Thursday, November 24, 2011

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:




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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35 comments:

Anonymous said...

You can talk about anything you want, but don't you dare diss Hugh Hendry. I'm out!

Anonymous said...

C says'
"As we look around us we are always amazed at the progress some people have made through life with little tangible ability"

I could resent that remark ,but I won't because I'm also amazed to have come so far with so little so i'm a great believer in "luck".

Good point on the German "rule" type behaviour though. Clearly it's been an oversight not to consider clearly the personality traits of the people at the core of this Euro issue.Flexible is not for example a word I would normally associate with them,bit intransigent would fit the bill nicely although it sounds better paraphrased as "pigheaded fuckwit".

VandalsStoleMyHandle said...

You can talk about anything you want, but don't you dare diss David Ferrer! He's an example of someone who's worked his bollox off to overcome his physical limitations...luck, my arse.

Anonymous said...

Also, this Hun-bashing lark, while viscerally satisfying to those of an Anglo-Saxon persuasion, is intellectually unsatisfying. I don't think we can get very deep into understanding the issues, or mapping potential outcomes, if we just push 'the Germans are intransigent idiots' line.

VandalsStoleMyHandle said...

sorry, that's my comment @ 12:13

Polemic said...

Suppose that's the thing with a long post... bound to be something to upset everyone.. kaboom. Sry folks.

Anonymous said...

C says'

Anon 12.13
That is where you are wrong.Anytime I find myself in 'game' across the table form the oppsotion my first job is to understand who i am dealing.What are their overriding personlity traits...know these and you unlock the secret chest of how to play them and that is what we are doing here..we are playing a in a very big game that never ends.Go back over the months and you will find repeated remarks from me about the german behavioural issues in this mess and why I have continued to expect them to cause the kind of market recations which has continually had me setting up short to get paid.So please do not talk about behavioural matters has though they give you no insight because that tells me you have little penchant for the art of doing business.

ntwsc said...

Been wondering how to help, Pol, and it's occurred to me that what you need is an i-blx phone tension-breaker app.

http://www.youtube.com/user/foilarmsandhog#p/u/4/o7aMLBzRRak

Me, in an effort to cleanse my soul I'm still giving thought to Eddie Mair's challenge to find a new expletive, while I tuck into my Bockwurst.

VandalsStoleMyHandle said...

C, that's great, man; you can get all your trade ideas from reading the red-tops and watching reruns of The Dambusters. More appealing than the pile of verbiage on my desk, at any rate...

FWIW, this is where I think we're going:
http://www.irishtimes.com/newspaper/finance/2011/1121/1224307907438.html

Anonymous said...

C SAYS'
Vandal the link was broken.

"red tops" ? Are these Bulgarian female "entrepreneurs"?

VandalsStoleMyHandle said...

Sorry, seems that long links get chopped off as brutally as my nadgers in this market.

Googling 'Merkel's pragmatic allies offer hope of new outlook' will do the trick.

As for those entrepreneurs, that wasn't quite the trade I had in mind :-)

ntwsc said...

No probs here with the link, Van, tvm.
Think the chopping syndrome has more to do with the route taken to access the comments.

Anonymous said...

what kind of world do we live in where 2% yields equal "disaster?" this has less to do with germany's credit (yet) and more about the forced and accelerating deleveraging across the banking system. banks only have one kind of liquid asset left to raise cash, and that is government bonds. continue to sell, they must. what is most discouraging is the sole focus on "treaty changes" and "fiscal union." unless these leaders start focusing on economic GROWTH, there will be no EU treaty left to negotiate. how many times did Sarko+Merkel+Monti mention "growth" during today's press conference?

Anonymous said...

Vandals, your "pragmatists" got vetoed by Merkel.

http://www.bloomberg.com/news/2011-11-24/germany-rejects-euro-bonds-after-failed-auction-wake-up-call-.html

cliffs:
-no bonds

Think this means Merkel's warming up to ECB?
...Me neither.

We're verging on full-on bond market dislocation. When they finally agree to do something substantial, it may be too late; the damage has been done.

I study medicine, and we're not going to lecture the cardiac arrest patient on the virtues of excercise and healthy nutrition until AFTER they've been revived. Alas.

Anonymous said...

C says'
The quiet at last.I'd just like to refer to the Anon earlier who used the words "Intransigent idiots" as a quote by way of reply I presume to my post.Please if you quote me do so exactly because I choose my worss with care and I never chose the word "idiot" neither was I "bashing germans".
My point was the Germans have golas they are trying to negotiate.The problem other countires and institutions are going to have with Germans is a function of their personality trait that I described using the word "Intransigent". Now go look up the definition for that word and I think having done so you will find it most appropriate in decsribing the process to date and the progress not made.

VandalsStoleMyHandle said...

C-man, I wan't commenting on your comment particularly; but now that you mention it, perish the thought that I might construe 'pigheaded fuckwit' to be a German-bashing remark.

@Anon 4:29, the point is not to get hung up on headlines or he-said-she-said; there's a cacophony of voices even within the German High Command...err, ruling coalition. Headlines are good for a few pips but don't really tell us where we are ultimately going. For that, we have to try and discern the grand games behind the soundbites...and to do that, you can't start off with a cartoonish stereotype of The Other; that's the unpopular point I'm trying to make.

theta said...

Speaking of losing faith, what do you think of Japan CDS trading at 128bps? I have two questions here:
a) Who buys those things?
b) Is it only me thinking that there's not enough availability of leverage available, which makes it very difficult for people to short it and bring it closer to its correct price (i.e. zero)?

VandalsStoleMyHandle said...

Theta, Google 'CVA desks to keep buying sovereign CDS - even if they never pay out'...the article will give you comfort that we have a banking system fit for purpose and that your taxes are being well spent.

theta said...

Vandals,
thanks for that, very interesting. It partially explains it but still, probably doesn't tell the whole story. In order for the CDS of Japan to trade at 130bps, there must be more than CVA desk demand at play. In a world with unlimited trading capital and leverage with the ability to hold to maturity, hedge funds would supply all the quantity needed to cover CVA desks' demand. But that's not the case, and market can stay irrational for longer than a hedge fund can be solvent, as LTCM can attest.
What about real money then? SWFs or big private wealth real money portfolios that could use their fixed income holdings as collateral while they short the sh*t out of those contracts. They don't seem to be interested though, preferring instead to buy insurance themselves. I wonder whether BOJ is allowed to trade CDS and if yes, can they short their own government's. It would make a strong statement and yield some nice profits for them (although not as nice as selling naked JPY puts as they do from time to time). It makes perfect sense. It will be a commitment on their part to always make sure the Japanese govnt doesn't fail in their JPY obligations and as the monopoly issuer of JPY they will always provide the JPY quantity needed to cover the government's needs.
To me it's clear that this is a failed market, in the sense that price discovery has failed. People buy it because they are told by stupid regulators they have to (as the article you pointed shows). Other people that would be interested to sell it, cannot. I'm not only talking about hedge funds that can't lever up enough, I'm also talking about retail investors for example that can't trade it at all, even unlevered. I would be interested in selling some for tiny (unlevered) size for example. But can't (at least I don't know how to, if you know any means available to retail, please let me know).
And yet, even though it clearly does not represent a properly cleared market, where true price discovery has taken place, people (media especially) refer to it on a minute by minute basis as if it's the holy grail of market and economic information. And worse, our leaders take decisions that affect the lives of all, based partially on these useless and meaningless prices. This is a true failure of the markets IMHO.

Leftback said...

The giant game of chicken continues. We will have to assume, here in this little island of Macro sanity, that the huffing and puffing will continue but there will be no actual blowing down of houses.

Merkel's talent for brinks(woman)ship is already being tested as several yield curves are inverting and bank runs are already occurring in smaller Baltics.

The dismantling of the euro cannot be achieved under these disorderly market conditions, so there will be no alternative to another can-kicking exercise: bank recapitalization, a rate cut and printing. So that, gentle reader, is what will have to happen, perhaps with international participation, the Fed, BoJ and IMF coming in to buy for a while to get the system moving again until Greed trumps Fear once again. In other words, Hendry was right.

While we are busy dissing Hugh Hendry, remember he gets paid when the ECB cuts rates and prints. Not the largest fund in the world, but Hugh has more AUM than Corzine as of November. Lucky, perhaps, annoying, well yes, but correct and successful? This time, I think so.

Note: Despite certain similarities, LB is not in fact Hugh Hendry or Gary Shilling.

VandalsStoleMyHandle said...

You put your finger on it, Theta; it's not a real market as conventionally understood. Sovereign CDS is like a derivative without an underlying...and yet certain segments of the media are beholden to it; happy days.

Hedgies could potentially get involved, but with wide bid-offers, rubbish volumes, and dealers marking the stuff in your face, you can see how the attraction might sour...it's not as if the world is short of alternatives in the 'juicy shite that just might kill you' space at mom.

Anonymous said...

c SAYS'
"PGHEADED FUCKWIT" isa term of endearment almost begrduging admiration and not an insult.
What's going to happen appears clearer as we go along. German goals for 'more Euope' will happen by hook or by crook and after they are satisfied they ave that in the bag they will move to offer the line of credit the marlet so dearly wants to see,BUT the market will also be disappointed because it won't be the usual bailout without terms that the market so loves with an immediate payoff. No,that is not the german way.It will be a long drawn out and excruciating exchange of tit for tat where the line of credit is conditional upon fiscal performance/improvement.Written into that will be remaining uncertainty issues every time a country comes up short and of course the policy per se is contractionary as the UK has discovered already.
I know the markets love this stuff,but I think once again we are taking our eye off the ball.That this process will happen I think is writ in stone simply because the german psych and the postion front and centre in it.What we should be looking at is what does it mean elsewhere for Asia who are export dependent on Europe to a large degree.How are they going to keep all that capacity moving when their main market is tightening for an extended period.
We know where the 'ball' is ,Europe,what we should be paying attention to now is where will it be going to next?

VandalsStoleMyHandle said...

All agreed, C, LB, T...time for a group hug, you pigheaded fuckwits, you...

Leftback said...

NO hugging, please. We are British....

greenzulu said...

You're right about offshore wind, it's a crock -- maintenance costs alone will kill you, amazingly expensive undersea power lines, et. al. You're wrong about wind forecasts -- you take a nearby airport with 20+ years of data, do a 3 year measurement on site, and the correlation is perfectly serviceable. If it's 20% down one year, it's 20% up the next, or pick your time frame, but that's how it works if you have long-term site data. I put up a lot of 'em.

Leftback said...

Another student of balance sheet recessions weighs in on the present crisis. Mangler needs to listen to this and stop fighting the (imaginary) last battle against inflation. Rate cut and QE, change of psychology in the Euro debt market. Life goes on....deal with political issues at a later date.

Richard Koo Says QE Already

ntwsc said...

Well I'm glad I got dear Mr Collins' summat for the weekend out of the way already

http://ftalphaville.ft.com/blog/2011/11/25/765421/do-you-believe-in-merkels/?utm_source=dlvr.it&utm_medium=twitter

with an appendage on more wind than a human bean could ever divest himself of.

And on a side note to Captain Barosso's crew demanding a 5% spending rise, I hope y'all spotted this little gem this morning

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8884126/EU-sends-Britain-a-20m-garlic-bill.html

I have reached a state of utter bereftness of silent expletives at the contemplation of treaty changes with particular regard to the overseeing of EU members' budgets, when the overseers themselves have never once in their singularly outstanding egregious existence managed to ratify their own profligacy.

Here's to a good weekend all.

ntwsc said...

Oh and I shall give the pigheaded fuckwit term of endearment a go too ;)

Anonymous said...

Just remember Germans are histirucally stubborn, and just like during WWII they could have surrendered one year before now they will not surrender.
In 1945 they had to see Dresden completely zeroed and someone in red had to knock in on the door in Berlin, now market forces are approaching the Bundes (reichs) tag and they will oblige Germans to surrender. For this reason instead of raf pilots wh sould thank traders saying that never was so much owed by so many to so few... :-)
by law of physics rigid systems will crack under pressure while flexible systems will endure, at least italians are kings of flexibility....

Cold Steel said...

Fuckwit rally clearly in progress, but I am long equities so I will take it. Trans-Testicular Torque is already high today and might even increase into the close. Not a good day for Mr Shorty. Ah, the joys of bear market investing.....

Anonymous said...

ICAP prepares for the return of the Drachma:

FX Brokers Prepare for New Drachma Trades

Anonymous said...

C says'
"Not a good day for Mr Shorty."Only if you were silly enough to stay short coming into the US bank hols. Rally should offer a nice short reset opportunity because I know there are still plenty of people out there who believe in santa ;)

Anonymous said...

Not to mention the IMF Tooth Fairy......

Anonymous said...

Losing My Religion - REM

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