Losing one's Religion(s)

TMM are, of course, fearless traders in the markets, valiantly striding forth over the bodies of the financially slain, effecting tactical advantage to their strategies as they out wit and out manoeuvre everything that the macro world can throw at them. Rugged-jawed, clean cut... well maybe a bit of designer stubble, commanding and heroic. Unless of course you like your traders with a feminine touch in which case we would advertise ourselves (as a recently divorced friend's mates did for him unbeknown on a dating site) as 6ft 4 Firemen who love puppies (it worked, by the way, he was mystified by the sudden 150 date requests in his inbox - some even from girls).

But we are human and whilst the Hedge Fund/Investment Bank way is to never show weakness in case someone uses it against you, perhaps once in a while it isn't a bad thing to share a bit of emotion. We aren't talking the emotion of dealing rooms which normally goes along the lines of "I'm 35 /45"... "Oi! You piece of shit, I need it more aggressive!".. "OK try... 35/45 YOU F**CKER!". Just as a side line on this point, aggression must still count in trading pits because have you noticed that when CNBC go "down to the floor" to interview a trader he never has a neck? And as a complete sideline could someone explain why they are always named after body parts - "Here we have Rick Patella with Scott Epiglottis"? We digress... No. Here, we mean that phase of bereavement when some of the things you believed in as foundations on which you built arguments and made decisions are crumbling to dust. Well, TMM are losing faith in a few of the things they believed in up until recently and though we are as described in the first paragraph above and would never show weakness, we are willing to share our bereavement over the recent deaths of a few old well-loved beliefs.

First Europe. As mentioned in yesterday's post we really really believed that the Germans wouldn't choke chain the rest of Europe to this extent. They may not have noticed yet, or worse not care, but the dog has stopped breathing and its eyes have glazed over and it may be even harder to revive than this one:

Reviving Puffy

But the Germans are only just noticing that they may just have set fire to their own house in the process as yesterday billows of smoke were spotted coming from their own bastion of probity, the mighty Bund market. In itself is a religion up in flames. Who would have thought in 2008 as the UK government took on the crippling burden of bank debt that only 3 years later a headline would cross the screen "Bunds sold for Gilts as traders seek safe haven" WHAT?! Has the world gone mad? Yup... Now, there are a couple of ways of looking at this. It's bad as this has now turned into a general exodus out of everything Europe including Germany, or its a good thing as setting fire to Germany may be what's needed to get them to FINALLY reach for the financial fire extinguisher. We would hope the latter occurs but are still terrified that the Germans are such sticklers for the rules that if they say "walk off that cliff", they will walk off the cliff. At least if they did that one of our core beliefs would remain. So, TMM have decided to use the Gilt/Bund spread as their NEW Risk On/Off metric.

Next... Wind Power - So the UK Government is sending signals that the energy generators are evil, global warming is real, we must go green. We have always believed that wind power works, otherwise why else would the countryside and coastal shallows be sprouting these things. So first we look at offshore wind vs onshore: Offshore costs 3x as much to build, 3x as much to operate and the connection to the Grid is expensive and complex. Plus the Capex is so huge that only the big boys can play. Simple, scrap that and let’s look at onshore and it doesn’t take long to figure out the following equation for wind power investment:

Success or Profit = Politics x Engineering x Nature x Market.

Engineering is actually pretty straightforward. Onshore wind turbines produce 98% of the power expected (for a given wind strength) and work 97% of the time. Impressive stuff. The trouble is that, of the wind farm sites you can find that might make sense and which you take to planning... 50% are rejected (by politics). Now let’s look at the Nature component: wind forecasting. In summary, its rubbish. Don’t be surprised by +/- 20% and its been -20% in recent years and they don’t know why – maybe global warming is going to change the wind pattern over Europe permanently. Great. Oh and recall that your leveraged by the laws of physics (10% weaker wind = 20% less energy extracted). The Market component is mainly power prices. Ask the expert forecasters again and they will tell you prices are going up for the next 20 years. Maybe. But you’re a minnow in the pond where the currents are being driven by world oil prices, carbon taxes, go/no nuclear politics, European recessions etc.

So as we look at the journey ahead and consider buying a plot of land and sticking up a wind measurement tower our profit forecasting says that is 50:50 that we will get planning and that if we finally generate some power our base case downside could be 80% of the production we expected x (say) 80% of the energy price we expected. But hey, that’s OK because it will only take 4 years to get to 20% base case profit. Forget it. Another belief dies...

Now then. Android phones. Last year we cheekily put up a post declaring our love for them over the latest i-Blx 4.whatever that had just come out. And indeed we just loved android for its super Linux like adaptability. Apps and controls that we could adapt to the nth degree. But Its all starting to go a bit "windows" on us. Just as a PC seems to run slower over time , the android phone is developing nasty symptoms probably due to that adaptability. Updates now take up greater and greater amounts of the "rationed like gold dust" pico-byte of RAM they are allocated and really we don't need a Taiwanese dictionary update to "maps" anyway. And as for data, is the thing in cahoots with our network provider to gobble "SETI project" amounts of data to ensure massive phone bills. Just stop it! At this very moment in another window we are having to dig around in some hidden root directory to erase a single file that blocks any update. Having spent a full man-week trying to get Macro-daughter's newest HTC "By-god-we-are-so-amazing" to talk to the home network even this stalwart has been forced to replace it with an i-blx phone. What a shame.

And finally, before you think TMM are losing faith in everything, there is one thing that they have been gaining faith in: Luck. As we look around us we are always amazed at the progress some people have made through life with little tangible ability. Survivor bias is a wonderful thing. Lets just look at the Bank of England, Australia ( and their banks), Hugh Hendry and David Ferrer and most of all...

TMM - for having such a charitable readership.

Happy Thanksgiving!

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