Ecinya’s delightful and daring dance with Sir Percy

INTRODUCING SIR PERCY

In the Ecinya pages over the years since 2000 readers have met many of our confidants such as SOT (the Sage of Toukley), The Prince (from the Grand Duchy of Luxembourg), DOG (a derivatives and commodities trader), Compass (a chartist of considerable skill and experience), The Delphic Oracle ( a Greek fund manager pregnant with market invective and occasional wisdom), Maximus (a stockbroker of Italian origin) plus others currently beyond instant recall.

Today we introduce Sir Percy Blakeney, the hero created by Baroness Emmuska Orczy in the novel and play ‘The Scarlet Pimpernel’ set during the reign of Terror following the start of the French Revolution. Sir Percy Blakeney was a hero with a secret identity and was the elusive Scarlet Pimpernel. Our Percy turns up on an irregular basis chock full of opinions about the past and the future and oft demanding an actionable idea. When presented with Ecinya’s view of ‘actionable ideas’ he often has a plethora of prejudices or reasons not to initiate action, but always renders the caveat ‘he will know it when he sees it’.

Our Percy and Ecinya have made a bet: Percy has bet that the All Ordinaries (XAO) will retrace by 103 points from its 21 February level of 5114 to 5011 by 4 April. Ecinya’s wager is that the XAO will retrace by 409 points to 4705 by 31 May. Percy’s retracement is thus 2% and Ecinya’s is 8%. The proceeds of the bet will go into our Parisian money box joining other accumulated bets from many sources which will eventually be realised as part of the cost of a trip to Paris or a bottle of French Champagne depending upon the realisation date. This is our first bet with Sir Percy.

Obviously the purpose of the bet is for someone to be correct and someone to be wrong. Opinions are much like posteriors, everyone has one. Essentially, Percy is saying not much will happen at all and the delightful dance that is the market goes on from almost the same level. Ecinya thinks the retracement will be more robust and interesting.

Given Percy’s customary elusiveness he has provided no explanation or documented reasoning. However, this is not to say that Percy will be wrong as ‘A hunch can be trusted if it can be explained‘ and no doubt Percy will one day mystically visit and enunciate his reasoning.

Why daring? For our part we do not wish to have the luxury of being elusive. Ecinya has a view that is stout and worth shouting about; Percy is prima facie placid, prosaic and perfunctory.

 

BUT HAVE WE BEEN UNFAIR TO SIR PERCY?

Perhaps, Sir Percy, in handing back to us the thoughts of Jesse Livermore ( which have been set out under Ecinya’s Market Wisdom tab for a decade or more) considered that he had provided meaningful and inarguable reasoning for his opinion. It should be noted that in 1929 Mr Livermore was reputedly worth US$100 million and at the time of his suicide in 1940 at the age of 63, in a Manhattan Hotel cloakroom, was still worth a not insignificant $5 million. Mr Livermore traded stocks before the invention of the internet, prior to globalisation, rampant hedge funds, dark pools and algorithmic- high frequency trading. However, incompetent bankers and politicians certainly were prominent during the wonderful years when he owned mansions around the world plus a yacht, private railway carriage and other toys and joys, including several wives.

Sir Percy provided the following from Mr Livermore:

It is too difficult to to match up world events or current events, or economic events with the movement of the stock market. This is true because the stock market always moves ahead of world events.

The market often moves contrary to apparent common sense and world events, as if it had a mind of its own, designed to fool most people, most of the time. Eventually the truth of why it moved as it did will emerge.

It is foolish to try and anticipate the movement of the market based on current news and current events such as: The Purchasing Managers’ report, the Balance of Payments, Consumer Price Index and the Unemployment figures, even the rumour of war, because these are already factored into the market.

After the market moved it would be rationalised in endless post mortems by the financial pundits and later when the dust had settled, the real economic, political and world events would eventually be brought into focus by historians as to the actual reasons wht the market acted as it did.

But, by that time it is too late to make any money.

 

ECINYA’S REASONING – OUR MAJOR CONCERNS

Our major concerns were outlined as part of our Strategy Essay of 25 January and were –

1. Australian fiscal management during and since the GFC – the chickens are coming home to roost and unemployment, slow growth. and higher taxes are on the horizon in a massive landscape of poor policy development and execution. Mid term we remain bullish on hard and soft commodities. Australia needs a Federal election as soon as possible.

2. Dr Ben Bernanke is treating a disabled patient with massive doses of monetary stimulus when the real medical disorder is fiscal profligacy and waste.

3. Europe needs to address creeping imbalances all over the place.

4. China may have a massive credit and property bubble which has not yet popped.

5. The normal menu of global unrest has a new entree in that China and Japan are in dispute in and around the China seas.

 

Embellishing the above –

1. The current Australian government is so far beyond incompetent that bizarre and absurd at both the policy and personnel level seems a more apt description.

2. America may well be ungovernable as it seems increasingly difficult to get Congress and the Obama administration to realise that the Rosy Scenario tango requires both monetary and fiscal policy to be on the same dance floor.

3. Europe doesn’t bother us as much as people might imagine as our observations is that outside of the capital cities the cash economy functions beautifully and la dolce vita or the sweet life is well in evidence. Of course, European banks are another story as is employment (particularly youth unemployment) and productivity, Germany excepted.

4. The evidence here is moving from anecdotal, scattered and intermittent to more regular and factual. We point out, even now, that Greek GDP per capita is about twice that of China in Purchasing Power Parity terms, considered the most relevant measure for country comparisons.

5. We said ‘entree’ not ‘main course’ or ‘dessert’. The protagonists are dancing around one another with more preening than performance.

Nothing has changed over the last month except that markets have continued to rise at a healthy pace.

 

ECINYA IS NOT ALONE

Janet Yellen is seen by many to be the favourite to succeed Fed Chairman Ben Bernanke. However, Paul Volcker has recently publicly criticised the Fed’s QE policies that are emphatically supported by Ms Yellen and Dr Ben.

James Shugg of Westpac appears to be on the same page as Volcker and Ecinya –

 

Westpac’s Shugg ‘still smoking’

WESTPAC’S plain-speaking London economist James Shugg remains as gloomy about the global economy as he was over a year ago, when he said the Australian dollar could plunge to US80c and a break up of the eurozone would prompt a "global catastrophe".

Mr Shugg said yesterday he thought the renaissance of economic optimism this year was built on a mirage, a result of "quantitative easing" in Europe and Japan, rather than fundamental economic improvements. He suggested Greece, and potentially other European countries, were likely to default next year.

"I stand by every word of what I said in November 2011," he told The Australian from London.

At a Rockhampton, Queensland, conference in late 2011, Mr Shugg said he had never been so worried about the economic outlook in 25 years.

"I’ve started smoking; I can’t get to sleep at night. Markets are freezing up and things are even worse than you are reading about," he reportedly said then.

Mr Shugg, who is still smoking, claims he was slightly misquoted, and had projected a global financial meltdown only if global creditors had not renegotiated Greece’s severe debt repayment schedule, which they did early last year. "The European Central Bank has also put its big bazooka behind European banks since then, promising to lend unlimited amounts to banks at a discounted rate."

As global stockmarkets surge to new highs, Mr Shugg said: "There’s still so much unjustified optimism out there; the fact is, we’re in a sovereign debt crisis that will last for a decade."

Westpac’s senior London economist, who grew up in Tasmania, said the required transfers required to keep Greece and Italy in the eurozone were so great that Germany would be better off leaving the group, even though its banks would need to be recapitalised at great cost.

"As we’re seeing in Italy, people are voting out governments that harm their kids and their grannies," he said, suggesting people were "sick of austerity", which was undermining key social services.

Mr Shugg also suggested Europe was likely to be the trigger of future problems, but said the US was "living on life support".

"We have a situation where $US85 billion ($82.6bn) a month is being pumped into the US economy, interest rates are at record lows and the economy is only growing at 2 per cent," he said.

More broadly, he said global economic clout was shifting inexorably from the west to the east.

 

AND Paul Volcker has never left the Exercise Caution In Your Affairs page –

Paul Volcker: Reasonable, rational, largely ignored. Why?

Fri 22 Oct 2010

  • ECINYA NOTE: This is from The Wall Street Journal and is so relevant to the current economic debate taking place in America that we are producing it in its entirety and without comment. We consider this to be part of the necessary rehabilitation that America needs to undergo to restore its economic, domestic and geo-political fortunes. We have considerable faith that America will soon begin to get it right, again. As Winston Churchill once said: "You can always rely on America to do the right thing, once they’ve exhausted the alternatives."
  • Paul Volcker was Chairman of the Federal Reserve from August 1979 to August 1987. In our view he was the last personally decent and competent boss of the Fed. Greenspan was close to being a charlatan and Bernanke has not yet impressed, and is unlikely to do so. America is on the path to recovery BUT only, sustainably so, if the views of Volcker are understood, appreciated, and his recommendations and insights implemented. We are hopeful, but not yet confident. We re-produce in its entirety a Wall Street Journal reporting which we consider to be of the utmost importance and relevance to the omnipresent debate about global stock-markets.
  • September 23, 2010, 4:38 PM ET – THE WALL STREET JOURNAL…………..

"Volcker Spares No One in Broad Critique"

Former Federal Reserve Chairman Paul Volcker scrapped a prepared speech he had planned to deliver at the Federal Reserve Bank of Chicago on Thursday, and instead delivered a blistering, off-the-cuff critique leveled at nearly every corner of the financial system.

Standing at a lectern with his hands in his pockets, Volcker moved unsparingly from banks to regulators to business schools to the Fed to money-market funds during his luncheon speech.

He praised the new financial overhaul law, but said the system remained at risk because it is subject to future “judgments” of individual regulators, who he said would be relentlessly lobbied by banks and politicians to soften the rules.

“This is a plea for structural changes in markets and market regulation,” he said at one point.

Here are his views on a variety of topics.

1) Macroprudential regulation — “somehow those words grate on my ears.”

2) Banking — Investment banks became “trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn’t easily be managed by the old supervisory system.”

3) Financial system — “The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government.”

4) Business schools — “We had all our best business schools in the United States pouring out financial engineers, every smart young mathematician and physicist said ‘I don’t want to be a civil engineer, a mechanical engineer. I’m a smart guy, I want to go to Wall Street.’ And then you know all the risks were going to be sliced and diced and [people thought] the market would be resilient and not face any crises. We took care of all that stuff, and I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.

5) Central banks and the Fed — “Central banks became…maybe a little too infatuated with their own skills and authority because they found secrets to price stability…I think its fair to say there was a certain neglect of supervisory responsibilities, certainly not confined to the Federal Reserve, but including the Federal Reserve, I only say that because the Federal Reserve is the most important in my view.”

6) The recession — “It’s so difficult to get out of this recession because of the basic disequilibrium in the real economy.”

7) Council of regulators — “Potentially cumbersome.”

8) On judgment — “Let me suggest to you that relying on judgment all the time makes for a very heavy burden whether you are regulating an individual institution or whether you are regulating the whole market or whether you are deciding what might be disturbing or what might not be disturbing. It’s pretty tough and it’s subject to all kinds of political and institutional blockages as well.”

9) On procyclicality — “It’s the hardest thing as a regulator in my opinion…when things are really going well, the economy is going well, the market is not disturbed, but you see developments in an institution or in markets that is potentially destabilizing, doing something about it is extremely difficult. Because the answer of the people in the markets is, ‘what are you talking about? Things are going really well. We know more about banking and finance than you do, get out of my hair, if you don’t get out of my hair I’m going to write my congressman.’”

10) Risk management — “Markets that are prone to excesses in one direction or another are not simply managed under the assumption that we can assume that everybody follows a normal distribution curve. Normal distribution curves — if I would submit to you — do not exist in financial markets. Its not that they are fat tails, they don’t exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years.”

11) Derivatives — “I’ve heard so many stories about how important” derivatives are but “there doesn’t seem to be much doubt that the creation of derivatives has far exceeded any pressing need for hedging.”

12) Money market funds — “Money market funds have encroached so much on the banking market. They are nothing, in my view, but a regulatory arbitrage. The purpose that they serve in handling payments and short term paper is a commercial banking function” but they don’t hold the capital or face the regulation of banks.

13) The Fed and Dodd-Frank — Volcker said it was a “miracle” that despite all the criticism aimed at the Fed the central bank “came out with enhanced regulatory authorities rather than reduced regulatory authorities.” "