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Dog days of summer

dogdays It appears that markets have followed most of Europe on summer vacation displaying very little movement. The calm can be perfectly put into historical context in the long term volatility chart below: Vix Source

Given the wide spread challenges in the global economy one can’t help but wonder whether the calm is justified or if this phase is merely the “dog days of summer” in the financial cycle that we observe as regularly as we experience summer in the calendar year.

Beneath the surface, many severe problems are brewing. For example, a year ago, I explicitly warned about Japan”s economic policy, named “Abenomics”, referring to the current Japanese prime minister. It now appears that the Japanese policy of flooding the market with printed yen has caused inflation to increase to 3.7% while the 10 year Japanese government bond yields 0.53%. Why would anyone in their right mind hang on to yen or Japanese government bonds? Abenomics is clearly unsustainable and all I can do is shake my head and wonder when this problem rises to the global financial surface.

Japan CPI



Finally, I would like to show the chart below which shows a falling global GDP while global equity prices are rising. Considering that companies’ earnings are derived from GDP and equities’ reflect future profits, it is quite illogical to assume this dichotomy to continue indefinitely. Either GDP needs to move up or equities need to come down.

Death cross


In conclusion I would like to once again remind readers that while complacency has entered the financial markets, do not expect this era of slow motion to last. Considering the action behind the curtain it is truly stunning to see the VIX at record lows. Caveat emptor!





Great Presentation by Mish Shedlock

Very often it pays to listen rather than speak. The presentation below is one where I would urge anyone with an interest in the financial markets and economics to spend some time soaking in the best analysis I have seen so far this year.




Smoke & Mirrors ?

abstract smoke

When global central banks reduced short term interest rates to rounding errors in 2008, the mission was clear: prevent financial disaster and arrest a world wide liquidity crunch. Mission accomplished. Yet today, six years later, we still find zero interest rates and money printing on an epic scale. In the article “Central Banks shift into shares as low rates hit revenues”, The Financial Times reported this week that global central banks have accumulated $29.1 trillion of assets including equities pushing up prices in anything that can be exchanged for the promise of purchasing power of cash. For those of you that are having trouble with such large numbers, total annual global GDP is about $77 trillion. In essence, central banks have created nearly 40% of global real GDP through “unreal” activities.


Source Google

Rather than discuss the sense or nonsense of this global quasi-nationalization policy, I would like to point out to the reader that if history is our guide:

a) artificial price setting is always temporary in nature as price levels find their true levels in the long run

b) the longer price levels are kept away from their natural equilibrium, the bigger the resulting potential diversions and thus, the larger and more rapid the eventual price adjustment.

While the financial market skies are relatively blue at the moment, math and history both point to extreme conditions in the coming years. Enjoy the warm summer days for as long as they last. Winter is not too far away(first snow falling in September 2015 in my opinion).


High Frequency Trading visualized


In recent years, the computerization of the financial markets has been stunning. 10 years ago, orders were placed side by side humans in order to exchange financial products. Today, over 90% of all trade decisions are made and executed by computers without human input. Adding computers to human intelligence has allowed the financial markets to become more efficient, faster and liquid, all positive attributes. However, there is a segment of trading that relies on HFT(High Frequency Trading) where it is legitimate to question the purpose of market participation.

Take a look at the explanation below given by the New York Times.

High frequency trading

As you can see, the example above leads to worse execution for the customer who enters the market while the HFT computers “front run” the order in order to capture a tiny gain on large quantities. Is it legal, is it ethical, is it efficient? I leave all these questions for the reader to be answered. Personally, at my firm, we also exclusively trade through our computers but I find much more satisfaction in trying to get the market right rather than front run customer orders.


Finally, take a look at a video a precious friend of mine has shown me in this regard. It’s a human hand playing  “rock-paper-scissors” against a robot who wins every time due to faster signal recognition. Similar to HFT, decide for yourself, is the robot cheating or outright winning and does it matter or not?


Cycling on

golden globe and arrow

Whether it’s the seasons changing, the earth revolving around the sun or business cycles chasing boom and bust, life as we know it occurs in similar repeating patterns. The financial markets are no exception to the forces of nature that we all submit to. Recently, I wrote a piece about low volatility and today I would like to analyze the effects of low volaitility on the financial markets in a more comprehensive way. First of all, let me return to my primary professional expertise, the FX market where we are approaching historical record low volatility(see below).


FX vol

Source:BCA Research

Low volatility in the largest market of the world(FX) points to a benevolent global economy where growth is consistent and risk is low. Of course, this very notion of low risk breeds complacency and typically leads to large counter swings as the business cycle turns and perceptions about the future change. So, where are we in the business cycle right now and what does it mean for asset classes?

Economic cycle

Clearly, we are in between the early and late upswing Phase in the global business cycle that is accompanied by rising asset prices and contained inflation as shown above. If you take this chart and relate it to FX volatility you will also notice that there is still some room/time for letting this cycle play out, probably a year or so before this business cycle will reach its top and revert to the downside. The reason I think we have another positive year in the business cycle left is due to the fact that the general cycle described takes an average of about 8 years and 2007 was the peak of the previous one. As for assets, take a look at the length of major bull markets in asset classes over the past 60 years and you will notice a similar pattern once again.




As I have stated numerous times before, keep riding this business cycle but do realize that the sun eventually sets, and winter does eventually follow summer and fall, especially in places like Chicago. I will do my best to alert you to when I start to see the leaves fall off the tree and  fall has arrived. Then, it will be time to harvest and take cover. For now, enjoy the sunny weather despite the occasional global political thunderstorm….

Late summer





EU elections

EU parliament

Having lived in the US for the past 20 years and only followed European politics from afar, I have always been a proponent of both the EU and the EURO. However, both projects appear terribly flawed from the outside looking in. The EU parliament  longs for more unified power over matters that are strictly up to member states sovereign authority. The Euro currency remains a noble project with terminal flaws that will reveal themselves by the end of this decade. Having 18 finance ministries and economic programs yet only one currency and central bank is a recipe for failure and I applaud the ECB for having done a tremendous job in keeping the Euro stable and strong.

Strangely, the European citizens are poorly informed of their EU representatives whom they elect and send to Brussels. While 50% income tax rates are the norm across the EU, it appears that nobody outside the European parliament is aware of the fact that civil servants there pay no more than 12% income tax themselves. Hmmm, I suppose I have been gone for too long to fully understand this situation… Perhaps, that is why I focus on markets rather than politics when possible.


Market Volatility dangerously low


Last week, I had the pleasure of returning to the CME where I had spent my last 15 years trading FX Options. Aside from (mostly enjoying) seeing old colleagues, being on the trading floor has always had the advantage of gathering many opinions in a brief period of time. Whether in FX, bonds or equities, it is clear that 2014 has been bad for business as volatility, the life blood of financial markets, has seen extreme lows implying low volumes. In Chicago Trader lingo, the current market environment is often referred to as “Tumble weeds blowing through the pit”.  Check out the VIX, the main volatility indicator for equity risk going back to the mid 90’s and you will see that we are once again forming a low Level bottom Phase at which Point it appears the market has no more interest in movement.

VixHowever, I would caution that low levels of volatility invariably end as complacency takes hold and an increasing number of “rear view mirror” market participants chase the past rather than evaluate the present for future guidance. From a trader’s perspective, I would point out that the “night is always darkest before the dawn” meaning that low volatility is always followed by a cycle of high volatility.




At the current Moment there is no specific indicator in sight that may change the slumbering markets but I would recommend that we evaluate our Portfolios closely at this juncture. While the bottoming process in volatility may continue for a year(my expectation), I am very confident that we will observe a much higher and trending higher VIX within the next 18 months. Make sure you are prepared for when that happens so that you can enjoy the roller coaster ride aka the global financial markets.

Global volatility roller coaster

The Global Minimum Wage Debate



The minimum wage debate has been ongoing for as long as I can think back. Proponents for minimum wages argue that income below a set level is insufficient to provide a foundation for self-sustaining existence. Opponents of the same law argue that businesses cannot afford to raise wages beyond productivity and remain profitable. Unfortunately, both sides are right in this debate. It is certainly true that living on $8 an hour before taxes makes it impossible to live meaningfully in modern-day America, especially when children need to be supported as well. At the same time, nobody can expect any Company to pay $12 an hour for an employee that adds $8 in profitability and endure a significant loss by hiring that Person. After all, business is “for profit”, not charity, by definition.

Interestingly, in Switzerland, the same debate is currently going on as well. While the Swiss economy is notoriously strong, the debate remains the same. In the article “World’s highest Minimum wage on Ballot in Switzerland” Bloomberg reports that “The Swiss will vote in a national referendum May 18 on whether to create a minimum wage of 22 francs ($25) per hour, or 4,000 francs($5000) a month. While about 90 percent of workers in Switzerland already earn more than that, employers say setting Switzerland’s first national wage floor would push up salaries throughout the economy. When adjusted for currency and purchasing power, it would be the highest minimum in the world. ”

Minimum wage

Should the level of minimum wage make a difference in this discussion and/or who should determine appropriate minimum wage levels? Would unemployment rise along with minimum wage increases?

Unfortunately, the answers to these questions are found in politics which is not part of my mission here. I will say, however, that a sound and growing economy should raise the profitability of labor to the point where minimum wage is a relic of the past. Hopefully, this debate will disappear soon and the economy will brighten for low-cost labor as well as everybody else. That in itself would be a healthy indicator for the global economy. Let us hope that the Swiss can return to blowing their horns rather than argue about making at least $25 an hour…









Valuation Matters



Remember the days of the era when everybody assumed great future wealth through Technology Shares? Any IPO that hinted at a tech back ground immediately raised fortunes as the new economy inspired visions of endless profits. The flagship companies of the day rose to enormous valuations during the exponential rise of the Internet. Yahoo, for example topped New Zealand in Terms of market capitalization back in 2000. Needless to say, that enthusiastic valuation has been brought back to Earth.


Russia-in-snowor apple???


Today, we find ourselves in another Major valuation discrepancy. Apple has nearly reached the same market cap as the largest Country in the world, Russia. According to my valuation models, Apple is fairly priced here yet Russia is priced incredibly low. It appears that the current political issues involving Russia have clouded Investors’ judgment regarding the Long term Outlook for Russia. While further disruption may cause continued short term downward Spikes in the Russian market, it appears very likely to me that the Long term Investor will make a killing if he buys and holds Quality Russian titles. It may not feel right and be the right match for everyone but the math does not lie. Choose for yourself who you would rather be in the  financial markets:

gandalfOr smeagol



Caveat Emptor!


A nuanced view


Having recently come from and lived in America for the past 16 years, it is very obvious to me that the perception of the state of the European economy across the Atlantic needs an upgrade. Since 2008 we have witnessed riots, financial collapse and awful employment numbers in the so called “PIGS” Portugal, Ireland, Greece and Spain. However, we hear very little about the engine of the majority of GDP within Europe, namely the northern European countries: Germany, Holland, Denmark, Sweden, Finland…

I have now spent the past week in Austria and yesterday in Germany and have noticed the following nuances to the European economy. First, it appears to me that while the economy overall is sluggish as it is in America, the core of economic output remains intact. In fact, take a look at the public buses used in Austria below. Needless to say, I doubt bankruptcy will be declared here anytime soon. Riots? I don’t think so.


At the same time, there are daily demonstrations in Southern Europe as many local and some state governments are teetering on the brink of financial collapse(Rome, Italy below).


In fact, a recent referendum in wealthy Venice resulted in the majority of Venetians wanting to secede from Rome and form their own country within the EU. Clearly, the dividing line between rich and poor in Europe has been increasing but in terms of regions rather than within society as can be seen in America. The question then remains, how willing and able are the diverging economies to stick together and at what cost. The best clue to that answer is painted on a steel mill in Linz, Austria, below(I took that shot while driving by).


“There can be no Europe without the Euro (currency)”. While this slogan clearly makes sense for that particular entity, I believe that the majority of the core economies is in favor of keeping both the EU and the Euro in place. After all, the EU and the Euro are political projects rather than economic ones. Given the ability and the willingness to do so buys this continent time to sort out its structural economic difficulties. This room to breathe is reflected in the Euro as being the strongest major currency for many years now. Having said that, the fundamental structure of the Euro remains terminally flawed and will have to be addressed as you cannot have 18 Treasuries/sovereign bonds under one unified currency. Unfortunately, the future of that needed resolution is murky at best and will probably require another painful crisis to kick-start.