A slight change in focus can produce a profoundly different understanding

A Competitive Alternative to Nationalisation

Nationalisation has reared its head again in the UK. A Corbyn Labour government will, it seems, pursue a policy of public ownership of certain sectors of the economy. Moreover, the stated intention reads like ‘expropriation’. There appears to be no plan to compensate the shareholders for the full value of the assets. This creates something of a conundrum. The announcement and prospect have already impacted share prices of target sector companies. The advent of a Labour government will reduce share prices further. By the time nationalization comes about the share prices will already severely undervalue the assets. A Labour government could pay the prevailing market price and still ‘expropriate’.

The Corbyn ideology is marxist and such ideology does imply expropriation. One stated concern is to stop such enterprises from paying ‘excessive’ dividends, especially to foreign companies. This has populist appeal. Evil foreign capital is exploiting our domestic assets. Of course, UK capital does the same in other nation states. The corollary is that UK capital should only be deployed at home and UK foreign direct investment will also be banned. Corbyn is promoting autarky at least with respect to capital. This fits with the populist ‘jobs at home’ mantra. This will create additional complications as many of the companies to be nationalized have substantial foreign investments.

The dividends do not of course go exclusively to evil foreign capitalists. Every UK insurance company, fund manager, and pension fund owns shares in the target enterprises. Union funds own these assets! These enetrprises manage money for UK citizens, such as pensioners and ISA equity investors. Anyone that owns a passive UK equity index in their ISA or pension plan has suffered some loss of market value and will be expropriated. Once again populism, as with Brexit, is leading people to act against their own self-interest. It was Sid that bought the privatized stock. It is Sid that is being expropriated. Marxism cares not for such niceties. The end justifies the means. Private property ownership is theft and so savings which build up wealth constitute theft. So Sid is fair game. In the mind of Corbyn his demographic has few savings. He may be surprised how many do so if they ever grasp what he is up to.

It makes sense to nationalize some assets. Even ‘capitalist’ economics can grasp this. Natural monopolies and monopsonies are good cases. Any activity which would involve a duplication of infrastructure is a good case. We only need one channel of gas pipes, electric cable, railway tract, broadband cable etc. Perhaps even wireless provision with its proliferation of antennae is also a case for rationalization and hence nationalization. A national mail and parcel service might also be appropriate. Such entities can ensure a more even distribution of services through internal cross-subsidization. The price of acquisition is the only point at issue in this respect.

There is also the matter of the efficiency of profit-driven versus state-run enterprises. Profit-driven enterprises are more efficient (on one definition of efficiency) but have two disadvantages. First, the benefits of the efficiency accrue to shareholders and not all stakeholders. Second, unprofitable services may not be provided at all even if there are good social justice reasons for doing so. The present regulated system tries to ensure profits are not excessive and that consumers are protected. It is not working that well according to some but it is obviously possible to make it work better without full nationalization. Corbyn’s Labour is not exploring these options because, of course, the motivation is ideological. What could a Labour party not driven by ideology achieve without nationalization?

There are a number of positive steps it could take. It could convert NS&I into a bank whilst retaining the government guarantee on deposits. All it needs to do is offer current accounts. This involves linking to the faster payments system, introducing a direct debit facility, and a debit card. The taxpayer would then own a bank with the cheapest deposit base. It could use this deposit base (which would grow if it became a bank) to fund public sector ‘commercial’ activity. For example, instead of nationalizing companies such as SSE it could set up a national energy company and run it on a non-profit basis in order to keep energy costs low. It establishes a low-cost competitor and basically forces the other companies to compete or quit the business. This competitive model could apply in a number of areas. The NS&I bank could help fund this.

Another key area that could use some competition, and NS&I funding, is the housing market. I have argued for a national housing association in an earlier blog and a Corbyn Labour government could establish such an organisation in competition with private provision. The objective could be to ensure provision of low-cost accommodation wherever it is needed across the country. It would be non-profit making (which just means no shareholders get dividends).

The populist criticism of many enterprises amounts to the Yosser Hughes plea ‘gives us a job, I can do that’. Low pay and high-end prices are blamed on greedy shareholders (who typically are workers and consumers as well). So set up a competitive enterprise and show us how it is done Mr Corbyn! Compete with the target industries and pay higher wages and offer lower prices. Do it with the advantage of a taxpayer guarantee and the cheap funding that a taxpayer guarantee can provide. If it is so easy the competition will fade and the state enterprise will dominate and set the standards.

There may be some areas in which nationalization is still preferable. The water companies come to mind as does National Grid. However, the regulatory model has not been fully exploited in these areas and still has scope for improvement. A Corbyn Labour government could tighten this screw first and then stand ready to pick up the assets if the present owners feel it is no longer worthwhile.

The problem with the Corbyn expropriation model is that it expropriates the savings of citizens that have worked hard and saved and made provision for their old age. He may have an ideological aversion to rentiers but the demise of the state pension and direct benefit pension scheme has made us all rentiers of necessity. Expropriation is being justified on outcomes. Some have accumulated savings but some have not. The reasons are diverse. To declare it socially unjust that savings outcomes are unequal is spurious logic. It creates new injustices and resentment and is not conducive to a healthy society. There are alternative ways of moving forward.



Social Justice and Individual Freedom

The political Right emphasise individual freedom as the pillar of social life. Along with such freedom comes responsibility, in particular for one’s own life. It is its solution to the moral hazard problem. The latter arises because if you help someone you may discourage them from helping themselves and a culture of dependency may emerge. The Right are thus attracted to social systems in which the individual is paramount. The individual can work as hard as she likes, keep the fruits of her labour, and deal with the consequences of failure. She owes no one anything and no one owes her anything. It is all negotiated. The problem is that outcomes are arbitrary and diverse. Some people succeed and some fail leading to unequal outcomes.

The political Left focus more on these unequal outcomes. They regard the unequal outcomes as socially unjust. Some people have more than they can use others have less. Some have economic and social power others have none. The problem is not resolved by equality of opportunity since unequal outcomes can still result. Small differences in initial conditions can lead to widely different outcomes. The Left typically seek to pre-determine the set of possible outcomes in order to meet some criterion of social justice. They may do it by taking direct centralised control of economic and social activity or indirectly by placing restrictions on possible outcomes. This may infringe individual freedom and raise moral hazard issues. If the state controls outcomes then why bother?

The first thing to note is that inheritance is a red herring (or an irrelevant distraction for my non-english speaking readers). Eliminating all social and economic inheritance will not ensure social justice in the sense of more equal outcomes. This is because of genetic inheritance, mutation, and learning. In the animal kingdom some survival skills are learnt from adults. Even more so with humans. Some parents will be better at preparing children than others. Then there is simply luck. These small variations in initial conditions will always exist and lead to widely different outcomes. Eliminating inheritance also infringes individual freedom and changes individual behaviour. It may demotivate effort.

The second thing to note is that a centralised control of social and economic activity does not necessarily eliminate social injustice. There is still hierarchy and centralisation of power. Everyone is equal but some are more equal than others. Corruption and nepotism may prevail. Dynasties may emerge. Organizing society in order to achieve some blueprint of social justice is notoriously difficult and subject to constant upheaval. It has never been achieved. There is no reason to assume it ever will be.

Through the Right and Left interaction politics behaves as if there is a trade-off between individual freedom and social justice. Philosophically this is a nonsense. How can you have social justice without individual freedom? How can you have individual freedom without social justice? The two are not mutually exclusive but rather an integral part of a healthy society. In a healthy society each individual has the freedom she needs. Social injustice is eliminated or at least minimized. If one recognises that individual freedom is not an absolute, but relative to individual needs, and that freedom in society comes with individual and social responsibility, then the two traditional political positions can be reconciled.

A healthy society blueprint cannot be outlined in a short blog but aspects can be illustrated over a series of blogs (and many previous blogs have tried to achieve this without calling it such). To illustrate let us consider internal consistency. A healthy society needs to be internally consistent. It cannot have one rule or law for some and a different one for others. All equal before the law. All have an equal say in forming the law but there must be some protection for minority groups from the dictatorship of the majority. Society is always diverse, only the degree varies, and pluralism needs to be the norm. Drug policy provides an interesting, and not obvious, example.

Some practices and substances are banned and those using or dealing treated severely. The argument is potential harm and addiction. The latter is a particularly interesting criterion because addicts, by definition, no longer have a choice in consumption. Yet other equally harmful and addictive substances and practices are allowed and even exploited by the state (through taxation). This is not internally consistent and harms the society by creating inequality and injustice, and cynicism. This is not a matter of individual freedom or social justice. It is about a healthy society.

Future blogs on social issues will be written from the point of view of a healthy society. If anyone discerns a political bias in my writing, Right or Left, it reflects their own internalized bias. I reject these distinctions and regard individual freedom and social justice as part of a healthy society. What is more I have a very precise idea what I mean by these concepts. More to come…


Baby-Boomers, Feminism, and Masculinism

The baby-boomers were born into another age when it comes to gender and sexuality issues. Homosexuality was illegal and conflated with pedophilia. Rape within marriage was a non sequitur. Relations between men and women were unequal on most levels. The desire to get women out of the factories had resurrected the mother-child bond narrative (conveniently forgotten during the WW2). Such power as women had, lay in their ability to confer or deny sex, and in family courts with respect to children. Women were no better off than in Aristophanes’ Lysistrata. Things have changed.

The baby-boomers did flirt with social justice. I say flirt because my generation, the baby-boomers, seem to have forgotten the importance of social justice. The essence was that society’s opportunities and rewards should not be denied to individuals because of some arbitrary identity or characteristic. The social justice desire led to much pressure to correct inequalities based on gender, sexuality, race, and religion. The pressure groups became political movements and found expression in many ways. The situation is not perfect (will it ever be?) but is much better.

One of the political movements that emerged was feminism. It was when studying psychology in my latter years that I came to understand feminism as more than just a political pressure group motivated to correct gender inequality. Feminism has identified something called Patriarchy. The objective of feminism it seems is to replace it with Matriarchy. At first flush this sounds rather confrontational and hostile from the point of view of ‘men’. It rather depends upon what is meant by the two terms and how they operate. What is meant by Patriarchy and Matriarchy?

In the original narrative Patriarchy is a world dominated by ‘men’. They had all the power, set the norms, and controlled society. But what exactly is a ‘man’? Heterosexual or homosexual? What about transgender people? The same applies to what is a ‘woman’? The social revolution that has taken place since the early 1950s has blurred gender and sexuality to the point that one must revisit Patriarchy and Matriarchy.

In biological terms we could define people according to levels of oestrogen and testosterone. Or we could define them according to the possession of a womb or testicles. I am not sure either category, in isolation, will get us very far. A more fruitful categorization would involve values. The narrative still distinguishes between feminine and masculine values. The important point is that a ‘man’ can hold feminine values and a ‘woman’ can hold masculine values. It has nothing to do with biology or physiology. Both feminine and masculine values are social constructs.

Patriarchy is often associated with physical force and power. Physical bullying is a masculine trait. But emotional bullying is, arguably, a feminine trait. Social exclusion is a form of emotional bullying and used (according to teenage movies) frequently by girls. Boys are more likely to use physical bullying (according to these same movies). Anecdotal but certainly squares with my personal experience. Which of these two values do we wish to dominate our society? Neither, I would say.

Yes I am being facetious but it illustrates the point. What is required is neither Patriarchy nor Matriarchy. What is required is social justice. We need to strive for a society in which no one is bullied, physically or emotionally, in which opportunities and rewards are not restricted according to arbitrary criteria over which individuals have no control, and in which conflict is a last resort and not part of the negotiation. Pursuing agendas based on binary power plays does not lead to social justice. It leads to a new dominant exploitive narrative.


Market Narratives

This week has brought a spate of head scratching among the market commentators. They are struggling to come up with a single coherent story which can explain the price action across the set of asset classes. I spent a large part of my career identifying and occasionally constructing market narratives so I always find this interesting and quite amusing. Market narratives are just stories market agents make up to rationalise what they instinctively feel they should do. The fact that no single coherent narrative is emerging is what is interesting here. It means no one has any conviction. The markets are in a state of flux. This is bad news.

On May 17, 2013, I wrote a blog about market narratives. It is worth reading as it contains links to a number of other of my blogs that deal with narratives. In the conclusion I wrote:

The risk to equities will come when the risk free rate has more scope to rise than the risk premium has to fall

This is the relevant narrative today. The risk free rate is rising, at least in nominal terms. The risk premium is not only no longer falling, it is rising. If the significance of this observation is not obvious then click the link to the previous blog. All is explained.

The rise in the risk free rate is evident because all major central banks are in tightening mode. The rise in the risk premium is visible from the new higher trading range for the VIX. Why is the world a riskier place for investment suddenly? Really, do you want me to draw you a picture? Or should I construct a narrative? I would say the fact that no one has any conviction is why the risk premium is going up. This said, all that one really needs to register is that the risk premium has risen and is not going down. The rising risk free rate will do the rest.

Much of the confusion seems to centre on the behaviour of currencies. In my view one should not construct narratives about currency. It is impossible. Look at a chart, check position data, and watch the price action. The currency market acquires and discards narratives more often than my bins are collected.

The correct trading strategy at the moment is caution and chart based. The lack of conviction is going to see position adjustments, stops being hit and so on. Timing is impossible. Look at charts and price action. If you do not know how to use charts then sit it out. Retreat to a ‘safe position’ in terms of your own risk preferences and wait. You will miss nothing except sea sickness in the storm that is brewing.

The Millennials

The Millennials or generation Y refers to those reaching adulthood in the 21st Century. I never thought much about this generation until the phenomenon of Brexit and Corbyn. The Millennials are typically pro-Remain and Pro-Corbyn. The obvious contradiction reflects a form of cognitive dissonance that seems to plague this generation. When challenged on why they supported Corbyn when the Lib Dems offered a clear pro-Remain platform the answer is always ‘tuition fees’. There is little thought in this response because if there were they would realise that the Lib Dems were never in power. They were in a coalition and in coalition one must make compromises. The Lib Dems successfully moderated a harsh Tory programme but to do so they had to give up some sacred cows. The inability to accept this is a another sign of cognitive dissonance.

The Millennials stand in stark contrast to baby boomers. The latter worked hard and prioritized home ownership, family, and financial security. They were self-reliant and tended to accept that sacrifices were necessary for a better future. These features are present irrespective of politics. Attitudes to wealth and work-life-balance veered more to wealth. The baby boomers, certainly in the UK, are a lucky generation. They have enjoyed an unusual period of peace and prosperity. Life expectancy has increased markedly. Many have reached their Shangrila of a ‘comfortable retirement’. They are the parents and the grandparents of millennials. The contrast is stark.

Millennials are confronted with relatively low pay, high accommodation costs, and high unsecured debt levels. They blame the baby boomers, their parents, their grandparents. But what the baby boomers see is the cognitive dissonance. The Millennials seem to lack ambition in financial terms. Pursuing wealth is not fashionable. Taking jobs they deem unpleasant in order to earn a bit more is not consistent with their priority of work-life-balance. They like to do ‘socially useful’, creative jobs. Such jobs do not always pay well. So the Millennials often find themselves living at home or getting ‘early inheritance’ from the baby boomers. They don’t mind doing this (cognitive dissonance again) because of course the baby boomers, their parents, their grandparents, do not deserve this wealth. No one should have more wealth than they need. The attraction of Corbyn now makes sense.

The Millennials are fundamentally geared to a socialist political view. It is not an ideological conclusion born of deep study of history, sociology, and economics. It is a psychological outcome. In order to reconcile the discomfort of the cognitive dissonance generated by the desire to live a less stressed life and the consequent need to accept help from the baby boomers, they reject the validity of private wealth and reclassify the help as a right. The baby boomers do not deserve it. It is all their fault anyway.

The implication for future voting patterns is clear. The growth of life expectancy has slowed markedly (making insurance shares better value I should add) and the baby boomers will die. The Millennials are set to dominate the electorate. The socialist narrative that has taken root will be driving voting outcomes. Corbyn and Momentum are in the ascendancy. The only thing that can disrupt this is the EU debate and recognition that Corbyn is even more committed to Brexit than the PM. However, the socialist narrative seems to still hold sway and overwhelm the internationalist inclinations of the Millennials. The future of the Conservative Party is poor whatever happens.


The Skripal Affair

The UK government has placed the order to use a nerve agent to attempt to kill Sergei Skripal firmly within the Russian state. I have no problem believing this to be true. Of course, the UK government cannot publish the evidence for this conclusion in the interests of ‘national security’. Once again we are required blindly to believe our own government even though we know it would not hesitate to lie to us if it felt the lie was in the interest of ‘national security’, (you might like to think about this for a while). Still, the Skripal affair troubles me.

The Russian state had the means, motive, and opportunity to make an attempt on Skripal’s life (you can see I watch a lot of detective dramas). What bothers me is the clumsy nature of the attempt. Surely, the Russian state could have achieved a surgical assassination that did not put half of the hapless citizens of Salisbury at risk? The Russian state effectively left an arrow pointing to the Kremlin. The event has enraged the British public because the risk to British Citizens is tantamount to a terrorist attack. Russia has been restored to evil empire number one status. The cold war is back. Now this is interesting.

Prior to the Skripal affair there was suggestion of collusion between the Russian state (or at least, Russians) and right-wing elements in the west. Collusion between the Brexit camp and Russia. Collusion between the Trump camp and Russia. Such thoughts can now be put behind us because surely Russia is clearly the enemy. Moreover, it has highlighted clearly for us who is the real enemy within; Jeremy Corbyn. He had the temerity to hesitate to condemn Russia without all the evidence. So the media has wheeled out the obvious observation that Corbyn is a communist and used this to explain his refusal to automatically condemn Russia. This also bothers me. I don’t like Corbyn and I believe he is a communist but Russia is not the Soviet Union. Russia is anything but a communist state so why would Corbyn’s ideology bias him in their favour?

For 6 years of my career (albeit in two distinct tours of duty as it were) I worked for the European Bank for Reconstruction and Development. The is a supranational organization capitalised by some 60 or so states. The largest national shareholder, many are surprised to discover, is the USA. The role was to bring the market economy back to the former Soviet states and encourage growth and economic development in these states. It has been very successful, so successful that they recently expanded operations beyond former Soviet and Balkan states.

Russia today has much more in common with 19th Century USA than a communist state. It is a country of robber barons, obscene wealth, and inequality. It is not a place in which Jeremy Corbyn would be comfortable. It is thus odd that the UK media should be able to make this false connection between Corbyn and the modern Russian state and the public lap it up. Corbyn had a strong ideological link to the Soviet Union perhaps, but not modern Russia. We are being manipulated and the manipulation is not even that subtle.

So I have no problem believing Russia ordered the hit on Skripal. However, their reason for doing so now, and using such a clumsy tool, should be of concern. It is impossible to know what the motive might have been. However, we do know the outcome of the Skripal affair. First, there is the resumption of  a pseudo-cold war which distracts from the suggestion of collusion between Russia (or at least Russians) and right-wing movements in the west, notably the Brexit camp in the UK. Second, it has allowed the UK media to create a crude, false association between Corbyn and modern Russia. The intention is to discredit Corbyn but there may be unintended consequences. If the public are sufficiently enraged by the Skripal affair it may allow the removal of Corbyn and the return of a Remain-supporting New Labour. Now that would be interesting.

Language and Integration

The immigrant bashing continues with that old favourite, not speaking the language. How can you integrate if you do not speak the language? It is a good question and one I often ponder when I am in Paphos, Cyprus, listening to all the English immigrants (sorry, expats) chatting away in English and unable to speak any Greek ( or Turkish). Still, let us not let the marvellous English hypocrisy get in the way of a bout of immigrant bashing. I am particularly sensitive to this subject because my mother never learnt to speak English. She arrived in England in 1954 with me (a year old) and those of my siblings that were not already here. Fifty odd years later on her death she still did not speak English.

It did not hold me back much. I passed the 11+, went to grammar school, university, and even taught at British universities. Indeed the only practical outcome, apart from her own isolation within the Greek-Cypriot community, was that I and those close to her learnt to speak a form of Greek. Cypriot-Greek* is not what Athenians would regard as good Greek and they have tended to look down their noses at the Cypriots (who is looking down at whom these days I wonder). The latter have traditionally done their best to emulate ‘clean’ Greek, but recently the language of my mother has come back in vogue. Some have expressed surprise at my impressive command of Cypriot-Greek. Thank my mother.

The problem for many non-English speaking immigrants is not their unwillingness to speak English but their lack of literacy in their language of origin. My mother was illiterate. Educating girls is not popular in some cultures and this is why so many of the non-English speaking people in the UK are women. Curiously, what seems to be an immigrant problem (damned immigrants refusing to integrate again) is largely a gender problem. It is aggravated by the fact that women in many cultures still take the carer role and men go out to work. It is a lot easier to learn the language if you are exposed to it daily. My mother had 7 children and various add-ons and rarely left the house. By the time she could leave the house Hornsey Road was full of Cypriot-Greek speaking shops and so even shopping was not a pressure. Like Sajid Javid I spent much of my childhood engaged as a translator (often in embarrassing circumstances).

Integration is not a problem with immigrants. It is a problem with the host community. It is a two-way process. If the host community will not permit it then no amount of effort by immigrants will enable them to integrate. One of the problems is bilingualism. You cannot be English if you speak two languages. Even English people who have acquired a second language are treated with suspicion! The other problem is name and colour. People frequently remind me that I have an unusual name (oddly it is unusual even in Cyprus and Greece but this is not what they mean). When they ask ‘where are you from?’ they look visibly irritated if I say Golders Green. I am still asked if I have been home this year. The problem is not only the unusual name but the darker skin. You cannot be English if you are dark-skinned. Indeed there is much kudos to being ‘sensitive’ to the sun (though ginger people are still mocked).

These subtle forms of racial abuse (for this is what it is) often come from people who become very indignant if you accuse them of racism. But they are racist, and the purpose of the language is to place a barrier of entitlement between immigrants and themselves. They are more entitled than we, and best we do not forget it. Such is the power of language that often those of immigrant origin use entitlement language as well. It probably makes them feel more integrated.

The reality is that immigrants are typically desperate to integrate. If they are not learning English there is another explanation ( gender issues) and not lack of desire. Immigrants find themselves in a kind of limbo, not quite what they were and not quite what they are trying to be. No one wants to be in limbo and they all try hard to integrate. First generation may find it difficult but second generation integrate with ease, in so far as they are permitted. So let us stop using the fact that first generation immigrant women do not speak English as an excuse to bash immigrants for not integrating. Let us recognise the gender issues. Let us recognise the role of the attitude of the host community in creating barriers to integration. Let us stop treating ‘unusual’ names, skin colour, bilingualism, etc as excuses for subtle racial abuse. And English people permanently living in Cyprus, Spain, etc stop calling yourselves expats. You are immigrants so learn the language!

  • The Cypriot-Greek dilaect has a demotic grammar much like other Greek Island dialects but also contains many non-Greek words. I was watching a Flemish language programme yesterday and was surprised to hear the word βιτρίνα (vitrina) . It means shop window in both languages. Go figure! Cypriot-Greek contains words from all the nations that have occupied the Island, which is logical. But when did Belgium occupy Cyprus?

S&P 500: Correction or Crisis

There was a through the whole of 2017 a strong sense that a ‘correction’ was due. Now that something resembling a correction has materialised the debate has shifted to whether it is a correction or the start of a bear market. The answer is of course that no one knows and will only be fully clear in hindsight which is of no use to anyone. Moreover, from the point of view of investment strategy it is irrelevant and serves only to give the scribbler something to scribble about. So what do we actually know?

There has been an extended rally in the S&P 500. It has outperformed most other major markets in local currency terms. The rally has coincided with (been caused by?) and extended period of low-interest rates. It has encouraged short volatility investment strategies. The longer it has gone on the more complacent (desperate for yield) have become investors, and the greater the accumulation of short volatility trades. The prospect of rising interest rates and inflation has finally rattled the complacency and generated this ‘correction’. Why now? Same reason why a cumulative globule of water in a tap finally drips. No idea. One thing is certain is that once a tap starts dripping it does not stop of its own accord.

It is unlikely that short volatility investments have fully unwound so we can assume this ‘correction’ has some way to go. Fear is finally entering the system and countering complacency (and greed). Whether this ‘correction’ becomes a crisis rather depends upon the distribution of positions and the leverage associated with short volatility positions. Some people will find themselves wiped out and be surprised. Mis-selling claims will emerge as careless people try to blame someone else. Old dogs like me have seen it all before. The present situation most closely resembles the 1994 bond market collapse. Anyone remember inverse yield curve notes and power caps?

The important thing is that the immediate direction of stock prices at the moment has nothing to do with the economy, apart from central bank policy and inflation. It is largely to do with positions and expectations (fear). Central bank policy and inflation will feed the fear. In the past I have found that the only way to manage investments in these circumstances is to look at a chart. This is why I left you with one in my last blog. According to Finance academics (which I once was) charts contain no useful information. In my view they need to get out more. So let us revisit an updated monthly price chart of S&P 500 futures.

US 500_20180213_08.17

What do we know? The market is overbought. It has accelerated away from the long-term uptrend. The candle for February is signalling a top. The 0.382 retracement of the move from 1814 (the last time the price touched the uptrend) to 2877, the high, is 2471 and we have not yet got near it. The 50% retracement is 2346, and long way lower than 2644, the price of the futures as a I write. The price could fall as far as 2065 and still be consistent with the long term uptrend. The ratio of the high, 2877, to 2065 is 1.393. That would be a hell of fall and certainly qualify as a bear market. Yet the long term uptrend would be intact. Where does this leave us?

The ‘correction’ is not over. Whatever triggered the correction, the markets own momentum will take us down further. The 50% Fibonacci retracement of 2346 seems the minimum move to expect before this correction is over. I would assume this to be the likely outcome and plan accordingly. We can discuss it again if and when we get there. Of course we could just turn around and rally and make a new high from here. But I doubt it.

Beans and The Bear Market

Bear markets are popular with proprietary traders. You would imagine that proprietary traders have no bias. The important thing is that they get the direction, or lack of it, right over the relevant time horizon. In my first opportunity at proprietary trading ( I was still also head of research is those poorly regulated days) I discovered a marked preference. My education was at the hands of a colleague (and often drinking partner) nicknamed Beans. The name arose because of his often reference to Soya Bean futures as an indicator of the direction of bond prices. These were days of inflation and the CRB Index was closely followed as a leading indicator of (US) inflation. Soya Beans had a material weight in this index.

Coming from an analytical background I initially struggled with this love of the bear market. Indeed I had a preference for bull markets. This was just as well as this was the beginning of the great bond bull market which may only now be completing. Fortunately, markets do not go in a straight line so there were plenty of opportunities for my colleague to earn his corn, so to speak. It was some years however before I full grasped this preference for the bear market amongst professionals.

The prime emotion in trading is fear. Bear markets reek of it. Market price action becomes wild when fear takes over. If you have ammunition it is an easy environment to make a lot of money quickly by shorting stuff. Moreover, volatility is typically much higher in a bear market, both implied and realised, and this creates repeated opportunities and makes it easy to correct mistakes.

The second most important emotion is greed. Fear never quite leaves one but it can become overwhelmed by greed. In bull markets greed grows with every uptick. It sucks latecomers in at high prices. The longer the bull market continues the more likely greed will morph into complacency, overconfidence, and arrogance. You will hear expressions like ‘it is different this time’ and a lot of waffle about ‘fundamentals’. The reality is that when a price chart starts to resemble a parabola you ought to be careful. At this juncture a lot of people will convert the chart to log form and linearize it. If you were not using a log chart in the first place this is a form of denial.

The bear market trader does very poorly in bull markets, snatching a meagre living from periodic pull backs. The bull market sucks in more and more investors taking more and more risk, often unaware of the degree of risk that they have. When the bull market ends they are no match for the ravenous bears that come out of hibernation to feed on their folly. Has this bull market ended?

The striking aspect of the equity market correction of the last few days has been the fact that it was visibly led by the Vix index. Someone started buying a lot of (implied) volatility. The Vix index spiked and this triggered selling of the S&P 500. Other equity markets followed. The S&P 500 had become parabolic and so it was vulnerable to a sharp correction but getting the timing right on that is always tricky. The result is such a sharp correction in both volatility and price as to scare the pants off many. Is it a correction or the start of a bear market? No one really knows ex ante. I will leave you with this chart. However, there are a lot hungry bears so it could be painful before the bull market resumes.

US 500_20180207_14.50

The Economics of Migration

There is a popular myth that migration displaces natives from jobs and depresses pay. Economic dynamics are very complex and rarely do such simple linear processes apply. It all depends upon causality. If an economy that is in some steady state equilibrium is suddenly confronted with a large number of unexpected migrants (an exogenous shock) then the initial impact may well be to displace locals and depress pay levels. The long run outcome is as likely to be a return to a steady state equilibrium at higher levels of employment and similar real pay levels. The idea that long run growth is proportional to population growth and productivity seems to emerge from most steady state economic models. The point of interest in this blog however is that migration flows are not normally exogenous shocks but rather endogenous responses.

An endogenous migration flow is one motivated by domestic economic need. Labour shortages are normally the root cause. Otherwise profitable industries may find it difficult to fill jobs with the right skills at the right price. Labour flows in and makes such industries viable. The result is to also increase opportunities for native labour that would not have been there had these industries not been viable. Migration flows in these circumstances do not displace native labour but increase job opportunities. The corollary of this is that restricting migration in such circumstances will destroy rather than enhance native jobs. If native labour had been available in the first place the endogenous demand for foreign labour would most likely not have materialized.

Restricting endogenous motivated migration flows will have one of two effects. It may render certain industries unviable and thus destroy native jobs. Or it may motivate investment in automation and AI as labour substitutes. This will boost productivity, itself a welcome outcome, but may also result in a net reduction in native employment, at least in the short-term. Automation, once embarked upon, displaces all jobs and not just those previously taken up by migrants. The idea that restricting migration flows will enhance employment opportunities for natives is thus not rooted in any economic logic.

The single market requires free movement of labour. The logic is that as regions (states) experience excess demand for labour it moves to meet this demand. The single market facilitates endogenous migration. The flows are of course two-way and labour could flow from the UK to other regions. Leaving the single market will artificially restrict labour flows. If the UK economy needs labour then, as explained in paragraph 3, restricting flows will destroy jobs for natives. If the UK economy does not need the flows or has surplus labour it will lose the opportunity for this labour to move to more dynamic EU regions. The surplus labour could depress UK wage rates further at least in the short-term. The economics of migration do not support simple linear thinking except in special circumstances and even then only in the short-term. Brexit will hurt those that voted for it the most.

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