Wednesday, November 25, 2015

Terrorism, the media and the flight for the right (GOP/Conservative etc) A very short post

I hardly ever watch network TV, I don't think I've watched a political gabfest in more than 3, maybe even 5 years.  Its just that pundits the world over have an opinion, it will not change, and its why the are on TV, they're a sure thing for the bookers -- the "hooker" of the TV world -- you get what you pay for!

Anyway, at a loss, in an Ottawa hotel I saw this debate on the confluence of recent Canadian elections, the Liberals' (left of centre) victory and the impact of the Paris terrorist attacks.  Present were a conservative pundit, a token "good looking" muslim women and  a radio host -- my guess is that no smart liberal wanted to be on that show.  BTW I do realize that's probably the beginning of a joke:  So a conservative, a Muslim and a radio guy walk into a bar...  

Back to my story: the conservative pundit (hereafter know by her initial TK) who I vaguely know is asked a leading question:  If the Canadian elections were held the day after the Paris terrorist attacks would the conservative have won?  Now TK is very good at her job, although I think she could have been blindsided if a Liberal had been present.

Her glib answer was that "she knew that the liberals were praying for no terrorist attacks".  Now this statement is made for a very good reason -- so that TK will be asked to come again.  She's the Canadian (therefore not crazy) version of Anne Coulter -- a right wing firebrand always present in the media.  Had a reasonably smart Liberal been there he could have answered the following:

"TK the implication of that statement is that Steven Harper and his army of minions (Sound evil but in a harmless kind of way) were praying for there to be some form of terrorist act!"  

Since no Liberal was there (and this is an imaginary conversation in my head) TK's assertion was left hanging unchallenged by either the Muslim (who's apparently very very afraid of walking in Toronto) and a quiet radio guy.   For starts it is self evident that neither the Liberals or the Conservative were praying for anything but victory.  Their real prayers were for local and national bread and butter issues, and not the risk of a terrible terrorist attack in Paris.

But this kind of vacuous punditry is why I don't watch TV -- ever. BTW is it just me or are there more commercials then before, and are they dumber too?  Gosh I'm turning into a surly old man...

Sunday, November 22, 2015

Goldman says oil going to $20/bbl -- so it probably will not do that!

This morning GS in a E&P report said that the current glut in oil could easily drive prices to $20.00/bbl. Nine times out of ten whatever GS says doesn't happen!  Take gold, it's rather amazing, although GS has a 2012 US$ 850 target (when it was trading at $1,300), today it's trading at US$1077.00/oz -- so not a very good prediction (it did make the cover of the WSJ).

So why is GS so often wrong?  

The short answer is that GS, like all brokers, is looking at generating "buzz" for their ideas.  The real issues are the following:
  1. There is a glut of oil with virtually all storage options full
  2. Lots of investors played the yield curve assuming that oil prices would rise -- it didn't
  3. New production in the US "non-conventional" is dropping fast -- drilling rig count is down 60%
  4. Other stuff that's worrying:  overall demand for trade is off, freight rates (ships) is down 70% in a month (that cannot be good)
So the signs are not good for oil, but they are not the "end of the world either".  GS's point is valid that weak oil prices seem to be here to stay a bit longer as the world economy slows further.  Not sure that the recent attacks have much to do with overall economic growth, but its certainly not going to help.  

So for all the hedge funds and private equity funds that went long oil as a sure thing, the big unwind is about the begin.   Any good trader (ok ok) will eventually kill a losing trade.  So that will add additional pressure on oil prices, its a great opportunity for the US government to build its strategic reserves (assuming they've not done so already).

Anyway, for Canadians, oil prices are as low as they've been in nearly a decade.  So there's that

Monday, November 16, 2015


Friday night the world has changed, again. The multiple attacks in Paris are a stark reminders of what happened in 2001, where several aircraft were directed at various American targets (World Trade Centre, Pentagone and White House).  These attacks are somewhat similar, except they targette the France's youth.  The region of Paris where the attacks occurred are known as the primary "fun spot" of Paris.  

It was horrible!

In Liars Poker, Michael Lewis talked about how his boss would use real (horrible) world events to theorize on how they would impact the world. economy in general and markets in particular. Therefore one question I got asked this weekend was what will be the economic impact of the attacks on the world economy; we have a strange confluence -- whereas last week everyone was "anti-Putin" this week, no so much.  My first guess is that conflict with Russia is now off the table;  The enemy of my enemy is my friends (or something akin to that). We seem to be on the same side (or sides that are close enough), the attacks (Monday morning) by the French air force seem to indicate that the country was "ready for trouble" and more news over the past few days seem to indicate that the French authorities had some information that attacks were expected. Over the next few weeks it will probably emerged that some very specific intelligence was available marking the targets; however, they were maybe dozens of similar target rumors.  With hindsight, the French will discover that they had specific intelligence together with a  number of false positive.

So the questions has to be:  Will the events of Friday change economic outlook?  The short answer is almost certainly, it may be a contributing factors to an already tepid global growth.  Europeans have a new reason not to go out and have fun, because although it was the French that were attacked no one believes that this will be an isolated incident.  The mass of Syrian refugees (apparently several of the terrorists arrived as refugees) makes detecting any "hidden" terrorist almost impossible.  The attacks could be the infamous "the one drop that made the water spill over"!  But other factors cannot could also be determinant: This morning Japan announced that it had, again, slipped into recession.  China's PPI came in below 52% indicating that growth was probably less the 7.2%.  Oil price this morning were briefly below $40.00/bbl.  Rumors abound that some of the big players in the US unconventional gas markets are very very close to default (technical -- convenants) or real payment issues.  

On the other hand military spending is spending, and it may not be seen as a positive thing, but it remains that a nation at war -- as France basically declared on Sunday will see increased spending.  The reaction to Friday's shooting is certain to increase the security threat in Europe (and elsewhere) that should/could lead to high GDP.  

So the short answer is; all the primers for a global recession are in place, maybe this was the "event" that made things go bad.  There is no doubt that a frighten population will spend conservatively.  That cannot be go for global GDP growth.

Monday, November 9, 2015

Gold, Automation, Oil and deflation (Revised)

First off, Gold's been off its feed for some months now.  Its not clear what's going on, but in USD gold is off nearly $200 since spring -- where it had been trading around $1,200/$1,250 for nearly 3 years.  Normally, I would blame the strong dollar, but its been more or less unchanged for two years, so that's not it.  My instinct tells me that something else is a foot!  My best guess is inflation expectation are going down the tube.  Not only are primary ressources suffering (e.g. oil prices, steel etc) but the central bank's pumping action seem to achieve little.

This morning a very prominent hedge fund declared that "the floor on oil prices had been reached" within 20 minutes of this pronouncement oil price dropped nearly 8%... goes to show "nobody knows nothing".  But a massive failed auction of used heavy equipment in Australia, CEO of Maersk declaring that trade was far worse than the market assumed all point to further economic slow down. What's going on in the Oil business is a massive inventory build-up in non-conventional channels (e.g. ships).  VLCC parked off Singapore is "standard" its easy to store there, and there are half a dozen large markets within 3 days sail, but off the coast of Texas?  Everywhere there are those tankers full of oil; the trade was obvious, as the market assumed a recovery in oil price, the old adage of "buy cheap and sell dear" was too much to resist by all these hedge funds and private equity firms looking for an easy profit, not only a crowded trade but a trade that's going to wrong way!   This is driving the inflation expectations down (and there goes gold prices...)

Over the weekend two studies came out on the impact of automation; now we are not talking of auto-painters or windshield installer we are talking learning machines that can do complex tasks -- like driving a car!  The two studies one from BoA the other from McKinsey have different prospectives -- McKinsey says this will change the work environment while BoA says its the end of the world (or words to that effect).  

Two anecdotes:  When I returned to Montreal working in the trading room the F/X desk was large (although this was a small bank), it had about 7 traders actively working their clients; today there are only two traders left, the reality is that most treasurer's F/X interactions have been taken over by machines; the treasurer checks his future f/x requirements (hedging or otherwise) and the systems (from different banks) look at the projected cash flow and offer a hedging solution.  For the treasurer it allows to manage the position weekly, daily or hourly without having to justify his changes/requirements to anyone -- its a machine.  The banks lost a massive information channel to the clients, but improved margins, fewer errors and greater profits.  The trader pool shrank from 7 to 2 -- a net 5 job losses (forget about back and middle office reconciliation error rates with machine orders has dropped dramatically.  There jobs too have been eliminated.

A friend ran a business with many suppliers across the globe and a single buyer -- its the wine business.  Every day they would receive bills from the suppliers that required reconciliation, these bills were ALWAYS identical.  over a 7 year period the font changed but little else.  The business employed a team of 10 to reconcile these invoices (each product in each business and each currency) with discount information for volume.  I pointed out to this friend that for $10,000 a year the business could purchase an intelligent system that would automatically scan emails for invoices, download the invoices select the information and create worksheet and upload the data directly to accounting system -- checking twice for errors.  Total annual cost savings.... nearly $500,000.  Error rate fell to insignificant levels, reports were automatically sent to vendors -- in their own language.  Of course 9 people lost their jobs -- these were mind numbing and the staff turnover for this segment was nearly 200% per annum, error rates were nearly 5% -- which created friction with the suppliers.  However, these jobs were a net loss to the economy, even if they were boring, it was also a filter to find new long term employees -- that is now gone.   This friend saw an immediate increase in profitability, reduction in expensive errors and satisfied customers.  

The reality is that two two examples were for very different jobs; a trader earns $400,000 to a million a year, and these systems made their knowledge worthless -- it could all be coded into computers.  While the win broker's job were mind numbing they were still jobs that someone had.  The benefits to society of these trading systems was unequal, the bank saved errors and massive salaries, the client go a better system (really it was a massive improvement).  The win guy increased his profits (massive), reduced errors.  The economy lost anywhere between 17 and 30 jobs.  Potentially pure salary deflation both for high and low paying jobs

Tuesday, November 3, 2015

Self driving cars and the market

Earlier this summer I was having a conversation with my father, the topic was self driving cars.  I though that within a few years self driving cars would begin as a solution to gridlock and the complete absence of parking spaces in large cities.  My estimate that "in the next 10 years" experiments would start.  My dad was far more pessimistic, he thought that the Americans would never be able to get around the liability issues (then again 30,000 people die from guns and that doesn't appear to be a problem, but I digress).  

Imagine our surprise when Tesla unveiled its latest software update which allows limited automatic driving on motorway.  Furthermore two guys drove across the country with a Tesla; 99% of motorway driving was automatic driving.  It gets better, last week I learned that machine learning was involved!   That every time an American (because the software is so far only available in the US) takes his tesla on the road and activate the automatic driving, the entire Tesla network learns how to better drive -- talk about Science Fiction -- OK so maybe I don't have my jetpack, but my self driving car is here.

Now, what does all this mean for the automobile market?  First off, the "big three"  (aka the legacy manufacturers -- BMW, Ford, Merc, GM etc) were once again caught flat footed.  The self driving explains why the new Tesla (4x4) is built the way it is built.  With machine learning taxi (electric) could soon be driverless -- imagine a Uber with no driver.  The car picks you up, and brings you to your destination... Do you need to own a car, could you be part of a pool of cars?  Will "mini-uber" be created?  If you live in a large city the whole issue of parking your car may have gone away!  You live in Manhattan and your car is parked in New Jersey!  

I never anticipated that the US would be the first market to have automatic cars -- really for such a litigious country its a little surprising.  Still for the past two months they have been there.

As for the great market crash of 2015, lets be clear it has not happened, sur stocks are not going anywhere fast, but they are not sinking.  Stocks today opened within a margin of error of where the were at the very beginning of 2015!  Granted, its not the 7-10% yield that investors have come to expect, but with interest so low, equity market investors still got their dividend (around 1% on average).  Every morning I wake up to some more doom and gloom (I'm usually Mr Doom and Gloom) and while I agree that the world economy is not firing on all cylinders its really not crashing yet.  There are "black swan" signs out there, China is a real worry -- its economy seems to be in stall speed, and the government seems to be out of stimulus tools -- Russia is very aggressive although I think the entire world wishes them luck in Syria (rather them than us mentality) Honestly, none of the G7 countries has any idea how to deal with Syria!  

Still there's nothing on the horizon that would suggest that changes are afoot.