Snapshots has been following the story of Carlos Ghosn and Nissan and what is essentially an allegation of misconduct and the concentration of executive power. While we have no view on Ghosn’s alleged guilt, this type of corporate scandal reminds us of Dennis Kozlowski and Tyco in 2002. Both of these individuals built successful businesses and created shareholder value but got unstuck late into a corporate expansion when corporate profits were booming (as defined by percentage of GDP).

Cycles As we said in Snapshots in July last year, we think about cycles of macroeconomic activity, corporate earnings and default rates. At the time, we said, “it is striking how the corporate default experience during the recession of 2008 was smaller than the corporate default experience during the recession of 2001. The 2008 recession […]

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Snapshots is going to take advantage of the pre-Christmas sales and promotions this weekend. The actual line of goods that you can get at a discount is not quite what appears to be advertised on shop front displays or in your email inbox. This is because there is a clever algorithm-driven marketing tool you need to contend with. You also need to read the small print and some on-line research beforehand will help the savvy buyer.

Pre-Christmas Sales in the Credit Markets The same approach needs to be taken with the credit markets which are closing at the year’s lows across the board. We think there is fundamental value at these levels (as measured by the default adjusted risky credit spread). However, we are mindful that defaults have been unusually low […]

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Snapshots is amazed at how quickly Black Friday has become a global cultural phenomenon. It has its origins as the unofficial start of the holiday shopping season after Thanksgiving Day in America. Its globalisation has occurred against a backdrop of nationalism and protectionism. We believe it has succeeded because of the power of the internet, the dominance of large internet retail giants such as Amazon and the importance of online influencers for global brands.

It is an example of why we believe globalisation and multiculturalism is a long-term cyclical trend which is here to stay even if it is interrupted by shorter cycles of nationalism and protectionism. Black Friday Sales One could be forgiven for wondering if the credit markets have been participating in the Black Friday sales. Bonds […]

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Snapshots was reading about Viv Nicholson on Wikipedia. She was a Yorkshire housewife who became famous in 1961 when her husband won the football pools and told a reporter she would “spend spend spend!” She did exactly that and her rags-to-riches-to-rags story took her through sports cars, fur coats, jewellery, a battle with alcohol and bankruptcy. A photograph of Nicholson was used on the sleeve of the hit single “Heaven Knows I’m Miserable Now” by Manchester rock band The Smiths.

Spend Spend Spend! Following the US mid-term elections, it is clear the fiscal agenda on both sides of the House is also to “spend spend spend”.  The Democrats want to do this with a large infrastructure-spending bill and Trump wants to do this with tax cuts for the middle classes. It is currently not clear how […]

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Snapshots is trying to avoid the “tape bombs” hitting our trading screens and focus on the bigger picture. The terminology of tape bombs presumably dates back to old physical ticker tapes that used to deliver news that caused share prices to move. Recent tape bombs include WPP, Valeo, Volkswagen, Lafarge, HeidelbergCement, Texas Instruments and STMicro. Share price moves in each of these companies have been down and by very large amounts in some cases.

The broader markets are also suffering and have turned into a “sea of red” with almost all the major equity markets now down on the year.  This is a remarkable reversal from the picture just a few months ago.  Credit spreads have been following suit and some credit indices are approaching two- year highs. JOMO and the […]

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Snapshots first came across Kondratiev waves almost a decade ago. The Soviet economist, Nikolai Kondratiev, first brought these to attention in his book, “The Major Economic Cycles” in 1925. Kondratiev waves were described as long economic cycles brought on by major technological innovations. The Austrian and American economist, Joseph Schumpeter expanded on Kondratiev’s work to include shorter infrastructure investment cycles and even shorter corporate business cycles.

We have been fascinated with waves and cycles in economics and politics (and even in physics and geography) ever since. We find that thinking about longer-term waves and cycles is an excellent way of grounding yourself in what can feel like chaos on a daily basis. ESG and Capitalism 2.0 We also think that we […]

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Snapshots is peering through the flames of turmoil in the emerging markets (EM). We expressed concerns about EM valuations in Snapshots back in November (Mongolian Deities) but the ferocity of the current EM sell off has still taken us by surprise.

Cause and Effect and Mary Jane To be clear, we are not surprised by the sell-off, just the magnitude of it.  In February this year, we wrote “When the world’s central bankers embarked on QE they said that central bank purchases would work through the “portfolio balance channel”. Ex-Fed chair, Bernanke, explicitly described it as pushing […]

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Snapshots is following the news coming out of the US involving the president, his lawyer and a porn star. A talented scriptwriter would struggle to come up with a story as headline grabbing as this. It also makes the Netflix hit presidential drama House of Cards seem timid and boring in retrospect. What is clear is that any potential impeachment and removal from office will be a complicated political process involving the US Congress.

Speciality Finance Speaking of movies, we were pleased to close our first media receivables financing trade last night. The production and distribution of media is a growing business because of the arrival of streaming giants such as Netflix and Amazon who have huge appetites for content.  It is also a capital-intensive business. Media is a subset […]

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Snapshots is using the August lull and out of office replies to think about the bigger picture.

Dancin’ in September It has been a weak year for the credit markets with negative returns across most sectors (with the exception of loans and parts of the ABS market).  As regular readers know, we took a cautious stance to the broad market in Q4 of last year when the Fed started to reduce its […]

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Snapshots is trying to stay cool in near record UK temperatures, which are the hottest since the summer of 1976.

2008 and 2001 Speaking of yearly comparisons, we were trawling through default tables for corporates recently.  It is striking how the corporate default experience during the recession of 2008 was smaller than the corporate default experience during the recession of 2001. The 2008 recession was caused by a collapse in house prices. This rippled into sub-prime […]

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Snapshots is waiting to see how the EU responds to Theresa May’s soft Brexit plan.

Junk Rated Sterling Assets The plan has cost May the support of two hard Brexit cabinet ministers.  Commentators are suggesting that Theresa May is in a weakened position with the EU and her party with this proposal.  We are not so sure and remember the late Muhammed Ali’s famous rope-a-dope tactic against George Foreman.  The […]

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Snapshots is really enjoying the 2018 Football World Cup. We think the addition of VAR (Video Assistant Referee) has added an extra level of tension and excitement to the game. However, it has not dealt with the gratuitous play-acting on the pitch. Historically this play-acting was only displayed by a few countries but it seems to have spread globally this year!

Weak markets At our weekly Multi Asset Credit meeting, our teams of portfolio managers and analysts also noted price weakness spreading across the credit market. This was initially seen in bank capital and investment grade and high yield corporates but has now spread to leveraged loans, CLOs and securitised products. As we have been saying for […]

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Snapshots has a serious case of World Cup fever along with 3.4bn people (almost half the world’s 7.6bn population) that are expected to watch this year’s tournament. The start of the World Cup also coincides with Eid celebrations for the world’s 1.8bn Muslims.

High Street Blues The UK high street is suffering from a different kind of fever, which has profoundly affected the casual dining and retail sectors.  The causes are well known:  the lowest GDP growth in five years, higher business rates, stubbornly high inflation, uncertainty around Brexit and the structural move to online shopping. Many household […]

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Snapshots is wondering if Italy’s new Prime Minister Conte is modelling himself on Donald Trump. We mentioned last week that their tax cuts looked surprisingly similar. This week they are both going to ask for Russia to be admitted back into the G7.

Conte also gave his maiden speech in parliament.  Rhetoric about Europe was toned down, tax cuts pushed out to subsequent years and the criteria for receiving universal basic income tightened.  However, the market remains nervous with Italian yields hovering near their highs.  The nervousness is compounded by the backdrop of tightening global liquidity which we […]

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Snapshots is trying to chillax and digest the political and market volatility of this week. Interestingly, chillax is now an official word in the Oxford English Dictionary and as of January 2018, so is the favourite word in the Snapshots household – hangry.

Ciao Conte The word ’fangry’ has not made it in yet but it would be a suitable description for the rhetoric from the populist coalition government in Italy when they were denied their first choice of Eurosceptic Finance Minister. Nevertheless they have succeeded in forming a government. The clearest strategy from the new government is […]

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Snapshots has been reading the excellent book “A Field Guide To Lies and Statistics” by Daniel Levitin. It contains eye opening examples of how biases and logical fallacies can appear in statistics and emphasises the need for critical thinking. This is important because we are in the second longest economic expansion on record.

GIGO Snapshots recalls some of the credit pricing models that were used prior to the last crisis.  They were built by quants who were clever PhDs and engineers and came from precision industries such as aeronautics.  They knew how to build 400,000 kilo metal airframes that could fly through thin air but their financial models […]

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Snapshots was disappointed to hear Elon Musk, a respected and talented visionary, call analysts’ financial questions “boneheaded” on an earnings call yesterday.

Normalisation This business cycle has been characterised by the capital markets allowing new technology companies, such as Tesla, to burn through large amounts of cash as they try to grow into their forecasted business models. As monetary policy normalises, the cost of capital is rising and we expect the bridging of capital to these potentially […]

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Snapshots recently invested in an electric toothbrush with a two minute timer. The consistency of spending thirty seconds on each plane of teeth has led to a marked improvement in the periodontal score of our teeth. We are very pleased with the return on invested capital on the toothbrush as measured by potential teeth replacement cost!

Toothpaste and Correlation We mentioned in Snapshots in January that synthetic CDO market volumes are increasing again.  We recently looked at the implied correlation risk in equity index tranches which is still at elevated levels post the financial crisis. Correlation across tranches has often been described as toothpaste in a tube that gets pushed around […]

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Snapshots was listening to the excellent song “Blind Faith” by British drum and bass duo Chase and Status. It reminded us of the blind faith structured credit teams put into their pricing models in the run up to the financial crisis.

Direct Lending It is hard not to think there is some blind faith evident in the direct lending market.  Direct lending is a topic that seems to come up in nearly every client meeting we have.   Huge amounts of capital are being raised in this sector.  The reason is obvious.  New Basel regulations mean that […]

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Snapshots was sad to hear about the death of former darts world champion and 1980s sports icon Eric Bristow who famously said “I have two bowls of confidence for breakfast each morning”.

Trade spats The US and Chinese officials have been displaying bowls of confidence in their escalating trade dispute.  They each want to impose tariffs on $50bn of trade.  This is small relative to the size of global trade (defined as the sum of imports and exports) at $29.3trillion, US trade at $5.2trillion or Chinese trade […]

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Snapshots was delighted to celebrate International Women’s Day yesterday. The benefits of diversity are obvious when you are the only man in a mixed-race household of four. They haven’t been obvious to the broader asset management industry yet but we are pleased to see multiple initiatives that are addressing this. We think this is not just a moral imperative but a profit seeking imperative as well. This is because a good investment process benefits from the input of a diverse set of opinions.

Structural reforms Last week’s Italian elections have resulted in a hung parliament as the public voted for populist parties. There has been a rise in Italian sovereign risk premium but it has remained very well contained. It is clear the broad political thrust in Europe is towards tighter immigration and looser fiscal policies. If this remains […]

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Snapshots has been bracing against snow and freezing temperatures in London this week. Meteorologists are attributing the weather to a “polar vortex anomaly” that they think was caused by an unusual jump in temperatures in the Arctic on Valentine’s Day. It is a good reminder that the weather is a globally connected system.

Global Connections Trade and the economy are also part of a globally connected system. President Trump wants to regulate some of these connections and has imposed a 25% tariff on US steel imports and a 10% tariff on US aluminium imports. This has led to warnings of tariff retaliation from the EU and China.  The corporate sector […]

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Snapshots watched the excellent documentary AlphaGo on Netflix recently. It is about an algorithm of the same name created by Google’s Deepmind team to beat Lee Sedol, the world’s best Go player. It is a moving account of a man’s life, work and passion pitted against an emotionless machine that can perform a mind-boggling number of calculations.

The State We Are In The rules of Go are relatively simple even if the permutations of each move branch into the centillions (that’s very large!).  The markets are even more complex. At Cairn Capital, we have a proprietary technology system called Nexus that we have been developing since 2004. It is very rich in […]

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Snapshots loves movie quotes and the following springs to mind this week: “Causality. There is no escape from it. We are forever slaves to it. Our only hope, our only peace, is to understand it, to understand the why.”*

Causality This week the market has been focusing on the spike in volatility and the unwind of retail funds that have been selling volatility. We warned on these products and the triggers that could lead them to unwind in Snapshots in August last year (Inverse VIX and Accelerators). However, this has diverted the attention of investors […]

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Snapshots has not found any inspiration from the world’s leaders in Davos. We asked Amazon’s Alexa for inspiration and heard some great existential quotes from the eccentric British philosopher, Alan Watts.

Telecoms Unfortunately, Alexa does not provide credit research yet so we still have to do our own.  It always helps to start looking where large volumes of debt creation has or is taking place. The current credit cycle has seen some aggressive debt funded M&A by the telecom industry as it tries to dominate in […]

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Snapshots is trying to avoid the Aussie flu which is causing the worst flu season in the UK since the 2011 swine flu. The Centre for Disease Control recommends a six feet clearance from contaminated persons.

The Six Foot Tall Man Speaking of six feet, one of our favourite quotes in 2017 was: “Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average.”* A good example of this was a pool of Buy To Let mortgages that we analysed recently.  It advertised an average (mean) […]

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Snapshots is a big fan of the mindfulness app Headspace. Keeping a clear head, being open-minded and letting go of presumptions is going to be very important in a post Quantitative Easing environment.

Quantitative Tightening This is particularly important because of the rapid pace of interest rate normalisation in short maturities. US Libor rates are at 9 year highs. China Libor rates are edging towards decade highs. Euro Libor rates however, are at decade lows. These coincide with the relative actions of the central banks. The Fed is in the third […]

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Snapshots is settling into the new year, European dealers and investors are adjusting to trading in a MiFID II market structure and the risk markets are sprinting out of the starting blocks.

Greed and fear The tone of all the MiFID II compliant research flooding our inbox is overwhelmingly positive.  The MiFID free blog-sphere paints a similar picture.  Global growth at 3.7% is the highest in seven years and is widely expected to continue. We said that 2017 was the end of ultra-loose monetary policies.  That leaves […]

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Snapshots thinks Emmanuel Macron’s global call to “Make the planet great again” is politically and economically clever.

  Clean Capitalism This is because renewables are becoming a major force in the world energy markets – a theme we first mentioned in Snapshots on 2 June 2017.  A report by the UN Environment Programme states “new renewable sources (…) accounted for 55.3% of all the gigawatts of new power generation added worldwide last […]

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Snapshots has been saying for some time that 2017 will mark the end of ultra-loose central bank monetary policy. This has coincided with jitters around some highly leveraged corporate entities

Snapshots has been saying for some time that 2017 will mark the end of ultra-loose central bank monetary policy. This has coincided with jitters around some highly leveraged corporate entities. Steinhoff Interest rates have not moved enough to cause broad interest coverage issues and the capital markets remain very open for refinancing. However, the market is […]

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Snapshots is an amused bystander watching the gravity-defying performance of Bitcoin. 

A history of ledgers The distributed ledger technology behind Bitcoin is certainly very interesting. However, ledgers are not new. According to Wikipedia, the first records of ledgers come from Babylonian stylus and clay slabs dating back to 2600BC. Since then we have had the invention of the double-entry bookkeeping system by Italian merchants in the 1300s, the creation […]

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Snapshots caught up with his dad for Thanksgiving lunch yesterday.

We talked about grandad who came to Newcastle in the 1950s as a Commonwealth immigrant and registered as a peddler. This involved selling household goods out of a suitcase on credit. The credit aspect was appealing because collections meant an opportunity for him to sell more goods. Losses given default were 100% and so it […]

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Snapshots is digesting the barrage of scandals, fast moving geopolitics, policy changes and market price action over the past two weeks. After a period of low volatility, the market seems to be waiting for some action before the year is up.

Confirmation Bias We are reading Michael Lewis’s latest book the “The Undoing Project” which is about the Nobel Prize winning behavioural economists Tversky and Kahneman.  The book has made us question if a degree of confirmation bias is setting into this market.  It has continued to rally with very low volatility despite increasing warnings of […]

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Snapshots was a big fan of the Welsh alternative rock band the Manic Street Preachers at university.

Their hit single “If You Tolerate This Your Children Will Be Next” and the song’s line “If I can shoot rabbits/I can shoot fascists” come from the Spanish Civil War that Welsh volunteers surprisingly fought in.  We highlight this only to illustrate how deeply emotive politics is. As investors we do not get involved in […]

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Snapshots is impressed by all the records currently being broken. Lionel Messi’s package to remain at Barcelona despite the Catalonia troubles. The FTSE all share index despite Brexit. They are proof that you have to look underneath the soundbites we are bombarded with to truly understand what is going on.

Little Blighty On The Down* Central Banks are rolling back Quantitative Easing and their associated liquidity programmes. One such programme, the Bank of England Term Funding Scheme, is expiring in February next year. It currently stands at £75bn and has provided UK banks with cheap term funding to make consumer and business loans. Some commentators have […]

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Snapshots can’t help but feel sorry for Theresa May after her disastrous conference speech and the continued infighting in her party. But then politics is a bloody and cruel sport.

The original 1990 series of House of Cards was set around a Conservative Party leadership challenge and is said to have drawn inspiration from Macbeth and Richard III.  For TV buffs it is a must see. My turn on the policy joy-stick The pendulum is swinging from central bankers and monetary policy to government and […]

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Snapshots has been filing expenses for our recent US road trip and still can’t believe we were charged $9 for a black coffee in Austin!

Inflation and Slack That is just an anecdote which in itself has no meaning but we note that some economists are calling the recent disinflation transitory, particularly in the US where a large component was caused by a wireless price war. Oil prices are also starting to pick up again (albeit from low levels). With oil supply […]

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Snapshots attended a fascinating workshop run by Good Judgement Inc yesterday

Behavioural Finance Good Judgment is a commercial spin out of a project that was funded by the US Intelligence Department after the forecasting failures of 9/11 and Iraq’s Weapons of Mass Destruction. The project was a big statistically measurable success and formed the basis of Phil Tetlock’s excellent book “Superforecasting: The Art and Science of […]

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Snapshots is watching live updates of Hurricane Irma and hoping for the best outcome for people and their livelihoods in her ferocious path

Written records show hurricane impacts in the Caribbean going back to 1600s.   They are unfortunately a part of human history.  They used to savage trading ships, fishing vessels, homes, plantations and cause many deaths.  The good news is that people and economies always bounced back.  Current damage assessments show the economic impact of Irma for […]

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Snapshots is currently enjoying the TV series Ozark on Netflix

Netflix and the HY bond market Speaking of which, we read with interest that Netflix increased its cash burn from $1.7bn last year to $2.5bn this year on rising content costs. The content is really great, which is what you would expect for a company that has produced 4 of the 10 most expensive TV series […]

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Snapshots’ paternity leave has been delayed by a few days. Thankfully it has nothing to do with escalating tensions with North Korea but is due to spinning babies and the Left Occiput Anterior

Fire and Fury The recent market rally stopped in its tracks and reversed quite sharply this week.  The reversal coincided with Tuesday’s comments by President Trump on further aggression from North Korea being met with “Fire and Fury”.  Also, Disney ended its distribution deal with Netflix which caused a pause in the perpetual business model […]

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Snapshots has been told that today is International Beer Day. According to Wikipedia participants are encouraged to “step out of their domestic/locally brewed comfort zone and sample a beer from another culture”. We’ll cheers to that!

Zero balance transfers and stoozing We have mentioned UK consumer leverage as an idiosyncratic concern in the current credit cycle.  One practice that demands scrutiny is EIR (Effective Interest Rate) modelling of credit card balances that are transferred at 0% for up to 49 months.  Banks assume an average balance, maturity and EIR for the […]

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Snapshots is wondering if the (very tight) air force flight suit that Emmanuel Macron wore this week is a sign that Europe has its mojo back. Indeed centre-left candidate Martin Shulz’s campaign slogan for the upcoming German elections is MEGA, which stands for “Make Europe Great Again”!

Central Bank Shuffle Despite the recent fall in inflation prints we believe the focus of the major central banks is still on policy normalisation.  The broad direction of travel is the same for the FED, the BoE, the BoC and the PBoC.  This is quite possibly being coordinated to prevent destabilising FX moves. We describe […]

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Snapshots is wondering if Christopher Nolan’s new movie Dunkirk will win an Oscar. Some critics are already calling it the greatest war movie ever made. As avid movie buffs we can’t wait to find out tonight

Back to the markets and Snapshots is analysing credit opportunities as the markets pause ahead of an August summer lull.  We have been saying for some time that opportunities in liquid credit are sparse away from bank capital.  Structured credit still presents good risk adjusted value and we are excited about a new asset class […]

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Snapshots is trying to stay cool in the unusually hot London weather and it looks as though the markets are struggling to stay cool too

Co-ordinated unwinding This is because global yields are still reeling from the aftershocks of last week’s central bank messaging.  This is now feeding into the equity markets and credit spreads.  The obvious risk here is that Mx Market (yes that is a deliberate gender neutral prefix) over-reacts and over-discounts what ze (another gender neutral prefix) […]

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Snapshots was up all night watching the UK election results roll in

The result was a surprise.  However, this morning the Conservative Party reached agreement with the Democratic Unionist Party of Northern Ireland to form a minority government which should mean a soft Brexit stance with the EU.   We think this explains the muted reaction in the FX, rates, credit and equity markets this morning. Banco Popular […]

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Snapshots has been listening to the Black Eyed Peas and is wondering “where is the love” in the world?

And is there a quantifiable measure of “love” between human groups that can be analysed and does it follow its own cycle, like the business cycle, the debt cycle or the default cycle?  We will leave that to social scientists and historians to ponder in the new data rich world we inhabit. The Climate Sceptic […]

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Snapshots is wondering if a European renaissance in risk assets is brewing

European Renaissance The original renaissance was a cultural movement that lasted from the 14th to the 17th century and is regarded as the cultural bridge between the middle ages and modern history. The latest renaissance was evident at the recent SALT investment conference in Las Vegas.  Among the reasons cited were lower P/E ratios, higher […]

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Snapshots is wondering why the old market saying of “sell in May and go away and come back on St Leger Day” is still around

Data mining This is because historic simulations show it is statistically not significant. In the words of Ron Burgundy it’s a case of “60% of the time it works all the time”. On a more serious note in the world of big data, machine learning and systematic trading, if a simple seasonal pattern existed it […]

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