Trichet asked about Anglo Saxon plot against the euro

The following quotes come from an interview with Jean Claude Trichet, President of the ECB on May 31st 2010.

Perhaps the most significant comment comes in the context of the conduct of the financial services industry with this very outspoken view:

I am deeply concerned by this gulf between the values of our democracies and those of the financial world, reflected particularly in the abnormal behaviours observed so often in recent years. This problem is faced by all of our democratic societies, and certainly on both sides of the Atlantic. The values of the financial world must change. In the prevailing ethos, they will no longer be tolerated as they are.

Not surprisingly Monsieur Trichet would not be baited into a discussion about a Plan B should Greece "fail".

If, for some reason, Greece does not honour its commitments, might there be a need for a “plan B”?

That is not part of our working assumption. Greece must and will honour its commitments. The European Commission, together with the ECB on the one hand and the IMF on the other, is following developments in the recovery programme very closely.

And finally, just to set the context for this rather remarkable question, the interview took place between M. Trichet and three French journalists

Sometimes, one imagines a sort of Anglo-Saxon plot against the euro. What do you think of this?

No, one should be wary of any conspiracy theories. I simply believe that some international investors struggle to understand Europe and its decision-making mechanisms. They have difficulty in gauging the historical size of the European construction and in anticipating the capacity of Europeans to take decisions that are just as important as those taken a few days ago.

It takes a far more febrile imagination to conjure up the notion of an Anglo-Saxon plot to attack the euro than it does to imagine that the structural weaknesses of a currency union without a political union, could ultimately see the EMU falling apart.

The Flash Crash and the European referendum wheeze

The large intraday "crash" from May 6th no longer looks like an aberration but, strangely suggests a forward looking market that uncannily may have been discounting the possibility that the second most traded global currency could be coming apart at the seams. If it does, and in some ways this would be the preferred solution for not only the Club Med countries but also for Germany, it will once again highlight the folly of our belief in the robustness of the creations of financial technocrats. A monetary union without a fiscal union lacks credibility and it may, in years to come, be seen as remarkable that, with only a 10 year track record, so many placed so much faith in the Eurozone arrangements.

On the other hand, when I remove my Armageddon hat, which has a nasty tendency to appear on occasion (somewhat like Doctor Strangelove’s salute), there is always the possibility that a new fudge will buy more time for the political elite of Europe to spin some new schemes for European unification. If, as in the past, European voters give the wrong answers when asked in a referendum about further integration, they simply hold additional referendums until they get the right answer.

But maybe next time it will be different.

1040 is the key level to watch on the S&P 500

There has been a lot of commentary in the last few days about the alleged appearance of a developing Head and Shoulders pattern on the S&P 500 Index, for example this piece which can be found at the Seeking Alpha site.

Here's another perspective on key levels on the S&P 500 cash index and, to declare my interest up front, I take a rather agnostic position with respect to H&S patterns. Even though the pattern template seems to be less easily discernible than is often suggested in TA text books, there does seem a good case for using the notion that the size of a correction will often equal the distance from a multi-period top to a key support line (could be called a neckline).

The critical support level from Feb 5, 2010 on the S&P 500 was actually 1044.5 - the intraday low.

Since then we have always managed to close above this level, even during this recent correction.

So we have about 175 points head room up to the April top and if we subtract 175 from 1045 it puts us at 870 which is probably the most important level for the whole period from the March 2009 low onwards and the level which was keenly tested in early July 2009.

It would seem to me that whether or not a right shoulder forms (which could take us back to 1130/50 or thereabouts) or, whether another sovereign debt/FX crisis takes us below 1040 on a closing basis, in a shorter time frame and more abrupt fashion, there is a growing probability that we will need to re-visit the 870 level again in the next 12 months.

Also 875 is the 62% retracement of the swing low of 666 and the high of 1220.

The fundamental story behind such a technically driven move (should it occur) would most likely coincide with a lot of talk about a global double dip and the mistakes being made by too many policy makers of bringing in fiscal austerity packages too soon.

Saving the most ominous technical signal to last, on May 25th (i.e. last Tuesday) the intraday low breached the Feb 5 low mentioned above and actually reached down to 1040 (the lowest level since November 2009).

In a pre HFT market environment, it strikes me that this breach could well act as a more immediate anxiety point that would need to be looked at again before the bulls would have confidence to mount a sustained attempt at taking us back in to the 1130-1150 zone.

But HFT algorithms seem to be less anxiety prone than us humans---when things get really scary they just shut down. And that is the new dynamic which produced the flash crash of May 6th and which makes a lot of traditional TA less useful than in the past.

Inter-market analysis using cues from FX, especially the larger scale patterns in the action in the yen, euro and the Australian dollar are, in my work, becoming far better clues as to the direction of US equities than ever before.

Ten reasons for current market turmoil

The recent near panic conditions across all asset classes showed no signs of abating yesterday with evidence of acceleration.
Even though my area is technical analysis, and I have a certain skepticism for much of the "reasoning" that is put forward to explain what is currently troubling markets, there are certain things that seem obvious to me. Here are my ten observations on the current turmoil facing markets

• 1. The Eurozone architectural framework is deeply flawed and to suppose that a monetary union can survive without proper fiscal and political integration was something the architects were clearly wrong about
  
• 2. The current austerity measures being insisted upon, primarily by Germany - which is required to pay the most in the EZ bailout - will only act to reinforce deflationary tendencies in the global economy
  
• 3. Markets are often irrational. How else can one explain the extraordinary love affair that many asset managers have had for the Australian dollar, currencies from emerging markets and EM funds in general.
  
• 4. A massive FX carry trade unwind is taking place that has very little do with "market fundamentals". It has more to do with quant funds that have been synthesizing investable funds to play with in the algorithmically based equity markets
  
• 5. Politicians should never say that they are going to take on markets - don’t bite the hand that feeds you.
  
• 6. Uncertainty surrounding financial regulation is keeping financials under pressure
  
• 7. France and Germany are not seeing eye to eye over the future direction of the EU and both countries are doing their best to protect the balance sheets of their own private sector banks which have huge exposure to debt from southern Europe
  
• 8. Inter-market correlations/alignments are far more significant as causes behind the mayhem than one month’s job claims number - although yesterday’s US numbers do suggest that the notion that the global economy is on the verge of "growing" itself out of the sovereign debt crisis is highly suspect
  
• 9. Valuation of assets based on fundamentals, P/E multiples etc. goes completely out of the window when investors behave viscerally which is why TA is so useful
  
• 10. Central banks can only prop up a flawed currency, i.e. the euro, for so long before markets lose total confidence in its integrity. The capacity for damage to global financial confidence from a disintegration of the EMU and the euro, is enormous and still has not been factored into current asset prices.
  

The S&P 500 faces a key test at 1050 and a close below that level would suggest that a large scale correction is under way with targets eventually down to 870 needing to be tested. Interestingly the 1030 area is an area indicated on the weekly Ichimoku chart as perhaps more fundamental technical support.

The clue to near term direction for US equities is more so than at most times to be found in the FX markets and in particular the direction of the euro and the yen.

Greece has violated the "no-Ponzi" condition

I found this extraordinary citation from John Hussman's newsletter in this article at Seeking Alpha and will simply repeat it without comment:

"The basic problem is that Greece has insufficient economic growth, enormous deficits (nearly 14% of GDP), a heavy existing debt burden as a proportion of GDP (over 120%), accruing at high interest rates (about 8%), payable in a currency that it is unable to devalue. This creates a violation of what economists call the "transversality" or "no-Ponzi" condition. In order to credibly pay debt off, the debt has to have a well-defined present value (technically, the present value of the future debt should vanish if you look far enough into the future).

"Without the transversality condition, the price of a security can be anything investors like. However arbitrary that price is, investors may be able to keep the asset on an upward path for some period of time, but the price will gradually bear less and less relation to the actual cash flows that will be delivered. At some point, the only reason to hold the asset will be the expectation of selling it to somebody else, even though it won't be delivering enough payments to justify the price.

"Unless Greece implements enormous fiscal austerity, its debt will grow faster than the rate that investors use to discount it back to present value. Moreover, to bail out Greece for anything more than a short period of time, the rules of the game would have to be changed to allow for much larger budget deficits than those originally agreed upon in the Maastricht Treaty."

Getting it right rather than ready by a Sunday evening

This weekend there are apparently frantic talks taking place in Brussels to come up with some new EZ stability framework. Meanwhile in London the messy result from the election is causing great urgency to discussions between two parties trying to hash out a pact to cooperate

There is a new meme, which highlights the impotence of politicians, which is that in regard to any major issue where they fear,(even mistakenly), that markets may fall precipitously that they've got to "solve" the problem and get out a press statement "before the markets open Monday".

Markets can plunge for all kinds of reasons -as was seen last Thursday, where still no satisfactory explanation has been provided, and sometimes the best policy is to tell the markets (whatever that means) that we're still working on the solution.

Surely it would be better to get it right rather than ready by Sunday evening.

Machines, market liquidity and casinos

There is an interesting piece from Mark Cuban about the illusion of liquidity in today's markets provided by HFT algorithms and how easily - to pursue the metaphor - that liquidity can evaporate so abruptly as it did in US trading on May 6th. The S&P 500 futures dropped like a stone losing more than 100 points at one point, and the DJIA managed a 1000 point plunge - all in the space of a few minutes. Hardly the kind of behavior which is designed to engender confidence in the investment community.

Here are some brief thoughts on the matter which I posted in conjunction with the piece:

Ironically, in my estimation, one of the reasons why regulators have indulged HFT shenanigans is that they believed that they would bring greater liquidity into the markets - which saw an astonishing lack of liquidity in October/November 2008.

As last Thursday showed machines don't panic - they leave that to us humans - but they just decide not to run their algorithms when certain parameters/thresholds are crossed. That may be an entirely logical response (the thresholds, of course, would have ultimately been set by the algorithm's programmers), but, paradoxically, markets require fractiousness and emotions to function, and it was only when the machines were turned off and bottom fishing humans got involved that the free-fall ended.

Longer term systemic liquidity requires confidence that the playing field can produce winners and losers and that skill will be rewarded. If traders/investors sense that markets are not only casinos, but ones where an Ocean's 13 type software crash can wipe out everyone, they will not want to play in them.

UK election result: no good outcomes, here's one of the worst

The UK election has produced a very unfortunate situation for the near term direction of vital fiscal/monetary policy for those troubled rainy islands in the North Atlantic.

Current discussions between the Liberal Democrats and Conservatives over some form of cooperation are beset by major hurdles and gotchas. Even if the leadership can strike a deal there will be deep misgivings about a Lib/Con alliance at the grass roots level.

While some favor a coalition in which Lib Dems would get Cabinet seats and have quite a list of red lines which David Cameron would have to respect, in order to count on the continued support of legislation as it goes through Parliament, it would seem that there is a strong chance that it may not be possible to structure a coalition pact. In this case the most likely outcome from the mess would be a minority government headed by David Cameron with the need to get assistance from other parties on an ad hoc basis.

Under the peculiarly anachronistic, unwritten constitution of the UK there are really no simple rules for determining which individual has the right to the top job where there is effectively no single party which has an outright majority of 326 seats in the House of Commons. It would seem that, amidst all of the many kinds of electoral/political reform required for the UK, something like a separate ballot for the leadership - along the lines of the US presidential vote, would at least provide a single candidate with more votes than any other. At the moment while it seems that Gordon Brown's days as PM are over, there is a clear question mark over how survivable and stable a government under Cameron would be.

Here is a worst case scenario.

• No coalition or long term deal can be struck between Clegg and Cameron but the Lib Dems decide to support Cameron with an emergency budget in order to placate the markets.
  
• The markets sense that Cameron's tenure is likely to be unstable and there is a sterling and/or gilts crisis.
  
• Cameron has to propose draconian fiscal measures to avoid a Club Med scenario for the UK capital markets
  
• Eventually - perhaps in as short as a year - there is another election and Cameron will be held up as the person who failed to tell the truth to the electorate during the May 2010 election campaign. (Never mind the fact that neither of the other leaders addressed the severity of the deficit issues in that campaign either).
  
• With Gordon Brown gone and replaced by a new Labour leader - who would then be smart to include fundamental electoral reform as a cornerstone of a second election manifesto - there is a strong likelihood that a Labour/Liberal Democrat coalition would be viable following that subsequent election, even if Labour were still unable to have an overall majority
  
• Meanwhile for the Conservatives they could, even more abruptly than was contemplated by Mervyn King's recent remarks - having accepted the poisoned chalice of the dreadful state of the public finances - find themselves back in the wilderness of being regarded once again as the "nasty" party of British politics.
  

Daily Form May 7, 2010

Inter-market Technical Analysis using algorithmic pattern detection

FRIDAY MAY 7, 2010       06:58 ET

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The first two charts for today’s commentary need to be considered together.
The one immediately below shows yesterday’s dramatic action in the S&P 500 e-mini contract for June and the one below that shows the cross rate trading between the Australian dollar and the Japanese yen.
It is because of the remarkable similarity in their formation that those, whose understanding of capital markets and determining fundamental valuation is derived primarily from mainstream academic texts in finance and portfolio construction, will find the inter-market dynamics revealed yesterday to be so baffling and incromprehensible.
US equity markets had an attack of bipolar meltdown yesterday in afternoon trading in New York, but a lot of the background to this abandonment of all calm and rationality was already at work in the forex markets from earlier on during the European session where trading was very loose and erratic.

The charts in a nutshell highlight the massive role of the FX carry trade and in particuar the panic driven unwinding by some very large quant funds that were positioned wrongly.

The S&P 500 skirted with limit down moves and as can be seen on the chart the lows of February around 1040 provided the bottom of the bungee jump.
My own suspicion is that, after a day like yesterday, which most resembled October 1987 of any trading day I can recall, there should be a very long pause for reflection on systemic risk. Having said that, there are many individuals who will want to present the case that there are now great values in the market and what a wonderful buying opportunity has been created.

As one of my favorite websites - http://zerohedge.com - showed recently a better text for many market practitioners to be reading is (facetiously of course) Quantitative Ponzinomics for Dummies .



The daily chart for $AUDJPY looks very similar to the one above - and just to spell out what is revealed - there was a major slump in the Australian dollar accompanied by a massive rally in the yen. This is not the kind of behavior that is to be welcomed by hedge funds who have big positions in the FX carry trade and the severity of the move, which coincided with the move in the S&P 500 as shown above, strongly suggests that some large quant funds were having to do some major position adjustment as a result of/ (cause of?) yesterday’s panic.
Just one final comment on this - my own intuition is that talk of "fat finger" errors which precipitated the crisis yesterday should be treated as a smokescreen excuse designed to disguise, to the retail investors especially, the incredible fragility of the financial economy as presently structured.

I shall be discussing both of the two charts above on Friday May 7th on CNBC's European Closing Bell.



The very long term chart for $EURUSD shows that a major trend-line has been broken and to cut to the chase I am now projecting a target of $1.18 - in coming months - based on the lines drawn on the chart.
Needless to say there will be bounces and rallies - which will be dramatic - as there are many prop trading desks that are now massively short the euro, but the underlying dys-functionality of the European Monetary Union- and the risk of its disintegration - should encourage position traders to be ready to sell any significant rallies.



Completely over-shadowed by yesterday’s movements in global capital markets was the election that took place on some rainy islands in the North Atlantic.
On the one hand in the markets we are facing the clash between a tightly coupled financial system - which has very little capacity to withstand crises and on the other hand in the case of the UK election we have an archaic electoral process, an unwritten constitution and no defined procedure for sorting out a messy election result.
Instead of politicians blaming markets for all of the world’s woes they should sort out a lot of the nonsensical nature of our political structures/processes - including the EZ framework- rather than playing populism to try to shift blame on to demonic short sellers etc.
The FTSE 100 looks set to head into the cloud formation on the weekly chart. One of the fascinating features of the chart is that the top of the cloud corresponds to the 38% retracement of the swing high/low since March 2009 and the bottom of the cloud corresponds to the 62% retracement- which I find to be uncanny.
I would suggest that the 50% retracement level - which sits, of course, in the middle of the cloud at 4648 -should be considered as a feasible target in the intermediate term.

Why I am uneasy about Buffet's unreserved endorsement of Goldman Sachs

The fact that Warren Buffet has provided 100% support to Goldman Sachs management in connection with the possible criminal charges is, in my estimation, only somewhat surprising. As one of the world's richest men it is entirely Darwinian to support the main financial hub in a fragile and complex financial system.

His endorsement for the firm is expedient and even what might be called judicious, however it remarkably fails to address many of the ethical issues which have been raised - including those at the recent Senate hearings.

The only surprise for me is that his endorsement has been reported as being 100%.
Surely nothing can be that certain. There must always be a residue of doubt/reservation for a reasonable man when allegations have not be diligently examined and even articulated yet by those investigating the firm's conduct.

The Jurassic Park of modern financial capitalism

Global policy makers are paralyzed by the fear of tackling the creatures roaming around the Jurassic Park of modern financial capitalism.

Is Goldman Sachs headed for same fate as Drexel Burnham?

This rather arresting opinion comes from an op-ed column in Barrons:

HOLDERS OF GOLDMAN SACHS STOCK WOULD BE WISE to remember that the last time the Justice Department threatened to indict a major Wall Street firm, the firm went away overnight -- vanished as quickly as, in the words of Time magazine, the Berlin Wall. The year was 1990. The firm was the formidable Drexel Burnham Lambert, master of the junk-bond market, which nose-dived during a recession when the junkers were unable to pay interest to the junkies who owned the high-risk debt.

I shared memories of the period last week with some Drexel alumni at the Milken Institute Global Conference at the Beverly Hills Hilton, which in my opinion is the one financial conference that is a "must attend" event. It's like a mini-MBA program, with lectures by top-drawer executives and venture capitalists going from the crack of dawn to the early evening. I've never seen a golf club or a tennis racket at this event.

Former Drexel executives -- the conference is run by the former junkmeister-in-chief himself, Michael Milken -- noted that the Justice Department was relentless in its pursuit of the firm, investigating it for several years before threatening it with a racketeering charge. Wall Street rivals, jealous of Drexel's predominance in the lucrative junk-bond market, urged the coppers on. The mere threat of an indictment caused CEO Frederick Joseph and the board to liquidate the firm almost overnight.

Could the same thing happen to Goldman Sachs? It's facing fraud charges by the Securities and Exchange Commission and, reportedly, a criminal probe by the U.S. Attorney's Office in Manhattan. However, it could take months or even years before investigators decide whether to press charges. And Goldman has at least one advantage Drexel didn't: Rivals depend on it heavily. It's trading desk is so crucial to so many institutions that the Street is unlikely to cheer the coppers on this time around.

The parallel with Drexel is quite intriguing and it just may be, to dissent from the opinion of the writer, that some firms may be thinking already about damage limitation because of their counter-party dependency on Goldman and its 2010 version of the Milken daisy chain.

Tectonic plates, glacial pace and the UK electorate

The following short quotes come from an interview with Nick Clegg in The Guardian for April 30th.

"In an election where the tectonic plates are moving so quickly and so radically, people have got to go with their gut instincts."

"I personally think both the Tories and Labour face profound crises of identity because they are both based on assumptions of mass support that have now evaporated. The arrogance of both the Conservative and Labour party that it's somehow their birthright to speak on behalf of millions of people. That's gone."

In the interests of full disclosure I have no partisan agenda and shall not be voting in a first past the post electoral system which I believe to be profoundly undemocratic.

What does seem clear from Mr. Clegg's remarks is that he seems to have the best sense of the mood amongst the UK electorate.

At the risk of trying to be too symbolic I thought it might be worth contemplating the notion that events in nature can sometimes act as metaphors for events in public affairs. Mr. Clegg uses the terminology of tectonic plates moving to describe the underlying dynamics at work in the UK, and I think he is right on this.

In Iceland we had the combination of seismic rumblings leading to a massive volcanic eruption where the fall out was exacerbated by the proximity to a glacier. In the UK we have the rumblings of a potential eruption which is coming up against the glacial pace at which the political class/establishment is willing to contemplate any meaningful reform of the electoral system, the cosy relationship between Westminster and the City, and the fact that inequality in Britain is becoming more and not less extreme.

Something is brewing in the UK and it may not be too febrile to suggest that if the energy which is building for change encounters a glacial response from policy makers there could be another nasty fall out similar to that from that unpronounceably named Icelandic volcano.

Britain, Greece and the IMF

We are less than a week away from the UK election and the evidence is mounting that Gordon Brown's next project appears to be either waiting for a large hedge fund to engage him as an economic adviser or to accept the customary peerage which is offered to ex-Prime Ministers. Indeed, for him to become a Lord would be a fitting end for a man who was unelected as PM and whose party systematically avoided any meaningful reform of the archaic British constitution which has seen the continuation of an institution - the House of Lords - which is totally undemocratic.

With the election over, it then becomes extremely urgent for the incoming government to tackle the developing crisis in the UK's public finances and determine the magnitude of the mess which it will have inherited. Anecdotally, it has been revealed that the Governor of the Bank of England, Mervyn King, recently expressed the view that the steps the next government will have to take, to resolve one of the most out of control deficits in the developed world, will be so unpopular that the next government could then see itself out of power for a generation.

Surfacing amongst media pundits is the meme - which the new PM and Chancellor might think to be politically expedient - that the new UK administration should immediately engage the International Monetary Fund (IMF) to undertake a proper analysis of the shambolic state of the public balance sheet (including all unfunded liabilities) and get all of the bad news out on the table. This would then allow them to put distance between the task ahead and the legacy of the past, and establish cover for the new government that the reason why draconian measures are called for is entirely due to Gordon Brown's mishandling of the economy over 13 years.

This would be tactically a smart move and somewhat analagous to the manner in which companies, will often during recessionary environments or after a change in top management, want to get all of the bad news "behind them".

There is one problem with this strategy however. It may be that the IMF would find such a mess that the government would no longer be in the position of having engaged a respected body to conduct an analysis of the problem, it could find that the skeletons which fall out of the closet are so serious that the government is then forced - by reticence from the capital markets about continuing to support gilts/sterling - into negotiating a support package from the IMF, similar to that which is now being finalized with respect to Greece.

The UK's public sector is more bloated than that in Greece - although the latter does have its own very undisciplined arrangements which provide extraordinarily generous benefits to Greek public sector workers.

It is conceivable that the IMF's stance on the need for large scale reductions in the UK civil service would be just as swingeing as those now being proposed for Greece. Needless to say this would not go down well with a large section of the UK electorate, although the notion that UK civil servants might take to the streets in the same way as those in Athens are, requires quite a stretch for my imagination.

So the IMF analysis option could backfire on the new government and as such it will probably be deemed more prudent that the skeletons are best inspected by a UK based research body where the full extent of the black hole can be carefully disguised with the repertoire of weasel words that are so much a part of the Westminster mindset.