Tick By Tick

Tick By Tick Comment - Anorexic Volume

Sun, 13 May 2012 20:41:16 +0100

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.

"Rising prices and falling volume are abnormal and indicate a weak and suspect rally. This type of activity is also associated with a primary bear market environment"

Martin Pring, Technical Analysis Explained

The reasons for the apparent disappearance of financial flows can be tentatively linked to thousands of independent factors but there are a select few that continue to spook investors beyond all others, namely: Deleveraging, Central Bank Intervention, Political Turmoil and Resource Allocation. As David Einhorn so pertinently pointed out over the festive season, those investing right now lie within a feedback loop that focuses on the decisions of central planners rather than the relative strength of a singular institution or sector. An observation that looks certain to continue well into the next few years as the full extent of fiscal irresponsibility by both the public and private sector become gradually clearer. One only has to look at the billions of Government secured Transport bonds that have emerged since the Greek default restructuring to see how much of debt has been effectively hidden from plain sight. To think that Greece is the only offender in the hiding of "quazi-public" obligations would be nothing short of moronic. Anyway, we'll save that conversation for another day, back to volume.

For those whose job it is to service the financial sector directly, the effects of anaemic volume is clearly the most troublesome. With less business being shared about, margins become compressed and financial edge evaporates whilst firms continue to compete for the scraps of business that dribble down the phonelines. Merely ask a participant from rates, credit, equities or the derivatives that service any of these asset classes, and you will have no doubt hear confessions of just how quiet the markets are despite many analysts pumping out reports to encourage investors to dip their toe into the turbulent markets once again.

"There is a paralysis among Hedge Funds"

Jay Lefkowicz, Concept Capital

Despite the seemingly relentless rally in financial stocks and increased shareholder returns from the likes of JP Morgan, don't be fooled that the floor isn't creaking behind the scenes. If one is to step back and consider the business model of any institution that relies upon brokerage revenue, the sole two drivers are that of proprietary risk and client flow. However, when the flow starts to fall due to reduced volumes, the risk limits within banks do not position the company to increase proprietary positions; in fact, the converse opposite occurs and risk appetite falls as proprietary trading market share inadvertently rises causing the net exposure to systematic risk to sky rocket. And all of this is occurring before we account for the effect of the impending Volcker rule legislation that will, in so many words, ban Investment Banks from frontrunning running proprietary trading operations. Despite my skepticism over the successful implementation of the Volcker rule, the substantive point to be taken away is still that there will be pressure on many of the largest firms to make up a greater proportion of revenues via client flow. (Did anyone else just hear an axe swiftly cut yet more headcount across the industry...?)

"If this is such a good party, why isn't anyone here?"

Nicholas Colas, ConvergEx

For those outside the financial sector, what I may have just purported may seem like an abstract concept given the bullish sentiment that has emerged since the New Year but you must understand that a market only needs two participants - or algorithms - to rise to infinity. To add some context to my point, let me share some figures with you. The proxy for USD equity trading volume (NYSE volume multiplied by S&P 500 volume) is at the lowest point in over 10 years despite the growth of automated and high frequency trading; if compared to the pre credit crunch levels, that is a 50% fall. To see exactly what I am referring to, the team from Zerohedge has graphed this phenomenon over the last ten years for all to see (Available HERE).

This may sound trivial to many, but their are millions, if not billions, of individuals who will all be affected in some form or another. Whether through personal employment (direct or indirect), negative savings yield or the continued trend of deflation in long term holdings vs necessity asset inflation of commodities such as food and fuel as a consequence of deleveraging vs monetary easing; almost of all of us will feel the pain.

"Investors have been scared...they are not fully engaged or confident in the recovery and it's going to take more that a few economic data points"

Richard Repetto, Sandler O'Neill

More interesting as we look forward is where we expect replacement revenue to come from across the board, both in terms of financial flows and economic growth. The trend within Finance has been to create continually more complicated financial products (Leveraged ETF's, Exotic Structured Products etc) or replace human skill with computer code and models. However, like all developments, these moves have structural limits and many induce long term negative consequences; just read Grant Williams' latest Things That Make You Go Hmm (link below) to see an example of Credit Suisse's financial folly and the vast sums that both retail and professional investors have lost along the way. Whether you represent a financially orientated firm or not, the main development that we undoubtedly need is some form of clarity and recognition of the issues that are plaguing the accuracy of any forward looking projection. Instead, we all find ourselves within a period of monetary and fiscal experimentation where even the sharpest minds struggle to decipher the mixed messages scrolling down their news feed.

Economic food for thought...

After that short introduction, I would like to introduce a number of articles and videos that are well worth viewing as we enter the new US tax year. Firstly, we have a must watch video and article from George Soros that looks to explain just how bad things have got in Europe. Secondly, Grant Williams takes a look at the increasingly complicated ETF's that banks are creating to lure investors into the marketplace. Thirdly, we have a visual and creative take on explaining the ECB's LTRO operation using what can only be described as incredible illustrations from Mark Flood. Penultimately, we have a particularly interesting article from Neel Kashkari of Pimco that looks at the margin pressure that continues to plague the equity markets as institutions seek a bumper top line. Finally, and by no means least, we have two graphs from the US Census Bureau that show the diverging population pyramids of China following its one birth policy and the future growth region of Indonesia; i'll leave you to make your own decision about their fate. Enjoy!

1. George Soros - Project Syndicate (HERE) and INET (HERE)

2. Grant Williams - Things That Make You Go Hmmm... (HERE)

3. Punk Economics - LTRO Explained (HERE)

4. Neel Kashkari (PIMCO) - Newtonian Profits (HERE)

5. US Census Bureau Demographics - Indonesia (HERE) China (HERE)

Best Regards

George Adcock

Things That Make You Go Hmmm - 1st April

Tue, 17 Apr 2012 21:18:19 +0100

Tick By Tick Comment - Time to Ask Who not Why

Tue, 27 Mar 2012 08:47:16 +0100

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

I believe that globally we are seeing a number of these small occurrences unfold. Occurrences that will no doubt have a profound effect on our future and we will all look back on and this "how did we not see this". Everything is easier with the benefit of hindsight. We all have a friend who "predicted" the housing crash but how many do you know who made themselves substantially wealthier because of it? It is the who part of todays economic equation that this letter aims to look at.

In the present economic environment, whilst most of us are thinking about if Greece will obtain a bailout in March, I believe that we should be thinking about who has been purchasing the European debt since the profligacy of the EU member states has been highlighted. Whilst the ECB's LTRO program has undoubtedly prompted a number of European banks to purchase European debt, we would be foolish to believe that these are the only institutions in the market. For instance, back in November, the worlds largest money manager Blackrock was scooping up BTP's (Italian Bonds) for their attractive yield. A move that many of us may find unbelievable given the global macro climate but, given the more recent collapse in yields, it seems like a very clever trade. Over the longer term, I couldn't disagree more with a fiduciary financial institution taking such a verantly stupid move but, as discussed earlier, I have a different investment agenda. However, Blackrock aren't the only player in the market and this is where it gets interesting.

"I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved"

Julian Robertson - Tiger Capital Management

See whilst you and I were still recovering from the credit crisis that gripped the global economy, a few select and particularly astute individuals were buying Credit Default Swaps on a wide variety of global sovereigns. However, as these individuals have slowly watched their investment thesis unfold more beautifully than Beethoven's fifth, the Eurocrats decided it was time to change the rules over and over again. Short Selling Bans, CDS bans, Free money LTRO programs, PSI deals....the list goes on. Being the determined individuals that many of these investors are, they were not about to sit down and let their John Paulson moment be ruined. Instead, many of these investors have decided to purchase the very debt that they have backed for default to gain a place at the table. Think about it this way, with 12 Month Greek bonds yielding a phenomenal 629% (Graph HERE), gaining a seat at the PSI table has become very very cheap indeed. Just today, I was told by Skandi hedge fund trader that CDS trades similar to this are becoming increasingly popular in the region in order to force a default.

"Equity markets may rally on this news because they are focused on getting a deal done, but anyone in fixed-income should now consider retching under their desks as we all just took one of the biggest screwings of our lives that may well not be a singular event."

Mark Grant - Southwest Securities

Whilst, I am unable to speculate about the effectiveness of such actions by CDS holders, I do believe that it highlights, what I feel, is a gaping whole in the European defence. Bring more people to the table and you stand a far lower chance of avoiding a default. Moreover, if we think about Greece and who the predominant holders of the debt are, the true concentration is with domestic banks and pension firms. However, if one is to look at the likes of Italy, Spain or France, the debt holder base is far wider and is unlikely to incorporate the same streamlined interests. Can you imagine, Mario Monti and Nicolas Sarkozy trying to explain to Blackrock's Larry Fink or China's Zhou Xiaochuan that they must face a not so voluntary haircut on their debt holdings...I think not and this is the problem. Another way to think about this common conflict is to examine the EU as an organisation itself, how should I put it..."too many ruin the broth"...or in other words, there are so many competing interests that very little of real substance is every achieved. To think that the same would not apply to an industry where people live and die by their figures would be, by all accounts, moronic.

It is these small details that build the really big picture and help those patient enough to formulate highly successful investment strategies beyond the thematic opinions that flood the financial marketplace. As Kyle Bass of Hayman Capital has said, "we like to evaluate the plumbing" before investing a penny; and since inception, Hayman has performed exceptionally for its investors and Bass has made an exceptional name for himself. There are thousands upon thousands of these small events everyday that can both add value or flip your own thesis on its head, however every now and again it is these small details that dictate or restrict how the future can be played out as in the case of Europe. To offer a couple more examples of the who that have strung to my leading of asking why, I have provided a couple more topics I could have openly talked about today below.

1) The Chinese Sovereign Wealth Fund (CIC) recently purchased 9% of Thames Water, the company that provides clean drinking water to all London residents

2) Gasoline follows a very similar trend to Gold and has outperformed the precious metal significantly over the last 4 years. China and India have made some of the biggest investments in US energy resource companies that produce the fuel.

Sometimes it just pays to ask who before even confronting the why.

Before I introduce the articles for the week ahead, it is worth noting the latest note out of Europe that is likely to put yet another hurdle to the PSI deal for Greece. As of this weekend, the bailout being proposed will subordinate the holdings of private bondholders against the holdings of the ECB. A move that Bill Gross of Pimco has already commented upon, adding that it "subordinates all holders of Euroland sovereign debt". One things for sure, you can guarantee that the Eurocrat response will be filled with yet more humorous incompetency.

Onto the articles. This week we start with a case study by Howard Marks, the successful CIO of Penn's Endowment Fund. The study looks at Marks' opinion on a number of different investment styles and his approach to liquidity and risk that allowed the fund to function effectively during 2008-2009. Secondly, we look at a Bloomberg article that talks about the fraudulent $6 Trillion (Yes, I said trillion) in US treasuries that were just seized from a safety deposit box in Zurich. Thirdly, Grant Williams takes another look at Greece and why he feels a default is inevitable despite the messages coming out of Europe. And last but no means least, we share the letter sent out by Fitch last week that upgraded Icelandic debt to BBB- (Investment Grade) after the country defaulted in 2008 proving that Greece really does have another option. Enjoy!

1) Assessing Performance Records - Howard Marks (Click Here)

2) Record $6 Trillion of Fake US Bonds Seized - Bloomberg (Click Here)

3) Things That Make You Go Hmmm... - Grant Williams (Click Here)

4) Icelandic rating upgraded to BBB- (Via Reuters) - Fitch (Click Here)

Best Regards

George Adcock

Tick By Tick Comment - A Sovereign Ponzi

Tue, 27 Mar 2012 08:46:41 +0100

Dear All

In 1903, a young Italian man by the name of Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi (Charles Ponzi to you and I) arrived upon American shores aboard the SS Vancouver. With dreams of becoming one of the worlds super elite, Ponzi swiftly moved from being a dishwasher to the Branch Manager of Banco Zarossi in Montreal (which ironically turned out to be already running a "Ponzi Scheme" far before Mr Ponzi's arrival).

Fast forward eleven years, including a brief spell in Atlanta Prison, and Ponzi was ready to launch his greatest scheme of monetary fraud. In lay terms, Ponzi set out to arbitrage International Reply Coupons between Italian and US rates using investor money. However, after running into a wave of red tape, Ponzi realised that the impressive returns that were being promised could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital. A Ponzi Scheme if you will.

If we re-evaluate part of the penultimate sentence…"could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital"…we get to the point of today’s email: Confidence. More specifically, confidence in Sovereigns.

“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.”

Helen Keller

At this point, I would like to ask how a Ponzi scheme differs from the modern sovereign bond market? If the primary activity in government bond markets is the refinancing of existing debt, are we not in a Ponzi scheme of our own? By this, I mean that Modern Governance and Treasury is based upon the idea of securing a consistent flow of investor capital to meet payments of the existing principal. Is it not?

If we look back to the origin of Government Bonds, it becomes clear that they were designed as a method to fund the activity of war. An activity that, if successful, would produce future cash flows that are capable of settling the initial borrowing. From a Finance standpoint, this lending would provide a positive CAPM value for the war.

Compare this to the bulk of modern Sovereign Finance, by which I mean the process of refinancing, and it becomes clear that there is no future cash flow resulting from the activity and, as such, the whole system has become built on the idea of investor confidence; embedded with the idea that countries can inflate away the cost of borrowing over the medium to long-term.

Over the last 24 months, this practice has become increasingly comprehendible by the investors of government securities and we have already started to see the first few wounded being carried off the battlefield for treatment and we can be sure that they wont be the last. If the continued trend of higher rate refinancing starts to spread away from just profligate European nations, it won't just be the PIIGS we talk about. Think West meets East with a little island in the middle or UJU for short.

After that short introduction, I would like to introduce a number of articles that are worth reading as we enter what the Mayans believe to be the last year of the current era.

1) Brazil Overtakes the UK as the 6th Biggest Economy in the World - CEBR (Click HERE)

2) Things That Make You Go Hmm - Grant Williams (Click HERE)

Grant talks about the factors that he feels will be the most pertinent in 2012

3) IceCap Asset Management - December Presentation (Click HERE)

4) New York Taxi Medallions - Bloomberg (Click HERE)

Arguably the safest investment in the world and up over 1000% in the last 30 years.

5) Graph of the ECB Balance Sheet - Zerohedge (Click HERE)

Over the festive period, I was fortunate to be given a copy of Keith Gessen’s Diary of a Very Bad Year, which in essence is a collection of interviews with an Anonymous Hedge Fund Manager throughout the credit crisis. Whatever I may or may not think of the content, one fundamental topic emerges out of the book. The topic of false hope (or Hopium) that exists in the market as we enter a downturn. After every wrought of the market, the HFM still shows a quite aspirational confidence that the market has reached its bottom due to good economic data or a form of government intervention. Yet the next month, the market takes a proverbial skydive once again. Sound familiar? It should. You've been warned.

"So if a higher-than-usual unemployment and slow economy is something like a chronic risk, the government can deal with that by borrowing and spending on stimulus. If the government takes all this risk onto itself, it may attenuate those chronic risks, but at the risk of you might get to the point where something goes wrong in the US and then the governments creditworthiness is in jeopardy and you have a huge mess"

Anonymous HFM – 2009 – Diary of a Very Bad Year

Best Regards

George Adcock

Tick By Tick Comment - The Bonus Dilemma

Tue, 27 Mar 2012 08:44:23 +0100

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.

Last week saw this frustration come to a head when the CEO of The Royal Bank of Scotland (A Zombie Bank), Simon Hester, decided to refuse his $1.6m bonus in light of increasing public scrutiny. The bank, owned 82% by the British taxpayer, has been left limping around the financial realm following what can only be described as some of the worst acquisitions and business organisation that has been seen in British finance since the Barrings escapade of the 90's. So fierce was the public outrage about RBS, since the start of the year, that the former RBS CEO, Fred Goodwin, was stripped of his knighthood by the British realm. More interesting is why he was knighted in first place but that is a discussion for another day. Anyway, back to bonuses.

"I was going to live on my salary or go down swinging"

Gene Tierney

Despite the resentment towards the bonus culture that is smeared across the Finance industry, the bonus system is significantly better for unemployment, shareholders and the state of the finance industry more generally than the pay scheme that has developed over the last three years. Before I explain why, I must note that the singular biggest floor of bonuses within Financial Institutions - especially banks - as strongly advocated by David Einhorn, is that combining performance related pay and leveraged investment in high risk financial products is almost certain to create financial bubbles. However, the current alternative pay structure that is being run within these institutions could very well be their downfall.

"It's not your salary that makes you rich, it's your spending habits"

Charles A Jaffe

The year is 2005, the S&P 500 has just returned 9% in 2004 and winning has become norm. The risk off episode following the Internet bubble has finally cleared from technology, and global risk is most definitely on. Seeing as this time is different, we have been advising our clients to diversify into the Emerging Markets not only to spread risk but also to take advantage of the fabulous opportunities that exist in these "booming" economies. Real estate continues to provide impressive gains and using synthetic derivatives, investors can now diversify their Mortgage Backed Securities risk by purchasing tranches of a revolutionary product called Collateralised Debt Obligations. You get the picture. During this period, the bulk of remuneration was made through discretionary pay that tended to reflect the impressive returns that both individual and institutions were making - albeit with very high leverage. Traders taking home $1m would expect to have around a 3:1 discretionary to salary based ratio for payment so that as long as profit was being made, the bonuses would continue to grow.

What has transpired is that as the media, government and public have scrutinised the sector during the fallout from the property boom, this ratio has changed. To "retain the best talent", these institutions have increased non-discretionary pay to astronomical and unheard of levels, whilst reducing the discretionary element of financial reward. A friend of mine recently revealed that the salary for a Managing Director - at one of the US Zombie banks - was doubled to encourage staff to stay and prepare them for lower discretionary pay. However, the lasting net effect of this across a global business is a huge increase in the fixed cost base from salary expense.

"As long as they are incremental or success-based, incentives work"

Dwain Celistan, DHR International

The effect of this was not properly experienced until the second half of last year when banking revenues failed to meet expected growth assumptions and the banks looked to shred their fixed cost bases to keep shareholders happy. Add in the catalyst of Europe and the implementation of Operation Twist (for its negative carry), and the banks proverbially wet themselves and fired just about everyone in sight. So far, the global fallout has been around the 100 000 mark from leading institutions (depending on your source) and I would hypothesise that a multiple of this number have lost their jobs from subsidiary industries that are supported by the financial marketplace. Both the direct and indirect effects of this in terms of unemployment, spending and subsidiary industry performance within the economy should not be underestimated. In general, an individuals spending of bonus income in comparison to salary income will be far more irrational and spontaneous which actually forms an essential part of economic consumption.

The sheer scale of this issue, until now, has been truly understated; and as the financial climate continues its volatile cycle due to fiscal incompetence, trying to explain this to the public seems to become somewhat of an impossible task. As we will no doubt see, the fallout from government profligacy will see the financial sector become a political scapegoat for a largely anticipated downturn. Still hate bonuses? Think again.

"The Euro has made Europe Stronger"

Angela Merkel

Before I introduce some of the best articles for the week ahead, I would like to offer my readers an apology for the lack of content in the last couple of weeks; and for those of you who emailed me directly, it was very kind and I would like to thank you openly. It seems that those of you who use Comcast for your email server are generating automatic complaints to my host that have since been resolved.

Onto the articles. The first link is to, the now infamous, Things That Make You Go Hmm.. from my friend Grant Williams. In this edition, Grant takes a look at the idea of Inflation targeting and the idiosyncrasies that exist within its rhetoric. Second, is a fascinating graph from Barclays Capital (via Zerohedge) which highlights both the size of Apple as a firm and the distortion that it creates in the tech market. Third, we have a interesting piece from SK Options Trading that looks at the idea of have a Short Intraday Long Overnight Gold fund that is likely to add fuel to the already raging belief regarding manipulation of the precious metals space. And finally, Bill Gross revisits the topic of Zero Bound Interest Rates. Enjoy.

1) Things That Make You Go Hmmm.... - Grant Williams (Click HERE)

2) S&P 500 Tech Earnings Outlook With and Without Apple - Barclays Capital (Click HERE)

3) Revisiting Our Proposal for an Overnight Gold Fund - SK Options Trading (Click HERE)

4) Life - and Death Proposition - Bill Gross (Pimco) (Click HERE)

Best Regards

George Adcock

Tick By Tick Comment - Treasury Smoke Screen?

Tue, 27 Mar 2012 08:42:49 +0100

Dear All

Ever since Captain Ben turned his printer off in March of last year, the world has been a wash with rumours of when the latest round of "easing", or more simply "fiat currency printing", will occur. Seen as some form of financial saviour, the process of monetary printing has managed to successfully inflate markets and provide the appearance of policy success. However, as we all know, not even the bearded superman can stop the impending global recession that will be started by debt of profligate European nations. Not that the print-o-nomic society that we live in has realised this yet. At this point, I think it would be unfair to point the finger solely at Dr Bernanke as the folks over at the Bank of England, the Bank of Japan, The Swiss National Bank, the ECB (oops!) and a old Zimbabwean man by the name of Robert Mugabe whose HP Laserjet has been pumping out fiat for almost two decades now should also be named.

"Those jobs aren't coming back"

Steve Jobs when asked by Barack Obama about the return of Apple's US Manufacturing

To digress for a second. When there is a sell off in the global markets, the first activity that that we tend to see is the acquisition of vast quantities of US Treasury bonds. Endorsed by Little Timmy, these bonds are seen as the safest asset out there despite there being over $15 trillion of them. Strange if you ask me, but some things you just have to accept. In troubled times, yields take a proverbial nose dive towards the pivotal zero real yield benchmark where, even then, some investors are still prepared to purchase the "super secure" instruments. Its fine though, it's not like the US has a debt problem is it? Anyway, back to printing.

When one evaluates how a fractional banking system works, it is clear that the currency of the nation in question will always become debased - or in lay terms, worth less than it was before. Think of it this way. I am the economy, there is only $1 in the whole system and the most expensive item is an elusive metal that costs 50cents. If I print $1 more dollar (or double the money supply); would you, as the seller of the elusive metal, still accept 50 cents for the elusive metal? (If you are even thinking about saying yes, please get in contact and I will explain why this would be a very bad move). In reality, the elusive metal should eventually become worth $1. This is the same process we are seeing with Gold - a metal traditionally worth the same value as one Dow Jones Industrial Average Index or $12 700 to you and I.

"When a stupid man is doing something he is ashamed of, he always declares that it is his duty"

George Bernard Shaw

Part of the design of fractional banking is to slowly print fiat currency so that money demand can be met with supply (M2), however what we experience during Central Bank easing is the rapid growth in supply designed to drive down the opportunity cost of lending between different counterparties. An event that also accelerates the debasement process. Moreover, similar to the rhetoric behind drug tolerance, the rate of printing required resembles an exponential curve to achieve the same effect as before which further accelerates the debasement process.

If we take this concept back to the process of purchasing US Treasuries during times of market stress, the market reaction can only be described as counterintuitive. Given the heightened probability of easing during these periods, the asset based return on investment is almost certainly going to be negative. Moreover, if yields were to rise, the Federal Reserve would likely intervene in the market to reduce the yields using further easing programmes.

Using this as a platform, it is my belief that once the European and Japanese smoke screens fade, this process will become further understood and eventually priced into the US treasury market with substantially higher yields than we have experienced in recent times. Furthermore, during periods of currency expansion - and therefore asset price inflation - it will become natural for investors to question the validity of the single figure nominal yields that a wide variety of financial products and personnel are used to producing.

"If Greece had gone through a very normal political life, I may have not been in politics"

George Papendreou

After that short introduction, it is time to introduce this weeks articles and media for your viewing pleasure. We start with a great interview with Bill Gross about the impending end game in Greece before moving onto an interesting graph showing how NYSE's Opex volume for January Expiry has fallen a mind blowing 27% in just 12 months. Then we move onto the articles starting with a piece by Warwick professor Robert Skidelsky on whether debt matters followed by an interesting comment by Manmohan Singh as to why he thinks centralised clearing for OTC derivatives is avoiding the real issue of retaining risk. Enjoy!

1) David Kaufman of Westcourt Capital interviews Bill Gross on Greece (Click HERE)

2) Option Volume for Opex 2011 - Zerohedge (Click HERE)

3) Does Debt Matter? - Robert Skidelsky (Click HERE)

4) The fallacy of moving the over-the-counter derivatives market to central counterparties - Manmohan Singh (Click HERE)

Best Regards

George Adcock

Tick By Tick Comment - Flat Earth News

Tue, 27 Mar 2012 08:40:48 +0100

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.

More recently, some of the big names in finance have even started to voice there growing frustration at the idiosyncrasy of the global market place. Specifically, I would like to refer to David Einhorn, founder of Greenlight Capital and a highly regarded value investor, who has openly criticised the broken equity markets for a "Lather. Rinse. Repeat." formation. By which, he means that markets are driven purely by media speculation rather than their attributable valuations. I have included his 2011 Investor Report in the links below for those who wish to explore what I have said in more detail.

"Against logic there is no armour like ignorance"

Laurence J Peter

More worrying to me personally is that we are starting to see signs of institutional money re-entering the market as the rally fuelled by anaemic volume continues. As a fiduciary for investor capital, Portfolio Managers have had itchy feet to join the current "rally" and increase returns to retain investor capital. However, one look at the broader picture and I would suggest that these investors are about to get burnt. Again. For the first time in this crisis, we have the IMF, World Bank and ECB telling us that the Global Outlook is shaky at best and yet no one seems to listen. As Maximus Decimus Meridius would say, "Are you not entertained?". Whatever the press leaks or hopium rumours like to speculate, Greece is fully insolvent or what a friend of mine, Grant Williams, describes as "done". The ESFS is no greater than a venture capital pitch. And the LTRO scheme will almost certainly collapse a number of European banks along the way as their leverage reaches astronomical levels. Like it or not people, we shouldn't be talking about a recession, we are already in one.

1) Greenlight Capital January 2012 Investor Letter - David Einhorn (Click Here)

2) Global Economic Prospects - The World Bank (Click Here)

3) Mission Impossible: Why China's Soft Landing Will Look Like The One We Had In The US in 2007-2009 - Smead Capital Management (Click Here)

Best Regards

George Adcock

Tick By Tick Comment - Downgrades Downgrades Downgrades

Tue, 27 Mar 2012 08:39:01 +0100

Dear All

When contemplating what I was going to write about for the first instalment of this weeks' market comment, I thought I had it cracked. However, by 2pm on Friday, my original subject matter had to be put on the back burner so that I could explain exactly what just happened. By what, I am referring to the mass cull of Sovereign Credit ratings across the Eurozone and the profound effects that it will have globally despite what Mr Sarkozy may opine.

Where to start? Where to start? Well, whilst the ratings are a significant blow to the ego of a certain brown-haired little French man, the market - at least the rational participants - had been expecting such a move for a couple of months now. The team at Zerohedge even seemed to joke about the matter on Twitter weekly. It seemed that every Friday the hope filled equity markets would be thrown into turmoil by a "downgrade rumour", only to find the murmurs unfounded and for participants to resume their hope fuelled rally on Monday morning. However, this time, the new "i've grown a pair" S&P decided to actually follow through with the threats and warnings that have been emanating for months. A move that we should all applaud. Someone had to bring things back to reality.

"A man in debt is so far a slave"

Ralph Waldo Emerson

Those following the Sovereign bond yields or viewers of the mainstream press could have been fooled into thinking that things were actually on the up. On Wednesday, Germany successfully managed to auction off their 5 year bonds at a record low yield (by the end of the trading day) of 0.74% with a healthy bid-to-cover of 2.8 which, compared to a couple of shaky previous auctions, is a move in the right direction. Despite the low yields suggesting a bearish formation going forward, the primary focus was on the elusive bid-to-cover that reflected a strong uptake of the new debt. Roll on Thursday and the ever delusionary Spaniards manage to issue both 3 year and 10 year debt at significantly better levels than expected which, of course, sent the equity markets in pandemonium. Were saved. Hoorah! Later that afternoon, Mr Draghi bought us back down to the real world with a sobering speech warning of the threats that still exist in the Eurozone but was quite clear that the measures HE has put in place seem to be working. (We will elaborate next paragraph). To add a cherry to the already glorious week for the Eurocrats, even Italy managed to secure the first 4.75bn Euros of funding it needs this year. Just another 305bn Euros to go then. No sweat.

"A second reason why science cannot replace judgment is the behaviour of financial markets"

Martin Feldstein

Now for the Who? What? and Why? Well back in December, the "genius" that is Mr Draghi set up the ECB's Long Term Repo Operation to plug the liquidity crisis (yes, he still struggles with the liquidity solvency differentiation). In doing so, he offered all of the European banks colossal amounts of cash - just the cool half a trillion freshly printed Euros - at the dirt cheap interest rate of 1% in exchange for any collateral they could muster. A similar situation to one of us mere mortals swapping an old car for Buckingham Palace. Of course, the banks took up Mr Draghi's kind offer and proceeded to hoard the money back with the ECB within the hour. Hmmm.

Now without full verification via the ECB holdings data, it can only be assumed, and not proved, that some of these insolvent illiquid banks have finally plucked up the courage to purchase the profligate nations' debt to earn a carry. A decision that they are now, almost certainly, regretting following the downgrades. The issue is a little more complex than the media suggest, but in the simplest of terms, when a bank is asked to fulfil a certain level of capital adequacy, there needs to be some form of security assumption behind that capital. As a result, the clever fellows over at the Basel Committee decided that a discount factor needs to be applied dependent on the different credit ratings. For instance, before Friday, holdings of Italian debt would have been assigned a risk weighting of 20%, a figure that after the announcement is now 50%. Great news all around ey? This is not the only factor either, as I have previously stated, holding assets of (soon to be) deteriorating value on your balance sheet will also increase your financial leverage and, after both Bear Stearns and MF Global, we all know how that story ends.

"When you combine ignorance and leverage, you get some pretty interesting results"

Warren Buffet

So now that the banks have reduced the quality of their capital and loaded up on even more risk assets, we can all rest assured that there is no more liquidity issue according to Mr Draghi. Do remember, his measures are "working". Only solvency to fix now..but wasn't that the... Moreover, it isn't like pension funds have to sell debt instruments when they fall outside a band of credit ratings is it?

Before, I share a number of articles for the start of the week. I cannot help but mention the late Friday afternoon QE3 rumour that wiped out almost all of the downside experienced following the S&P leak. I ask only two questions of you: If QE3 were to happen, what level do you think the price of Oil would reach? And secondly, if the high price of one commodity asset was going to accelerate a US decline, what do you think it would be?

This week, we have a great selection of articles for you to read. These include the full S&P FAQ sheet on the downgrade which is a must read, Macro Man's annual predictions, David Rosenberg's review of the bullish argument, the Economist looks at Purchasing Power of Parity and a truly scary Spanish Unemployment graph. Enjoy.

1) Credit FAQ: Factors Behind Our Rating Actions on the Eurozone Sovereign Governments - Standard and Poors (Click HERE)

2) 2012 Non-Predictions - Rates - Macro Man (Click HERE)

3) David Rosenberg Explains What (If Anything) The Bulls Are Seeing - David Rosenberg (via Zerohedge) (Click HERE)

4) The Big Mac Index - The Economist (Click HERE)

5) Spanish Unemployment (23.3%) - Zerohedge (Click HERE)

Before I go, I would like to remind you all that this week will see the US Congress debate the raising of the upper limit of the US debt limit which always proves interesting. More to come later in the week.

Best Regards

George Adcock

Tick By Tick Comment - Austerity

Tue, 27 Mar 2012 08:36:21 +0100

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.

The logic to austerity is very simple, cut your costs to reduce (or slow) the debt Burden. However, since its mass inception across various areas of the world, the economic skeptics among us have started to consider the validity of such measures. An excellent research report by Dr Tim Morgan initiated my skepticism over exactly how populations are expected to grow and cut concurrently. Is it possible? Well, Morgan argues that the fundamental growth assumptions built into the UK austerity plan are a little more than ambitious, and if this growth were to falter, we could experience a financially depressive state bought on through debt. Sound familiar? (A copy of the report is available HERE)

"There is no austerity equal to a balanced mind"

Chanakya

So does it work? Well, at this point I would like to introduce Hungary. The IMF austerity poster child. With a GDP half the size of California's, Hungary is a small European economy that has been indirectly crippled through profligacy of a vast quantity of other nations around the world. The story is actually fascinating. During November 2008, Hungary accepted the assistance of IMF, World Bank and Europeans (yes Europeans!) to help counter what can only be described as a run on the entire country. Since this point, the Hungarian government has successfully implemented a range of austerity measures to reduce their sovereign dependence on the global bond markets and, as the IMF puts it, "restore stability in the financial sector". In the period from January to November last year, Domestic borrowing fell by 8%. A truly staggering feat.

However, the story doesn't end here and im afraid that it doesn't end with "They all lived happily every after". Actually the result has been the polar opposite. Hungary, this week, was downgraded to junk by Fitch following what can only be described as a horrific bond auction. But why? The issue actually lies within Hungary's exposure to foreign denominated debt financing. Whilst Domestic Borrowing fell 8%, the repayments of Hungary's non Florint holdings increased by over 20% due to significant moves in the currency market from a weaker Hungarian economy and exposure to currencies such as the Swiss Franc. See, whilst the rest of the world was buying their 3rd, 4th or 5th house, the Hungarian population and Government were borrowing in Foreign currency denominations to avoid particularly high interest rates domestically. An activity that has vaporised the pertinence of any austerity measure in its entirety. The matter is made yet worse by evaluating the countries Monetary Policy. Any form of sovereign Florint printing would not result in a reduction of debt burden but would likely bring inflation.

Does austerity work? Can weak economies grow without reduced capital injections? I'll let you decide.

Before, I share my selection of the best articles from the last few days. I cannot go without mentioning the latest QE rumour that has emerged this week on the back of James Pethokoukis' article. Despite being better than a Jenna Jameson film to a certain bearded man over at the Fed, I see QE as the singularly most hopeless and dangerous policy that has re-emerged over the last decade. Supported by no credible or empirical evidence to suggest real long term growth, the policy is no different than the government lending the population their credit card for three months and expecting everything to be okay. Instead, the inflation that will result over the longer term will make the population as a whole poorer. Similar what they say for dogs, QE isn't just for Christmas it's for life. For those of you short EURUSD, I would urge you to look at the price change of the last two major interventions.

"Quantitative Easing is one of these PhD approved euphemisms that doesn't really convey the essential point..."money printing" would be so much a better step in the direction of intellectual hygiene. These people talk about quantitative easing as if they didn't mean to debase the currency over which they have temporary control"

Jim Grant

Without further ado, here are a number of articles well worth reading for the week ahead.

1. January Surprise: Is Obama preparing a trillion-dollar, mass refinancing of mortgages? - James Pethokoukis (Click HERE)

The article noted above that started the most recent QE rumour

2. Things That Make You Go Hmmm... - Grant Williams (Click HERE)

Grant takes another look at the Eurozone and Gold

3. Boom Time in the Middle East - Religare Research (Click HERE)

Religare discuss the growing Middle Eastern tension

4. Towards the Paranormal - Bill Gross (Click HERE)

Bill's welcome to the New Year

Some individuals have mentioned that they cannot access the links due to restrictions on their workplace internet. If you would prefer me to send .pdf attachments out, please let me know.

Best Regards

George Adcock

Tick By Tick Comment - Globalisation

Tue, 27 Mar 2012 08:33:25 +0100

Dear All

Since the its first publication in Towards New Education in 1930, the word Globalisation has been on the lips of every individual with socio-economic interest globally. We now live in a world were it is not just our lineage that may transcend borders but instead almost every facet of our lives. Billed by some as the greatest advance since the Industrial Revolution and by others as the most un-equitable transition in our history, Globalisation has truly revolutionised our lives - and within this process, we have started to see subcultures of Globalisation. For instance, in the last 10 years, we have experienced a social media revolution that has bought us all closer together and made us far more interconnected. As a society, we have opened up our doors to sharing information, thoughts and feelings openly across the single biggest development of them all, the Internet.

"The internet is becoming the town square for the global village of tomorrow"

Bill Gates

Despite the fantastic cultural and economic advantages that the utilitarian many may experience, the process of Globalisation comes at a cost. In essence, we now all rise and fall together. The idea of economic independence in modern society is a fallacy and those who may come close are described as extreme or dictatorial, and those who don't want to share are no longer invited to the party.

So when I look at what a lot of the analysts and economists have been saying about the US recovering whilst Europe falls into recession, one must question how they can even make such claims. Even if the US had no direct trade link with Europe, they would still suffer the secondary effect of producers of US imports losing economies of scale through falling demand from Europe. Moreover, we actually know that the European Union and the US have the largest bilateral trading relationship in the world. As we know from magic, the greatest skill a party has is that of diversion.

"During times of universal deceit, telling the truth becomes a revolutionary act"

George Orwell

After that shorter than usual introduction, here are a couple of graphs and an article that are worth reading before we reach the first of many pivotal European bond auctions.

1) Death by a thousand cuts - The Economist (Click HERE)

2) Graph showing the decoupling of Equity market - Zerohedge (Click HERE)

3) Graph showing the market results of Fed Intervention across Equities and Treasuries - Doug Short (Click HERE)

Due to time pressure, I have been particularly pushed to get this note out in time due to a few changes in personal circumstances. Going forward, all future notes should be back up to there more detailed and lengthy nature.

Best Regards

George Adcock

Things That Make You Go Hmmm - 19th February

Sun, 19 Feb 2012 22:15:16 +0000

Things That Make You Go Hmmm - 6th February

Sun, 12 Feb 2012 21:41:35 +0000

Kaufman Interviews Bill Gross about the Situation in Greece

Sun, 22 Jan 2012 21:39:59 +0000

David Einhorn - Greenlight Capital - Jan 2012 Letter

Thu, 19 Jan 2012 21:20:38 +0000

Towards the Paranormal - Bill Gross (Pimco)

Sun, 08 Jan 2012 17:30:29 +0000

Religare Research - Boom Time in the Middle East?

Sun, 08 Jan 2012 17:23:43 +0000

Things That Make You Go Hmmm - 8th January

Sun, 08 Jan 2012 17:19:08 +0000

Things That Make You Go Hmmm - 28th December

Thu, 29 Dec 2011 14:22:08 +0000

CEBR - Brazil GDP Overtakes UK GDP

Thu, 29 Dec 2011 14:20:23 +0000

IceCap AM - December Presentation

Thu, 29 Dec 2011 14:18:38 +0000