Monday, July 19, 2010

Computer says "No"

Just when you think bureaucracy can’t get any more idiotic... it does. After a day of mind-numbing stupidity at work resulting from a “computer says no” mentality worthy of an email post on this site, one of TMM's members went home to find out their car insurance had run out that very same day. Fine, no problem, we'll just ring them up and ask them to start it off again tout d’suite. "Ah no sir, even though yesterday your renewal quote was for X amount, as the policy has now expired it will count as a new quote and the price will be... wait for a moment, please, caller... 1.5 times higher". Huh? So you're telling me that in the space of 12hrs, your perceived risk of me crashing has gone up 50%? “No sir, I m not saying that at all. The computer is”. So thats twice in a day I have been sandwiched in a logic vacuum between two thinly spaced slices of stupidity. I think I have discovered the Casimir effect of stupidity and its all to do with virtual particles of stupidity arising in logic vacuums.

Which reminds me of the McDonald’s behind Harry’s on Boat Quay in Singapore which a few years back was running a half price 50c offer on cheeseburgers. Now, TMM is not saying they were regular customers of such establishments but “needs must” and every now and again a reminder of the splendid culinary delights of the West were needed to temper the wonderful local specialities. As such, one of TMM's members asked if they could do hamburgers at the 50c price too. “No sir, only cheeseburgers”. So after a complete failure to get anywhere with a growingly heated logical debate, he walked out... And then walked back in again:

TMM: “Do you cook burgers to order?”

Attendent: “Yes Sir”,

TMM: “Good , then I’ll have two cheeseburgers please... Without the

Attendent: “Certainly sir”.

We know how in markets logic and what the computer says often seem at odds. Just take the Euro/Everything rally we have been seeing. The mind may say "Yes" to running Euro shorts but the computers of risk management and the computers of trend models have all said “No”. Well actually its been more of an “Abort Abort Abort” + red flashing lights and that klaxon noise. The CFTC figures have seen some massive turnarounds in underlying USD positions over the past week with a swing from 3.6 Bln long to 5.4 Bln short. And if you are a European who dashed out to buy Gold with your Euro savings you are now down about 12% from the highs and feeling a bit Edward the Second'ed, as it has nearly filed the gap on the Gold/Eur chart 915 area from the beginning of May. TMM knows it behaves like carry (or is supposed to), but the policy mix is now very deflationary. It's very hard with a UK budget like that and up coming Eurausterity to claim that your currency is at imminent risk of debasement. Not to mention other silliness in the precious metals - recent action in Aquarius Platinum is due to BP-like safety controls leading to possible cuts in world production of 5-6% if South African regulations are ammended. And Platinum and Palladium are... down to flat. Either we are thinking a few too many steps ahead, or some decoupling between the Platinum group and Gold is in the offing.

But it wasn’t a surprise to see the markets spin on a dime and say bonjour to Monsieur Toilette on Friday, for it was the mythical 16th of July and you can't say we haven’t had any notice that Friday was going to be the 16th of July. Now as to why the 16th of July is such an important day, TMM is sure that there are an awful lot of things that could be found to correlate to it, but we are massive believers in “Correlation does not imply Causality” so instead we will leave it to someone else to decide that hedgehog deaths in Nigeria divided by sunspots is the root of it all. In fact, TMM remembers back in the early ‘90s when work being done on the correlation of USD/DEM to Oil prices (then a popular theme) threw out the lovely result that in fact you would be better trading USD/DEM against “Icelandic Fish Catches”. Strange but true. Ironic really, as who would have thought that 15 years later we would actually be trading the modern version of USD/DEM against “Icelandic Fitch Crashes”.

But now that we have even mentioned the 16th of July it will, of course, be even more important next year as, even if you don’t believe it, next year it will remain in the back of some of our readers' minds like some survivor bias ghostly influence. Which brings me on to another bizarre quantum like function of markets. If say Mr Large Hedge fund or Voldemort type character were to buy a gazillion payout of a binary one touch option from one bank and then sell it to another bank , one would think that the market was now net flat and the relevance of the strike of the binary should be irrelevant. But it won't be because you can be pretty darn sure that the hedging processes that both banks employ will not exactly match out over the duration of the option and on run up to expiry you will at best have wobbles as the timing of gamma hedges between the banks mismatch or, at worst, a full out slugging match between the 2 banks to protect/drive the barrier. So a market that should be flat, isn’t and the passing of the trade has left ghostly entanglements.

But enough rambling and back to today's markets. It feels as though the summer holiday season has kicked in big time today and yet we are still of the opinion that the “Market does very little ‘til the end of August” view is not widely held and the fat tails are still loaded, but just to test it we would be most grateful if you could share your thoughts with us in our “Where will it be at the end of August poll”. In the meantime, TMM are going to go back to writing code that makes computers say "YES".






Nemo Incognito said...

looks like gold just got the memo viz policy mix being very, very deflationary at this point.

Leftback said...

3 Month Euro Libor rising: for the first time August 2009 the rate is over 0.8%. Are we going to see a EUR squeeze against obscure Eastern European banknotes as European bank computers say "Nein", "Non" and "Nyet" to one another...?

Thanks to your post, a young fund manager of my acquaintance here in Copenhagen tells me she is quite anxious to get long the Dong.

Leftback said...

The leaks begin...

Hypo reported to fail stress tests. Well, you'd be a Lire if you said you were surprised. Francly, it's not a shocker they fell short of the Mark. I am sure a few more Drachmatic failures will be Punted out soon and have their shares Pounded.

Nic said...

Is Voldemort back to buying every dip in EUR or is it just some moral support until the stress tests are over?

FX said...

Vacuums and Dollar bulls...or is it,

Stupidity and Dollar bulls....mmmmm

We'll know soon enough.