Tuesday, March 11, 2014
It's been a long time since I rock and rolled,
It's been a long time since I did the Stroll.
Ooh, let me get it back, let me get it back,
Let me get it back, baby, where I come from.
It's been a long time, been a long time,
Been a long lonely, lonely, lonely, lonely, lonely time. Yes it has.
This will be my last regular post so please indulge me in a little retrospection. Macro Man will have to morph into a new beast but more on that later.
As has happened with my great TMM friends CPMPPI and Nemo before me, my life is changing in a way that will prevent me from being able to devote the attention to this blog that it deserves. After twenty five years of service in the City I am about to make a huge break and move on to a completely different project.
When I took on the keys to Macro Man from the original a little shy of four years ago, as part of the three man Team Macro Man, I was at once daunted with the prospect of having to write properly for the first time in my life (a skill which I never felt I was particularly suited to, having an almost dyslexic inability to spell) and a fear of how to combine a background that was not reflective of either the original Macro Man nor my team member's expertise as fund managers in their own rights, with my own views on the markets. For I have always been on the sell side of the fence where FX has been my specialty (where the overlapping bits of all the other asset classes meet in the centre of the asset Venn diagram) and this has naturally lead me to have a broad asset interest. In FX we tend to have to have a clue as to what's going on in the world as a whole as unlike Bond or Equity sales, we can hardly say "My dollar is greener than his, buy mine".
But this function of other asset class’s factors driving FX would often lead to trades that though intuitively sounding right, would, when analysed along their own logic trees, make betting on a roulette roll look preferable. For example a typical FX patter would run along the lines - Iran is making aggressive noises in the middle east (chance that it really is aggressive 80%), this means that global oil supply may be threatened (80%), which means that oil prices may go up (80%) which means that Norwegian oil revenue would go up and that the country balance of payments will benefit (80%) and that would mean that their FX rate will appreciate (80%) and meanwhile Japan as a net oil importer will see its current account suffer (80%) and so the currency ]go down (80%) so therefore buy NOK/JPY. Which is great to argue when each step of the argument has an 80% outcome but when you sum all those 80%s it isn't many steps before you are below 50% from the original point and in the final case only at 0.8^7 = 21%. Whilst the example above is loose and subject to nit picking I hope it gives and idea of how quickly the odds drop and would often lead the realist in me to asking people wanting to buy NOK/JPY on such an argument why they didn't just buy oil. Which sort of didn't make me a good FX salesperson. But it's a good example of where Pink Flamingo's are fluttering onto lawns that they really don't belong on.
But as we know, the world of FX is populated by many characters each with their own behavioral biases, both on the client side (client menagerie here) and the sales side (sales menagerie here). One day I hope to sit down and write a book titled "The Players Around The Table" to flesh out my understandings of the behaviorally different poker players around a markets table. It is behavioral as much as mathematical. In fact as the maths is naturally more predictable than the behavior, it instantly makes a lot of the maths redundant as a lead indicator as it gets behavioral discounted ahead of time. As we have so often seen, mathematical trading models have to be adaptive to cater for the behavioral feedback loops they create in their own markets. TMM have been a long proponent of fading pack behavior and our facetious development of Dinner Party Indices, Taxi Driver Indices et al were all sharp references to such.
But the world of FX does appear to be changing fast. The old world sell side is starting to see the pond dry up with fish fighting for margin against the machines that are cutting spreads to suicidal slivers under the drying glare of the new regulatory sun.
It is somewhat ironic that the regulatory intensity designed to flatten the playing field across banks to the customer's benefit is actually creating an elevated plateau of super players who are protected from competition by the cliff cost of entry that new regulation is imposing. Perhaps this could well be the regulator/policy makers plan, with the whole business being pushed towards a model of a single super platform which, voila, is easier to manage from a regulatory control perspective. Which leads one to wonder what edge the banks will have in the future world of FX which is currently suffering its own schisms as the authorities' investigations into WMR fixing fixing is beginning to highlight general practices that once were deemed acceptable in the "unregulated" market but are now seen otherwise. On that side of things it had always been a dream of mine that when I did start up a large fund I'd name all the component sub-funds names such as "Large Investor", "Smart money", "Triple A", "Asian Sovereign" and finally "Profit taking" and "Stop loss" and end up making more money suing banks for disclosing my name to the market (as they continued to use such terms as "Smart money selling” and "Stop loss buying" to cloak the flows of their other clients) than I would in normal trading.
But anyway, the world is changing and so is my future career. Whilst I will continue to trade my own money and pop back now and again hopefully as a guest poster in any new TMM structure, I am taking up a fantastic offer of a senior post in a successful creative company catering to the needs of those with very large boats. A complete and total departure from my past but not only does this marry up many of my own dreams, it is domiciled by the sea in one of the most beautiful parts of the UK. It's time to cash in a life of City hours and stress for a better lifestyle but no doubt a whole new type of stress. If you never cash in then what's the point of playing?
So it is time for me, Polemic, to bow out and head off into the setting sun. It has been a real thrill and pleasure and I am going to miss Macro Man tremendously as there were moments of pure joy (most notably the single hour that it took CP and I to pen this xmas post through raging hangovers) but I hope that I have left enough tears and laughter in the Archives, Glossary and Top Tips to keep my memory alive. You can still find me at firstname.lastname@example.org and would be delighted to stay in contact with you all especially the regular commenters who have been instrumental in keeping this blog alive during our off periods. Of course I would especially like to hear from you if you have a very big boat!
So long and thanks for all the fun
TMM will be auditioning for new members so sharpen your quills and sharpen your wit and standby for for more details.
Monday, March 03, 2014
Team Macro Man provide a translation of the latest G"whatever" statement on Ukraine. The original is in italics.
We, the leaders of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States and the President of the European Council and President of the European Commission, join together today to condemn the Russian Federation’s clear violation of the sovereignty and territorial integrity of Ukraine, in contravention of Russia’s obligations under the UN Charter and its 1997 basing agreement with Ukraine.
We the G8 (oh we can't say that can we, how about G7? Just stick our names down) have in our hands a piece of paper signed my Mister
Hitler Putin.." It seemed to work for Mr Chamberlain. Oh it didn't? Are you sure?
We call on Russia to address any ongoing security or human rights concerns that it has with Ukraine through direct negotiations, and/or via international observation or mediation under the auspices of the UN or the Organisation for Security and Cooperation in Europe. We stand ready to assist with these efforts.
Hey why don't you all just talk about this? You can borrow one of the meeting rooms at the UN if you like and we'll provide the coffee and biscuits.
We also call on all parties concerned to behave with the greatest extent of self-restraint and responsibility, and to decrease the tensions.
Okay you can see we aren't armed. Now put down the weapon and don't touch that gas tap.. please? Let's take a deep breath and we'll have a nice cup of tea and, err what else?
We note that Russia’s actions in Ukraine also contravene the principles and values on which the G-7 and the G-8 operate. As such, we have decided for the time being to suspend our participation in activities associated with the preparation of the scheduled G-8 Summit in Sochi in June, until the environment comes back where the G-8 is able to have meaningful discussion.
As is fashionable when we run out of or can't find any actual laws being broken we accuse you of being MORALLY wrong and hence we are morally right not to come to your morally wrong party until you start behaving morally right. So there. (Hey who wrote this "until the environment comes back where" bit? A Google translator bot?)
We are united in supporting Ukraine’s sovereignty and territorial integrity and its right to choose its own future. We commit ourselves to support Ukraine in its efforts to restore unity, stability, and political and economic health to the country.
When we say commit we mean we are resolute and determined to appear strong and unified and hope that no one asks what we will actually do. Oh they will? Err, oh hell.. how about..
To that end, we will support Ukraine’s work with the International Monetary Fund to negotiate a new program and to implement needed reforms. IMF support will be critical in unlocking additional assistance from the World Bank, other international financial institutions, the EU, and bilateral sources.
There. We'll give them an overdraft facility. That should solve it shouldn t it? It sort of worked for Greece and Ukraine is near Greece isn t it? And they both have nuts Eurovision song contest entries. Or was that Azerbaijan?
Has Russia backed down yet? Oh please God make that nutter back down because he's too big for us to "Sadam Hussain". He's got Nukes??? You're F##kin kidding me..... Michelle? Where're the bunker keys???
Saturday, March 01, 2014
Thursday, February 13, 2014
Tuesday, February 11, 2014
So much for the renewed attack on the weak EM. Despite wobbles in the morning in DM equities they never really succumbed to any supposed correlations. Serves us right for not trusting our own beliefs that the market is getting these correlations wrong and thinking they would do so again, even temporarily. So no pull back and we had to put back on the longs we had taken off.
We are left this morning hearing the siren call of one of or favourite indicators - The STPLTI. Standing for "Short Term Pushed Long Term Indicator", this indicator is usually a precursor to shallow pocketed investors being removed from the field on stretchers. We have seen it work perfectly in Europe, where speculative positions on the imminent demise of the Euro were bundled up into old suitcases, put in the attic and reclassified as "long term". Which is all well and good if you can afford to have your positions slowly dry and decay whilst you wait for Godot, but in the real world you normally need that cash for something else so harsh truths of cash management ultimately force you to retrieve the remnants, count the cost and start again.
The same has occurred in the gold market (just read Zero Hedge comments) and we would posit is happening right now in the Bitcoin market. But this morning it's the EM market that looks like Downton Abbey on Boxing day, huge trunks being stuffed with all the short term positional Christmas joy of EM demise to be shipped either home or up to the attics because it's over in the short term but will happen again.. Sometime.
TMM aren't immune to STPLT themselves and their own portfolios contain the dusty remnants of stocks that having once been sure fire things have basically become free options with pico-deltas (all that battery technology that didn't make it). But we are all too aware that in this world of short term return measures you need very deep pockets to ride out the "one day" trade. Which of course most people haven't got. So when we hear, as we are this morning, those folks short EM (who two weeks ago were looking for imminent collapse) saying that it's now a "long term trade 'innit", we look for things to start motoring higher and we go long stretcher bearers.
Do we detect a bit of this in Europe too? OMT legality has raised its head again in a big way. Wolfy in the FT and Euro permabear Evans-Pritchard are touting it as disaster but TMM think that OMT is much like a fire extinguisher. Even if they are ruled illegal it doesn't mean that your house will catch fire in the first place nor that you wouldn't use them anyway rather than burn to death (even if the German lodger does prefer self-immolation). Others would suggest though that if it were known that the fire extinguishers may not be used then it's open house for the arsonists.
So if that were the case, the most sensible thing to do would have been for the Germans to collude quietly with Euro central command and agree not to voice any of their debate. So even if they did decide that OMT is illegal, they just wouldn't tell anyone. Just like Reagan's Star Wars, it isn't the reality, it's the possibility that breaks the back of the aggressor.
So why are the Germans being so German about it? Perhaps it's just constitutional process that has a course to take and isn't designed to upset anyone, but like that giraffe being cut up in Copenhagen Zoo in front of the kids, it's a fact of life that has shocked those that don't like to see the messy bits of reality.
Maybe it's time to just go with the flow, rather than booking a lot of space at your local storage company and hoping all those now long term positions don't end up on "Storage Wars".
"Hey Barry, I've found a long DEM/ITL from 1998!"
Monday, February 10, 2014
Last week's ECB press conference was notable for how hawkish it was relative to expectations. Which has TMM wondering if this is actually a glimpse of a deeper policy that would go a long way toward explaining the ECB’s inactivity. That is that the ECB recognizes that one of the key misalignments in the Euro area is productivity-adjusted labor cost differentials. Even after the recent crisis, Germany labor costs remain very competitive vs those of other Eurozone countries. As long as that persists, Germany will have a high trade balance and negative capital balance with its EU neighbours. In other words, German capital will continue to finance Germany exports.
Now, within a currency union, the smoothest way to normalise this gap is over time via differing inflation levels within the EU over time. In particular, if German labor cost inflation exceeds that for rest of EU for sufficient time, real labor cost differentials will shrink. To us, this appears to be the path the ECB is taking.
If this is the case then it is worth noting that since Germany is much smaller than half of the EU, this policy stance by definition would mean very low inflation in EU ex-Germany, and as a result low inflation prints for the Eurozone as a whole. In other words, the ECB WANTS low inflation prints for the Eurozone as a whole because it signifies that the labor cost differentials are narrowing. The ECB’s implicit acceptance of a long period of below target inflation (via its staff forecasts) is reflective of that. As a result, as long as inflation expectations remain anchored, TMM thinks the ECB is likely to continue its current policy of non-action. Whether inflation expectations will remain anchored, however, is a whole other story altogether. But the lack of action was the removal of one risk support.
US: The ISM print last week was obviously the big shocker, but TMM thinks that it overstated the drop, just as the previous prints near 57 probably overstated the real improvement. Weather remains a large factor clouding many recent data point and TMM thinks it will be some time before that is cleared up. On the bright side, barring a more severe mid-cycle slowdown, there isn’t a great deal of room for the ISM print to fall further from here. But it was the NFP that was the main headline. There was something in there for everyone. Poor headline for the bears and yet stunning households for the bulls. As usual the one that is touted most is the one that supports the following price action. As stocks shot up it was classed "Boomshakalaka"!
Momentum - This week has started though with a dramatic fade in momentum. The rate of rally in US markets into their close had us looking for a reasonable follow through in Asia, but overall it was pretty unimpressive and we were interested to see USD/TRY, USD/ZAR and gold all moving higher. The gold component particularly noticeable. So whilst we remain fundamental bulls for equities and EM the speed of the return of TRY and ZAR moves, as HF bullies give them another beating, combined with the rapid decline in DM equity market momentum has us trimming our longs and playing a turn down for the next couple of days giving us another dip to buy on, but whilst folks love to correlate everything (usually wrongly) in market slides we won't stand in the way today.
TMM also have a friendly bet that if mrkets do indeed start falling today the NFP corpse will be rewrapped in its "bad news" clothes and wheeled out as evidence.
Talking about dips to buy on, here is our favorite chart du jour. -
How exciting for all those lucky bitcoiners! Yet another dip to buy on! We've said it before. Railroads of the late 19C. The ideas are good but that doesn't mean you will make money owning the first iteration. One aside, with gold rallying and bitcoin dumping could we be seeing the "log cabin" switch taking place where large swathes of Montana are switching out of surefire Bitcoin back to surefire Gold? Of course not, but someone is bound to seriously suggest it (buy shares in gold coin retailers in mountainous States).
Oh and finally we just have to give credit to the genius "Gigawipf" who gave us the floppy disc orchestral version of Soft Cell's "Tainted Love" which we make today's "playing out" music.
Friday, February 07, 2014
Team Macro Man proudly present their NFP number generator
Just input your min and max and the result will be as valid as anyone else's. Don't like the result? Just press the "gonna be" button again and it will give you another!