Words That Finance Has Changed The Meaning of Forever.

As TMM waits for the Fed's taper or non taper, it occurred to us that our careers in finance have seen our understanding of many words in the English dictionary mutate far from their original meanings. So in the cause of linguist conservation we feel it only right to remind ourselves of their original and, some would say, true definitions.

Taper – Something you ask the barber to do to the back of your hair.
Hike - To go on a walk in the countryside
Rally - An event with cars or campaigners
Crash - What a car does.
Bubble - A sphere blown from a soap solution.
Stops - What a car does when it confronts an octagonal sign
Yield - To submit, quantity of a crop.
ARM - Appendage.
Legs - See "ARM".
Leverage - A plank of wood placed over a fulcrum.
Seagull - A marine bird
Butterfly - A pretty insect
Future - As in flux capacitor
Condor - Endangered avian predator
Whale - Large seaborne mammal
Roll - Small round bread served with turkey dinners
Capital - Seat of government
Spot - Acne
Forward - A direction, opposite of backward
Spread - Something to put on bread and crackers - eg Philadelphia or Gentleman's Relish
Libor - A common Czech name.  Libor is a Czech masculine given name of Latin origin, derived from libare 'sacrifice' or from word liborius free. (see here)
Long, Short - adjectives describing length
Curve - a line that is not required to be straight, as in curve in the road
Depo - A storage yard or warehouse
Greenshoe - A green shoe
Option - A choice
Choice - An option.
Regress - To return to a less developed state
Call - A way to communicate telephonically
The Street - The road outside
Axe - A bladed implement used to chop wood or heads
Swap - To exchange something, perhaps football cards.
Exchange - To swap something
PE - Physical Education
Delta - A crap airline
Mark - A masculine name
Greeks - Bearers of gifts of dubious provenance
Hedge - A line of shrubs in your garden
Cross - Angry
Index - At the back of a book
Flow - Speed of a river
Rates - Council tax
Seat - A potentially valuable piece of furniture, or a Spanish car.
ECB - England and Wales Cricket Board
Fed - Nourished
Buba - A large gentleman you are warned will become your friend if you go to Prison.
Old Lady - Contemporary of your grandma
Threadneedle - Something your grandma does
Unched - Cockney description of Quasimodo
Flatten- A hedgehog meeting a steamroller
Tail - Something at the back of a dog, horse, cat etc
Put - Place something on a surface.
Curves - Rubensesque feature
Straddle - An equine implement
Risk - A game that takes forever to play
Survey - Source material for 'family feud/fortunes' questions
Cycle - Method of transport
TV - Something you watch
Front-runner - Usain Bolt
Black Scholes -  Ginger footballer in United away kit
Cover - A blanket
Ref - Bloke with a whistle at a sports game
Emu - A flightless bird
Bailout - What an Itatian captain did when he failed to do it fast enough on the Costa Concordia
Return - To go back, key on keyboard
Volatility - The speed at which a liquid evaporates.
Alternatives - Other options
Cliff - See white, Dover
DIs - Detective Inspectors
Bills - What you pay at the end of a meal
Bond - Covalent, Hydrogen and other ways to stick atoms together.
Coupon - Money off
Principal - Head teacher
Interest - A hobby.
SWF - Single Wealthy Female
Entertainment - Doing something you enjoy with people you like
Bonus - Something that is UNEXPECTEDLY received as an additional benefit.
Equity - To be completely equal.
Resistance - Electrical unit measured in ohms.
Support - A truss.
Compliance - Doing what you are told by others.
Compliant - Pretty drunk and happy to go along with anything.
Fix - To repair to proper state.
Head Hunter - A Cannibal
Margin - Blank bit on the left hand side of the page where the teacher makes comments.
Quant - British fashion designer who gave us the mini-skirt.
Techs - Higher education colleges teaching practical skills.
Misselling - A Roger Hargreaves character who ran a shop.
Wave Count - Activity performed by surfing judges.
Bobl - A pompom of wool on the top of a hat.
QE, QE2 - A series of Cunard liners.
Schatz - A number 2. Or a German expletive.
TP - A native north american's tent.
Var - A unit of reactive power of an alternating current.
Overdraft - The breeze above your head.
Overdrawn - A picture by Picasso
Fine - Just Dandy.
Fee - The word before Fi,Fo and Fum.
Banker - Upstanding and trustworthy pillar of the community
Garden Leave - To leave your garden to go to work.
Free Cash Dispenser - Something that gives you free cash.
Crack Spread - The diameter of a builder's derriere.
Convertible Bond - Timothy Dalton
Convexity - Feature of a good skateboard
Vega - Vegetarian from Nevada
OMO - A brand of detergent
Super Mario - A game character
Carry - Lift and move something from one place to another.
Liquid - A material that conforms to the shape of its container.
TARP - A large protective plastic sheet.
Google - Ten to the power of one hundred.
Apple - A tasty fruit.
Raider - A member of an American football team headquartered in Oakland.
Troika - The three omnipresent cups at most Russian table settings (all filled with vodka).
Small cap - Hat for a boy
Vampire Squid - Vampyroteuthis infernalis, a small, deep-sea cephalopod.
Stocks - Something you put criminals in and throw rotten vegetables
Dove - Stout bodied bird with a short short neck
Hawk - Predatory bird with a penchant for doves.
Rate - To judge a performance
Prime - Stage of life when you are in your finest form
Benchmark - A mark on a bench.
Spoos - eating utensil used for liquids
Whites, reds, greens, blues -  Denizens of a Crayola box
Decay - Characteristic of Detroit
Premium -  Good, better than usual; something that you don't expect to end up worthless
COP/RUB -  the goal of most teenaged males
Gilt - The feeling you get for doing something you shouldn't have
Fat tail - a mistake you wake up next to in the morning
Poison Pill - Mossad aspirin
VIX - cough medecine
Strip - to remove clothes
OIS - more than one oi, a British interjection
Book - something you read
Dollar Yen -  a desire to acquire US currency
Repo -  To forcibly take back, viz. Emilio Estevez in "Repo Man"
Swap Spreads - Exchange duvets
Aussie -  Ex-Sabbath frontman whose actions often defy explanation, indeed belief. reputed to have remained too high for years on end

Please feel free to add your own. Some have already been flagrantly stolen and added from the comments section below.

Is That Really a Reason To Be Bearish?

Calling asset prices a bubble explicitly, or implicitly as a function of the Fed’s large balance sheet, is fairly popular these days. Market commentary projecting a “melt-up” driven by “excess liquidity” seems to be common. So whilst TMM do believe this to be a factor we would like to go one stage further and posit that DM equities are not expensive relative to other asset classes.

Now we realize this is a pretty hairy topic, mainly because there are a lot of ways to look at this asset class and hence a lot of ways to claim that they are rich or cheap. So instead of then trying to ‘prove’ that they are cheap (when we have just said the diversity of cheap/rich measures makes results inconclusive), we will go over the more popularly cited reasons for why they are expensive and follow with some counter points as to why they are not.

Yields are excessively low. Hence the high Equity Risk Premium is a mirage.

The Fed, along with a majority of market economists, pegs LT nominal GDP growth at 4%. 30y Treasury yields are not far from that level at all.

Short Term yields are unlikely to move a great deal relative to the size of the ERP. Even if the Fed hikes a year earlier than anticipated, (let’s say Sept 2014, and then at the 100bps / year pace that it has projected) fair value for 5y yields would be ~2.10%, vs ~1.5% now, a difference of ~60bps. This compares to an ERP of 225bps, using 30y yields, or ~350bps using 10y yields, both of which are historically very high.

Size of Fed Balance Sheet is huge. By implication, the money the Fed has printed is finding its way into stocks.

For this theory to hold, the private sector will have needed take the cash it has received from the Fed from selling bonds and used the cash to purchase stocks. Now, a balance sheet of all major entities in financial markets is hard to come by, but this story does NOT hold water based on retail flows. 377bn has been taken OUT of equities since 2007: (This conclusion was also recently reached by a McKinsey study)





Earnings as a percentage of GDP are too high. They will revert back to the long term mean, which means substantially lower profits.

That is only true if you look at TOTAL earnings. DOMESTIC earnings are NOT excessively high as a percentage of GDP. Much of the recent earnings growth over the past decade has actually come from abroad:






CAPE10 (Cyclically Adjusted Price to Earnings average over the past 10 years) is too high. The chart looks something like this one. This metric has always mean reverted, so stocks are bound to come down.

This cyclical adjustment process basically deflates earnings over the past 10 years by the CPI, and then takes the average. This process means that the adjusted earnings measure assumes the surge in profits from overseas over the past decade will revert. It also assumes that the financial crisis that we’ve had will recur every 10 years. Neither assumption seems especially probable.

Here is an alternative way to look at this metric: The current CAPE10 is ~24.8. The inflation adjusted trailing 12m P/E (CAPE1) is ~16.7. The S&P price is the same in both calculations, so the difference is purely in the adjusted earnings measure. The 1y inflation adjusted EPS is 104.6. The 10y inflation adjusted EPS is 71.3 – a discount of 32%. So you have to ask yourself – do you believe that a third of S&P earnings unsustainable and will eventually disappear? Keep in mind that 25% of earnings are from foreign sources.


Commodities are not going up with stocks. Hence, the growth isn’t ‘real’.

Equity Bull markets in conjunction with commodity bear markets are not uncommon. The previous such instance lasted from 1980’s to the late 90’s.




What is more, we see the increase in supply of metals and the drive to gas, which are keeping prices low, as a benefit. This time around commodity prices damped by increases in supply won't be a tax on growth.

Consumer confidence and employment are not going up as quickly as stocks. Hence, the growth isn’t ‘real’.

Higher profitability seems to be one RESULT of the weak employment growth. The jury is still out, but one line of thinking is that technology has increasingly replaced humans in low value added roles, with the cost differential going to corporate owners. The chart below from Blackrock illustrates this, and highlights a trend that seems to be over a decade in the making. Furthermore, we have not heard of a good reason to believe that this trend will reverse.





It’s all PE expansion, not earnings growth. Hence it is not sustainable.

Historically, PE’s expand during growth periods. Growth = more earnings and more savings = higher equity prices. This tendency is pretty common, sustainable and usually only interrupted by a recession or sharp slowdown.


Equity market capitalization as a percent of GDP is too high. Hence, it has to mean revert.

A higher share of earnings from overseas should mean a higher market cap to domestic GDP ratio. Globalization means more foreign companies may list in the US. Publicly traded companies also have financing advantages, and fewer large companies are remaining private. Companies like Berkshire Hathaway buying up private businesses also increase the market cap to GDP ratio, but arguably does not destabilize anything.


Demographics imply lower PE. The rising number of baby boomer retirees implies strong demand for fixed income and weak demand for equities, which should lower equity valuations.

Arguably, this should only affect the valuation differential between fixed income and equities. In other words, perhaps the Equity Risk Premium could remain higher than average until this demographic effect fades. But as we noted above, with LT yields appearing reasonably fair, the ERP remains very high, and arguably would still be high if treasury yields were 100bps higher.





With those general points covered we can move on to a topical specific.

Hussman Funds recently published another piece on why stocks are too high and though we don’t want to single them out, we do want to address their piece because there are similar claims popping up all the time. (And hence our rebuttal would also apply)


HF Claim: Without reviewing every detail, recall that this model partitions market conditions based on whether the S&P 500 is above or below its 39-week smoothing (MA39) and whether the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) is above or below 18. When MA39 is positive and the Shiller P/E is above 18, conditions are further partitioned based on whether or not advisory sentiment (based on Investors Intelligence figures) has featured more than 47% bulls and fewer than 27% bears during the most recent 4-week period. Investment exposure is set in proportion to the average return/risk profile associated with a given set of conditions (technically we use the “Sharpe ratio” – the expected market return in excess of T-bill yields, divided by the standard deviation of returns). While a simple trend-following approach using MA39 alone (similar to following the 200-day moving average) has actually slightly underperformed the S&P 500 over time, that trend-following approach has had a fraction of the downside risk of a buy-and-hold strategy, with a maximum loss of about 25%, versus a maximum loss of 55% for a buy-and-hold. By contrast, the very simple Sharpe ratio strategy here has clearly outpaced a pure trend-following approach, with much smaller periodic drawdowns.

Let’s see… 39 week moving average, CAPE10 below 18, 47% bulls vs 27% bears over the past 4 weeks. Why pick those numbers, except that they make the results look good? If there isn’t much more of a reason, then ladies and gentlemen, please see this Wikipedia entry on overfitting. The point is that you can make the historical data say any you want. As a rule, we are skeptical of any claim using numbers alone.

HF Claim: I should also note that overvalued, overbought, overbullish conditions have been entirely ignored by the markets since late-2011… With no need for further stress-testing in future cycles, and every expectation that overvalued, overbought, overbullish syndromes will continue to bite as sharply as they have in every other complete market cycle, I continue to believe that the future belongs to disciplined investors who adhere to historically-informed strategies.

Ironically, this is a claim that is not backed by numbers, and furthermore, relies on very subjective assessments.

Overvalued? Most people think markets are fairly valued here, and TMM actually thinks they are cheap. Problems with the CAPE10 metric have already been noted.

Overbought? What does that even mean? If it means being above a moving average, then as they noted themselves, being long equities when equities are above a long term average has done pretty well. In that case, being overbought is a BULLISH indicator.

Over-bullish? Again what does that mean? Look again at the chart of mutual fund flows at the beginning of the post, that shows 377bn taken OUT of equities since 2007 – a trend that only stabilized at the beginning of the year. That suggests over-BEARISH to us.


We are pretty sure we haven’t covered all the ‘evidence’ that equities are overly rich, but hopefully this does at least cover most of the quantifiable ones. Claims that the stock market is in a bubble because of Twitter’s crazy IPO or other anecdotes are pretty hard to either prove or disprove, so they are not included here.

The Fed's Bubble Solution.

So I buy an apple for a buck from you but I sell it back to you for 2 bucks. I Have 2 bucks and you have a 2 buck apple. You sell that to me for 4 bucks and you have 4 bucks and I have a four buck apple. 8 bucks, 16 bucks... We do this a few times until you have just bought a million+ buck apple from me and I can't afford to buy it back for 2 million bucks. So you cut the price to 1.4m and sell me a 50% share in the apple for 700k. So we are now back flat on our cash positions but we both own a 700k share in the apple (example here). Wow. As we have that sort of wealth behind us we needn't be so tight about buying that new Tesla now or that new home cinema or that holiday. So we go and spend some of our cash savings on STUFF. And when we do, that real money will stimulate the real economy.

It would be very topical to suggest that the Twitter IPO pricing is today's apple but TMM's broader concern is that the Fed think the apple scenario is a viable solution for creating growth where the stock market (or more generally risk assets, as we should include housing) is the apple. The Fed isn't mandated to inflate asset prices but it would appear that this is exactly the effect that these academics with their models are prone to produce and those models tend to exclude the negative repercussions that have occured every other time a population ultimately had their quasi-wealth evaporate in front of their eyes (tech stock, property etc). It has been a disaster and more real money has had to be printed to replace its function.

Whereas a reduction in leverage is needed, the Fed is in effect encouraging it. Leveraging at the personal level was what got us into this mess in the first place and to create an environment that is doing nothing to quench credit demand whilst at the same time stifling credit supply through increased bank regulation and balance sheet restriction is similar (and probably as equally short sighted) as most government policies towards drug addiction. They do nothing to alleviate the reasons people crave the narcotic, instead they try to restrict supply. And the result? The addicts go underground and pay way over the odds for bad product and get into a worse predicament which causes yet another outcry. Underground dealers = payday loan companies. Wonga = Whoonga. It's all self inflicted.

There is a huge hypocrisy in the demand for careful lending from banks and a demand for the provision of "social" lending. Perhaps, if governments are really that concerned they should take on the burden themselves. How about raising Fed funds or base rates to 1.5% and allowing the consumer direct access? But that means that the taxpayer is taking risk. Much easier to utilise the bank scapegoat as middleman and fine away excess profits. (It is interesting to note the lack of media noise about malpractice and the huge fines levied on the pharmaceutical industry recently compared to the noise about banks)

But back to this rally. There appears to be a lot of grumbling annoyance that equities are still grinding higher as they "aren't supposed to". If this follows the psychology of grief, we obviously haven't reached the stage of "acceptance" yet which would imply there is a way to go yet.

We have read plenty of research talking about record longs in fund mangement positions together with minimum cash balances all presented with overlay price comparison charts of 1987 and 2000 crashes etc., but we are sceptical. It's a pretty easy game to find visual fits for Price/time overlay charts (especially when you stretch scales) and only the winners tend to be waved as survivor bias results of proof. As for the positional data, though the normal sectors of fund management are captured in much of this data we wonder if the true extent of the flows of reserve managers are showing up. These behomoths of investment only have to swing small fractions of their huge portfolios from bonds to equities to see large responses in price. The big difference this time is the message from the CB's (other than the Bundeathstar) is "go long, stay long". So we will.

We would like to also thank our great friends the Benchmarks for helping us out further. Nothing worse for a fund manager than to under-perform your peers however right you may be in the long term. And nothing worse than under-performing the main equity indices as for some strange reason many consider them the risk free benchmark that you have to be an idiot not to outperform. So, break from the herd and the jackals of fund consultants will snap at your heels, which leaves you with the choice of rejoining the pack and going over the cliff with your peers later or being eaten by the jackals now.

So despite the Central Banks tilling the ground and sowing the seeds for one, we are still a way off this being a bubble. We are invoking our DTTVI (Day Time TV indicator) along with a few other indicators and all suggest this has a good way to run yet as it's not a bubble until -

Daytime TV has shows for the masses dedicated to running portfolios in it.
People give up normal jobs to trade in it.
People mortgage their houses to buy it.
And finally our old favourite.. the 25year old BMW 3 series drivers are bragging about their portfolios in it

——
P.S. and the ECB have just added their dose of detergent to the bubble solution.

TMM's Top Tips

Team Macro Man have been compiling their Market Top Tips in the style of UK's "Viz" magazine.

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Pit Traders - Why not show off the weight of your brain by displaying it on a neck fit for an elephant.

Pretend you have a highly paid job in finance by willingly paying the astronomical prices city bars demand.

Wealth Advisors. Why not cold call everyone on Bloomberg on the assumption that they all  have vast fortunes they don't know what to do with.

Head Hunters - Why not make the recipient of your call feel really special by immediately calling back on the same number and asking to speak to the person next to them.

Management - Surprise everyone by managing UP expectations at year end.

Analysts - Display your mastery of English by writing 16 pages of analysis when the single words "buy" or "sell" would do.

Shouting "F***ING SYSTEMS!" and smashing your keyboard into your desk makes an ideal alternative to apologising for your own input error.

HF CIOs: Telling PMs which trades would've made money after the fact is a great way to show your superiority

Sales - Why not show off your mastery of both sides of a price by shouting out the wrong one when the client deals.

Forwards dealer? Dealt on the wrong side? Just insist you were dealing futures conventions.

Emerging market traders - Learning the names of the capitals of the countries you trade in is an ideal way of showing a knowledge of your markets.

Emerging market traders - Once you have learnt the names of the capitals of the countries you trade in, pronouncing them in ridiculous accents is an ideal way of showing a knowledge of your markets.

Analysts - Using the word "exhibit" instead of "chart" or "table" in research is an ideal way of showing you are a failed lawyer.

TV Business Anchors - Starting a piece with "You know what? I know nothing about this" makes an ideal alternative to an over-confident pretence.

Fund managers - Suffering from huge negative returns? Benchmark to something that has done worse.

Want to offload your huge share of bank stock to a gullible buyer? Privatise the Royal Mail at a discount first.

A cumulative graph is an ideal way of ensuring a graph that goes up on the right.

99/01 makes an ideal price in anything that is fixed at par.

Pretend you are an options trader by randomly shouting "And I want it {insert 3 random greek letters} hedged".

Pretend you own your own e-trading platform by mentioning latency in every sentence.

Asked why a market is fast moving? "Stop losses" makes an ideal alternative reply to "I haven't a clue"

Back Office. Have an urgent settlement query? Make it un-urgent by addressing it to the trader involved by second class post.

Traders - Don't know what spread to make? Just make choice and shout at the sales guy for not spreading a gift.

Huge loss? Save face by justifying it "for tax reasons".

Been out with your friends drinking 'til 4am and are sick at your desk? Blame it on a client.

Relationship management - Pretend you are an Agatha Christie murderer by weaving a web of deceit about what you have or haven't done.

HR - Dress for the part! Wear a dark cloak and carry a scythe when creeping up behind someone to "tap them on the shoulder"

Traders -unsure of your position? - Buying 100x your limit is an ideal way to know you are now long.

Options dealers - If you wait long enough before making a price the client will most probably go away.

Metals traders - Why not show off your market acumen by remarking on huge demand for metals every time the dollar craps out.

Kicking the power off button on the PC under your desk makes an ideal way of avoiding complex pricing.

Fibonacci levels make an ideal alternative to knowledge.

Head Hunters - show off the depth of your rolodex by asking candidates to connect on linked in

Pretend you are senior management by confidently asking questions that betray your lack of knowledge of the basics.

Relationship management - Why not introduce your company's biggest competitor as a client as they obviously trade large amounts of your product.

Back office - Pretend you are a trader of 25 years ago by slicking back your hair and wearing Gordon Gekko braces.

Sales - Shouting "Nothing, Too Wide!" at the trader is an ideal way to cover up you forgot to get the price out.

Impress your dealing room colleagues by having a friend mail you large empty boxes embossed in top designer logos.

A slide presentation of illegibly dense spread sheets makes an ideal way of saying you have no social skills.

Clients. Calling all your banks asking for a complex derivative in 100x market size and telling each "nothing too wide" makes an ideal way of passing a dull day.

Traders - Asking "How much? For who(m)?" six times makes an ideal way of buying time to trade ahead of the client.

Sales - not answering the phone is an ideal way not to make a mistake.

Analysts - Making a forecast which involves price AND time is an ideal way to be wrong.

Technical Analysts- struggling with non performing trend lines? - try a log graph.

Elliot Wave analysts - the wave count doesn't fit? Easy .. just change it.

Hungover? A disabled toilet makes an ideal midday bedroom.

Junior on the lunch run? - When offered to "get something for yourself" buy a new suit.

A recently resigned/fired colleague makes an ideal scapegoat.

The matrix title background displayed full screen makes an ideal IT wind up.

Telling your boss that you were never told you had to book any of the trades you have done for the last 2 years is an ideal way to induce his cardiac arrest.

Having a glass corner office is an ideal way of not having to produce anything.

Traders - randomly standing up and screaming "YES , OH JESUS ,YES!!" is an ideal way of making people think you are a good trader.

Management - Introducing new protocols and systems every year is an ideal way to f*ck everyone off.

Regulator - Making it everyone else's responsibility is an ideal way to avoid responsibility

Compliance - Making it everyone else's responsibility is an ideal way to avoid responsibility.

Management - Making it everyone else's responsibility is an ideal way to avoid responsibility.

Compliance - Introducing online regulatory training is an ideal way of ensuring everyone has a reason to be fired.

Brokers - Telling witty football stories is an ideal way of best pleasing a client desperate to get out of a position.

A Sinclair ZX80 or Commodore 64 makes an ideal replacement for many banks' trading platforms.

HR - Randomly blocking 2% of the security entry cards each day is an ideal way to keep staff on their toes.

Fund Consultants - Charging fees for pointing out the past without any responsibility for the future makes an ideal way to earn a living.

Strategy - A set of dice make an ideal analysis tool.

Spot traders - Shouting loudest is an ideal way to win an argument.

Fix fixers - Using Bloomberg IB chat to communicate all your misdeeds is an ideal way to be caught.

Business analysts - Why not insist all lower desk heads provide irrelevant data and analysis which you know they don't have.

HR - Silently walk around the dealing room putting a sticker on each fourth desk.

Management - "Focusing on core strengths" makes an ideal mantra for buying yourself another year.

Management- Introducing tolls at the security stiles in reception. makes an ideal revenue earner.

Back office - Employ speakers of obscure tongues to add that extra level of excitement to urgent phone queries.

Cleaners - Stretching bin liners trampoline tight over the bins and setting up a dry cleaners is an ideal way to supplement your income.

Money Market dealers - hanging a wooden sign over your desk displaying "5/8, 1/2" is an ideal alternative to making prices all year.

Option dealers - offering a client 1mth EUR/USD makes an ideal alternative if he asks for 3mth SGD/JPY RKOs.

Suing someone for money you have lost makes an ideal alternative to facing up to your own stupidity.

Why not make your next year's targets seem less surreal by dropping acid.



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The comments section is open for additions.

Perusing a Speculative Commodity Rally.

First a kind message to those delightful people that provide rail services to the southeast of England.. "IF I WANTED TO BE HELD IN A SWEATY BOX IN LEWISHAM I WOULD HAVE CALLED A PHONE BOX S+M NUMBER RATHER THAN PAYING TO GET ON YOUR TRAIN!". There. That feels better, but it does strike us as odd that if a bank might possibly have missold a tiny product it has to pay grillions in compensation but should a rail co well and truely screw up thousands of people's day then a tannoy apology suffices. We can hardly see the regulator allowing banks to just get away with "we apologise for the manipulation of your fix this morning, this was caused by overunning profiteering. Once again we apologise for any inconvenience caused".


It's going to be light from us this week as the wild and windy moors or northern England attract us away (if we ever get there) from the wild and windy markets. But these markets aren't really that wild or windy unless you are an uncool dude who is refusing to toke on the spliff of carry and refusing to go with the mellow flow of the market. It's all a bit Apocalypse Now. The beginning of the river trip where whilst you know there is some real badass shit out there, you might as well ride the boat up the river catching some rays, listening to some tunes and puffing on whatever takes your mind off worrying about the next ambush around the corner. As Mrs TMM has often said, "Only worry about what you can change" and yelling that "It shouldn't be here" isn't going to change it.

Which is probably exactly what most people are worrying about at the moment. Core beliefs have not died and we are in that part of the S curve where beliefs are being sorely tested by Mr Price inserting cold steel into the flesh of positions based on fundamental pricing and traditional measures. As mentioned in previous posts, we think that we should hang up the logic and embrace the mood for the next few days. Or at least not stand in front of it.

Does this all end in tears? Of course. You can't please all the market all of the time but in what guise will those tears manifest themselves? Well TMM are putting on their simple hats and see something like this.

Increased asset prices are the transmission function by which CB created cash and liquidity leaks out into the real world, reduces deflation and finally creates some inflation. We believe that western central banks are going to be deliberately along way "behind the curve" in a traditional sense, not wanting to choke off any growth (unlike the idiots in Congress). Equities, when they really start to move, become a form of money as they become a method of payment or collateral for loans in their own right and though not measured as money supply, should be. But TMM feel that any rally, when dramatic enough creates such price stretches that other assets start to look comparatively cheap. Even things that have been considered basket cases begin to look attractive.

Now whilst things don't look good for commodities on a big macro scale, running short has seen at best lacklustre performance over the past few months and in many cases shorts are beginning to hurt. China data is picking up (even if you don't believe it), copper prices are not going down and iron ore prices are going up (as is coal). Now of course this doesn't mean that the macro background is monstrously better but TMM think that the current background of price chasing in equities is starting to spill into commodities.

Whereas equity asset rallies transmit inflationary pressures through stimulating greater leverage against those portfolios (late 90s) commodity price rallies show up directly in inflation. IF speculation spills over into commodities then we could well see a repeat of 2006 where production was being syphoned off into speculative storage just exacerbating the problem of price rallies. Whilst regulators have been focusing on nailing down banks we would suggest that they have taken their eyes off the ball when it came to reducing speculative commodity price spikes, so the risks remain. TMM's greatest counter indicator is also saying its time for commodities to become more interesting - Haven't most financial institutions just finished dramatically scaling back their commodity capabilities?

TMM know that supply has increased dramatically in many of the basics but we still think that there is a strong risk of an "unexpected" commodity spike with its inflationary consequences coming on top of rallying economies and strengthening job markets. Not an ideal time.

So back to the start of this post, an "end in tears" is certainly on the cards, but where tears = inflation,

What are we doing? In the short term and as a spec path of pain trade, as the old favourite of Aus looks already overdone, we are thinking this.

US debt ceiling rebound in risk + Minimal immediate tapering = EM higher beta bounce.
=> EM bounce + rallying commodities + an under-performing market = buy Peru.

Have fun. We will be singing Kate Bush songs about "wiley windy moors" into the teeth of howling gales.

Regulator's Perfect Market Hypothesis

With so much talk about "Perfect Market Hypothesis" around after the recent  Nobel prize awards, TMM started to wonder what a perfect market would actually look like and swiftly came to the conclusion that it is all in the eye of the beholder. Considering that the regulators are now stamping their authority on western financial markets we thought it probably best to start with the Regulator's Perfect Market Hypothesis as they are driving future direction.


Regulator's Perfect Market Hypothesis

Market overview -

The market will be permitted to function on condition that:-

The market is not and has no derivative.
The market carries no risk for small investors
The market carries high returns for small investors
The market transfers risk away from the State to the large investor, unless that large investor is a State pension fund.
The market directly funds investment in national infrastructure.
The market is environmentally friendly.
The market generates significant tax revenue.
The market supports more regulatory and reporting staff than it does investors or operatives.

Regulation -

The Market will be bound by regulations flexible enough to be interpreted freely by the regulator but stiff enough to mean that breach is necessary to allow normal market function.

Information Dissemination -

Any person or body analysing the market will be deemed unfit to participate in the market.
Any analysis on the market shall be submitted to and be the sole property of the regulator for them to release at their discretion.
Information relevant to market direction will only be released at 9am each morning, two hours before market open.
No form of communication involving any aspect of the market is permitted other than that issued by the regulator.
Pricing information will be published daily to those who can produce evidence of having completed 200 hours community work in the prior month.


Trading -

All trades will  be executed on an Exchange.
No electronic trading will be permitted.
The Exchange floor will be populated by randomly, yet inclusively, selected people weighted towards those from disadvantaged backgrounds.
The market will trade between the hours of 11am and noon local time.
The Exchange will be run by a Utility company operating under a state umbrella.
Only one trade will be permitted per day per counterpart.
The Exchange will demand collateral of 110% of the face value of any open position and said margin will receive a rate of return of Libor -10% or −10% whichever is lower.
All trades will be subject to a 5% "Tobin" tax
Trades will be submitted to the Exchange that will then decide on the size and direction of the trade thus eliminating any advantage of proprietary knowledge.

Reporting -

Each trade will be manually examined for signs of malfeasance by a team of 10 regulators and only released for settlement once committee approval has been sanctioned.
Failure to report a trade due to regulator error will be deemed the responsibility of the investor if they are in the highest tax band.
Each trade will be published in 6ft high letters upon the residence of the transactor, together with their open position.


Price action -

        The Market will be permitted to rise on condition that -

All the population own it (Apart from Hedge funds, bankers and anyone else deemed morally reprehensible at that moment).
The rise creates greater tax revenues.
The rise does not create Inflation.
The rise does not create social inequality.
The rise does not create deflation.
The rise does not create a bubble (to be deemed as such at the discretion of the regulator) .

       The market will be permitted to fall on condition that -

It is solely owned by investors deemed as morally corrupt.
Hedge funds are bound to buy at the previous high from small investors.
Profits from the sales are used to create more nurses and teachers.
It is about to go up again.

Rider -

The market will not be referred to as a market but as a "growth and employment scheme designed to reduce risk whilst enhancing living standards, social mobility, equality and diversity through mutual participation and synergistic interactions"

Morning Murmuration

That's another set of Debt Ceiling re-sit exams behind us. Sort of, for whilst the preliminary results for the debt ceiling are a deemed to be a scraped "pass", further re-sits are inevitable later in the year, but in the meantime markets can now allocate a bit of freed up processing power to the background tasks of tapering and growth overlaid with a smear of collateral long term confidence damage to US process and reliability.

This morning's price action is a little underwhelming. Earnings are now upon us and the valuation camp are calling tops for US equities but the the core sectoral bulls are chomping to get back to buying now that the ceiling is on the back burner. Some have already cast their die. Dagong, one of China's credit rating agencies has downgraded US to below Botswana in their rankings, but in TMM's eyes Dagong is just China's answer to Zero Hedge. However, for many there is a lot of indecision as to which way today breaks. It feels as though everyone is watching the guy next to them for confirmation of the next move on to which to jump.

In other words, behaviourally, this morning feels like a murmuration of starlings.



TMM are hoping the flock rises.

Now back to bubbles. What do you do when you are not getting an income from anything or you consider the income too low relative to risk of underlying price moves to make it worthy of consideration? Well if you are like TMM you focus on the price change capital value part of the equation rather than the income or coupon side. Of course the price SHOULD be reflective of the income streams but that can easily be ignored when prices start to trend and rising prices are backfitted against future hope stories to justify monstrous P/E's. (Look what at Tesla).

This versions of the problem with the "relative" zero bound effect is something that we feel is destabilising the old balance between true valuation and bubble generation, with the bias moving to price chasing and a faster frequency and greater amplitude in the wave form of asset classes. Money will chase price moves amplifying them rather than seeing logic damping them. A great example of this is London property where the dividend (rent) is thought to be so insignificant that it ofeetn isnt even collected (empty properties). It is all to do with appreciation of a capital value which cannot even be truly measured other than against "last price paid".

TMM are not saying that London property is a bubble, though it does share many of the definitions of one, and are definitely NOT saying that UK property is a bubble. This (courtesy of housepricecrash.com) does not look like a bubble -



But we are saying that we expect this behaviour to become more redolent in financial markets as capital chases capital growth rather than income. It's all part of the super savings glut. As with a ship taking on water, the inpouring and sloshing of all this cash can destabilise and capsize any craft not fitted with protective bulkheads in the way that did for the the Herald of Free Enterprise and Titanic, but we believe we are a long way off that point in any of the markets currently being cited. Screaming "Stop! Bubble!", is hoped by many to stop the bus they have just missed allowing themselves a chance to get on board.

It's just desperation for performance driving herd mentality in a low yield world which is too driven by short term peer performance benchmarks.



Now, back to the Starlings..

Congressional Ultimate Worst-Case Scenario Survival Handbook

Watching the train wreck of US Congress conjures up images of two characters in an action movie fighting it out on the roof of a train as it approaches a bridge or tunnel or broken line. Only in this case we don't care who wins as long as they just stop the train.

This led us to research recognised ways of surviving when riding the top of a train and we found this in the Ultimate Worst-Case Scenario Survival Handbook

How to Maneuver on Top of a Moving Train and Get Inside

1. Do not try to stand up straight (you probably will not be able to anyway):Stay bent slightly forward, leaning into the wind. If the train is moving faster than thirty miles per hours, it will be difficult to maintain your balance and resist the wind, so crawling on all fours may be the best method until you can get down. .

2. If the train is approaching a turn, lie flat; do not try to keep your footing: The car may have guide rails along the edge to direct water. If it does, grab them and hold on. .

3. If the train is approaching a tunnel entrance, lie flat, and quickly: There is actually quite a bit of clearance between the top of the train and top of the tunnel-about three feet-but not nearly enough room to stand. Do not assume that you can walk or crawl to the end of the car to get down and inside before you reach the tunnel-you probably won’t. .

4. Move your body with the rhythm of the train-from side to side and forward: Do not proceed in a straight line. Spread your feet apart about thirty-six inches and wobble side to side as you move forward.

Warning - the sizes and shapes of the cars on a freight train may vary widely. this can make it either easier or significantly more difficult to cross from one car to another, A 12-ft boxcar may be next to a flatbed or a rounded chem car.

————

This is obviously modelled on the Congressional Ultimate Worst-Case Scenario Survival Handbook entry.

How to Maneuver on a Ridiculous Impasse and Get Up on the Inside

1. Do not try to stand up straight (you probably will not be able to anyway as you are a politician): Stay bent slightly forward, leaning into the resistance. If the issue is moving faster than your simple mind can comprehend, it will be difficult to maintain your balance and resist the pressure, so crawling on all fours may be the best method until you can climb down.

2. If your policy is approaching a turn, lie flat; do not try to keep your footing: Your party may have guides along the edge to direct policy. If it does, grab them and hold on and go with the flow.

3. If the impasse is approaching a deadline, lie flat, and quickly: There is actually quite a bit of clearance between the impasse and political death - about six weeks, but not nearly enough room to stand for election again. Do not assume that you can persuade the opposition to agree to step down before you reach the deadline - you probably won’t.

4. Move your view with the rhythm of the opinion polls -from side to side and forward: Do not proceed in a straight line. Spread your feet apart, ignore common sense and wobble side to side as you move forward.

With the additional tip -

5. If you see a broken bridge coming up ahead DO NOT alert the driver, everything will be just fine, just keep on fighting.

Warning - The sizes and shapes of egos in Congress may vary widely. This can make it either easier or significantly more difficult to jump from one solution to another. A 6-ft bonehead may be next to a 5ft knucklehead or a rounded obfuscater.

FX Fix Fix?

A quick comment on the ongoing investigations into FX fixing fixing, where the public's ire against city malfeasance, led by Bloomberg articles, has come crashing through the gates of the commission free, pretty unregulated, non-exchange, "my word is my bond and my price is my price not someone else's e-platform" FX market, born forward upon the blazing chariot of the newly armed regulator supported by premature media branding of it all as "scandal".

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

Today has seen the first "outing" of a POTENTIAL perpetrator who PERHAPS COULD have MAYBE done something wrong when hedging his fix trades. And the media are all over it. TMM are struck by how glaringly unfair it is that whilst today in the UK a newspaper cannot say that a footballer has had carnal knowledge of his goat, or even say that they are prevented from saying something about said footballer, the financial regulators can publicly say Johnny Spoteffeks is under investigation (hence wrecking his career) and not have to give any reason why, nor even to have found him guilty of anything. That in our mind (if the bollocks of benchmarks are normal) is blue whale testicular.

It would be very sad should anyone fall victim to an FX fix fix fix, so perhaps can we ask that the FCA be subject to any upcoming Royal Charter on press regulation? Or do we have to wait for them to say something incriminatory about Ed Miliband's dad before that happens?

US Politics stretching equity catapult elastic.

The broad thesis that TMM have been running over the last few months is that the world continues to recover from the great financial crisis and we don't expect that to stop.  If we were to look at the recovery as a Formula 1 race then though everyone is generally moving forwards, emerging markets have pulled into the pits to refuel, Indonesia and India having been found to have severely overheated. Europe has just left the pits after having had most of its bodywork patched together after a nasty crunch and is catching up fast. But the leader over the last 2 laps, the US running on natural gas, has suddenly pulled over. Not due to equipment failure but  to an insane in-fight between its own management team leaving the leading driver under instruction to shut the car down. Team Macro Man think that the Fed should do a "Vettel" and ignore team instructions and just get on with winning the race.

Early August had a definite feel that good news was pretty much fully discounted with respect to direction (but not yet fully priced - more later) and that we should be looking for something for the disasternistas to get their teeth into in order balance things up and wow hasn't this US showdown been just the ticket? However we maintain our dogged view, last employed during the European crisis, that when politicians are close enough to the edge of mutually assured destruction they WILL get their acts together. The frightening part for everyone else is seeing them dance so close to the edge.

So where are we in the US? The political risks appear to be limited now to an extended government shutdown. GS estimates something like ~15bps off 4q GDP growth per week of shutdown, but it will be made up when the government re-opens, so it’s not clear how big of an impact it will have. But the main driver for the recovery of markets is the removal of both the default tail risk ( cf. European response to OMT) as well as the risk from a sudden stoppage in entitlement programs.

It seems unlikely that the Fed will taper while the government is shut down and we have to cope with a lack of reliable macroeconomic data. People have also noted that even if the government IS reopened shortly, much of the released data will be affected by the shutdown in various ways anyway resulting in noisy feedback loop debate as to what reality is.

Given that the FOMC minutes showed a fairly close vote towards a taper last month, it seems reasonable to assume that taper mania will be back in full swing as soon as the shutdown is over. Consensus seems to be moving towards 1Q right now, which seems reasonable. But barring a downturn, it seems hard to imagine a substantial fall in yields in the near term. The Eurodollar strip is priced almost to perfection vs the FOMC’s projections after adjusting for a ~20bp spread for Libor-OIS:




What is interesting is that the pace of hikes priced into the market slows starting in 2018, ~5 years forward. There are several possibilities for this, but one may be that Yellen has said in the past (6/6/12, specifically) they she thinks the economy’s equilibrium real Fed Funds rate is probably well below its historical average. She didn’t give a number of course, but with the FOMC central tendency estimate for the equilibrium rate at 4% at the last SEP, there was 1 vote at 3.75, 2 and 3.5, and 1 at 3.25. Note also that in her “Optimal Policy” speech, she has Fed Funds at 3.25 in 4Q 2018.






Watching market response through all of this has been interesting and indicative. Considering the moves in T-Bills and the responses by Hong Kong to haircut them as collateral ( the Swiss considering the same) it looked as though the closest thing to cash and the world's favourite safe haven was doomed to destruction. But relative nonplussed performances of Eur/usd and indeed the non-cataclysmic equity response had us wondering if maybe some Machiavellian political forces were encouraging this run to spur the other side back to the negotiating table. The US10year back to 2.60 can be seen as a return to comfort levels after the last panic spike higher. This leaves us with the view that this US congressional mess is a valley that has to be bridged to higher lands on the other side.

In the meantime, traditional measures make the conditions for equities look pretty benign here, although given the repricing in the VIX, arguably almost all of the default tail risk has been priced out already. BUT, and this is the big but, we are strong believers that in an environment where people continue to have to choose between cash, bonds or stocks, the inflows into stocks will continue. To TMM there is a mismatch between folks talking the equity talk and walking the equity walk,  perhaps because they are afraid of the the micro-analysis telling them that equities are fairly/over/madlyover priced. But if we are to look at how markets have behaved and how the current environment of excess savings chasing minimal returns is playing out, then traditional fine measures will be nothing in the face of sloshing tides of money chasing anything that is simply "going up". (We recommend Izabella Kaminska's great post on yield chasing and bubbles here).

TMM has, as regular readers will know, been a great fan of overweight Europe for the past year or so but popularity is catching up with us and we note that based on forward P/E, the Eurostoxx50 has now exceeded late 2009 levels. Against the S&P, the Eurostoxx is as rich as it was last December, and before that in late 2006.





Now as we said above, this matters little if we are looking for another tidal wave of renewed portfolio switching (this US scenario has offered a secondary "out" opportunity to those having missed the boat re bonds to equities) but it does make us look at reweighting more to US from our very overweight Europe view.

TMM feel that the debt stuff will be resolved, or put on the back burner again European style, enough for a market melt UP into the year end.


—

And as a footnote - Whilst TMM believe the pricing and distribution of UK's Royal Mail issue was designed to act as ground bait to attract the shoals to take the hook of a trickier upcoming RBS sale, its success has given the UK public's general interest in equities a real boost. TMM reckon that for every cry of "Foul easy profits" from left-wing spokespersons there are a hundred responses - "Easy profits? Where?"

Guiders 1 - Bond Vigilantes 0 - Guidance minus 1.

We would like to think that our last post was the reason  the FED held back on tapering, having taunted the CB'ers with our "You can't pull it off, you don't have the respect of the market for your commitment in the face of anything" taunt. But we doubt that very, very, very much.

TMM's polite "front of house" way of reporting the event is -

The FOMC is now on the record that they are unhappy with 10y yields at these levels given the current backdrop, at least for now and that a 7% UER rate no longer means no more QE. These dovish shifts were surprising because the data appears to have come in inline with the Fed’s own projections, and Bernanke said so. The Fed seems most worried about the rise in mortgage rates and potentially the fiscal issues ahead, and it appears they want to take out some insurance against that. It’s not clear exactly what will ease their concerns, so until the Fed signals otherwise, yields may be range bound.

Positioning suggests that the rates move could move further. But we note that relative to the FOMC’s own projections, the front end now looks fully priced. The median FF projections for YE 2015 and 2016 are 1% and 2%, respectively. EDZ5 and EDZ6 are trading at ~1.3% and ~2.4%. Adjusting for the historical 15bp spread between 3m Libor and Fed Funds, that leaves a risk premium of 15bps and 25bps, respectively in those contracts.

And the impolite behind the scenes TMM response is - WTF?

This has lifted the phrase "Don't fight the FED" to a completely over the top "Don't f**k with me you m*fkr" response. But there is a paradox here. If forward guidance is meant to be taken seriously then how come the derivative of forward guidance, namely forward guidance of forward guidance can be so totally and utterly shot down in flames. How can you, Mr B., expect us to believe we will end up where you guide us if you let us go so far off the path of expectation in the case of QE. You had the chance in August and early September to guide expectations of QE but no. You watched us all the way to the cliff edge and then nudged us over. A backlash against the assumption of the Hilsenrath leakage days?

So well done Mr Moderation. You may well just be trying to say "3% is too much in UST10y" but you are going to have to pull off some particularly wordy magic in your statement to abate the headlong spew in markets back into everything that has drifted off since May's first mention of tapering.

TMM are prepared for carnage, or rather Bernankage (that's going in the glossary together with Carneyage) as the world lights celebratory cigarettes in the global credit crisis room that has just had another 300psi of gasoline vapour pumped in, by buying the ying-yang out of yen, buying the cahoonies out of carry, buying the 'eck out of equities and the 'emming hell out of EM. And as for Gold - We can hear the roars of "toldjasos" echoing from the cabins in the woods. Staunch that, Florence Nightingale.

Ben's parting gift to central bank history is to go down as the FED chair that made Greenspan look not so much a hawk, but more a velociraptor.

Fed guidance -

Ready Reckoner on Syrian Negotiators

Team Macro Man have drawn up a quick ready reckoner for use when considering the Syrian negotiations.

FX Coin Vortex

TMM's simple explanation as to why the BIS FX volumes appear to be so large. The FX market has become a coin vortex. It's just the same coin flying further around the electronic market before it finally finds a home.

Rubbish Month and Rubbish Guidance.

It's time that the long absence is explained. 2013 has been a survivalist year for TMM and we have seen some changes that we have so far overcome but are now struggling with. CPMPPI and I have both experienced dramatic changes in our employment situations leaving CPMPPI moving on to a career that precludes him from continued contribution, Nemo is buried up to his eyeballs in his own job and as I now find myself looking for employment I am not sure if I will be able to keep it up either. So that leaves new recruit "GMS" and I feeling a bit like Custer and his mates. Throw in a surprise death in the family which involves diversions of practical response as well as the usual emotional support and really the last month has NOT been the easiest to contend with.

It has also led to feeling of a disconnect between self and market. Micro plays and nuances are not becoming discernible from this altitude and the big macro landscape appears not really having changed dramatically.

US data isn't slowing. The payrolls print was the only weak one in the past few weeks. ISM, non-mfg ISM, jobless claims, are all still super strong.

China is producing better numbers (note we don't go further to judge the validity of those numbers).

EM is stabilising and everywhere starting with "Ind- " is looking less panicky to the point of becoming bounce attractive.

Europe is seeing PMIs going ballistic. Though we note concern that PMIs may be delinking with regards to GDP but we would like to think its more like there was a 'jump' in the linkage because production couldn't go any lower, while spending could (due to austerity). I.e. EU GDP growth is likely to continue higher, following the PMI prints.

Syria is what we would like to coin as (new term here) a AOAO trade (Armageddon On, Armageddon Off) and so other than buying cheap tails it isn't worth playing in the belly of probability. Much like US debt ceilings and democrat/ republican budget posturing - Though it will be interesting to pick the bones out of how much a Syria strike will assuage Republican gun toters and arms manufacturers towards a less confrontational budget debate.

The main topic of interest is the steepness of yield curves and how much the tsunami of bond sales can percolate through linear interpolation into the territory of forward guidance. It's a big battle that's being waged in the rates markets across the world. The bond vigilantes vs the forward guiders. To clarify things a bit, let's add a bit more detail to our canvas. In the red shirts in the long end corner , the sellers of bonds, the economy bulls, the Larry Summers cheerleaders who are so trigger happy and hate bonds so much, they just keep on selling. In the blue shirts in the short end corner the cowering Central Banks Forward Guiders, bruised, battered, but still trying to keep the risk premia down in their short ends.

What is more the CBers in exiting QE have basically walked over to the vigilantes and handed them a script of every punch they plan to make. whilst also leaving themselves with nothing new to throw at them apart from a Muhammad Ali type of slating "I am the greatest, I am going to nail you" or rather as Basci said "Believe us and you will win" - which they are hoping will lead the vigilantes taking them at their word and throwing in the towel rather than howls of laughter and a pummelling. Unfortunately the promise of forward guidance is binary, rather like that old Russian saying on pregnancy, you either forward guide .. or you don't. You can't have a bit of forward guidance maybe, because promising forward guidance gets everyone leveraged and beautifully long of the short end but as soon as they realize that you maybe didn't really mean it that way they panic and you have a mad rush for the exit leaving a mess.

The problem is that in doing so the CB'ers are effectively committing to control the unknown and for that reason we can't have confidence in them. And as soon as we don't have confidence in them they are then trying to control the unknown, which leads to a further collapse in confidence.

So CB'ers - We can't believe you whilst you promise us short term rates to stay low in an uncertain future and still have us believe that you are adaptive to future conditions enough to achieve your mandates.

It's a bit like your teenagers promising to do what you ask for the next year in return for a ride to the cinema and we know what the chances of that are.

Dancing Numbers

So that’s our holidays done for a bit. It’s a shame really as time spent dozing in far off climes, or time spent with people from other professions followed by the return to a room full of screens covered in dancing numbers from which one has to decide which ones are going to get bigger and which ones smaller really does make us go soft in the head and question exactly what we do. Yes, sorry folks, however fantastically clever you think the world of finance is, all that complex method, all those Nobel prizes, stats, PhDs, papers, research, central bank watching and even lunches, dinners, seminars in Bali all just boil down to guessing which numbers will get bigger and which ones smaller.

But hey ho, such is life and while there are still queues of brainwashed interns willing to work for nothing at financial institutions (that are ironically based in countries that pride themselves on abolishing slave labour over a hundred years ago) for the shot of maybe making it big time, it will probably go on. Huge quotients of intellect still willing to go through an X-factor ordeal (Do you really want it? Will you give your all for the chance to attain your dream? Or rather OUR dream). There will only be one winner and chances are it will be your employer rather than you.

Right, now with that dose of reality out of the way, lets crack on. What’s going on with these dancing numbers?

Well, to use the vernacular, bugger all by the look of it. Have we returned only to find that all other human market participants are left on the beach?

UK - Carney has managed to give the newspapers reason to think he will stay “low for longer” and reignite a buy to let property bubble and yet convince the market he is going to stay “low for shorter” kicking GBP higher. At which point TMM will congratulate their flawless TMM Holiday FX indicator as it once again managed to pick the top in EUR/GBP the moment we boarded the plane back from Europe to the UK. Carney appears to be able to speak “Parseltongue” which is a clever trick making their goal of achieving economic escape velocity whilst holding longer term rates down possible. TMM still like the UK prospects and though may cite “we have seen 3 recoveries fail so far so this one is likely to as well” as pretty much denial.

TMM had a bit of a debate today about the targeting of unemployment rates as far as CB guidance goes and note that despite the different mandates, most CB's do target it some way. As we have said many times it all comes down to wage inflation and though employment levels are a laggard they are not as much as a laggard as inflationary pressures caused by wage inflation. Wage inflation also being the component of overall inflation that has to be targeted rather than reacting to exogenous inputs.

But it does all depend on the assumption of a reliable relationship between unemployment levels and wage growth. Should we see that break down then we could see inflation pick up without the CB’s employment targets ever being hit.
how could that be?

Well some things to consider.

- Spain – what’s their employment rate been at and for how long? Targetting a 7% unemployment level would be a Utopian dream for them.
- In the UK there may be a bolstering of unemployment claims as disallowed disability claimants shift to “unemployed”.
- Continued widening income disparity. i.e. a shortage of highly paid engineers vs a surplus of low-skilled service workers. (Also the increasing dominance of global industries by the mega players and rising barriers to entry for the small fry)

The last of these points is a concern and TMM can't see a short term end to continuing wealth disparity trends, which means London, and Manhattan real estate prices will continue outperforming and the disconnect between stocks and the real economy could continue also, as more of the savings go to the wealthy, who put it into finance instruments, a form of saving which contrary to popular press who assume that all savers have their money in cash at 0.0001% at the post office, has seen savers rewarded with stellar returns. And with respect to inflation, while income disparity may not have a large impact on an aggregate level, these trends do suggest the increased likelihood of sticker prices (oligopolies aren't likely to cut prices!) and increased dispersion of the various components of inflation baskets. But we have digressed enough.

US – zzzzzzzzzz Really is there any major development to factor in over the last 2 weeks? The blogosphere appears to be rummaging in dustbins for old bits of bad news to cite ( trailering “The Cliff 3” – with all your favorite stars) but lets stick to the big stuff, not much other than the US bonds to stocks flow story seems to have got ahead of itself just on price action as bonds are doing ok and stocks are having a hard time rallying even though data has been ideal with strong ISM globally, while employment growth (and hence the timetable for CB tightening) remains slow. Maybe that just means they need to consolidate some. Clearly people do not hate bonds as much as maybe one would expect.

But the killer has probably been the mighty USD which, judging by the performance of FX dedicated funds, has taken many to the cleaners.

Europe – The data is getting incrementally better and monetary trends suggests growth through year end. The picture is less clear after that, but it appears to be the consensus view that Europe is economically on the mend, but we think it’s a begrudging consensus with positioning lagging belief. People still don’t appear to want to see Europe as a success and still seem to trade it as a “less short to flat” rather than an outright long. But its holiday time in Europe and the small Mediterranean island TMM were holidaying on, despite reported lower visitor numbers this year, was by no means dead. Unlike the markets.


China – Data continuing to improve, a turn around in all things China linked has lifted the foot off the Asian brake on global confidence but we do still wonder about what is really behind those figures (more soon on that).

That will do for now, the fractal component of markets means that there will always be some microcosm to break into even smaller discussion points but for now let's just accept that things are pretty quiet and there isn’t that much point in yelling about the next great move because most of the arguments behind each view really haven’t changed that much over the past 2 weeks.

Let the numbers dance and while they do
We’ll take a seat on the side for two
More weeks to pass, as data yields
Passage to Elyssian fields

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]

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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.