will once again fall on what is some of the most fertile soil on earth just waiting for a dousing to turn it, in the space of a few years, into highly productive farm land.

Genius! But why stop there? We then package it up as an ETF and sell it as a tail hedge against global warming, performing the same purpose as CDS does against underlying weather dependent assets. Also like CDS, the chances of ever having to deliver are tiny. It's just a hedge.

Of course once we create this ETF it should be easy to persuade investors that they only need to own a tiny amount in their hedge book, but as they start to buy we can then brand the product as a new "Asset Class", its price seemingly not correlating much to anything other than just going up (only buyers at this point remember). Then as soon as it is accepted as an asset class every benchmarked fund will have to own a piece of it too just because his peers do.

At this point someone notices that the price of this ETF is a one way street and it gets picked up by momentum followers and ultimately Jo Public investor who applies a gold like basic "end of the world" logic to it and scuttles off to talk it up on "Hero Zedge".

As the price really takes off another feedback loop kicks in when Robert Peston and other media reporters notice that the price of the Atacama ETFs are flying. Knowing that they are sold as a hedge against global warming they deduce, applying a flawed logic often applied to Sovereign CDS, that price must represent true probability of outcome and therefore the chances of a global warming cataclysm has rocketed in the eyes of the "experts". Such reporting (together with the liberal use of the word "crisis") will most likely spur the rest of the retail population to buy what's left of the product at an exceedingly high price.

Voila! Job done, issue sold. Who needs the Winklevoss brothers?

So TMM are launching their Atacama ETF with the following benefits

• Hedge against global warming.
• Hedge against authoritarian government (You won’t have to worry about the NSA in Chile)
• Hedge against inflation (Real Estate is always a hedge for food and energy inflation, right?)
• Limited Supply (well, there IS a limited amount of desert, isn’t there?)
• Cheap (if you are first in)
• No pesky management fees (except for taxes and our ‘administrative’ charge)
• Comes with animals and plants. (well, "will" if it rains).
• Helps save endangered desert species (until it does rain)
• Free option that there may be gold or oil under it.
• No need to rehouse indigenous occupants as there aren't any.
• Massive opportunity to build solar energy center while you wait.
• Not correlated to equities or bonds.
• It’s a REAL asset in its own REAL asset class that only correlates to Ponzi schemes and you don't own any of them do you?

What could possibly go wrong ?

Bad News Swarm Attack

Europe is back.

Portugal - Two government resignations and the 10 year moves from 6.5% to 7.75%.  That's a big daily move by any old fashioned measure but if you look at where we have come from we are only back to levels seen last November so well below OMT announcement levels and there is fat chance of Dr Aghi being able to do anything pre German elections. But it's a spike big enough to spook everything Euro and encourage the Euro-disasternistas out of the wood work with the "Toldjaso, Europe is bust" mantra's. Add Italian and German PMIs, ignore the French, add a dose of USD buying anyway and it's enough to give the start off the day a whiff of summer 2011/12. 

But TMM think this remains psychological and whilst there is a chance of a pukefest in everything today, the Euro component is a "buy on dips".

The worrying part though is that Europe is the kick in the nuts to a market that was already falling. US markets rejecting 1625 50d mov/av again and that sizeable pull back after European close didn't set things up well. But our core concern remains in Asia where it would appear that the recent fall back in regional sov CDS (see Indo) and rally in Investment Grade and Sovereign bonds is camouflaging real problems in the High Yield and  the corporate market.
Despite trackable indices showing "not too bad" measures ( look at Indo CDS) behind the scenes are... well, pretty foggy.

China's bill discount markets and the like are not on bloomberg, not widely reported and if you want to get even the vaguest sense of what is going on you need to survey a bunch of loan officers. Thank god for consultants because efforts to create a senior loan officer app to be distributed via iTunes have thus far not been successful - we just wish they were bearing better news. All indicators are that the engine block of China's economy - credit - have frozen and while Shibor is semi under control much as Libor came under control post Bear Stearns it really isn't telling us much of anything about shorter term OTC markets with echoes of 2008 repo markets. TMM have learnt one thing over the last couple of crises and that is that if the transmission mechanism isn't working its time to get liquid or flat and continue trading from safely by hiding under ones desk.

Due to the opacity of China TMM have concluded that fixing this is going to look at lot less data driven / Target2 / Draghi like and a lot more like fixing the plumbing of a very old house in London where previous works were done by squatters in the 80's (undocumented) and original work done by pre-war owners whose records are as readily recoverable as the library of Alexandria. In summary, crossing the river by feeling the stones.

Which leads us to Egypt and the Arab spring part 2 that we have been expecting for a while. The headlines are spectacular but we don't see major market contagion. If Syria can't shake things then a second round rumble in Egypt with the Army acting as a stabilising force is unlikely to. However we bear in our minds one of our old dictums that some countries end up with effective dictatorships in the first place because that's all that works governing a populace of disparate extremes.

Put that lot together with this morning's price moves and it feels as though we are only a hair's breadth away from an old fashioned general meltdown in everything, involving more positional liquidation (which might explain why AUD/USD is not falling any further after Steven's comments overnight).

The market can cope with one problem at a time but today feels more like a swarm attack. 

The 4.30 at Aintree? Well it's an Asset Class 'innit.

Team Macro Man could not help but notice the Winkelvii are launching a Bitcoin ETF. Now, some of TMM are known for nasty, nasty put downs and angry letters to the editor type behavior so we will try to keep this brief - 

ARE YOU MAD?????????

Someone on one of Team Macro Man's chats recently described this ETF as a Rorschach test of what people think of digital currencies. That is utterly wrong: it's an IQ test. Bitcoin is anonymous, untaxed (for now) and quite liquid in and of its own right despite all the complexities of a cryptocurrency. A bitcoin ETF is taxed, has fees, may or may not be liquid at all. So, this is really a test: do you want to facilitate the exit of the Winkelvii from an investment at inflated levels which they will soon be taxed upon or do you want to sit this hand out? 

Excellent. You and TMM can wait for this deal to fail miserably and you can back bid the Winkelvii at much lower levels which they will almost certainly hit since they are US citizens and unlikely to have any means to avoid being taxed upon bitcoins when the IRS comes knocking.

This brings TMM to the psychology of anchoring and herd mentality. Suppose we told you there was this thing bitcoin and we issued a research report all about it. Maybe you buy it, maybe you don't. But if we issued a research report and showed your real money asset allocation competitors gave it a 1% weight, TMM are pretty sure you would at the very minimum think twice about it. This gets down to the way to sell something bizzare and new - call it an asset class. Just as Bonds become "investment grade " when they move up to BBB, so it appears any thing with a price that moves, however spivvy, becomes investable if it can be promoted from "Betting on a horse"  to "Asset class".  

TMM have noticed this as a growing theme having also just received an invitation to a conference inviting them to learn about "Volatility as an Asset class". Now we know that volatility funds are prolific but does that actually make volatility an asset class? 

The key features of something that can be seen as an "asset class" is that its cashflows and the drivers thereof, are somehow independent or unrelated to other existing asset classes. TMM think that if it looks and quacks like a duck then it's probably a duck and not something entirely new. To that end new asset classes such as MLPs and the like are just underlying assets with slightly different taxation for certain entities - a big pipe is a big pipe at the end of the day.

Now this of course does not apply to assets without cashflow such as bitcoin and gold and you are free to define new asset classes however you please IF THEY TRADE THAT WAY. But herein lies the problem with true speculative assets - their ability to diversify and behave like something new and different is driven by positioning.  If it's crowded it probably won't work unless the money keeps coming in. So TMM think that as the general USD squeeze continues and the pain spreads, it's worth getting back to valuation 101 and asking oneself simple questions like: can this company pay me back? Will this company grow? Does this country have the asset base or the ability to tax to pay me back and where are the factor pressures that drive inflation?

TMM know this doesn't provide much counsel on gold but perhaps our readers should move on from Wink-evil's latest "asset class" (ahhm), much like everyone else. 

That is once they have signed up for our conference (at an early bird discount rate of $1,999 per day) launching TMM as an asset class.