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Tuesday, 24 October 2017

On Mork, reality and CFA wisdom

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  • Peters 475px June 2014

Anthony Peters knows what it feels like to be an alien… of a sort.

“Mork calling Orson, come in Orson…”.

It was a huge shock today to hear of the death of Robin Williams, a comedian of my generation who has been with me for the past 35 years. I suppose I sometimes feel like Mork in that I too post daily reports from a strange planet. My readership outside the financial industry is probably as wide, if not wider, than it is within it, and for many out there it is a rare insight into how City folk think and act. I am sometimes perplexed by the actions and responses of those around me and often I wonder whether I might not, just like Mork, be something of an alien. Perhaps that explains why I am not, at my age, retired due to excess wealth.

Some might think it strange for me to open with reflections on the late Robin Williams but there is one bit of his work which is really quite relevant to what we do. In 1979 he recorded a stand-up performance, the live version of which I was lucky enough to see him perform parts of at the Comedy Store in Los Angeles and which was released on vinyl under the title of “Reality, What a Concept”. It has always been a treasured piece in my record collection and no doubt I will take the time to sit down this week-end, to wire up the turntable, and to listen to it with its inimitable “Soviet Suppressions”.

“Reality, What a Concept”. I don’t suppose there is a more apt way of describing the current state of financial markets.

Licensed to drive

To add to the mix, today sees the release of the final results of this year’s CFA exams. I have sitting close to me a young man whose finger nails are now chewed up to his elbows as he awaits his Level Three results, due in the US morning. Along with another crop of thrusting young investment professionals, he will know all there is to know about volatility, covariance and correlation but will still have no better idea than you or I do whether the market is going up or down. At least he will, along with all his educated peers, have a significantly better toolbox than I do when it comes to explaining why it all went wrong.

Warren Buffett, incidentally, is not a CFA charterholder and neither is George Soros. Think of it as a sort of driving licence which permits a person to take a car on the road but which doesn’t mean that they’d ever be any good on a track. A great driver can, however, quite legally become the Formula 1 world champion without ever having qualified to drive on a road. Simple.

For all its merits, the CFA does not replace the natural talent which made the Paul Tudor Joneses, the Izzy Englanders and the John Paulsons of this world what they are. It is, however, a very effective buoyancy tank which helps lift the CV to the top of the pile and that in itself must make the three years of hard slog well worth their while.

Risk rebound 

On a practical note, risk markets rebounded on Monday after a very weak Friday session but the picture remains opaque. The iTraxx S21 Xover closed at 280bp which might have been 18bp better on the day but is still closer to the 309bp at which it was trading at launch in March than to the 219bp tight of mid-May. 

There is enough volatility in the index to please even the most fervent of cynics but it looks like the sort of price action which makes it painfully easy to get topped and tailed. More to the point, the basis risk which this kind of volatility brings with it, when traded against a highly illiquid market for the under-lying cash products, is eye-watering.

Equity markets with their higher liquidity are a less dangerous place to be playing and I can sympathise with investors who sold high-yield funds to buy equities where the risk reward looks to be broadly more favourable. High-yield fund outflows are not trivial and the total return stats reflect the withdrawal of end-investor support.

Once again the authorities have missed that in their clamouring for CDS to be used for hedging purposes only, they have removed the magnitude of the directional risk and replaced it with higher basis risk. Hedging does not remove risk, it simply transfers it to someone else. I’m not sure whether that particular pearl of wisdom appears in the CFA syllabus.

Just as Robin Williams had it – reality, what a concept.

That’s it for today. Nanoo, nanoo…

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