Anarchy in the UK

Hard as it is to believe, it was nearly 40 years ago that the Sex Pistols released Anarchy in the UK.   Despite the ensuing decades of  the Winter of Discontent, Thatcherism, New Labour, and foreigners in charge of the England football, rugby, and Bank teams, the sentiment has never been as apt as it is today.

Indeed, as one wag on Twitter noted, a list of the prominent and the powerful Britons who've recently stood down from their positions recalls another musical act that burst onto the scene 20 years ago:

Chris Evans:  Ginger
David Cameron: Posh
Roy Hodgson:  Sporty
Boris Johnson: Baby
Nigel Farage: Scary

A more serious development, of course, is Standard Life's decision to gate their GBP 2.9 billion UK commercial property fund.   This in turn has recalled the dark days on 2007, when the price collapse and gating of money market funds was the canary in the coal mine that illustrated the severity of what was to become the financial crisis.

Now obviously, these are not the same things.  When considering the liquidity spectrum, money market instruments and commercial property are about as far apart as you can get, so a gating of the latter connotes far less danger than of the former.  That being said, this is another sign of real economic damage being inflicted by the Brexit fiasco (are we allowed to call it that yet, given that "uncomfortable limbo" was not among the referendum choices, but that's what we've currently got?)  The Standard Life fund, which had performed like a rock star since the crisis, has seen a significant markdown in its price in the aftermath of the vote- much like its major competitors.   This development, a rather unwelcome change from the fairly steady appreciation of the past seven years, has prompted a wave of redemption requests- which the fund's 15% position in liquid assets is unable to meet.

That investors are unable to immediately access their money, and that SLI will have to sell some property to raise it for them, is an example of the real economic costs resulting from the vote.  One episode is an anecdote; two may be coincidence; however, if you collect enough examples, what you have is soon called "data".  On the upside, for the time being it is only the UK that has shot itself in the foot, though the EU is standing there with a loaded pistol cocked and firmly aimed at Italian banks.  Of course, Italy has its own referendum approaching in October; while the reform of the Senate may not seem as existentially significant as membership of the EU, it would be a crushing blow for Renzi's government to lose, throwing petrol on the fire of what will undoubtedly be a turbulent political environment this autumn.

It is for this reason, perhaps, that there is a growing demand for assets such as precious metals and linked instruments.   With real interest rates tumbling and political uncertainty high, this is perhaps a perfect storm for this complex.   Macro Man has of course been following GDX for some time; he retains the strategic position he purchased earlier in the year, and has now seen the price more than double.   Lately silver has also gotten into the game; after fulfilling its downside head and shoulders target a few weeks ago virtually to the penny, it has exploded to the upside (while still lagging the GDX move.)


Although it's rarely a good idea to buy these instruments right after an explosive upside move, that resistances are being breached with relative ease is a strong signal that the trend is real.  Given the trends that appear most likely in both the political and monetary spheres, it looks as if anarchy in the UK and elsewhere could be the best possible outcome for the metals.

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Anoop Menon
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July 5, 2016 at 8:50 AM ×

EU much of something is bad enough...

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Anonymous
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July 5, 2016 at 9:44 AM ×

"...this is another sign of real economic damage being inflicted by the Brexit fiasco..."

What a load of sh*t. It's a sign that the UK property market is a ponzi scheme, and has been for the past 10-20 years. But hey, let's blame everything on Brexit (which hasn't, and may not even happen) and avoid doing any real thinking... ffs.

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Anonymous
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July 5, 2016 at 9:56 AM ×

there is one thing I do not understand: EUR.

Draghi announced he will buy all sort of crap. he will allow governments to fund their fiscal policy at privileged levels. As a result, the quality of ECBs portfolio continues to go south.

Why isn't EUR going south as well? Maybe because the mkt expects Yellen to do the same?

If that is the case, GBP down (happened) EUR down (should happen), USD should follow.... only thing to buy is Gold... no?

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SPCTR
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July 5, 2016 at 10:17 AM ×

Time to put on a Bund/OAT spread widener...

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Leftback
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July 5, 2016 at 10:59 AM ×

Of interest this morning, that other speculative commodity, Texas Tea, is reversing hard down this morning as we had suggested it might do early in Q3. Long metals and short oil looks like a decent pairs trade for those so inclined. We had mentioned that last week's squeeze conditions were going to be followed with renewed selling this week, and so we'd like to wish 12 y-o Anons a very happy morning from the North of England, where the sun is shining and our P/L is coming up roses.

Both MM and Anon @9:44 are correct. Standard Life gating a couple of small insignificant funds may indeed be a sign of things to come, and indeed it is true that UK property (especially London) is a Ponzi inflated by hot money. We may be about to witness Jeremy and Jemima Estate Agent go through a bit of a soft patch, forcing Jemima to go back to her old job on the perfume counter at Harrod's. Slow-motion capital flight takes many victims...

Btw, on the ground in Britain, one suddenly realises how integrated the UK has become with Europe, how many plumbers and waiters and restaurant owners are here doing a great job but are from somewhere else. Do people really want to go back to that especially naf version of Britain of bad food, sloppy service and people who didn't know how to fix anything but charged you a lot for it? It's hard to imagine that everything can be disentangled, or that anyone really wants that?

The mass resignations of the politicians and the ensuing claims to be Thatcher reincarnated are quite comical, not to mention the 25 minutes of BBC news devoted to Chris Evans (who is he, anyway?). Rarely has LB felt so foreign in his own country.

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Skr
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July 5, 2016 at 11:32 AM ×

Leftback, I'm in Asia at the moment on hols, and the amount of Chinese, Japanese, Korean and Philippine people that have told me, they have bought sterling because it's so cheap, and planning to take vacation in UK, and visit Bigga Ben. Might go some way to explaining the bounce. Buy tourism related?

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Error404
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July 5, 2016 at 11:45 AM ×

Leftback@1017

While your first two paragraphs are straight down the mountain, para 3 wanders far off-piste and headlong into a pine tree called logic. Brexit - which our contemptible elite will anyway sabotage, after first doing immense and unnecessary damage to the real economy - is not about repatriating Polish plumbers or Spanish barristas. It's about recovering, sovereignty, freeing ourselves from an unnecessary and quite widely corrupt layer of government, and avoiding being sucked deeper into a doomed German-dominated superstate. Yes, one of the attractions of getting sovereignty back is to regain control of our borders, but where is it written that visas can't and won't be granted to your favoured nationalities of servant? (By the way, out here where I live in the backwoods there are plenty of 'first nation' people delivering perfectly good service and food. You ought to try it. We even have electricity.)

Regarding SLI, it's difficult to feel much sympathy for the punters. Putting commercial property into a pooled vehicle and pretending it's a liquid investment is one of the more absurd forms of maturity transformation - rational only to a fund manager or finance graduate.

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Anonymous
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July 5, 2016 at 11:54 AM ×

A nicely written piece MM,

I was intrigued so I had to search the net.

After becoming a US citizen in 2013, it appears John Lydon slams the prospect of a Brexit as "suicidal."

If you weren't sure if punk was dead? :)

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Anonymous
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July 5, 2016 at 12:02 PM ×

@Error404. As your name suggests, you are quite mistaken. "Sovereignty" and "taking our country back" is so 1950s, so small-minded and deluded... You live in the wrong century. Perhaps you should read the memo -- the very nature of global capitalism and how it will actually change when we hit the next Kondratieff cycle in the next decade or so, means that Britain will end up being the poor relation, insane in the membrane loser if it tries to isolate itself from the rest of the civilized world. Look at your politicians -- even the lying rats Johnson and Farage are abandonding ship. If they were so confident about the rosy future, they wouldn't be scrambling off faster than they can pronounce Great Britain.

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Bruce in Tennessee
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July 5, 2016 at 12:46 PM ×

http://www.ft.com/cms/s/0/a8009b06-3fca-11e6-8716-a4a71e8140b0.html#axzz4DX88sS7o

Longest earnings recession since crisis looms for US shares

...Lefty, thanks for the post. I think that the anons who feel that Brexit was a big mistake haven't seen the end of the EU union story quite yet. The north vs the south thingy that existed pre-brexit won't be any better without Britain...do you lads think this amalgam will flourish? Kinda reminds you of putting Shiites, Sunnis and Kurds together in one country and expecting it to flourish...

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checkmate
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July 5, 2016 at 1:14 PM ×

Guys,where is it written that leaving the EU is turning inwards. Somehow equates to turning back to times gone by?. Etcetera .
The concept of detaching from the EU was to be to enable the UK to seek more global relationships. That is, turning outwards. Likewise it has not been mooted that the UK wishes to deny Europeans access to the UK and its capital or employment markets. No, the idea is to have some semblance of control over that access. I very much doubt that any European currently working in the UK need worry about their ability to remain doing that.
What consistently surprises me is how people who are clearly intelligent still wish to engage discussing issues like this has though they are black or white. Ergo, the UK wishes to leave the EU then this must mean they wish to shut their doors to the world.
Come on guys you are almost certainly capable of better than this.

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Celeriac1972
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July 5, 2016 at 1:31 PM ×

Aviva have also suspended ealing in their Property fund.

Others to watch include Henderson, M&G, L&G, Threadneedle. All have funds with >£1bn. I expect they will all suspend dealing.

Meanwhile the FCA has been driving bond managers wild for the last few years with questions about liquidity management etc. I'm not saying that there aren't any questions to answer, but global bond markets are somewhat more liquid than physical buildings...

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Celeriac1972
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July 5, 2016 at 1:32 PM ×

"ealing" - I think I'll let that one stand.....

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July 5, 2016 at 1:52 PM ×

I'm only waiting to see how much are liquid credit instruments..

is time to JBTFD? hello, can i go? where are you?

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amplitudeinthehouse
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July 5, 2016 at 2:32 PM ×

Farage was spot on to leave. The whole lot should go. Bring in a new front line and leave the personal agenda's , animosity and aggravation brought about having to face each other in the office each day. Put another ginger and sporty girl on one side of the floor and put the rest of the sporty girls on the other and get on with backing winners :)

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Anonymous
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July 5, 2016 at 3:09 PM ×

All of a sudden bid ask spreads on $VIX futures weeklies blew up. Jul 27 bid ask now: 17.10 - 18.20
Not sure what happened.

error404 Some here on the board think just like this guy...

“The British have violated the rules. It is not the EU philosophy that the crowd can decide its fate.” European Parliament Chief Martin Schultz

I mean who cares about a middle class plumber or waitress loosing their good paying jobs.

Daniel Hannan certainly doesn't. He told the BBC’s Newsnight programme on Friday that free movement of workers to and from the UK should continue to ensure that Britain stayed part of the common market. “The idea of staying within a common market but outside the political integration, I think that is feasible,” said Mr Hannan. “It means free movement of labour.”

The Brits are learning the hard way that one does not simply vote away tyranny. If they want to stop the cheap foreign from flooding into their country, they are going to have to seek other means.

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Anonymous
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July 5, 2016 at 3:26 PM ×

Spreads are back to normal; 17.50 - 17.80

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Anonymous
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July 5, 2016 at 3:46 PM ×

Looking at bond yields every day and week it's easy to figure out what the new theme song at CB meetings is: https://www.youtube.com/watch?v=qKggnBh2Mdw

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Anonymous
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July 5, 2016 at 3:54 PM ×

5yr UST from 1.4% to .94% in last 5 weeks ......

lowest since taper tantrum in 2013

British pound is now the eye of the storm.

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Anonymous
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July 5, 2016 at 4:32 PM ×

Aviva/Standard Life/etc property funds -- when will people ever learn!!
They invest in physical property yet offer folks daily liquidity -- their demise is a result of their liquidity mismatch and I suspect that like the Bear Stearns funds (back in 2007), they won't be the first...

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Justabeancounter
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July 5, 2016 at 5:18 PM ×

Indeed Anon @ 4.32.

What could possibly go wrong offering daily liquidity on a property fund?

Add to that extended periods of price dislocation which causes funding issues, ala LTCM, Peleton, MF Global et al and it's an absolute recipe for disaster which has all sorts of negative knock on effects.

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Anonymous
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July 5, 2016 at 6:37 PM ×

"...an implosion of the Italian banking system would cascade into other European banks and the funding market, creating disorderly markets and lower sentiment causing a slowdown in economic growth and also prices..." - Saxo

The EU is gonna implode folks (let's hope so anyway)

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abee crombie
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July 5, 2016 at 7:33 PM ×

Interesting post MM. I've been long goldminers for a while and thinking about the current run as well. Had to take a little off but I agree, this run might extend a while. But hard to classify it as a new bull market just yet. But this sure is an explosive first move. For those more risk, I expect Bitcoin etc to be the real beneficiaries if Gold/Silver really start moving. Chinese love bitcoin! and its appeal to tehcnologists and punters alike is a volatile mixture

that aside, and my fundamental view that oil has bottomed (though can easily still go back to $40) the biggest news we should all be paying attention to is surely US 10 year interest rates making new lows. 30year already new lows. XLF going to feel more pain if rates really start dropping (NFP predictions?)

US Equities feel weak. I still think new highs could be in the cards but this defensive led rally isnt anything I really want to buy

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Leftback
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July 5, 2016 at 9:01 PM ×

Rates have moved a long way very fast. Going to be contrarian here and suggest the jobs numbers are OK and we see some give back in fixed income this week. Keep an eye on Italian banks, UK financials though... accidents waiting to happen, or perhaps clearly already in motion.

Took profits today on USO and IWM positions that we entered or added to on Friday morning last week. Back to the Hammock again with a nice pile of profit .... we expect more moves in FX this week, with the dollar being the likely beneficiary.

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Bruce in Tennessee
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July 5, 2016 at 9:04 PM ×

http://www.bloomberg.com/gadfly/articles/2016-07-05/goldman-s-wishful-thinking-won-t-end-rut-in-bond-yields

Goldman Can't Wish Away Yield Rut

Dougie's TBT is down 2.5% today....

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Anonymous
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July 5, 2016 at 9:37 PM ×

August 2011, recall the short sale ban in France, Italy, Spain, Belgium. Seems so long ago now, the sovereign crisis.

BMPS short sale implemented this evening.

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abee crombie
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July 5, 2016 at 9:42 PM ×

Lets hope you are right on rates LB. If not, we are going to get ugly fast. Looking at chart of German 2 year (schatz) it freaking amazing. The zero bound is clearly broken. Trend monkeys dont care. But at some point its just an accident waiting to happen on the reverse side, or maybe I just dont understand the inherit safety in German bunds that is worth -60bps

maybe some better bond math experts could help me calculate when the negative carry actually equals the price momentum. Ie at what rate of change does the total return turn negative.

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amplitudeinthehouse
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July 5, 2016 at 9:51 PM ×

Abee, EU episode will be a non-event when countries realize that being Yennish doesn't fit all, it's not a unisex monetary device. And if we don't invite the New York (bankers) spice girls to the intervention party I get feeling they might handbag me!

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Anonymous
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July 6, 2016 at 12:22 AM ×

Bank of England tells banks to cut rainy-day fund to boost lending

Carney: UK facing ‘period of uncertainty and economic adjustment’

Yeh, real smart of you. It will hit you right in your face.

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Leftback
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July 6, 2016 at 5:51 AM ×

How mad are capital markets? I mean, now that no matter how bearish one is that you simply can't stay short overnight - just in case a central banker brandishes an imaginary bazooka?

Usdjpy challenging 100 again this week. The falling £ has really helped out LB's long UUP position, which we had entered based on an entirely different scenario. Better lucky than good...

Bond prices seem a little stretched here, to say the least. No cheeky shorts yet, just watching and waiting for the tap-in.

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July 8, 2016 at 1:08 PM ×

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