## Why do I dislike the Eurozone so much?

You have probably seen me banging on about the Eurozone with words such as ‘toxicity’, ‘failed experiment’, and ‘f*cking stupid idea’. I previously wrote about why I voted out (because the EZ is failed and we need to be as far away from its alcoholic, abusive father as possible) but I want to go a bit further and break down why I feel the Eurozone is failed. A lot of excerpts will be taken from Rosa’s book, Euro Error, written in April 1999 (he almost predicts what would happen over the next decade).

The root cause of the toxicity is the currency union. Using the same currency for 19 different varied economies cannot work. It would be akin to treating someone with a bruised leg and someone with a gunshot wound with the same dose of painkiller. It can’t work because monetary policy is adopted as a tool to accommodate and constrict to complement fiscal policy. In this way, you have to start asking why it was implemented, and from what I feel, it is to have Europe as a statist entity.

The State’s expenditure is, in a way, the national economy’s overhead cost. We are reaching the point where these overheads prove to be excessive and drag down businesses’ potential to create wealth. Which is to say, in the final analysis, that the responsibility for Europe’s malaise falls on the policy that was chosen and the people who were responsible for implementing it. Contrary to the litany of governments that hide from any criticism behind the “tyranny of the financial markets” and the “constraints of globalization,” supposed to deprive them of any room for maneuver, it should be clearly recognized that the financial policy of the State, the “macroeconomic” policy, is not dictated by the international environment. It results, in fact, from a choice that is basically political and not economic: that of the construction of a European State, intended to superimpose itself on the national states.

Dr Jean-Jacques Rose, Euro Error.

This currency union forces governments to adopt very restricted fiscal policy which in turn forces them to adopt low productivity, low wages, low growth, high unemployment in certain states, while governments have to force more and more spending.

As a key current theme in the wake of Brexit, Trump, Italy and Austria, I feel the next excerpt from Rosa is key:

The rise of xenophobia in France and Germany, for example, is a particularly worrisome consequence of the loss of jobs and the declining growth. It now constitutes a political risk that cannot be overlooked. This political backsliding, traditional in difficult times, is explicitly tied to growing unemployment, as the foreigner is accused of stealing jobs from the nationals. Let us not forget that a similar phenomenon developed in Great Britain at the time of economic stagnation under the impetus of Enoch Powell, and in the United States in the years of uncertainty, when Governor Wallace and other politicians of the extreme right mobilized a considerable fraction of the votes. All this undercurrent was rendered inconsequential by the return of prosperity. This shows that moralizing speeches on their own have little chance of reversing the trend toward political extremism if the economy continues to drag, thereby destroying jobs.

I tweeted this last night:

Yes, people are using racism as anti-immigration rhetoric to support their so called ‘arguments’. But look at the reasons why people do this. I see a lot of words explaining how these people are hugely uneducated, which is why they voted out – then how do you expect them, if they are so uneducated, to be able to explain European stagnation? So they go to the thing that seems alien, and which must be the cause. Don’t get me wrong, I have absolutely no sympathy for these people when they are spewing hateful bullshit. But it’s absolutely brain dead not to recognise the reasons why, when the rise of populism has occurred in various different countries. I also wrote about the rise of Trump, and the same findings of rising unemployment amongst the working and middle classes were found.

Note that unemployment rates in Greece, Italy and Spain are 23.4%, 11.6% and 18.1% respectively. Note further what Rosa says re mass unemployment:

If the situation of the unemployed had remained that of the interwar years, today’s unemployment would be politically insupportable. At the time, the one who lost his job was often the only financial support of his family. The standard of living was low. Compensation was limited and offered neither systematic protection in old age nor health insurance. Under such conditions, unemployment that strikes more than 10 percent of the working population must cause an intense social mobilization and instigate a speedy revision of economic policies. One hears, particularly on the left, that well-compensated unemployment is better, after all, than poorly paid work. Better to be an unemployed person in Europe than a hamburger-flipper in the United States. This thesis is caricatured in the recently popularized idea suggesting that our time might see the advent of the “end of work.” Companies and markets would like that. This proposition suggests that there is no way to avoid it. The search for high productivity which international competition imposes on us will reduce the demand for low skilled labor. We should look to a new era of leisure.

In essence, the availability of welfare payments to the unemployed (which combined with a fixed monetary policy increases fiscal spending) has put governments into a sense of security whereby a higher level of unemployment is socially sustainable, when in fact, it isn’t in the eyes of those it is hitting.

E.L. Jones said that the reason why Europe has come so far in the last 60 years is that there is competition between states. Yet the introduction of the Euro has taken this competition away whereby again, fiscal spending cannot be complemented by changing monetary policy dependent on specific conditions.

Having said all of this, I am not going to say that countries have been entirely fiscally responsible alongside the rigid monetary policy. Greece, for example, has a ‘rules are meant to be broken‘ mentality, almost. You notice that with many houses in the country, some are part finished. This is so they aren’t classed as a legal dwelling, and so do not have to pay as much tax as a finished dwelling. EUR 285bn remained unpaid in taxes in 2012 in Italy (18% of GDP). This fiscal irresponsibility had a huge part to play in why Greece required a bailout, with massive structural deficits and accounting measures which had hidden the levels of debt that they had (the Maastricht Treaty meant they could only have 3% of GDP as a budget deficit when Greece had upward of 10%). Troika then had to bail them out in order to allow for liquidity and spending so that they wouldn’t totally collapse, which has then caused further fiscal conservatism.

But Greece could have been able to ease the impact of the financial crisis and a reduction in demand alongside the changing economic cycle – but this couldn’t happen because the ECB sets the rate of interest on the Euro. In essence automatic stabilisers require both flexible monetary AND fiscal policy to be able to work with changing economic cycles.

Rosa also says something on macroeconomic responsibility:

For the end of growth and the advent of permanent unemployment in Europe are, in fact, explained by this disinflationary policy implemented at the beginning of the Eighties and then reactivated, after a brief interlude of recovery at the end of the decade, by the Bundesbank’s restrictive policy. Conservative monetary policies have a secondary effect of driving up the currency exchange rate and penalizing exporters as well as domestic producers, who are then faced with increased competition from imports whose prices have gone down. That generates fear, an unfounded fear of “globalization.” Actually, competition from the poor countries is irresistible not because of their low wages. More to the point is that our products are too expensive, and our wages also, insofar as their domestic price does not change, or in any case not instantaneously, with the increase in the exchange rate. It is our currencies’ rates of exchange that penalize export, bolster imports particularly from emerging countries, and make our wages prohibitive compared to those of foreign countries.

The fear of globalisation does sound quite familiar…

This was very brief and there are more topics involved, but I just wanted to provide an explanation of why a currency union doesn’t work.

## Shorting AUDUSD on open @ current price

I will be blindly short from current resistance on market open. If my first zone fails (SL at 0.7500) then I will be watching for a move and rejection of 2nd rounded test @ 0.753 with a stop at 0.756 with half of my original position. From the large bearish candle you can see that many weak longs got taken out at the original support (0.7300). Conversely, the two days following, those shorts were taken out. This leads me to believe that the current level is strong to initiate further shorts into.

Image | Posted on | 1 Comment

## Red Credit or Black Credit Cards? – Part One

Great post on credit building

Dear Present,

I’m just going to jump right in,

It is funny how the majority of the black community are against borrowing money, credit cards, financing cars or other items. It seems like the black community, in general, look down on people that lease or finance cars and look at credit cards as some type of VIP one-way ticket to hell. Not understanding, that financially (for people with a stable income), these things are more beneficial in our short and long term lives.

Personally, I think the problem is thelack of financial education or with the understanding of how the banking system works or how it makes its money.

View original post 1,539 more words

## The economic costs of mental illness…

The evidence gathered is compelling. Over the next 20 years, NCDs (non communicable diseases) will cost more than US$30 trillion, representing 48% of global GDP in 2010, and pushing millions of people below the poverty line. Mental health conditions alone will account for the loss of an additional US$ 16.1 trillion over this time span, with dramatic impact on productivity and quality of life.

The above statistic found by the World Economic Forum is frightening. Mental illness  is essentially being demonstrated as being one of the biggest global economic risks in our generation. $16tn is a huge figure. If we factor in other diseases, such as cardiovascular disease, diabetes, cancers, respiratory diseases etc, we reach a net potential GDP loss of$30tn.

It has been found that cardiovascular diseases and mental illness will have the greatest economic burden, and there is no surprise since stress, anxiety, depression and cardiovascular problems are very closely linked. The WHO have said:

These NCD-driven concerns are markedly higher than those reported for the communicable diseases of HIV/AIDS, malaria and tuberculosis.

However, the ‘fix’ for non mental issues are in fact an economically ‘cheap’.

A recent World Health Organization report underlines that population-based measures for reducing tobacco and harmful alcohol use, as well as unhealthy diet and physical inactivity, are estimated to cost US$2 billion per year for all low- and middle-income countries, which in fact translates to less than US$ 0.40 per person.

Mental illness treatment, on the other hand, face much higher costs of scaling up to improve the situation drastically.

The new study calculated treatment costs and health outcomes in 36 low-, middle- and high-income countries for the 15 years from 2016-2030. The estimated costs of scaling up treatment, primarily psychosocial counselling and antidepressant medication, amounted to US$147 billion. Yet the returns far outweigh the costs. A 5% improvement in labour force participation and productivity is valued at US$ 399 billion, and improved health adds another US$310 billion in returns. However, current investment in mental health services is far lower than what is needed. According to WHO’s “Mental Health Atlas 2014” survey, governments spend on average 3% of their health budgets on mental health, ranging from less than 1% in low-income countries to 5% in high-income countries. The scaling up figure adds up to roughly$3.7bn extra having to be spent (merely an average of the sample and not country specific).

The Lancet found the following:

The net present value of investment needed over the period 2016–30 to substantially scale up effective treatment coverage for depression and anxiety disorders is estimated to be US$147 billion. The expected returns to this investment are also substantial. In terms of health impact, scaled-up treatment leads to 43 million extra years of healthy life over the scale-up period. Placing an economic value on these healthy life-years produces a net present value of$310 billion. As well as these intrinsic benefits associated with improved health, scaled-up treatment of common mental disorders also leads to large economic productivity gains (a net present value of $230 billion for scaled-up depression treatment and$169 billion for anxiety disorders). Across country income groups, resulting benefit to cost ratios amount to 2·3–3·0 to 1 when economic benefits only are considered, and 3·3–5·7 to 1 when the value of health returns is also included.

Note that the above figures are per year. These figures are also only for 36 of 195 countries.

What are the actual economic effects of mental illness on the economy?

The first and most important is that people take themselves out of work. This firstly decreases productivity whereby you have output decreases, whether short term absenteeism or longer term removal from the workforce, but also increases the dependency on the welfare system, whereby the government spends more on healthcare, receives less in income tax (assuming the person has taken themselves fully out of work), spends more on unemployment welfare and receives less on VAT where those out of work have less disposable income to spend on goods and services.

In a previous article, about why Trump won, I wrote about the increase in pain killer medication consumption between 2008 and now:

43.5% of men not in labour participation had taken pain killer medication the day before surveyed. This is over double those of employed men. The stat among women is not as great, but employed women are on long term pain killer medication at a greater proportion when employed, lesser so when not in the labour force. Staggeringly, 2/3 were complaining of emotional pain, depression or tiredness.

6% of prime age working men, therefore, believe that they are too ill to be able to work. Since 1968, that figure has quadrupled, where the rate was 1.8%:

The trend for women is different. We have seen a social change where women have dropped out of housework and entered the labour force which has masked the rise in women reporting being ill or disabled and taking themselves out of the labour force:

I would argue that there is a strong causation between being long term unemployed, depression and the consumption of prescription pain medication. However please don’t take this as fact, as it has not been tested.

For the Lancet Commission on Investing in health, the value of a 1 year increase in life expectancy in low-income and middle-income countries was estimated to be 2·3 times per person national income, and 1·6 times per person national income worldwide

Previously I had compared cost of treatment to other NCDs such as treatment of obesity and smoking & drinking. However, individual treatments for mental illnesses are still quite low when compared to country health budgets:

After standardising for population size, the cost is actually quite low; for depression treatment, the average annual cost during 15 years of scaled-up investment is $0·08 per person in low-income countries,$0·34 in lower middle-income countries, $1·12 in upper middle-income countries and$3·89 in high-income countries (table 2). Per person costs for anxiety disorders are nearly half that of depression.

The cost:benefit of treating mental illness, however, is far less that communicable disease:

For example, a return on investment analysis for malaria, also for 2016–30, but using the full value of a statistical life-year, estimated benefit to cost ratios in the range of 28:1 to 40:1.37 An investment case done for maternal, reproductive, neonatal, and child health obtained a benefit to cost ratio of less than 10:1 for 2013–35,36 which is closer to the results obtained in this study. Inclusion of other benefi ts arising from scaled-up treatment of common mental disorders that could not be captured though the present modelling exercise, notably reduced welfare support payments, and improved outcomes for other affected people (eg, partners and children of women with perinatal depression) would generate higher ratios of benefi t to cost

Source: World Health Organization on behalf of the Roll Back Malaria Partnership Secretariat. Action and Investment to defeat Malaria 2016–2030: For a Malaria-Free World. 2015. World Health Organization, Geneva

This could be one reason a to why more isn’t spent on mental illness treatment. Governments are unable to see black and white statistics based on cost:benefit analysis. With malaria, you can treat with vaccines; to decrease infant mortality, you improve the post natal care, ensure the child is vaccinated and improve the conditions of which the mother gives birth in. But with mental health it is no where near as binary. You cannot simply take a pill and be cured. There are various different ways in which people can be treated, and some cost more than others. A government policy maker would look to optimise as best possible, and at the current stage, there are a lot of external unseen variables that are hard to factor in to health care provision (as horrible as that sounds).

However, I believe that government spending on mental illnesses will increase when the benefits of treating a mental health condition is proven to provide benefit to other non communicable diseases such as cardiovascular disease.

From the data shown, it is clear that we are faced with a burden of non communicable disease. One criticism that I would have of what I read is that I think that mental illness can have a greater causation toward other NCDs in which the cost:benefit ration should be greater. I know it was mentioned in once of the sources but I feel the link could go further, especially as a stream to push policy makers to spend more on mental health.

Posted in economics | 1 Comment

## 6 Best Economics & Trading Podcasts

There are some really great finance & trading podcasts out there. Whether experienced or know nothing about economics/trading, I’m sure you can find some value in the following.

In no particular order…

Great podcast where the host, Aaron Fifield, interviews a different trader each week. Really good for insight and opinion on how professional traders do business.

One of my favourites from Think Or Swim founder Tom Sosnoff

Two Blokes Trading is run by Tom and Owen, two guys that I personally know who in June began a journey to learn to trade, with the end goal of becoming profitable. They record interviews and their progress each week. Very funny and good podcast to listen to as everyone can relate to their experiences.

If you ever studied Economics at any level, one of the more interesting books was Freakonomics. One of my favourite topics by these guys was ‘Why do drug dealers stil live with their moms?’ which explores the economics behind drug dealing in south side Chicago during the 90s. Now, Levitt & Dubner write articles on various topics (one I included in my recent Articles of the Week section on the truth behind the gender pay gap…

Exchanges at Goldman Sachs is a podcast in which people from across the firm share their insights on developments shaping markets, industries and the global economy. As long as you trade against their ‘Top Trades of 20xx’, this podcast is well worth listening to.

Tastytrade is run by Tom Sosnoff and is a live online TV channel by real traders (unlike CNBC and Bloomberg). They take trades live on the channel. However, they also offer podcasts via Apple and RSS feeds.

Planet Money by NPR is the most comprehensive on the list. Really gives great up to date insight on the global economy, and has highly interesting topics that don’t become TOO technical.

## What is liquidity?

Really easy description of liquidity. Some tend to get a bit confused as to how the markets move based on submitted orders.

Posted in analysis, article, economics, trading | 1 Comment

## Is there a major problem with the US student loans market?

This is an interview I did on the issues with the US student loans market with Zak Mir on TipTV (thoroughly recommend watching daily). Pretty important topic as there is a bubble forming, and it also has some parallels with our system here.

Posted in analysis, economics | 1 Comment

## USDJPY short from 116.50/75

Rounded retest off thin bullish move. Think we will get some sellers at current resistance who will be taken out quickly for the move up.

## EURUSD bid to 1.0825/50

My thoughts on EURUSD for the coming weeks.

## Why I voted out and for relatively unheard reasons…

We have seen a pretty revolutionary moment in our history. This is the first time that a country has voted to leave the European Union… and I am quite pleased.Let me make myself clear. Whether we left the EU or remained, the key issue is that we need to make the most of the situation that arose. If we had remained, we would have had to be proactive in assuring that we were in a position to enact reform. Now that we have left, we must be proactive in achieving the best terms that we can. In my opinion, we would have accepted the status quo had we remained and we would have been a part of a ‘sick’ organisation had we remained, not just because of EU bureaucracy, but also because of the nature of the relationship between the EU and the Eurozone.

Look, you cannot be a part of an organisation whose vested interests are tied closer with countries within the currency union and not with those outside of it. It simply cannot work. Take a look at the peripheral countries.

Italy:

• Debt:GDP = 133%.
• 11.7% Unemployment
• -0.3% Inflation (MoM)
• 36% Youth Unemployment

Spain:

• Debt:GDP 99%
• 26% Unemployment
• -1% Inflation (MoM)
• 45% Youth Unemployment

Greece:

• Debt:GDP 177%
• 25% Unemployment
• -0.9% Inflation
• 50% Youth Unemployment

To have a comparison, let’s fix for Germany and the Eurozone as whole:

Germany:

• Debt:GDP 77%
• 4.2% Unemployment
• 0.1% Inflation
• 7% Youth Unemployment

Eurozone:

• Debt:GDP 90%
• 10.1% Unemployment
• -0.1% Inflation
• 21.1% Youth Unemployment.

Look at the data. The point I am trying to make here is how can you have so many varying economies within the Eurozone, firstly with the same monetary policy being attributed by the ECB, but secondly, invoking the same laws from Brussels (which also have a heavy impact on the economy; trade deals, free movement of labour etc)? It cannot work, and it has been proven to be ‘sick’. You need to have fiscal AND monetary policy mobility to truly be able to efficiently run government budgets, otherwise you create huge deadweight loss if policies are counter effective.

What I find ironic is that Germany is the best performing country. They also have a massive trade surplus. I wonder why Merkel wants to keep the UK in the EU, as well as all other states (800,000 cars are exported to the UK per year…). Contrast this with the Eurozone as a whole and you can see that Germany are way above the average, while the peripheral countries are well below it.

Jean Jacques Rosa wrote a book called Euro Error which predicted this conservative austerity and far right uprising due to unemployment. What have we seen? Far right uprising in the Netherlands, Poland, France, Greece and Austria. They hide behind the veil of being racist, which they are, but the true problem always comes down to a group of individuals’ economic positioning within a country. The Eurozone has failed these people. It was doomed from the start in my opinion.

As a side note, immigration is not an issue for me. Immigrants since 2000-2011 have contributed a net surplus of £20bn to UK finances. Indigenous British people have a net deficit of £150bn to the welfare system.

What has really been made apparent as well, is the political fragility we have faced since 2008. We’ve had David Cameron resign, a huge split in the Tory Party with no real strong candidate for leadership being made apparent, 14 Labour Cabinet ministers resignations after Hilary Benn’s sacking and a call for Corbyn to step down, something which I feel he has to do firstly because he really didn’t argue his side during the campaign for remain and furthermore, was remain really his true feelings on the Brexit issue? I don’t think so, and this is why a vote of no confidence has been made. In terms of this, I feel that Brexit would allow for a new swathe of sovereign thinking to enter the House of Commons. We wouldn’t have Eurocentric opinion on trade and laws. What we would have is the independence to strike deals with China, India, South America, the US and Canada… which won’t take 7 years to complete…

Posted in economics, politics | 8 Comments

## How does an FX broker make money?

People tend to not understand how a retail broker makes money. It is very, very simple. Almost too simple.

## Good roundup of The Autumn Statement by Disunomics

You can listen here. I don’t fully agree that we are doomed (see last post here) but this is a great roundup of certain factors.

You can follow him on Twitter here @Disunomics and view his blog here.

## Why The Fall In GBP Was Inevitable… And Why It Is Good.

When Sunderland voted in June, we saw a 6% fall in the price of GBPUSD. The reasoning was that Sunderland surely wouldn’t have voted to leave since they were a Labour stronghold.

Why was this inevitable? Essentially it’s due to something called the Balassa-Samuelson Theorem.

Countries with high productivity growth also experience high wage growth, which leads to higher real exchange rates. The Balassa-Samuelson effect suggests that an increase in wages in the tradable goods sector of an emerging economy will also lead to higher wages in the non-tradable (service) sector of the economy. The accompanying increase in inflation makes inflation rates higher in faster growing economies than it is in slow growing, developed economies.

Definition taken from: http://www.investopedia.com/terms/b/balassasamuelson-effect.asp

Essentially, over the years, UK productivity has slowed a huge amount relative to wage growth. This means that workers consume more than they can produce and this causes a decrease in the current account surplus (and eventually changes to a deficit, as we have now).

Let’s look at the relationship between US living standards (which can be a proxy for productivity if you look at GDP per capita). At the end of the 19th century, UK living standards were 13% higher than that of the US, however by 2013, the living standards were 39% lower! US productivity has outpaced UK productivity, therefore, by 57% throughout the 20th Century:

Yet the real rate has stayed relatively stable, and in the last decade, GBPUSD has actually increased in real terms:

If the Balassa-Samuelson Theorem holds true (which it does when looking at the chart), then GBPUSD has been overvalued for a long time, based on the productivity discrepancy between the US and the UK.

Why does having a lower sterling benefit? Well, you have a re-distributive effect where UK exports become more attractive. We currently have a current account deficit of £5.22bn. It widened heavily in September due to firms still purchasing amid uncertainty at a higher exchange rate price. Economic effects have time lags – monetary policy for example has approximately 6-12 months before it has much effect to the everyday person. Greater exports lead to greater tax receipts for the UK and an increase in the price level when looking at the aggregate demand relationship (C+I+G+(Nx) = Aggregate Demand, where C is consumption, I is investment, G is government spending and Nx is net exports) and a shift upward in aggregate demand equates to economic growth. Obviously short term price shocks will affect the pocket of the everyday person as the market is out of equilibrium and because the time lags are still at play.

Adjusting for cyclical factors in the income balance, the IMF’s External Balance Assessment (EBA) models estimate that sterling is moderately overvalued in 2015. The 2015 CA balance is projected at -4.1 percent of GDP. If cyclical factors are removed, the EBA model estimates that the trade balance would improve by 0.3 percent of GDP. Based on the analysis above, staff estimates that the income balance will also improve by another 1 percent of GDP as cyclical conditions outside the UK improve. The underlying CA balance is therefore estimated at -2.8 percent of GDP. The EBA-estimated CA norm for the UK of -0.3 percent of GDP thus suggests a CA gap of 2.5 percent of GDP. Applying an elasticity of -0.23 (for the relationship between the current account and exchange rate) yields exchange rate overvaluation of 11 percent. The EBA REER index and levels regression estimate sterling overvaluation of 12 and 10 percent, respectively. Taking an average of these approaches and allowing for uncertainty suggests sterling overvaluation in 2015 of about 5–15 percent.

https://www.imf.org/external/pubs/ft/scr/2016/cr1658.pdf

In simpler terms, the IMF have examined exchange rates relative to sterling alongside UK international investment positions and have noted that due to external factors alongside reduced net income from foreign direct investment, the current account deficit had widened in 2015. When the deficit widens, the exchange rate depreciates as stated above. This is why it was inevitable that sterling fell. Now, look back at the chart and note the percentage decrease in GBPUSD and look at the prediction made by the IMF…

Could OPEC Push Oil Back to $90? What Do the Charts Say? An article I had published in Finance Magnates. Essentially I believe 3 things for 2017 – • USD weakness due to CCY swaps becoming too expensive to fund treasury & US equity buying from foreign investors. • OPEC meeting at the end of the month could drive oil prices up. • Chart technicals indicate oil bullishness. Posted in analysis, article, financemagnates | 1 Comment ## The 8 Best Investing Websites and Apps For Young People (and old I guess) Investing is a pretty unknown topic among the majority of young people. Not only is the knowledge about investing not widely directed towards the youth demographic, but we also face the problem of less disposable income, lower wages and a lack of confidence in the financial system (maybe). However, there is so much information out there these days, and passive investing can be done from an app on your phone a lot of the time (although I would advise actually sitting down and researching investments for a while, rather than randomly clicking buy on a Junk Bond ETF and not knowing what you’re doing). This is a list of websites and investing vehicles to get you off to a good start. Click each logo to be directed to the website. This is literally a Bible of financial information. You have everything here from who Jesse Livermore is, to what options arbitrage is, to how diversification of a portfolio works. I use this daily and the articles in the trending section are extremely useful. In the search bar, I input ‘investing for young people’ and the first link was ‘The Best Investments for Young People’. You don’t really need me now… Nutmeg is a wealth management firm who have really made investing easy. The initial investment amount is £500. From there, you simply apply variables such as how much you want to have in X years, how much you can add per month, and what type of risk appetite you have (whether you are risk averse or you are willing to take a lot of risk). What a great idea this is. Moneybox is a savings an investing app that works by causing you to say ‘it’s only 30p’ or ‘it’s only 54p’ by rounding up your purchase to the nearest £1 and saving the difference. You are then able to invest it into 3 different categories of investments: This really takes the chore out of investing, however you are slightly limited in terms of diversification, but it is a perfect, no excuses way of getting into investing right now. What’s more is that it only charges £1 per month in fees and a 0.45% charge of the total portfolio at the end of the year… some brokers charge upwards of £8 in commission for each ETF trade… Khan Academy probably taught me more about economics than my economics lectures. I’ve linked the macroeconomics section because I feel that the more knowledge you have about the economy as a whole, the more careful and knowledgeable you will be about choosing your investments. You have sections on everything from bonds to Keynianism and the monetary system, all in video format, and all exceptionally well explained. TradingView is for investors who want to combine charting analysis with fundamental analysis (balance sheets, product releases, earnings expectations etc). This is more advanced and requires quite a lot of time and study, and is venturing more on speculation rather than passive investing, however the more strings to your bow you have the better. You can learn more about simple charting methods here. This isn’t out in the UK yet however there has been a job posting for London, which normally indicates they’ll be opening a London office. Robin Hood allows US equities trading for free. It’s too early to say whether they’ll allow UK stocks but we shall see. I presume they markup the spread (the difference between the buy and sell price of an asset) in order to make revenue, so technically it’s not free but if you’re investing on a longer time frame, this shouldn’t matter. Reuters is my favourite news service. It provides, in my opinion, the best financial news out of all providers. Click the link to download to mobile. Those who are already more than beginner investors can look at IG Index for their ETF brokerage department. IG are probably the best retail platform to offer ETFs. They have a full free education section where ETF investing is explained in video media. Be warned that you do need to have slightly more than basic knowledge but still it’s not that difficult to learn about diversification of assets and other terminology. For you degenerate nutters who want to trade FX & CFDs, my list of good brokers is here. I hope this was useful. Like, comment & share.. Posted in Uncategorized | Leave a comment ## Sterling Update Good Morning, FOREX. For sterling at least, the main focus today will be with the Autumn Statement. Traditionally this was an opportunity to announce revised growth and borrowing forecasts for the years ahead, but more recently has turned into something of a mini-budget in itself. The economy has held up well since the Brexit vote in June, but remember that the UK has not yet started the process, so both the government and BoE recognise that there is a considerable period of uncertainty ahead. There have been some mixed messages from the government so far. The new Chancellor, Phillip Hammond, has relaxed the previous commitment to balance the budget by 2020, but has also acknowledged that the low rate environment provides an opportunity for expanding infrastructure investment. The reaction to Trump’s victory in the US also provides some food for thought for the UK government. Seemingly, markets have reacted well… View original post 205 more words Posted in Uncategorized | Leave a comment ## How Can New Traders Improve Their Trading Quickly? Here Are 8 Tips Posted in article, trading, Uncategorized | Leave a comment ## Bid GBPUSD at Rounded Retest @ 1.2420 Entry @ market. SL @ 1.23750 TP @ 1.26300 Nice rounded retest here. Pretty strong level. COT data indicates non-commercial speculators are bid on sterling. USD slightly weakening from highs of DXY @ 101.5 gives a bit more impetus on cable bids. Posted in analysis, article, trading, Uncategorized | Leave a comment ## Why did Trump win? A few articles ago, I wrote a pre election update, where I alluded to the market pricing in a Trump win. That can be viewed here. Today this became a reality. We have Donald Trump, potentially a racist, sexist, bigot, as head of the biggest and most powerful country in the western world, and I feel that this wasn’t really a surprise. Disenfranchisement is a word, which throughout history, has resulted in radical behaviours and choices being made. Whether you look at workers who looked up to Ned Ludd during the 18th and 19th century, the French sans cullotte & Robespierre during the French Revolution, part of the reason as to why Hitler came to power, even the UK miners during the 80s, economic disenfranchisement has always led to anger and radical behaviour. Let’s put this election into context because I feel that there has been a lot of misunderstanding as to why people have voted for Trump. The following chart shows the labour participation rate for all people over the age of 16 in the US: Note the period between 1990 – 2008. We had a range of a 1% change in the labour participation rate throughout the whole of this 18 year period, 1990 saw a recession where GDP fell by 1.4%, 2000-2001 where GDP fell 0.3% and of course the Great Recession where GDP fell 5%. Since the 2008 crisis, labour participation has fallen by almost 5%. This means that as a metric, almost 5% of people have taken themselves completely out of the US labour force. This is not the same as being unemployed, and would give rise to why unemployment is so low (and is the statistic that everyone looks at when looking at the health of the labour economy which I think is myopic). The reasons for this decline are due to manufacturing based being moved out of the US, or closing down completely, while the majority of those taking themselves out of the labour force are low skilled workers. You also have subdued wage growth with the lowest 10th percentile of low skilled workers seeing only a ‘0.13 percentage point increase with every$0.50 increase in hourly earnings‘. I have spoken on automation at varying degrees and to be fair to Obama, the trend for labour participation, especially amongst lower skilled workers, is down, but that isn’t the point. These people aren’t going to care about that. They are going to want to ask why they are on social security payments for eight years, having to go and collect food stamps weekly. Trump appeals to them due to being a businessman and seemingly want to shake things up (however simplistic this may seem).

Quite a sad caveat of this is the amount of working age men who are on long term pain killer prescriptions. 43.5% of men not in labour participation had taken pain killer medication the day before surveyed. This is over double those of employed men. The stat among women is not as great, but employed women are on long term pain killer medication at a greater proportion when employed, lesser so when not in the labour force. Staggeringly, 2/3 were complaining of emotional pain, depression or tiredness.

6% of prime age working men, therefore, believe that they are too ill to be able to work. Since 1968, that figure has quadrupled, where the rate was 1.8%:

The trend for women is different. We have seen a social change where women have dropped out of housework and entered the labour force which has masked the rise in women reporting being ill or disabled and taking themselves out of the labour force:

I don’t feel that this provides a full picture though. Let’s look at more monetary based reasons.

In 2014, 47% of US households surveyed said that they couldn’t afford an emergency expense of $400. A third of 36-51 year olds said the same. Stress related to financial worries accounted for 64% of stress related illnesses in 2014, coming above health problems, family issues and work issues. Clearly the two are linked and would also lead to a marginalised working and middle class. Increasingly, college educated people can be accounted for within this marginalisation, as automation increasingly decreases human capital compensation, as well as the actual requirement for human capital. I spoke about this major problem with regards to the US student loans market here. What I am alluding to here is that it is not simply low skilled workers who are being affected. College grads are as well. If we use college grads as a bastardised proxy for the middle class, this shows that increasingly, the middle class is being pushed down into lower and lower incomes – the job market just isn’t there for them. Funnily enough though, this proved to be a plus for Clinton and not Trump, but the real swing here was students with ‘some’ college or an associate degree. The New York Times In other words, those who have either not completed college or are still in college increased their vote by 10% in favour of Trump. Potentially the burden of having to pay back a student loan but not having the job prospects due to not completing University or still being at University weighed a lot on their voting strategy. This is another marginalised group of people. Looking more politically, Trump ended up taking 5% of voters who would usually have voted Democrat: This is more opinion based, but I feel that this was due to her weakness as a candidate through the Wikileaks emails and her potential corrupt nature. The difference on this voter swing was 1% in favour of Trump with Clinton attracting 4% of the Republican vote. This chart shows voter sentiment towards the state of the economy today. 78% of those surveyed who answered that the economy is worse today were Republican voters, polarised against 72% of Democrats who said the economy was better today. Add in feelings toward the federal government and we get an overwhelming dislike of Obama’s government amongst Republican voters – no surprise there. What is strange though is that 45% of people who answered that they were dissatisfied were Democrats. Potential reasons external to employment could be due to the Affordable Care Act (or not so affordable). Aka Obamacare, health insurance premiums have risen by almost 25% since the start, but more importantly, they have risen higher than wages: What’s more, a survey conducted by the NY Fed found that 20.9% of manufacturing firms in New York State said that they were employing fewer workers because of the Act, while almost 17% in the services sector said the same. A 10% increase in healthcare costs for 2017 are estimated. The key phrase here is ‘manufacturing sector’ – again we come back to those disenfranchised voters who are seeing no relief on either job prospects or wages. This chart proves it: Trump had an 11 percentage point voter increase over Hillary in two wage demographics where the Democrats should have won. I took a look at voter demographics sorted by race, but there is no change. It seems that the white non college educated voters turned out. The college graduate voters seemed to feel disgusted with both candidates, since it was their lowest turnout ever. What we have to take from this however, is that you cannot just say that everyone is racist because they voted for Trump. Yes there are bigoted views, yes there are racists and yes Trump is deplorable and I would have voted for Harambe as well. But it is ignorant and lunacy to totally ignore the reasons as to why radical candidates are selected. It occurs over and over again when an entire group of people feel disenfranchised, and even worse when this group is uneducated and feel pretty hopeless. In addition, when this seeps through into classes above, such as the middle class, it is no longer conducive to argue that everyone is a racist, not that it was conducive in the beginning. In addition, I feel that Hillary failed here by actions she has committed over the course of her career. I do not believe that someone proven to be so constitutionally toxic and with such power via the Clinton Foundation and in congress, should be allowed to push for Bills and make foreign policy decisions when she clearly has vested interests. Having said that, Trump shouldn’t have either. 2020 Kanye for prez. Posted in article, politics, Uncategorized | 4 Comments ## A Few Market Risks I’ve Been Looking At Recently • TEDrate went above VIX for 3 months consecutively. Last time it did this was 2006… During August – December. • Last time initial jobless claims were this low in the US (43 years ago) the economy went into recession straight after. • Equity risk premium compression means stock markets are so highly levered based on nothing. 127% of SP500 rallies during 2002-2008 were due to earnings. 92% of Rallies during 09-15 were due to ERP compression (yield seeking behaviour due to low interest rates (risk free rate)). • The BoE has quietly asked its U.K. banks to check its exposure to Deutsche Bank at the end of October. • Italy’s non performing loans continue to rise. Monte dei Paschi’s stock price continues to fall. • Banks are doing a load of accounting off book called ‘customer accommodations’ (Wells Fargo for example said they didn’t own any specific derivatives, but they do and call them customer accommodations which don’t have to be accounted for in a specific way on their balance sheet… To the tune of$1.2tn).
• LIBOR is steadily rising still, the same as it did just before 08.
• A proposed rate hike could deleverage the US economy with a reintroduction of a risk free rate.
• Further unrest in the Middle East.
• LATAM issues could easily spread through region further.
• China’s credit bubble – shadowy investments, huge household debt, asset bubbles forming in equities, iron ore. Depreciating Yuan. PBoC have been dumping 2-3 yards of USD per day on their FX swap lines. They hold USD reserves in US treasuries and they have been heavily dumping these reserves to support the Yuan. Also dumping US equities to finance other spending behaviours.
Posted in analysis, economics, Uncategorized | 1 Comment

## Spotlight this week – USDCAD

Still USD strength left. USDCAD obviously strongly correlated with WTI. However, I feel that 1.42/43 is a turning point that I’ll be watching for.

WTI H4

WTI D1

WTI W1

Open interest has recently dipped as has volume very slightly while price has risen. That’s a bearish signal but long term that big period of accumulation would lead me to think we are going higher. This combined with my USD bearishness gives a good case for longer term oil strength.

Posted in analysis, economics, trading, Uncategorized | 1 Comment

## Marginal Gains: What are they and how can they make you do better?

Marginal gains is like the life version of compound interest. It is based around the idea that improving everything that you do by small increments of 1% aggregate in the end to large scale changes. The idea was introduced to me by my old boss. As a keen cyclist, he had read and studied the strategy that Sir Dave Brailsford took with Team Sky when he became team leader in 2010. Here is a background (taken from http://jamesclear.com/marginal-gains):

In 2010, Dave Brailsford faced a tough job.

No British cyclist had ever won the Tour de France, but as the new General Manager and Performance Director for Team Sky (Great Britain’s professional cycling team), Brailsford was asked to change that.

His approach was simple.

Brailsford believed in a concept that he referred to as the “aggregation of marginal gains.” He explained it as “the 1 percent margin for improvement in everything you do.” His belief was that if you improved every area related to cycling by just 1 percent, then those small gains would add up to remarkable improvement.

They started by optimizing the things you might expect: the nutrition of riders, their weekly training program, the ergonomics of the bike seat, and the weight of the tires.

But Brailsford and his team didn’t stop there. They searched for 1 percent improvements in tiny areas that were overlooked by almost everyone else: discovering the pillow that offered the best sleep and taking it with them to hotels, testing for the most effective type of massage gel, and teaching riders the best way to wash their hands to avoid infection. They searched for 1 percent improvements everywhere.

Brailsford believed that if they could successfully execute this strategy, then Team Sky would be in a position to win the Tour de France in five years time.

He was wrong. They won it in three years.

In 2012, Team Sky rider Sir Bradley Wiggins became the first British cyclist to win the Tour de France. That same year, Brailsford coached the British cycling team at the 2012 Olympic Games and dominated the competition by winning 70 percent of the gold medals available.

In 2013, Team Sky repeated their feat by winning the Tour de France again, this time with rider Chris Froome. Many have referred to the British cycling feats in the Olympics and the Tour de France over the past 10 years as the most successful run in modern cycling history.

It may seem pretty obvious but generally people focus on the bigger goal rather than taking on a smaller challenge and building on that. For example, why do so many students cram when it comes to exam time, when really it’s far easier to learn 1% of the course each day for 100 days than learn 50% of the course the week before the exam (obviously there is some temporal discounting here, but it still applies in the same way).

Examples of 1% gains could be only taking the stairs, carrying a company branded pen on you at all times when at work or with a client, taking multivitamins; essentially easy things to do that after a specific time period, can provide exponential benefits when aggregated.

As a trader, you can incorporate marginal gains external to your actual trade optimisation as well. Reviewing your journal once per week, having some time off from looking at lines going up and down on your screen, and reading really interesting blogs could potentially be beneficial… or they might not be. I think the premise is right though. Break things down into more manageable pieces, see where improvements can be made easily. If they can’t be then move on. If they can be, then improve. Rinse and repeat until you have a gold Lambo.

For trade optimisation though, use a service like EdgeWonk which is a great journalling tool and can help you find your edge quicker by looking at a load of different stats.

Seriously though, I think a lot of success is about finding a small edge over others (the same as in trading), except in life there are many unseens, so you kind of have to manipulate what you have in order to do better.

## Articles of the Week – 11/11/2016

CAT Bonds, Michael Lewis, 2007 – Written by Micahel Lewis in 2007, this shows how the financial markets have disrupted the insurance industry by introducing financial assets called CAT bonds (catastrophe bonds) into portfolios of investors. It also demonstrates how looking for outliers provides huge profitability. Really good article, especially in the wake of the Italian earthquakes.

‘For the first time ever, the rich in India beg the poor to help them’ – Modi the PM of India is currently cracking down on Black Money – money that is undeclared by rich Indians. Now, the rich employers are turning to their poor employees for help.

50% of Millenials have less than $1000 in savings. Most are mired by student debt – This goes hand in hand with what I spoke about on TipTV a few months ago: Low income earners can’t take advantage of economies of scale – This article shows how low income earners cannot buy in bulk, and therefore have higher marginal costs resulting in greater average costs. Tinfoil hat time – the last time the Euro Dropped for 9 straight days was 4 days before the Lehman crisis – Citibank Posted in analysis, article, economics | Leave a comment ## The reason why people are so shocked at recent political decisions on Twitter… Mark Zuckerberg has today said that he is going to solve the fake news stories that are constantly being shared on Facebook; this spread of misinformation is extremely damaging and counter-intuitive and provides a platform for people to become mob-like and validate opinions with false fact. Something else which adds to this is the fact that sites such as Twitter and Facebook become an echo chamber of opinion. Why they do this has to firstly be explained by their revenue models. Facebook and Twitter rely on advertising revenue to turn a profit, whether this is done by promoted tweets or by creating campaigns which direct users to a specific post. This requires engagement and impressions (per 1000 impressions, the advertiser pays Twitter or Facebook) which are targeted towards specific demographics and location. We used to run trading adverts directed towards men between the ages of 21 and 70 as this was the primary demographic for a retail trader. However, Twitter and Facebook also go a step further. They use computer programming to understand what you discuss the most, what your political leanings are and what your core follower base also tweets about. This is where we can start adding a ‘why’ to the statement made in the title. If their advertising efforts are based on engagement and keeping you on the site as much as possible, then the content you consume must be the hook. Facebook and Twitter are able to push content with specific ideologies (such as supporting Hillary or Trump during the 2 year campaign) and also push ‘who you may follow’ users with similar ideologies. This becomes a problem for several reasons. Firstly, you start to feel that your social media is an accurate reflection of the outside world. For example, there is no coincidence that many on social media were shocked that Trump won the US election and that the UK voted out in the EU Referendum. You can see the stats for Twitter demographics here: 36% of 18-29 year olds use Twitter. That is 56% more than the next largest age demographic which is 30-49 year olds. The amount of users in older demographics slips heavily for Twitter. Contrast this with Facebook and you have a more ‘balanced’ age demographic: Facebook tends to be a more conservative medium of opinion sharing because it is far less anonymous, whereas Twitter allows very quick interaction with topics and people from around the world. Twitter is far less personal as a social medium than Facebook which, on top of the character limit, allows people to be more outrageous and impactful, irrespective of the next point. In general, youth voters are far more left leaning than older citizens. If you combine this with the above stats, you will end up having a greater proportion of Twitter users being more left leaning than right. This means that the same opinions on Twitter will be echoed. Add to the fact that you generally follow people that you like the tweets of, you end up only listening and seeing the opinions that you want to hear and see. Referring back to the initial point, Twitter therefore creates a self serving revenue generator, where agreeable content drives revenue. This can develop a representation heuristic, something which was studied heavily by Daniel Kahnemann and Amos Tversky, who won a Nobel Peace Prize in Economics for their work in the field (the paper on heuristics and biases can be found here and their Nobel Peace Prize winning work, here). When people rely on representativeness to make judgments, they are likely to judge wrongly because the fact that something is more representative does not actually make it more likely. So when people’s followers and media sites were pointing to a Hillary win or a UK remain, this provided assurances and validity to the respective voters’ ideologies and provided confidence. But the demographic skewdness provides this bias. If you really want to look at something statistically astounding, check out Bayes’ Theorem in relation to breast cancer detection. These opinionated echo chambers also reflect another bias, with the help of Twitter’s content algorithms, known as a confirmation bias. This means that when you hold a specific view, you seek out news or statistics to prove your view. There was a debate going the other day about how we don’t know if the world is flat or not. I provided evidence for the reflection of the Earth on the moon’s surface being round during a lunar eclipse, that there is a curvature of the Earth when looking at a ship on the horizon, that we have mapped the Earth from planes outside of the Earth’s atmosphere, even that James May from Top Gear had done it: Even though this refuted the bias, the person came back with a made up law that the US had banned exploration of the North and South Poles because they’d find out we had a flat Earth… right. Anyway, the point is that biases affect our day to day lives. Twitter is essentially forcing a bias onto each and every one of us, whether you are politically left or politically right, an SJW or non-SJW, Arsenal fan or Liverpool fan and it’s very clever, since it is a self serving revenue generator as I said. However, it is also very toxic. It alienates groups very easily, and allows people to believe their own bullshit since it is constantly validated by those who share the same beliefs. Especially among the SJWs. They can just go away with their constant triggerisms. Posted in Uncategorized | Leave a comment ## Short US10Y Yield (long 10Y bond) Posted in Uncategorized | 1 Comment ## Who says we need career politicians leading the country? For only the second time ever, the US has a President who is has not been a career politician. Ronald Reagan was the first real President who moved from acting to be the governor of California for two terms (Arnie anyone?) and then the 40th President of the United States. Now we have Donald Trump, reviled by some and loved by others. A previous post of mine showed why people turned to the more extreme vote in Donald Trump, that being due to their feeling of disenfranchisement and hopelessness. Similarly, Reagan won his election in an environment of high inflation and high unemployment (Maggie Thatcher had been elected the Prime Minister of the UK the year previous amongst weak opposition in Ted Heath and promises to counter high unemployment after the Winter of Discontents). Whatever you may say about Reaganomics and the theory that an economy has ‘trickle down’ benefits, he was seen more as a people’s person and far more relatable than his opponent, Jimmy Carter, since he won the 1980 election by 10x Carter’s vote. It’s too early to say anything yet about Trump, but looking at Reagan you could say he actually did OK as a President. I don’t think he was amazing because of his narrow minded economic policy and an ‘America can do no wrong’ attitude, but towards the end of his leadership he ended up softening his stance on Russia and negotiating a fair and safer nuclear agreement with them, something which enabled the frosty stand off to come to an end. A counter point to this is that Reagan was the first candidate that was likable enough to gain a Republican presidency, since the GOP had been out of the White House for many years. His reverence is possible due to people overseeing some major misgivings; revisionism always provides different perspectives. But coming back to the main question, I really do not believe that we need career politicians to be constantly head of our nation. If you look through history, of the 56 Prime Ministers to date, 42 studied at Oxbridge, 11 did not go to university (most recently Winston Churchill and John Major), and only 3, Earl Russell, Neville Chamberlain, and Gordon Brown, went to other universities (Edinburgh, Birmingham and Edinburgh respectively). Oxbridge graduates heavily dominate UK politics, and in particular, those with PPE degrees. Only 4 Universities offer this degree, Bristol, Durham, Lancaster and Oxford. It seems to be the degree to take if you want to have your best shot at being a cabinet member or prime minister. But this just creates a generic character type for leader and you end up getting the same issues arising over and over again, especially with economic matters. Peter Jones has said today that he is thinking about running a campaign to become Prime Minister, and you know what? I don’t think it would be a bad idea. Now I can’t judge without seeing his policies, but I think that having someone who has made something of himself, lost it all, and then built it back up to being the financial behemoth that he is today says something about a person’s character. It shows drive, knowledge and a feeling conviction in their ability. Politicians who are elected Prime Minister haven’t actually proved that they have been a success at building something before if you think about it. They build a campaign on promises. Building a multinational company and then running it is almost like running a mini country. You have advisors who run the day to day activities while you are the representative who guides the vision of the firm. I would argue that this qualifies someone more than someone with a PPE degree… Posted in Uncategorized | Leave a comment ## Poker & Trading: they’re the exact same thing. ‘I play poker.’ ‘Ah you like a gamble then?’ ‘No, I play it. It’s a business.’ Daniel Negreanu, professional poker player. I have no idea if that interchange ever happened, but it most probably did. Anyone who has traded has probably heard the same thing, just replace poker with trading. It’s almost always followed by, ‘yeah, my Dad did that for a bit but he lost a load of cash,’ or some comment to try and bring you to a level of relativity, because put simply, they don’t understand risk, a tested sample size and the concept of explicit risk:reward. Risk is quite a foreign concept to most. The way the majority of the world makes money is by having a job whereby a set salary is paid with the only variables on that salary changing being hours worked and performance ceterus paribus. Professional poker players and day traders can experience swings in income relative to risk taken. You can go long periods without earning anything. Why is this? Trading and poker strategies are measures over large sample sizes. A greater sample size provides a lesser degree of error and generally allows for a p-value to be below the standard 5% significance level when accounted for sampling error, which is predetermined. However, you don’t necessarily need to delve into deep statistics in either to realise when a strategy provides significance. For example, if you have a trading strategy that over 1000 trades netted a win ratio of 61% and risk:reward of 1:2, that would be a profitable strategy. Because you know the final outcome over this sample size, you don’t need to hypothesise whether it is significant or not. The same goes for poker. If you have played 1,000,000 a lot of hands in a month (and professional players do this when including online tables as well) then you have a pretty good basis for your outcome to be significant. When comparing poker to trading, however, it is probably more apt to compare online poker, since live poker can be less mechanical due to increased variables (you can see your player, their tells, you can get into their head etc). Live poker can also have these tells where you can see by how quickly they check, call, or raise as to how strong their hand is but the key here is that you can’t see your opponent when trading or playing online poker. However, live poker is heavily based on pot odds and betting strategies. Let’s take an example. Let’s say you are dealt 8H 8S and on the flop you get 7S 2S 5H. Here you have two potential situations. You have four aces that can drop to give you two pair aces high with you holding second highest pair based on the flop, or you have an 8C 8D that can drop. You also have 10 spade cards than can drop to improve your hand on the turn. This means you have seen 5 cards and have 16 outs. Now we can calculate turn card odds. This leaves us with 21 ‘useful’ cards and 31 cards that are not useful. 31/21 is roughly 1.5. This means that for you to call the pot only has to be 1.5x bigger than the call amount. So if the current pot is £10 the call amount must be £6.60 or less to make it a statistically valid call based on the pot odds. The 1.5 figure is basically your chance of winning the pot at this stage. As soon as your pot odds drop below 1, this is a signal to go all in usually. This is very barebones, but it shows what goes through a poker players mind when calculating whether to take a risk or not, much like how a trader does. Something else you’ll notice about poker players and traders is that they can have relatively aggressive (not as in they’ll punch your face in) personality types – highly competitive and quite alpha in nature. This most certainly adds to a risk taking nature due to the reward seemingly being more important than the amount risked. Slightly off topic, it’s also why men have a lower life expectancy than women. Men take risks more in their occupation choice than women. Traders and poker players also have their favourite games, whether it’s a specific time frame or session to trade, or for poker players, a cash game or tournament type game. This edge building is vitally important provided that it is followed through over a full sample size. This edge preservation builds into the personality type as well. A good poker player can sit at a table and check out the other players. They can see who the loose and tight players are – who is scared and who is greedy. This is the same as in the markets. You can sense when fear is coming in and where people are excessively greedy. You then play off of this… or just consistently go against retail sentiment. Posted in trading | 5 Comments ## TEDRate goes above VIX when fixed for first time since 2006, exactly 10 years ago. TEDRATE held above the VIX for 3 months leading up to November. Hadn’t held above for longer than 2 weeks since the 3 months leading into the end of 2006. VVIX made consecutive higher lows (don’t know if there is actually anything here but seemed interesting). Could have some bearing on LIBOR steadily increasing impacting Eurodollar spread. Posted in analysis, economics, trading | Leave a comment ## AUDUSD Long to 0.8100 Looking for a move up to outside of upper value on AUDUSD. Price has consistently been supported by the 200DMA and we have had a break of a long term weekly trendline beginning in 2013. In addition, we have a Wyckoff bottom that has formed with completion at target indicated. Gold also looks like it could have a bullish run as I feel that the dollar bull run is unsustainable. First major resistance is at 7830 AUDUSD. Major downside risk at 7250. I would be inclined to add at a rounded test of 7830 to the downside. More passive traders may wish to take some off the table. Posted in analysis, trading | Leave a comment ## Accumulation oil longs above$30 will be a good idea.

Looking at longs on weekly from $30. Mid term moves would imply dollar strength with oil looking to fall further, however eventually facing weakness. Looking at Gold as well, we have reached a key daily resistance and the yellow metal has the potential to move to$1000 to the downside:

I still maintain USD bearishness, however.

## USDJPY bearishness, LIBOR and Yen Swaps

I remain bearish on USDJPY. Yen is still bid and I feel that USDJPY’s proxy for risk behaviour is outpacing actual market sentiment towards equities, which is why I feel there is downside available. In addition, Kuroda has said that it is ‘not desirable’ for the yield curve to flatten. That means potentially that the BOJ will look to satisfy their hunger for QE to prevent the deflationary hole they have spiraled into. You could start to see yield upticks on longer term Japanese Govt Bonds if this is the case. We know that negative rates are not a long term solution, so it is almost certain this is what will need to occur.

Another issue we have is that there is a decoupling between LIBOR and short term interest rates.
When USD is in low demand, the LIBOR rate rises and vice versa for high demand. If you look to pre-08, banks were very much unwilling to lend out dollars, which caused LIBOR to rise. We are seeing the same thing occurring, as well as the well discussed TED spread, a liquidity risk indicator on upticks.

In addition, Yen is being used heavily as a funding currency with the Japanese buying foreign bonds very heavily. This further leads to a USD demand tightening with foreign investors looking to borrow Yen and lend USD. This is why we are seeing the USD falling heavily vs JPY and I feel it will continue to do so.

## 6 days until election…

We’re finally here. Possibly the most divisive, puerile, worrying and tit for tat election the US has ever faced. The Podesta emails have been ruining Hillary’s chances heavily with evidence of corruption and shady dealings.

In terms of the FX markets, we have seen some moves indicative of heavy risk off plays. Note the following charts:

Swiss Franc front month futs

University of Iowa Election Stock Market

We can clearly see here that CHF has acted as a proxy for outright winning sentiment, over the last 6 months at least, when it has been a 2 horse race. Friday we saw the FBI open an investigation into Hillary’s deleted emails which saw Trump’s ‘price’ on the IUESM increase hugely. Accordingly, CHF bids increased heavily as investors looked to flock from US equities and the dollar. We saw a lesser reaction on USDJPY as traders have been consistently bid Yen, but Friday saw CHF shorts puke and traders switch their positions (note heavy long position by commercial specs – red line on first chart).

I don’t want to be a future teller, but looking at the USD Trade weighted index, I can see further risk off moves being made apparent even into the longer term, with the USD downside looking highly exposed. Take a look at the following:

USDJPY vs GBPJPY (Red vs blue)

Rate Hike Probability

Chart 1: strong downside potential pre election on the index. Trumps isolationist policies would follow that the USD would fall in value on a trade weighted basis as countries look to trade exclusive of the US. This probably wouldn’t happen, but it’s the uncertainty that the market could face that would cause the downside.

Chart 2: is there a case that the values of GBPJPY and USDJPY have to converge again? The EU referendum vote caused a value decoupling between many previously correlated GBP vs USD pairs. Many believe a Trump victory could cause a move of -15% on USD and this would certainly cause this value convergence again. This is purely looking at the chart from a technical perspective.

Chart 3: a 25bp rate hike in December is priced in at 68.4%. I do not see the US being able to hike on a Trump win. Again, there is too much uncertainty as to how the economy would cope with inevitable deleveraging if a hike were to take place.

Posted in Uncategorized | 1 Comment

## Returning to the Bank Index, Junk Bonds and adding in upticks on TED spread… oh, and Deutsche Bank

First update here (with original included).

Deutsche Bank is facing a stiff period again. Back in Feb they had to activate some of their contingent convertible bonds in order to prop their equity price up. Essentially this works by converting some bond value into equity. More recently, the German stalwart has been embroiled in a very costly litigation battle and is now subject to a $14bn fine due to rule breaking in their US arm and ontop of that, this US arm failed bank stress tests. What a mess. Currently, DB are trading at EUR 10.5. In Jan 2014 they were trading at almost EUR 40. Why is this? Well there are many beliefs that they are under-capitalised heavily, yet their Chief Communications Officer said this morning that there was absolutely nothing to worry about and that liquidity was fine. I find that whenever someone as the face of a corporation says that there is nothing to worry about, there generally is – because why would you have to say that there is nothing to worry about? Who are you trying not to panic? I mean investors and the rest of the world can see that you have a gross bond derivative exposure of$74tn (alright the net figure is far less, but still greater than their market cap). Forget the numbers though. The real issue again is lack of transparency – who owns what derivative and what happens to y if x fails? Just like the last crash was caused by structures products and derivatives, this one will be too, but on a bigger scale since there isn’t the same financial capability to support bailouts.

We recently had Wells Fargo opening a load of customer accounts fraudulently. What a lot don’t know is that the so called conservative bank also operates a book of up to $2tn of derivative based investments, called ‘customer accommodations’.. Wells Fargo also hold VIEs – variable interest entities – off book investments… that add up to$1.5tn. Net risk is $60bn… 40% of their capital reserves. But apparently there is a minute risk of failure… Bank accounting is basically a load of b*llocks. Take a peak at this chart. What we see here is that the US bank index is facing a downtrend,$JNK is following the same, however, the TED spread – the difference between the spread on 3 month US Treasuries and 3 month Eurodollar futures (interbank loans) is facing strong upticks week on week. This can be a good sentiment indicator for liquidity/credit risk. Now this is extremely worrying due to the velocity of the increase in the TED spread over the past year and the confirmation that the banking index and high yield debt market are both facing downtrends. With all that has been said above, I reckon there is certainly now strong signalling for a heavy market event.

## AUDJPY, Decoupling and Recessionary Behaviour

Just had a look at this AUDJPY weekly chart. Price has been heavy for a good 18 months now with Yen remaining bid vs AUD. I tend to find that intraday, AUDJPY acts as a risk on/off proxy. However, over the last 18 months we have seen a strong decoupling, whereby equities have been heavily bid and the pair has been very much offered. You can see that we are also heading lower on the correlation coefficient. Is this recessionary?
Clearly this is due to absolute and total confusion in the markets and severe yield seeking behaviour where there isn’t really any base for it. The reason could most definitely be down to central banks buying up a large part of the equity markets. Look at Japan for example. 65-70% of the Japanese ETF market is owned by the BoJ. The Fed has always maintained that they want to have realised financial stability; surely this adds to this argument? Furthermore, it could show why Yen is actually very strong. ‘Real’ money isn’t actually in the market and so investors are still bid Yen as a safe haven and treasuries. It would explain the heavy risk on and converse risk off behaviour occurring simultaneously.
Since the equity risk premium has practically been eroded away by low interest policy, this means that the performance of global equity markets has really been down to this, and not innovation, earnings (which have remained stagnant) etc. This can be seen here:
I mean, if this isn’t a bubble then what is?
September: a rate hike is currently priced in at 24%. For December it is priced in at 44%. Another rate hike would indicate deleveraging of US markets. That could be a trigger for downside movement.

## Is It Time To Start Accumulating Shorts on SP500?

Took a quick look at the COT data for today.

Commercial hedgers are holding an extreme net short position while non-comm speculators are holding an extreme net long position. Theory says that when these two are aligned in this fashion, you see a market turning point (SP500 is at all time highs). Chart below:

As of writing, the COT data was as follows:

The ratio of calls:puts is 0.55 (for every new call contract party there are almost 2 new put option contract holders).

This would lead me to believe that there is some severe downside preparation and that a change in commercial hedger positioning from here would lead to a bearish market. Technically, I feel that seeing a topping pattern an a strong rejection higher on an end of week candle could be the catalyst for strong downside movement. I believe that if we get a stronger approach to 2,200 this week and a rejection of that number, that could very well be what the market is looking for in order to really start puking any long holdings.

## Why I am still a USD bear… but for purely technical reasons

USDJPY Weekly Short by DavidBelleFX on TradingView.com

Should be pretty self explanatory – Trade Weighted Dollar Index is following the same pattern as when USDJPY dropped off a cliff back in December. Same bullish inefficiency needs to be filled, and there is a head and shoulders, again similar to USDJPY in December.

That is it, simple as.

## Corporate High Yield Debt & BKX (Update) + European Banks

Original post here.

I read this article earlier when I went to update my post on High Yield Debt and the US Banking Sector and found it extremely interesting. We are extremely close to the predicted levels of a bearish market in $JNK. The author Jeff York (@Pivotal_Pivots on Twitter) shows the yearly pivot point in$JNK at just below $37 and from looking at volume and basic chart patterns, I would not be surprised if we do enter a bearish market between$37 and $39. What does this mean? Well, the$BKX is very likely to follow. Why? Well it means a change in EM fundamentals but more importantly, it could mean bank illiquidity. I can foresee a situation in European banking where we see Monte dei Paschi fail (they have negative equity of -2.44%), which then sends shocks through Europe and over to Germany and with Deutsche Bank net bond derivative exposure at greater than their market cap, a bailout would be inevitable.

What really irks me is that with Basel III (the new legislation brought in to keep banks solvent), the goalposts have been moved. The regulatory environment is actually causing major systematic issues to the banking system and corporate financing sector as a whole (explained in the conclusion):

‘The devil is in the details and here is where we find the problems caused to the corporate sector:
• The definitions of the Regulatory Capital and the RWA (risk weighted assets) have changed:
• Calculated according to the Basel III definitions, the Core Tier One ratio would have been 5.7% instead of 11.1% according to the old definitions
• The 87 “large banks” who answered the impact study would have been short of €600bn of equity at the end of 2009. New stress tests are disclosed regularly and the shortcomings differ, but they are still there. This means that banks will either/or have to raise more capital or decrease its present lending, which will create a crowding out of capital in the financial markets either way
• There are new definitions of core equity leading to that it is reduced with up to 40% for large banks increased the crowding out effects even further. Major changes in the definition:
• Some financial instruments are not any longer eligible as Regulatory Capital
• Intangibles and deferred tax assets shall be deducted from the Regulatory Capital
• There are changes in how RWA is calculated in average increasing it with 23%. Major changes include:
• Sharp increase of RWA amounts from trading activities (stress tests on value at risk, securitisations…) leading to many banks decreasing the trading leading to fewer banks quoting prices. This has already led to reduced liquidity and increased costs and risks for corporates in managing its financial exposure from import and export etc
• This encourages particularly banks to perform their swaps through clearing houses
• This may weight on complex derivatives businesses
• Loan portfolios require being marked-to-market even though it is not required by accounting standards. This increases pro-cyclicality

• Basel III introduces a “Leverage Ratio” such that the amounts of assets and commitments should not represent more than 33 times the Regulatory Capital, regardless of the level of their risk-weighting and of the credit commitments being drawn down or not
• The Financial Stability Board recommended in July 2011 that the 29 identified systemically important financial institutions have a Core Tier 1 ratio increased between 1% and 2.5%. Of course these “SIFIs” are the main large corporates’ banking counterparts. This provision has been “enacted” by the G20 in November 2011.
• The European Commission has added:
• Minimum solvency ratio shall be 9% for the EU banks (instead of 7%)
• The EU banks shall comply with this level in June 2012 (instead of 2019)

### AREA 2: Assets and liabilities management

Banks will have to comply with two new ratios:
• Liquidity Coverage Ratio (LCR)
• Net Stable Funding Ratio (NSFR)
LCR: high-quality highly-liquid assets available must exceed the net cash outflows of the next 30 days:
• High-quality highly-liquid assets:
• Level 1 assets: Recognized at 100%: cash, sovereign debt of countries weighted at 0% (which include the PIIGS as they are part of the Eurozone), deposit at central bank. Level 1 assets shall account for at least 60% of the “high-quality highly liquid assets”
• Level 2A assets: Recognized at 85% and must not represent more than 40% of the assets: sovereign debt weighted at 20% (countries rated below AA-), corporate bonds and covered bonds rated at least AA-
• Level 2B assets (introduced Jan, 2013): non-financial corporate bonds rated between BBB- and A+, with a hair cut of 50%; certain unembumbered equities, with a hair cut of 50%; and certain residential mortgage-backed securities (RMBS), with a hair cut of 25%.
• The Level 2B assets will not be eligible for more than 15% of the “high-quality highly liquid assets” and a total level 2 assets will not be eligible for more than 40% of the “high-quality highly liquid assets”

• Changes from January 2013 provide:
• To some extent, lesser cost of carry for banks on “high-quality highly-liquid assets” but still limited because of the 50% hair cut and 15% limitation
• Improvement for the financing of investment graded companies (BBB and above) by banks through bonds, which will remain in competition with residential mortgage-backed securities (RBMS) with lesser hair cut and whose markets is restored with these new provisions
• Level 1 assets remain at least 60% of the “high-quality highly-liquid assets”, which means that concentration risks and cost of carry remain.

• Net cash outflows = cash outflows – cash inflows
• Cash outflows:
• 100% of any repayment in the next 30 days
• 3% (on Jan 6, 2013 decreased from 5%) of retail banking deposits
• 40% (on Jan 6, 2013 decreased from 75%) of deposits from non-financial corporates and public sector entities
• 100% of deposits from other financial institutions
• Between 0% and 15% of secured funding backed with “high quality highly-liquid” assets
• 10% of credit lines to corporates, sovereign and public sector
• 30% (on Jan 6, 2013 decreased from 100%) of liquidity lines (back-up, swing lines) to corporates, sovereign and public sector
• 100% of credit lines to other regulated financial institutions
• 0% of secured funding from central banks maturing within 30 days (prior to Jan 6, 2013 the figure was 25%)
• Cash inflows:
• 50% of loan repayments by non-financial counterparties (it is considered that banks, even in difficult times, will have no choice than to renew at least 50% of the maturing loans)
• 100% of loan repayments by financial institutions
• 100% of bonds’ repayments (whoever the issuers)
• Changes from Jan 2013 provide:
• The new computation of net cash outflows will free hundreds of billion euros of “high-quality highly-liquid assets” requirements
• Theoretically the changes from Jan 2013 are particularly good news for banks with large corporate activities
The LCR shall be fulfilled at any time, absent a period of stress. The purpose of this ratio is to offer a mattress of liquidity under such periods. The Basel Committee expressly mentions that, during a period of financial stress banks may use their “high-quality highly-liquid assets” as a mattress, thereby allowing it to fall under 100%. Initially the Committee planned the LCR should be in force from Jan 1, 2015 but the schedule has changed: The ration should be at least 60% on Jan 1, 2015, 70% on Jan 1, 2016, and exceed 100% from Jan 1, 2019. As of December 31 2010 more than 95% of the banks already had a LCR exceeding 65% and most banks with major activities in corporate banking was ranging between 60% to 80%.
NSFR: long-term financial resources must exceed long-term commitments (long term = and more than 1 year):
• Stable funding:
• equity and any liability maturing after one year
• 90% of retail deposits
• 50% of deposits from non-financial corporates and public entities
• Long-term uses:
• 5% of long-term sovereign debt or equivalent with 0%-Basel II Standard approach risk-weighting (see comment above for LCR) with a residual maturity above 1 year
• 20% of non-financial corporate or covered bonds at least rated AA- with a residual maturity above 1 year
• 50% of non-financial corporate or covered bonds at least rated between A- and A+ with a residual maturity above 1 year
• 50% of loans to non-financial corporates or public sector
• 65% of residential mortgage with a residual maturity above 1 year
• 5% of undrawn credit and liquidity facilities
Essentially this means several things for the banks & corporates:

Hedging is penalised decreasing the liquidity in the markets leading to increase in costs to hedge the operational financial risks of corporations. This is further emphasised by the penalisation of the interbank markets through requirement of more capital, and additional constraints on liquidity on interbank transactions.
Corporate credit by banks is penalised:
• More capital required in general
• Back-up facilities for commercial paper programs require that banks will have to have 100% of liquid assets in front of 100% of undrawn facility. The cost of carry will obviously be invoiced to the client and the ability of the bank to borrow long term will determine the availability of back-up facilities
• Restrictions in maturity mismatch (including for repayments) are introduced. This may mean that the risk of borrowing short term to finance long term investments will be transferred to the corporate sector.
• Trade finance (introduction of the leverage ratio)
• Consumer finance (leverage ratio)
• Project finance (NSFR)
• Public sector finance, except governments (leverage ratio + NSFR)
Overall, the main revolution for banks is in the liquidity ratios (LCR and NSFR), whose definitions are very severe for the corporate sector. For example, the average French banks’ LCR would have been around 58% at the end of 2009 if calculated to the Basel III definitions. Also consider:
• Access to central bank liquidity is not considered by Basel III ratios
• French banks used to push life insurance products vs deposits – life insurance, even invested into certificates of deposits, gives no credit at all to liquidity ratios
Overall, Basel III aims to sharply deleverage the economy threatening economic growth at the same time as the debt crisis puts a pressure on governments to spend less. There is also some level of naivety in the provisions of the definition of “high-quality highly liquid” assets, which banks shall hold abundantly in their balance sheets to face their short term liquidity commitments. In fact the banks are pushed to hold huge amounts of sovereign debt…
The need to deleverage the economy is obvious however the way Basel III is designed has led to that the corporate sector to a large extent must rely solely on funding and hedging from outside of the banking sector. The basic role of the banks to redistribute financial risk and fund trade has in fact seized up.’ http://treasurypeer.com/dummies-2/basel-3-for-dummies/

Basel III will eventually lead to a liquidity crisis and with there being several banks with a huge amount of bond derivative exposure it will lead to issues for BKX. However, the fact that many corporates have had to now go and find funding external to banks has created a liquidity problem in the high yield market too. If you don’t have many buyers and a lot of sellers, I think we will know what will happen to price pretty quickly if we do see further issues in the high yield market arise.

The GBP Situation…
So sterling has taken a battering after the referendum. We had a fall of 14% to the current yearly low at under $1.28. See chart below. However, I feel that we have made a temporary bottom. Note the inverted head and shoulders with the low into low volume. I feel that we have a lot of potential to get back up to equilibrium at$1.42.

We have weak shorts after Brexit. I feel that these need to be taken out if we were to get a further move down, as there is no volume down at these levels.
On the monthly chart above, we do have a big head and shoulders pattern, which can leave the downside heavily exposed if it plays out. Fundamentally, however, the UK has the highest 5yr inflation swap price (compared to the US, Eurozone, Ems). This, surprisingly, could indicate hawkishness and the possibility that the base rate could actually be increased. This does go against a lot of market opinion, especially in the current uncertainty and potential for recession… but the market pricing does not lie.

## A modified strategy for trading big moves, from my pal Adam Wilson

‘The time frame I enter my trades on with an explanation as to how. The candle highlighted in yellow is the last bearish supply and demand zone prior to the big move down. Once the low of the move can be identified (highlighted in red here) then the fib can be drawn. From this price action is monitored at the 0.5 and 0.618 fib levels. As we can see here the 0.618 was respected very nicely and so shorts where entered. Stop and take profit can be seen clearly on this analysis. Nearly a 2R trade and this works very well on all time frames.

For me this strategy is intuitive as I feel that using the demand/supply zone where the market structure breaks as a fib plot is more effective as it shows a new zone for price progression, rather than using the top/bottom exclusively of the big move.’ @TradingDailyFX, Twitter & Instagram.

## The case for bullish WTI…

The following charts should be relatively self explanatory:

1. WTI weekly chart + volume profile. I feel we are capped at $36 to the downside for now purely based off technicals & volume. We have the potential to hit the yearly lows. 2. Strong USD = weak WTI. However, looking at the following dollar index chart, we have a potentially huge collapse in the USD. Note the next chart; 3. You can view the correlation between dollar and oil here: 4. The USDJPY had a big head and shoulders in Q4 2015. At the same time, there was a huge bullish inefficiency leading up to the move. Take another look at figure 2. We have pretty much the same thing occurring with the dollar index. 5. Take a look at the dollar index on a monthly timeframe… you can clearly see the bullish inefficiency (highlighted): I have previously mentioned my USD bearishness here back in May I still hold very much the same view. Posted in Uncategorized | Leave a comment ## Trading The NFP The NFP is one of the most volatile events. You can see ranges of 200-400 pips intraday. This means that if you get it right, you can have a great payday. Conversely, if you get it wrong you can blow your account if your stop isn’t respected. I never trade news events because it is a pure gamble. It can simply destroy any edge you have and at the end of the day, all trading is about is preserving your edge. This strategy has a pretty decent success rate and provides an approximate 3:1 risk to reward. I have written this article in association with Dirty Economics. Give them a follow on Twitter Posted in Uncategorized | Leave a comment ## My thoughts post Brexit… We have seen a pretty revolutionary moment in our history. This is the first time that a country has voted to leave the European Union… and I am quite pleased. Let me make myself clear. Whether we left the EU or remained, the key issue is that we need to make the most of the situation that arose. If we had remained, we would have had to be proactive in assuring that we were in a position to enact reform. Now that we have left, we must be proactive in achieving the best terms that we can. In my opinion, we would have accepted the status quo had we remained and we would have been a part of a ‘sick’ organisation had we remained, not just because of EU bureaucracy, but also because of the nature of the relationship between the EU and the Eurozone. Look, you cannot be a part of an organisation whose vested interests are in the currency union and NOT with the single market where it supposedly aims to uphold welfare laws, human rights laws and fair trade agreements. It simply cannot work. Take a look at the peripheral countries. Let’s start with Italy. • Debt:GDP = 133%. • 11.7% Unemployment • -0.3% Inflation (MoM) • 36% Youth Unemployment Spain: • Debt:GDP 99% • 26% Unemployment • -1% Inflation (MoM) • 45% Youth Unemployment Greece: • Debt:GDP 177% • 25% Unemployment • -0.9% Inflation • 50% Youth Unemployment To have a comparison, let’s fix for Germany and the Eurozone as whole: Germany: • Debt:GDP 77% • 4.2% Unemployment • 0.1% Inflation • 7% Youth Unemployment Eurozone: • Debt:GDP 90% • 10.1% Unemployment • -0.1% Inflation • 21.1% Youth Unemployment. Look at the data. The point I am trying to make here is how can you have so many varying economies within the Eurozone, firstly with the same monetary policy being attributed by the ECB, but secondly, invoking the same laws from Brussels (which also have a heavy impact on the economy; trade deals, free movement of labour etc)? It cannot work, and it has been proven to be ‘sick’. What I find ironic is that Germany is the best performing country. They also have a massive trade surplus. I wonder why Merkel wants to keep the UK in the Eurozone, as well as all other states (800,000 cars are exported to the UK per year…). Contrast this with the Eurozone as a whole and you can see that Germany are way above the average, while the peripheral countries are well below it. As a side note, immigration is not an issue for me. Immigrants since 2000-2011 have contributed a net surplus of £20bn to UK finances. Indigenous British people have a net deficit of £150bn to the welfare system. What has really been made apparent as well, is the political fragility we have faced since 2008. We’ve had David Cameron resign, a huge split in the Tory Party with no real strong candidate for leadership being made apparent, 14 Labour Cabinet ministers resignations after Hilary Benn’s sacking and a call for Corbyn to step down, something which I feel he has to do firstly because he really didn’t argue his side during the campaign for remain and furthermore, was remain really his true feelings on the Brexit issue? I don’t think so, and this is why a vote of no confidence has been made. In terms of this, I feel that Brexit would allow for a new swathe of sovereign thinking to enter the House of Commons. We wouldn’t have Eurocentric opinion on trade and laws. What we would have is the independence to strike deals with China, India, South America, the US and Canada… which won’t take 7 years to complete… Posted in Uncategorized | 1 Comment ## Bearish S&P500 Note the above chart. Looking at the red lines in particular. They have recently turned net short during mid – late May. For me this indicates a bearish market, We have seen a sharp move up from 2040 to the current price, but funds have shorted into this price move, as identified by the blue line on the lowest chart. I’d have a stop above 2110 as an invalidation point with an initial target of 1980, whilst managing the trade if we were to look lower. Posted in Uncategorized | Leave a comment ## Intergenerational Transmission. You what? It’s a pretty easy concept once you think about the two words. Intergenerational – between generations – and transmission – movement. Add another word in, such as wealth, and you get the movement of wealth between generations. In the context of today’s world, we have increasing inequality (but decreasing poverty). I’m sourcing this paper in this post as it is up to date (2015) and contains some very interesting points. First, let’s make some assumptions and clear some things up. 1. Wealth and income are different. 2. Wealth is less equally distributed intergenerationally than education and income. 3. Wealth IS however, more easily distributed intergenerationally. Right the boring stuff done, why do richer people stay rich? Is it because they have some innate biological superpower that they give to their little Sebastians and Indias that allow them to be fantastic at finding money making opportunities & being intelligent. Well the study says nope. Innate biological features, such as father/mother’s intelligence, are a very small factor in the positive correlation of intergenerational transmission of wealth. Therefore, we have the nurture argument remaining (environmental factors). These include parents’ education, wage, parents’ investment knowledge & their propensity to save. However, the study says that none of these factors actually suggest there is a mechanism to which wealthier parents can provide increased wealth to their children (which I think is bollocks and the study just hasn’t gone deep enough since it’s pretty evident through experience that wealthier parents can provide better contacts, investment knowledge & occupational advice, since it’s self fulfilling). What is interesting about this paper is that they fix for the biological (innate) factors by looking at the Swedish adoption system. They find that any child moved from biological parents, irrespective of innate ability, to a wealthier family automatically have much higher chances of being wealthier. I won’t bore you with the statistical robustness checks, but trust me, the data and regressions are confident on this (no surprises there). Returning to the introduction therefore, no wonder we have inequality, with a very dense amount of wealth at the top and less and less as the triangle bottoms. That base is only going to get wider as well, as the middle class is squeezed. Low wage growth, the automation of jobs and increasing barriers of entry to the market for innovative ideas will increasingly make wealthier people more wealthy and reduce the requirement of human capital for the middle classes (which therefore in turn leads to less wealth and a weaker transmission of wealth to future generations). I’m pretty depressing on all of this aren’t I? Next article will be something fun… pissing off Corbynites. Posted in economics | 1 Comment ## EURAUD Analysis (18/05/2016) EURAUD H4 chart and D1, respectively. RBA have been ‘reluctant to cut rates’ giving AUD bullishness. EUR remains slightly stagnant, although my overall bias for EURUSD is still bullish. Charts show movement from low to high volume areas, with H4 point of control restraining movement to the upside. Posted in trading | Leave a comment ## EURGBP Bearish Analysis (17/05/2016) This is EURGBP on the daily. I feel that either result from Brexit will in fact cause GBP strength. The chart is pretty self explanatory – movements from low to high volume and back, following the ebb and flow of the market. The chart looks very similar to the following USDJPY chart, in terms of a strong bullish run up with many inefficiencies to fill. We’ve also made a pretty strong head and shoulders pattern, which can have a lot of significance on the daily. In addition, we have the opposite occurring on GBPUSD: Considering everyone is looking to the downside on sterling, it’s only right that I look to the upside… One caveat: Ouch. Posted in trading | Leave a comment ## How does our brain allow us to make decisions? There is an extremely famous psychology paper written by Daniel Kahneman and Amos Tversky named ‘Judgement Under Uncertainty: Heuristics and Biases’ (Kahneman won a Nobel Peace Prize in 1992 for his work in the field, specifically on prospect theory) which explores the decision making process As trading requires decisions to be made constantly – stop loss adding, lot size, whether a trade is right to take etc – I think a quick write up would be highly applicable. Essentially, there are several ‘heuristics’ or ‘biases’ which I will attempt to put into a trading context. 1) Reliability. Making sense of data on the spot is a difficult task to undertake. When you look at a chart, you are looking at a representation of the market in candlesticks and not the actual market. Adding more and more indicators causes the reliability of this data to further decrease, possibly leading to a distorted view (however, if you are profitable with indicators then that is all that matters). Decreasing the reliability is pretty self explanatory. Anyone familiar with this equation will know why, mathematically: y¯±tα/2Sn 2) Representation. We normally feel that if a pattern is forming that it will play out in the way we expect based on knowledge of previous events. Let’s say we have a man in a suit. Would you say he is more likely to be a gardener or a lawyer? You’d probably go lawyer based on an understanding that most lawyers wear suits and most gardeners don’t. When back testing, you may look for data to represent the notion you have about a certain set up and ignore the set ups that have failed, therefore leading to a skewed view of that strategy. Indicators represent a potential set up and not what is actually occurring – indicators are used to fit a concept in your head. The fact that something is more representative does not necessarily make it more likely to occur. 3) Anchoring. People place too big a value on the first number or value given to them. They then compare from that. An easy, easy sales tactic to get someone to buy something is to offer the most expensive first, then offer the cheapest, and then the product you want to push is to be between these two values. Little tip there for retail FX account managers. In trading, you could consider it like this. Say you see Cable trading at 1.50 in January, but now it is at 1.40. A lot of people will start to say this move is too overextended; ‘it has to rally’. Instantly your bias is skewed based on the number you see at the start of the year (I don’t know if this is a good example, but you get the picture). 4) The Gambler’s Fallacy. When an event occurs more or less is a short time period, you may believe that it will happen less or more in the future. As said before, the market is impartial. Past events do not change the probability of future events occurring. Think of it this way. You’re at a Roulette wheel only playing black and red (and for example’s sake it’s a European wheel with no 0). You hit 20 blacks in a row. You might assume that the ball has to land on a red the next time. But the probability of it landing on black again is the same as it landing on red (only a 1 in 2 chance of either event occurring). 5) Availability bias. I hate trading gold now. The reason being is that back in December I just had a torrid time with it. This is all I remember when I think of gold now. However, I don’t remember the times I had profited. Again, here is a bias based on frequency/magnitude of past events, that are not indicative of future behaviour (apparently; I don’t buy that quote though). Biases allow us to make decisions quickly. However in an environment where subjectivity has to be eliminated as much as possible, they can be detrimental. Automated traders do not have the problem of biases as the emotion is taken out of the trade, which is why possibly developing an algorithm can be hugely beneficial if you have a stringent set of rules that you can programme into a computer. This can be done via coding which I have no clue about, or by using pictorial programming applications such as Qubitia. Posted in economics | 4 Comments ## Bearish On AUDNZD Looking at AUDNZD, we have broken a year long trend line with a heavy bearish movement from 1.13000. I would be expecting a retest of 1.0760/70 with a view to move off of the point of control and test the lower volume down at 1.04000. I shall only be entering this if we get a sustained indication that the bears are in control at around 1.08000. I don’t have much to say on this fundamentally. AUD is possibly facing downside pressure due to commodities having some further weakness, but for me, I’m focusing on the technicals with this move. Posted in analysis, trading | Leave a comment I’ve decided to make this page because I get asked a lot about which are the best resources to use to learn how to trade and which steps to take. I’ve also made a library of general reading. #### Stage 1 Let’s pretend you have no idea what trading or the market is. This is where stage 1 comes in. Let’s begin… Babypips.com – this should provide you with the very, very basics of what the market is, why it is there, amongst other elements such as technical analysis and fundamental analysis. Once you have finished this you should be able to at least place a demoballer trade. Video – Trader Dante’s ‘What Everyone Should Know About Trading’ – Tom Dante’s Twitter: @Trader_Dante #### Stage 2 So you have made it through all of the BabyPips stages and listened to the berating from Trader Dante. But really, I’ll be frank with you, you still know nothing. In stage 2 we’ll expand a bit further… http://forums.babypips.com/free-forex-trading-systems/51590-order-flow-trading.html – This will explain liquidity and why the market moves to where it does, and the market mechanics. I believe this is one of the most overlooked topics amongst retail traders and I was lucky enough to be guided to this topic pretty early on. It really does help. Understand what you are looking for and then for a month, just sit and go through your charts to understand the market ebb and flow for one hour per day. Stage 3 I’d suggest by now that you have at least opened a demo account. If you haven’t done this yet, then clickhere and get it sorted. On the other hand, if you want to jump in at the deep end, open a live account here Now that’s out of the way, the next two books are about psychology (the most important part about trading) and the 3rd has a few more advanced topics in… Trading in the Zone – Mark Douglas. This book is purely about psychology and how to find a psychological edge. Hugely important. RIP Mr Douglas. The New Market Wizards – Jack Schwager. Interviews with some of the best traders ever. Slightly outdated, as it was written in 1992, but all of what is spoken about it still relevant today. Master the Markets – Tom Williams. This was recommended to me by another trader on Twitter and is a great book, especially the section on spread volume analysis. As a newbie it will go over your head, but get out of your comfort zone or you won’t progress. Read it til you get it. The Wyckoff Workbook – Richard Wyckoff. Added this because it is very rational & relies on 0 bullshit. Stage 4 You should basically be a multi-millionaire at this stage. No, I’m joking. You probably won’t be ever if you play the probabilities and neither will I. But that isn’t the point. Someone will be so give yourself the best chance at being one. Now here is the Holy Grail… Harmonic Trading Volume 2 – Some idiot who knows nothing. Seriously, stay away from harmonics. They are crap. Stage 4 should be just chart time. You can read all the books you want, but without doing it and experiencing then you can’t physically understand the market movements. I could have listed 100 books you need to read at each stage, but that would have hindered getting the the doing stage. One thing people underestimate is their subconscious. The more you watch, the more you, even implicitly, pick up certain patterns that work, and you then end up consciously recognising these patterns which enables you to then refine and perfect. Until of course market conditions change and you need to change something, but whatever. Posted in Uncategorized | Leave a comment ## Erm… Don’t want to sound alarmist. But look at this. I was just looking at the Dow and the Transport sector index. This is a part of Dow theory which states that the transport index is a good indicator of the economic state of the country and therefore should correlate with overall movements of the index (if people/businesses aren’t wanting goods, then how are transport companies going to be increasing in value if they have nothing to transport?). But look at this chart. Transport Index ($IYT) Red. Dow Jones Industrial Average ($DJIA) Blue. Back in 2007/2008, we had divergence between the index and the sector. How can an index keep increasing in value when the underlying indicator is showing negative sentiment. What is alarming here is that we have had the same thing occur, albeit more sharply and with a deeper initial drop. Then we had the actual crash in 2008. With what I have been saying in previous posts about my global bearishness, is this just me trying to confirm my bias or is there a real issue here? Posted in economics | Leave a comment ## I’m a big USD bear. Here is why… Take a look at the following charts. 1. This is the USD trade weighted index on a weekly chart. 2. This is the same chart on a monthly time frame. Both indices are indicating bearishness. Since The Euro is gaining strength (and since it is weighted heaviest in both) I’d argue that is applying heavy downside pressure and will continue to do so. We have seen poor trade data from China just three days ago. I’ll take Investopedia’s explanation of why this matters hugely for the USD as they word it much better than I could. China is primarily a manufacturing hub and an export-driven economy. Chinese exporters receive US dollars for their goods sold to the US, but they need Renminbi (RMB or Yuan) to pay their workers and store money locally. They sell the dollars they receive through exports to get RMB, which increases the USD supply and raises demand for RMB. China’s central bank (People’s Bank of China — PBOC) carried out active interventions to prevent this imbalance between the US dollar and Yuan in local markets. It buys the available excess US dollars from the exporters and gives them the required Yuan. PBOC can print Yuan as needed. Effectively, this intervention by the PBOC creates a scarcity of US dollars which keeps the USD rates higher. China hence accumulates USD as forex reserves. With a huge amount of dollars in reserve, the Chinese buy up US treasury bills (US debt) as it is a relatively safe medium to hold this value in. Now, I hold a bearish view on China. They have an overheating housing market, alongside a pretty big credit bubble. Since there is a huge amount of US – China interdependence, I think you can tell what would happen if China failed… In addition, today we had the US 10 Year bond auction where we saw the lowest yield on US 10s in a month. Since we had a huge amount of foreign central banks buying up these US 10s, I would say that we are pricing out a rate hike. This is obviously USD negative and gives further weight to USD bearishness. We have other elements, but it’s late and you’ve probably stopped reading now. Posted in economics | Leave a comment ## Junk bonds and the US bank Index Something I noticed today is the relationship between the$BKX (US bank index) and $JNK (Barclays High Yield Corporate Debt index, or ‘junk’) and also the technical structure of$BKX.

See chart:

$BKX in red,$JNK in blue.

Obviously the bank index and an institution grade product will have certain price correlations (since banks and funds are likely to hold junk bonds more than retail investors and so during the credit crisis, defaults were high and so they followed the bank index), but what is most notable is that that the correlation has become much more strongly positive through 2015 – 2016 (note the tightening of the price lines compared to 2009 – 2014). I’m not a corporate debt expert. But with certain macroeconomic issues still very much working in the background, many lower rated firms may find themselves being unable to commit to their debt refinancing obligations over the next few years, especially firms in the energy and mining sectors. This will lead to major liquidity issues in the banking sector, which then leads me onto a technical aspect of the chart.

I’ve outlined a perfect example of a bearish flag. A consistent upward sloping channel coming off of a bearish move. With European banks possibly facing a crisis (which has been a bit quiet recently) and new Basel III liquidity regulations coming in 2019 (might be too late), what’s not to say US banks aren’t going to face another crisis? We’re already seeing issues to do with sovereign debt coming back to annoy the ECB with Greece facing problems again, while Brazil & other Latin American countries facing big issues and China facing huge internal debt issues & an overheating housing market (another story I won’t go into now). In my opinion, I don’t think we are far away from another crisis, although I’d hate to be a naysayer.

## AUDJPY & DAX Daily Analysis (08/052016)

I have a short term bullish, long term bearish view on AUDJPY and therefore I am bearish equities also. AUDJPY is an extremely good indicator for risk sentiment and intraday movements are well correlated, therefore, with the indices (Nikkei has an extremely high positive R^2 figure with AUDJPY). Looking at AUDJPY from a volume standpoint, you can see that we are in an area of low volume. Price has tested these levels before and has rejected this area. Ideally price wants to get up to Y84.000 to facilitate trade for a move lower.

Fundamentally speaking, iron ore prices are still in a downtrend longer term while Yen is still bid. Ideally Kuroda wants Yen to weaken in order to reduce the deflationary effects on the Japanese economy that they are currently experiencing (alongside other issues such as an aging population, which is also a deflationary pressure). I’ll be looking at purely downside plays on both assets.

## So… Binary Options…

For those that know me definitely know my distaste for binary options. I dislike everything associated with them, from the product itself to the people in the industry. If I could, I would ask David Cameron to do one great thing and ban binary options, but, I can’t so, whatever.

If you don’t know what a binary option is, then let me explain. It is a product whereby you can select a timeframe for price to reach above or below. If you think the price will go above a certain level before expiry (expiry can range from 10 seconds to several days, weeks, months), you would buy a ‘call’ option and if you think price will go below, you would buy a ‘put’ option. If you win, you normally win approximately 70-80% of your stake. If you lose, you lose your stake. Simple as; appeals to the simple minded gambler (compare a binary options site to a betting site and you’ll see what I mean).

But what is actually wrong with them? Here’s a list.

You are at the absolute mercy of the broker. You can say that a lot of FX brokers make up their prices if they run a B book/are a market maker, but they are (on the most part if you aren’t with a broker running MT4 Virtual Dealer Plug In) simply playing out the stats that 70-80% of people will lose money. Why not take the other side? But with binary brokers, they aren’t even following the underlying market a lot of the time & binary options aren’t an exchange traded product/traded on the open market and therefore aren’t at the mercy of supply and demand. Ever thought why investment banks don’t trade in them?

Negative expectancy. Most binary options brokers payout 80% of every £1 invested. So let’s take an expectancy equation: (Reward to Risk ratio x win ratio) – Loss ratio = Expectancy Ratio. And now let’s plug in some numbers. Let’s say you win 50% of your trades with an 80% payout each time (and this is assuming totally symmetric information between client, market prices and broker): (0.8 x 0.5) – 0.5 = -0.1. This means that if you win 1 in 2 trades, you will lose £0.10 for every £1 you put in. You can change these figures around to assume, for example, that the broker has a 10% edge, in which case you will lose £0.28 for every £1 you invest… numbers don’t lie.

Bonuses. Once the broker has your money they will slap a bonus on top and say you need to turnover 20-30 times your deposit to be able to withdraw. At this point, consider your money gone. There isn’t much left to say about this because the broker is probably Belize regulated and your money is in the Balkans somewhere. Don’t even try and go to the FCA or the Ombudsman because they won’t do anything.

They are owned by the same firm. Spot Option almost has a monopoly over the industry. Most of the platforms are owned by them, and each firm pays Spot Option white label revenue whereby all they have to then do is market and sell to punters. If you have ever been on the end of a binary options sales call, it is absolutely soul destroying listening to the bloke on the end who thinks he’s smashing the financial world, when really he’s in a glorified boiler room, and there are so many of these firms that have popped up. There is a reason why you receive cold calls and it is merely to enable a transaction of money from your pocket to theirs.

Their target market. Think of who falls for the sales tactics of binary options ‘sales people’. They see the ease of the platform, combined with the promises from the sales people and affiliates that loads of people are making money etc (which is against regulation to say) and a lack of financial knowledge and they deposit. And then they revenge trade when they’re £1,000 down because they know this time they can make it back. On top of this you have the sales person’s promises and before you know it. Food bank. Plastic bags for shoes and a card board box for a bed (hopefully someone’s situation never gets that bad).

Just stay away from them. If you want to waste £1,000 but have a better RR then just pick a direction during NFP and go £10 a point (I do not advise this but in comparison it is better than trading binaries).

Now if you want to trade Vanilla options, which are exchange traded and open to supply and demand, I would suggest www.ore.com.

## Bloomer Loves Boomers

I’m annoyed. I was browsing Reddit this morning when I woke up and I came across this video by Texas TV host, Alexis Bloomer where she states that millenials (those born in the late 80s – mid-late 90s) are essentially ungrateful, stupid and lack manners. We are a disgrace to the Earth, in essence, according to Bloomer.

Now, I take serious offence to this (I don’t, but pretend I do so this sounds like a rant and not a fantastic piece of economic writing) for a multitude of reasons, not just because some of what she said is baseless (see where she says we don’t even say ‘ma’am’ any more as evidence for our ignorance and laziness) but because she totally ignores the context of the world in which the baby boomers lived (those born between 1945 and 1965) and, and the world that we live in now.

Let’s stay with a common theme for now. In my last economic piece, I spoke of the debt burden that students of today are under, where 70% of students will graduate with an average of \$35,000 in student loan debt, double that of two decades ago. Compare this to the baby boomer generation – the cost of education in the 60s – 80s was extremely low (in fact it was free to go to university, but we must bear in mind opportunity costs of education vs entering the labour market). There was a massive gap in the job market that required filling post war which allowed for ease of labour market access. Nowadays, if you want that grad job in finance, you need to know how to price an interest rate derivative, know Bloomberg inside out and be able to recommend constrictive monetary policy to a small nation, all before you finish your A2 economics exam. There was a lot more scope for economic and social mobility during the baby boomer era compared to now is what I am getting at.

So while the boomers have enjoyed this prosperity 50 years ago, let’s examine what their legacy has left. We have great gifts such as global warming & climate change, 8 year cycles of boom and bust, with the biggest global economic recession of all time only 8 year’s ago (uh oh) 100% caused by the heads of financial institutions and their creation of complex debt products for profit.

Baby boomers have created the system that we function in today, and when you create a system, you generally do so with your best interests at heart. For example, who is now reaping the benefits of their final salary pension payouts? The baby boomers. Now who is having to pay back the costs of this? The millennials.

Who benefited from dirt cheap housing? The baby boomers. Who is now having to pay the baby boomer rentiers many times over just to get onto the housing ladder? The millennials.

Who owns £500bn of the UK’s assets? The baby boomers. Where did most of the effects of quantitative easing go post financial crisis? Into propping up the FTSE and house prices… baby boomer assets.

So Ms Bloomer, millennials aren’t lazy, we have more economic obstacles to overcome than any of our parents. I mean, you only need to look at far as a certain Republican candidate to see the epitome of a caricature of a baby boomer… except he is running for president. Christ.

Posted in economics | 1 Comment

*Japanese Candlestick Charting Techniques – Steve Nison (Price action, charting)
*Trading for a Living – Alexander Elder (Psychology)
*Trading and Exchanges – Larry Harris (Comprehensive book on trading and market microstructure)
*Trading Price Action Reversals – Al Brooks (Price action, charting)
*Growing The Money Tree – John Svazic (New to Forex/investing, technical indicators and algorithmic trading)
* Inside the House of Money – Steven Drobny
* Market Wizards – Jack Schwager
* Michael Lewis Books (The Big Short, Flash Boys, Boomerang, Liars Poker)
* Trading in the Zone – Mark Douglas
* Reminiscences – Jesse Livermore
* Fooled by Randomness – Nassim Taleb
* The Speculative Strategist – Will Slayter
* Reminiscences of a Stock Operator – Jon Markman
* The Wyckoff Workbook by Stewart Taylor (Theory by Richard Wyckoff) (Very important and no bullshit)

Most of these you can find here (alongside hundreds of others).