Tick By Tick

Dear All

In 1873, a British Physician named Sir William Gull used his diagnostic skill to term a severe eating disorder that seemed to plague those experiencing a neurotic loss of appetite as anorexia nervosa.  A condition that has become one of the most pertinent medical and social disorders of modern times with an estimated 1-2% of the westernised young female population experiencing the tell tale signs of the disease at any one time.  The condition itself is one of the strangest phenomena in nature, counterintuitive to our primordial need to hunt and gather as much food as we can, some individuals feel the need to starve their body of the vital energy that it requires.  The human body's reaction to this activity is to burn away excess fat deposits before moving onto our muscle proteins that provide the vital ability for our bodies to function.  Moreover, when taken to its eventual conclusion, these proteins become so depleted that the heart begins to fail.  

Much like food for the human body, trading volume and money movement represent the essential fuel to keep the financial sector functioning and overtime a deficiency of these vital ingredients can lead to a heart attack of a very different nature.  Like it or not, the financial sector represents essential fuel to the global economy with an almost unparalleled skew towards more developed nations where society nears the conclusion of demographic transition.  Hard-lined socialists may call us prostitutes to the industry; capitalists may say that our reliance is merely a function of the free market economy.  Whichever you choose to believe, the substantive point does not changed, the industry makes up a substantial proportion of global GDP and provides both direct and indirect employment to millions.  When this fuel is sucked from the system, it does not provide the sort of fast hitting effect of Cobra but rather the slow constriction of a Python. 

Dear All

After spending over two millennia and billions - if not trillions - of dollars studying the atmosphere around us, I find it amazing that we are still terrible at predicting future weather patterns.  Weather, like finance, is a dynamic system.  What one person opines or sees in data, another will see the converse opposite.  Think about August of last year, Gold bugs and debt skeptics felt that they were seeing the beginning of an impending debt spiral whereas value investors, all over the planet, scooped up stock due to their belief in the intrinsic value of securities supported by both historic valuations and multiples.  Just like weather, one strategy will not triumph over another unequivocally.  Over long periods, those with a value orientation have tended to fair well, whereas those who have correctly picked market downturns have made vast sums over short periods.  Lorenz, the godfather of Chaos Theory, would have likely found that these convexities create the preconditions for Chaos.  Chaos, and its related fields, examine how the effect of small occurrences dramatically affect the outcome of seemingly unrelated events in the future.  

"Banks have turned into gigantic gambling institutions.  You never know what you own.  I wouldn't touch them if you pointed a gun to my head"

Bill Fleckenstein - Fleckenstein Capital

Dear All

As we just crown off the first month of our final twelve according to the Mayans, one of the most important events in Finance is upon us.  Q4 GDP? Q4 Results? Christmas Sales Figures? No, No and No.  I am, of course, referring to the season where individuals from all walks of finance are found in bars across the world either drowning their sorrows or reaping the rewards for another well remunerated year.  Bonuses, are by their definition, an extra reward for achieving what can be considered "above the norm" financial results; despite the practices of many of the leading banks throughout 2007-2008.  But..But..We had to retain the best talent I hear echoing around the room.  A rhetoric that the ordinary Anglo-European finds very hard to stomach.

"Out of Control"

UK Prime Minister David Cameron on Bank Bonuses

The media and public bashing of the bonus culture that surrounds the financial sector and its quantitive nature is nothing new.  However, given the events that have unfolded over the last five years, individuals all over the planet have a right to vent there frustration.  Whether you blame lackadaisical policies by Governments, extreme risk taking by financial institutions, personal greed or general naivety for the housing crash - the effects have impacted us all in some form or another.  A quick rewind of the tapes would quickly remind us of all the soon-to-be pensioners that piled their nest egg into property in the hope of crystallising a long term rental yield or capital gain only to find, in some circumstances, over fifty percent of their net asset value being destroyed during the crash.  A very bitter pill to swallow.  One, that is made exponentially worse by news that many of the Wall Street and City of London elite are taking home seven figures for their efforts this year.

Dear All

In 2008, a former mainstream journalist by the name of Nick Davies wrote a book called Flat Earth News.  In the book, Davies explores the idea that the bulk of published news comes from a very finite number of sources, yet these stories become so widely published that readers make the assumption that they are completely valid.  For instance, Davies quotes that only 12% of the stories that we read in the media are original - and that was only from the sample that he could obtain.  Coupled with this concept is the ongoing process of media amplification.  A term that is likely to be very new to the majority of you.  Behind the idea of media amplification is the paradigm that "important" news becomes over-published, or in alternative terms, stories that would be highly unlikely to be published in the press are included to amplify the impact of the underlying rhetoric.

"Whoever controls the media, controls the mind"

Jim Morrison

So what does all this have to do with the markets?  Well, when one takes a broad look across current published discourse, it is clear that the topic of European profligacy and insolvency dominates almost every headline.  However, in the background, some really key events and stories are being under-published despite their normal market impact.  For instance, during yesterdays trading session, the Bank of England purchased £1.7bln worth of 10+ year gilts which drove the spot rate for sterling significantly higher and provided extra "liquidity" to the market.  The under-reporting of this meaningful Central Bank intervention from the BOE is just one of a number of events that are going vastly under-reported.  Moreover, I believe that the effect of this will be an even greater dislocation in what can only be described as a counterintuitive market fuelled by hopium.  Heard much about the US debt debate this week?  I don't think so.

Dear All

Every year the folks over at Merriam-Webster's Dictionary award the coveted prize of "Word of the Year".  Initially devised using a myriad of statistics, the award is now determined using an online poll devised by the popular internet dictionary and encyclopaedia company; which yields truly fascinating results.  (Well to me anyway).  Over the last four years, we have seen what I would refer to as intrinsically Finance related words take the crown (Pragmatic, Austerity, Admonish and Bailout) versus distinctly unrelated semantics from the preceding years.  This includes the likes of the word "Blog" and "w00t".  (for those wondering what exactly w00t is - it is the noise made when expressing joy - think whoop whoop!)

"All our work, our whole life is a matter of semantics, because words are the tools with which we work, the material out of which laws are made, out of which the Constitution was written. Everything depends on our understanding of them."

Felix Frankfurter

Anyway, I digress.  This development towards a greater lay focus on the activities of the Finance world is hardly paradoxical.  The actions of corporations, Governments and individuals alike have had, by the most part, lasting detrimental effects on the global population since the real-estate Ponzi exploded through the later half of the last decade.  However, it is the winner of Merriam Webster's 2010 Word of the Year competition that brings me to the real point of this weeks first note.  The word in question is: Austerity.  Or, according to Wiki, the process of "deficit cutting, lower spending and a reduction in the amount of benefits and public services provided".  A concept that the political powers of the US seem unable to get their head around.