On the roaring trade in politics
When the crisis began in 2007, I would get calls and visits from all kinds of junior colleagues who were looking for answers which they assumed my longer span of experience in markets would be able to offer. As the crisis deepened, I must confess that even long experience was no more use than is a single chop stick. Nevertheless, a few of the useful old maxims remain in place, top of the list of which is: “Trade the politics but invest in the economics”. Well, it is of a fashion.
The problem is that it has become ever more difficult to distinguish between one an the other or, perhaps more accurately put, the dependence of the latter on the former has increased rather than decreased over the past five years.
“The Market”, the measure of all things is now pretty much fully under the control of the authorities, reflected in the staggering performance of equities in 2012. We might know it but but we still find it very hard (and most probably also undesirable) to quantify how much of this year’s stock price price rises and credit spread tightening, let alone bond yield rally is thanks to near endless cost-free liquidity which is being provided, irrespective of what the aftermath might be. How lucky are we that markets don’t have to pass a drugs test and that there is no anti-doping agency watching the monetary authorities. QE and OMT are not the growth hormones they are described as but they are simple performance boosters.
And yet, within this utterly artificial market environment, there remains space for the politics and economics rule to apply and the current goings on in Italy are a case in point. The temptation to buy BTPS and MIB stocks must be huge and the rally yesterday afternoon which followed the early sell off down to 15,100 pts which led to a close at 15,354 pts is a demonstration of just such a response. Sure, the market closed down 345 pts or 2.2% but chart technicians will be excited that there is an open gap between 15,567 pts (Friday’s low) and 15,427 pts (Monday’s high) which will have to be closed and on that basis I’d expect some good buying before the week is out. The 10 year Spain/Italy spread closed last night at 67bp, having opened at closer to 80bp. Pretty soon, that must be a buy. Oh, for a bit of good old short term volatility!
History repeats itself
On the back of yesterday’s references to the similarity between the trench warfare of World War One and quantitative easing, I enjoyed an exchange of notes with a chum who wrote to me, re attrition: “Doing the same thing over and over again and expecting a different result is a working definition of insanity.” I was highly amused by his doing nothing other than stating the obvious but after some words on Ludendorff and Hindenburg I asked “Are you an historian by trade or by vocation?” – myself being a graduate in politics and modern history. His delightful reply was: “By inclination. You need to know your history, if only to get the joke and laugh when it repeats itself as farce rather than tragedy.”
Aphorisms on a Monday – what will we be thinking of next?
Alas, back in the practical world, the wobbles in Italy put the kibosh on new issuance in Europe and it was an overall quietish day. Up a bit, down a bit, up again a bit and then down again. Christmas is two weeks today but with the way it falls in the calendar, by this time next week large swathes of City folk will primarily be involved in seasonal drinky-poos, fiscal cliff or no fiscal cliff.
If there is anything serious still to be done, it had better be done pretty pronto, especially year-end position adjustments, as liquidity will now disappear at a frightening rate. The shift in financial year end by the large investment banks from end November to end December which upset the markets immediately after they all took banking licences in 2008 looks to have been digested but that does not detract from the fact that December trading gets stickier by the year.