Thursday, 21 February 2019

Makin' whoopee

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The question was posed yesterday by a seasoned wealth manager who simply asked: “Where the hell do I have to go to make money?”. 

The fact is that there are no slam-dunks. Arsing around and trading volatility has certainly not proved to be the solution. If buying cryptocurrencies is not an investment, as mainstream asset managers, central bankers and regulators keep on telling us, then why is buying options on an abstract algorithm, which was itself created for the pricing of options? That there is all around too much money invested – if “invested” is the word, which I sincerely doubt – in trying to extract the DNA out of horse droppings and to grow it into a Derby winner. 

While all of those clever people in the City are getting hot under the collar over post-tax reform earnings, the real music is being made in the world of falling car sales and rising credit card defaults. We sailed into the 2007/2008 subprime mortgage crisis by disregarding and in some cases even burying rising default rates. Why, I wonder, are we doing the same again? It is, as I have frequently observed over the years, because the penalties for being short in a rising market are far more severe than those for being long in a falling one. Falling markets, especially panicky ones as we have at the moment, are great places for money managers to hide their bad bets. Cutting one’s dog positions in this environment can easily go unnoticed in the white noise of repricing markets.



The overnight rebound in the Nikkei will give some people a measure of solace although its positive performance is nothing more than a second derivative. China reported its merchandise trade figures, which stunned with a massive undershoot. The trade balance had been forecast at a surplus of Rmb330bn but only came in at Rmb135.8bn. The Lunar New Year is still ahead of us so it would appear that some consumer stock-piling has taken place, which led to imports not being 5.3% stronger as had been expected but 30.2%. This kicked the stuffing out of CNY/USD, which in turn pushed the dollar index back above 90 for the first time in several weeks and in consequence, as ever when the dollar strengthens, Japanese stocks were off to the races. My guess is that European markets will be defensive from the open as they tend to feel happier being cautious ahead of an uncertain US open and rallying later on a strong NY showing rather than being too buoyant and having to chase the transatlantic cousins lower. 

Meanwhile, Mutti Merkel has finally given away enough candy to the SPD leadership to come up with a working coalition government. Whether it is enough for the membership has yet to be seen and whether this left-leaning construct will satisfy the overall electorate, which certainly swung more to the right than to the left, is a different matter entirely. No citizen, German or otherwise, has ever cast a vote for a coalition. The word “coalition” doesn’t appear on ballot papers. When all is said and done, Germany has become ungovernable and the message to Merkel at the election of last October, namely that she has recklessly abandoned the ground of her traditional support and has swayed too far to the left, has resulted in nothing more than her having to concede even more to the left-of-centre SPD. Her moral authority is holed below the water line. 

Euro-enthusiasts, backed by a very vociferous Emmanuel Macron, will surely be planning to launch a land grab before the risks inherent in the upcoming Italian elections can play out. The likes of 5 Star in Italy or AfD in Germany might be treated as comedy acts and dismissed by the establishment while their very prominence begs the question whether they are not merely players and what is metamorphosing into the comedy act itself is liberal democracy. 

Alas, it is that time of the year gain and I shall shortly be heaving my creaking bones and aching joints off to warmer climes for a few weeks of relief from the cold and dampness of an English winter. Before China closes down on February 15 for a week of Lunar New Year celebrations we have carnival, which begins today across parts of Europe, all of Brazil and other bits of Latin America as well as, of course, New Orleans. So, fireworks all round. No doubt the flashes and bangs on Wall Street and in the City aren’t over yet either and I wish all of you the best of both skill and luck for the coming weeks. Thanks to the miracles of modern technology I shall be observing events from afar and should I feel the urge I might just put out the odd column. But please don’t hold your breath. Back on March 6 by which time the worst of the cold should be behind us and the first daffodils should be flowering. A propos daffodils, England/Wales at Twickenham on Saturday… More fireworks, I trust.



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